21st Century Economics

This blog is for entertainment purposes only. Any actions, decisions or thoughts you may have or do as a result of anything you read on this blog is entirely your own responsibility. Anything you read may or may not be true. This applies to everything you read here, whether or not you have read this particular article or not.

The information in this blog is the best known science, researched information and data available or it should be. Anything you read may or may not be true. It is entirely up to you to decide if what you read is true, if it is based on fact and/or if it is worthy of your consideration. You and only you are the judge of my credibility or lack thereof.

What I can say is that one person wrote almost all of the articles in this blog. He is now, by most standards, an old man, retired and living in the mountains of the North. He has traveled to more than 30 countries, lived in 22 states and has more formal education than most and has graduated several times from the school of hard knocks.

If this blog makes you think, then I have accomplished my intent.

This is not offset by anything else, happens mostly in January and is in the billions of dollars. The result is prices go up and the general market rises. This has happened all but 4 times in the past 25 years………one of those four is January 2008.

What a prudent investor would have noticed is that in January 2007 the price of gold was $610, in July it was $685, in December it was $835 and now, so far in January 2008 it is at $912. This is a clear indicator that people have been bailing out of the market for more than a year. And note that the rate of exit is increasing. In the first six months, it rose $75 but in the last six months it rose $227. That should have been a clear sign to prepare for the worse. It was for me.

Unfortunately, this is just the beginning. Remember that the boomers own more than $6 trillion in stocks in the market plus trillions more in real estate. In fact, while the underlying retail price inflation has only come to 14% over the past 5 years, the value of residential housing has climbed 78%. More than 40% of that total home value is in the hands of boomers that regard it as a pre-retirement investment. As I predicted and justify in The Dismal Science article (written in 2005) on this blog, the boomers will precipitate the largest and longest recession in US history beginning around 2015.

The intense competitive business environment is often the motivation for a careful and extensive cost-cutting effort within a business and it is also often part of the motivation for consideration of any mergers or joint ventures with other utility organizations. Since labor costs are often seen as one of the most expensive items on the budget, it is natural to look to cutting the size of the payroll as one of the first areas to review to lower overall expenses. This is a very common practice, especially in a merger situation of two organizations that each have a full operational and support staffs, since it is often not necessary to retain everyone to meet the needs of the new, combined organization.

There is, however, an additional important consideration. Many business researchers now view the labor force of an organization as a critical, perhaps, the most critical strategic resource that can affect competitive advantage. When viewed as a critical strategic resource that should be evaluated on the same scale and level as other strategic elements, labor takes on an entirely different perspective. This can be even more important in a merger situation, which is, by definition, a critical strategic decision.

This is called the “resource-based view” and is the object of a serious field of theory, research and practice called Strategic Human Resource Management (SHRM). More and more companies are looking beyond the results of managerial efforts to determine the knowledge, skills, abilities, even traits and motivations critical to achieving strategic objectives.

Corporations have long sought to identify their “core competencies” - those things that the organizations do that contribute to their sustained competitive advantage. Human resources have always been included in competitive analyses, but focus until recently was more on the results of people’s efforts, not the behaviors contributing to them. Now that has changed.

Rather than take the view that the deregulated environment or the new merged organization can best be addressed by offering the lowest electric rates by cutting costs and that cutting costs equates to downsizing the staff, SHRM dictates that the prudent objective is to achieve sustained competitive advantage through the strategic use of all available resources, including human resources. This approach may result in downsizing the staff, if it is done to achieve sustained competitive advantage, however, an organization would be ill advised to downsize potentially valuable staff just to cut costs or to increase product sales.

If you are a consultant or a programmer, becoming an advocate for improved organizational communications can be a very lucrative career move right now as there is an increasing demand for people that can analyze, redesign and implement improvements in organizational communications. This report will describe some of these methods.

Many industry analysts feel that the entire information revolution and all the buzz-words and technology can be reduced to simply “corporate communications” - the movement of information from one place to another. I have found that there are, in fact, four central elements to corporate communications that are progressively created or developed by the support mechanisms that the IT department in the organization provides. These four elements are:

Data: This is not yet usable information. It is numbers or letters collected and saved in various forms - usually DBMS files. A number like “6″ has no meaning other than quantity relative to another number like “5″.

Information: Data that is given “context” is information. The number “6″ has much more meaning and usefulness if we know it is in the column of numbers labeled “Weight in Pounds”. Now “6″ is information. But 6 Pounds of what? This information may not have meaning until it is applied to some environment or situation.

Knowledge: If we now add that the “6 Pounds” is the shipping weight of a product being ordered, we have knowledge. This is data, in context and applied to some environment or situation.

Wisdom: There is a forth level of intelligence for this number. Wisdom usually comes from exposure to more than one number and over more than one occasion. For instance, if I have ordered this same product many times before, I have a history of experience with its weight. If all other times in the past, the weight was “5 pounds”, then I can speculate that there is an error or a problem with the “6 pound” number for this order. I would then be able to act on that knowledge, therefore applying my wisdom.

Now let’s see how this applies to “corporate communications” and your utility’s Strategic Planning. The IS department is involved in the collection of a lot of “data”. The providers of this data help you create information with these numbers by giving them context. The numbers may represent various power management numbers or financial figures.

The IS Department then turns this information into knowledge about the environment using software like Maximo and Lawson. This gives the numbers application.

Up to this point, the IS Department has moved data and applied it in a defined environment of financial or operational context. What is most often done now is to give the results back to the “customer” - finance, operations, etc.. They then provide the experience to create or apply wisdom to this generated knowledge. The IS Department could assist in this final stage.

By adding various communications enhancements to the movement of this data and information around within your utility, the IS department could significantly enhance the creation of wisdom from this process - in essence to capture a part of the total intelligence of the organization and automate it. How? By Corporate Communications in a variety of forms. Here’s how:

1. If more people can see and participate in the communication process, there are more exposed to the information, more experience to draw from and hence a larger pool of corporate wisdom. This can be achieved through E-mail, Intranets, on-line computer-based training (CBT) and groupware. This supports cross-training, improved understandings of why and how a process work and speeds the process along while keeping it accurate.

2. Capturing the processes, to the extent possible, so that some of the wisdom is transferred back into the automated system. For instance, document management systems and groupware software can be programed to automatically route documents to the correct next person in the approval or review chain without manual intervention. This is a captured process that is no based on experience with the current procedures.

When expanded into the realm of expert systems, it is possible to capture complex decisions based on the accumulated experience of many different people over a long period of time. For instance, the power management software might be programmed to automatically adjust distribution switches based on detected loads. This is an automated decision based on experience of operators that has been captured in the power management software. Expert systems can be very powerful in their application to the electric utility environment since decision trees can be fairly well defined.

3. An extension of the expert system concept is to capture the decision rules rather than the decisions themselves. For instance, rather than say that a certain action occurs with particular reading reaches a set threshold, the software might examine the rate of increase and warn the operator that the set threshold could be reached within the next few minutes or hours. This is a form of wisdom that computers are very well suited for - tracking and interpolating numbers to support the prediction of potential future events. Another example might be that at the current spending rate, the department will use up all of its maintenance contract funds three months before the end of the contract - therefore, you might make a decision to reduce the number of calls for support to a minimum and only for very serious problems.

There are some very sophisticated aspects of this kind of automated wisdom. People that are working on the latest state-of-the-art in this area call their software “Database Event Alerters”. These can fall into one of four types of notification: synchronous, asynchronous, interrupt and time-based. There is an equal number of “trigger” and “event registration” types with a variety of application responses. Some of the biggest names in software are now creating database event alerter software add-ons to their DBMS packages, including CA, Borland, IBM, Informix and Microsoft.

4. Finally there is the automated creation of wisdom that may not have previously existed in the corporate experience of the staff. This is done by allowing the software to use special and very sophisticated algorithms to look for “patterns” in the data and information. This most often is done with massive volumes of data contained in “data warehouses”. The process is called “data mining” and it refers to being able to find and identify valuable gems of intelligence among the massive volumes of data that might not be otherwise recognizable to the human operators.

For example, if the software was programmed to look for time-based events, it might find that whenever there is a large decrease in evening load from a rural manufacturing plant there is a large increase in the account of the local county government. IT would further identify that this occurs in the Fall through early Winter. If this were provided to an operator by dates and times, he might find that they correspond to major sporting events and the manufacturing plant lets employees attend the county-sponsored stadium for nighttime football games.

The market, of course, is the federal market - all of our federal government including the Department of Defense. This article is not to tell you how to get in on this but to tell you that it exists and that there are some pretty tricky ways to take advantage of it. Let’s reveiw some examples:

Set Asides:

If you are a minority including disabled, veteran, black, Hispanic, woman or any of several other categories of “minority”, you can get preferential treatment when bidding on a government contract. All the federal government agencies are required by law to “set aside” a certain number of contract for these minorities. The part of the Federal Acquisition Regulations that applies to this program is section 8a and so this is often call the “8a program”.

Subcontractors:

Billions of dollars are spent every year on a very short list of “prime” contractors. In fact 20% of all the federal contractors get 80% of the money. Often these “primes” (like Boeing, AT&T, Lockheed-Martin, General Dynamics, etc.) play a political game as well as a bidding war with their competition. One year, Boeing beat out its competition for a $1.6 billion contract by announcing that it will subcontract a portion of the work into every State in the US. Often these subcontracts are worth 100’s of 1000’s of dollars to some small supplier of some minor component or service that is needed by the prime to deliver the service.

You can tap into this market by registering with the “small business liaisons office” of each of the primes. You can get many of the contacts online or from the SBA. You register your SIC codes as well as your size, capabilities and location. It is very possible that you can get a contract simply because of where you are located.

Vendors:

The federal agencies have their own supermarket. They call it the GSA Schedule. It is a list of products and sources that have been approved by the GSA - General Services Administration - that have been approved for sales to the government without additional contracting. For instance, if you sell software and get on the GSA Schedule, then government agencies can buy from you without each one of them having a separate contract with you. Actually, it is the GSA that has the contract with you and they are the ones that actually do the buying but it is the actual buying agency that might contact you for the sale.

You don’t have to just sell things. You can sell services also such as printing, cleaning, designing, programming and other services that are routine or maintenance in nature.

The advantage is that GSA does all your marketing and advertising for you. They publish their catalogs for all the government agencies with prices and on their web site. Its like getting listed in a Sears catalog or an ad in the phone book.

Solutions, Not Products

I believe that customers most often buy or look for solutions to their problems, they do not, in general buy products or services. If you address a “solutions-based” marketing objective, there will be slight differences in your approach to business development and in the preparation and investments required. For example:

1. If you sell solutions, you do not necessarily have to walk into every potential client holding out a specific product or service. Rather you maintain a “toolbox” of a variety of tools to use on whatever is determined to be the client’s problem. Once the problem is analyzed, you apply the “appropriate” tool to fix it. This fix may be a product or a service. It can be consultation on applying a particular methodology or process. The larger your tool box, the more clients you can appeal to. You must create a diagnostic and repair capability, at least this is the image you project to the prospective client. Like any repair shop, you need a number of diagnostic tools to find the real problem and then you need to be able to select from a variety of tools to fix it. This requires the ability to be agile, flexible, adaptable and responsive to the client’s needs and circumstances.

2. Since you cannot fix every problem for everyone, like any repair shop, you must specialize in some area of diagnostic and repair services. You do not want to be too limiting but you also do not want to market in areas in which you are clearly not qualified. “Business Management Consulting” is so large and generic that you should narrow the field to some aspect of this large subject area. Areas that allow us to project an image of expertise while not being too confining include the following:

Risk Reduction
Business Improvement
Decision Support
Organizational Development
Business Process Engineering
Downsizing/Rightsizing
Program/Project Management Optimization
Contract Development

What is remarkable about these marketing areas is that the “toolbox” for every one of them is remarkably similar. Some may require a few extra tools that the others don’t have an obvious need for but the ability to see other problems and offer solutions can be a powerful business development advantage.

3. The “toolbox” concept is useful because it denotes a wide variety of potential solutions. To that end, you must stock the toolbox with tools. Tools in this case are not only software and hardware products but include methodologies, procedures, analytical techniques and management concepts that can be selectively applied. It sounds like a big and difficult toolbox to fill but you already have most of what you need.

You just are not calling them tools or putting them in one box. The attached figure titled, “Management Consulting Services” gives a breakdown into “tools” that are more familiar. The upper diagram breaks down business management consulting into subcategories that would make for good marketing areas. These are broken down further into more familiar “tools”. For example, “CBT” or “Paradigm Change Support” are products being sold to a client AFTER you or they have decided that these products will address their problems.

It should also be noted that the corporate staff can simultaneously be the repair people AND the tools. The skills, experience and knowledge of the people are among the most powerful tools that can be applied to a client’s problems.

4. So how do you fill the tool box? By simply defining what you already know and adding a few new capabilities that will fill in the gaps. For example, a previously developed training product is a product but if you are marketing Strategic Marketing Services, a previously developed training product becomes one of several tools you can draw upon to support your marketing thrust. In fact, the previously developed training product itself, represents this concept. The organization may not actually have a single product called a previously developed training product - it is a combination of methods, techniques and simple software programs that allow survey, analysis, assessment and improvement. Isn’t this just a toolbox concept with a specific focus? The corporate’s training capabilities, as defined in any of a number of prior proposals, can be similarly viewed as a toolbox consisting of a variety of tools (training program design, course development, curriculum design, assessment and evaluation).

It is the collection of these individual tools into a larger toolbox that gives us strength, credibility and competitive advantage. Suppose you group what you already know, add a few new tools to the box. The new tools might be new people or consultants that have skills that can be added to the corporate toolbox to round out a targeted repair/service/marketing capability.

You then label the new toolbox and repair capability with a new title or titles. The new name(s) will be the conceptual marketing direction and allow us to focus on refining a larger and more powerful corporate capability than when you are trying to sell individual tools, one at a time.
I do not know what the new name should be but let’s just use an example to see the synergy:

Suppose you wanted to go after a super hot ticket in government right now called Acquisition Reform - the improvement of the way that both the government and the contractors do business. This involves two very different markets with different goals- the government and the contractors.

On the government side, they need to improve their organizations (training, assessment, team-building, conflict reduction, etc), they must reduce their contracting risks (BPR, TQM, ABC, ACMA, etc.), and there is a very large requirement to improve the project and contract administration (B&P R&D, Contract Administration, automated RFP/SOW).

On the contractor side, they too have to improve their organizations (training, assessment, team-building, conflict reduction, etc), reduce their contracting risks (BPR, TQM, ABC, ACMA, etc.), and improve project and contract administration (B&P R&D, Contract Administration, automated RFP/SOW). In addition, they are concerned with their market image and customers (customer loyalty, Intrepreneural Development, Image improvement), their technical capabilities (software, networks, database design, etc.) And their competition.
Interestingly, these two diverse markets need virtually the same services provided by the same tools and marketed under the same general categories within the market concept of Acquisition Improvement. Corporate’s toolbox would simply have a new sign on its side.

5. You need an identity. This serves several purposes. One of the most important is to build internal teams and cooperation toward some common goals. By defining a collective marketing strategy, and involving a number of different people with different skills under s common vision or marketing strategy, you begin to focus on not only the market but on how you can interact to improve the synergy of your combined talents, skills, knowledge and experience. Such common visions and fully integrated teams can address a huge potential market while gaining a reputation for having the right answer and the best solution to the client’s problems.

Another important purpose of the identity is to set us apart from your competition. If you gain a market identity that denotes credibility, it will improve your ability to get past the first barriers to a contract. This market credibility can be enhanced by simply carefully selecting what you call yourselves and how you present yourselves. I would rather hire a training coordinator than a retired teacher. I would rather have a management consultant than an personnel advisor. An engineer is preferable to a technician. It all is in those first few flashes of recognition and impression.

One other benefit of an identity is the effect on the organization’s people that have to use the title. As with many consulting businesses, the company probably uses very few titles. The stated reason is that it is hard to keep up with the changes and it allows flexibility in dealing with a variety of clients. This fools no one, least of all the customers. A title denotes more than identity, it gives a basis of discussion, a reference for skill levels, an indicator of experience and an indicator of relative position. If it also serves as a source of pride and prestige for the barer, then it improves employee morale. If it supports the marketing theme has some commonality with other corporate staff, it also serves as one more support element in team building. I believe you can achieve all these benefits by the simple act of a carefully selected identity.
Suppose you call your repair people Business Engineers (BE). Just like the hard science engineers, you can have:

BE’s that specialize in technology (software, networks, database design, etc.)
BE in Organizational Risk Reduction (change management, cultural diagnosis, Diversity)
BE in Organizational Improvement (training, assessment, team-building, conflict reduction)
BE in Business Operations Optimization (BPR, TQM, ABC, ACMA, etc.)
BE in Strategic Marketing (customer loyalty, intrepreneur and image development, etc.)
BE in Business Development (B&P R&D, Contract Administration, automated RFP/SOW)

As noted above, this title can denote a certain amount of built-in credibility. It specifically is not a technician. These are not entry-level people. It is not a scientist. These are not esoteric think-tank analysts. It implies a knowledgeable skill in business. These are people that know how to apply business solutions.

6. As you can see, this process does not cost a lot of money. You simple wrap some intelligently selected marketing strategies around a set of carefully chosen themes for collectively selling your services to target markets. You can see from the attached graphics that the roll-up of mundane skills, easy technology and common methods into themes and services is just a matter of perspective.

Principle of Regression to the Mean: A notion worked out by Sir Francis Galton (1822-1911), an English gentleman-scientist that, in any series of random events clustered around an average or a mean, an extraordinary event was most likely to be followed, just by luck of the draw, by a rather more ordinary event. One application is contrarian investing which works simple because regression predicts that the worst stocks get better.

Representativeness is a mental problem-solving method that is a sort of short-cut the mind takes in dealing with real-world problems that are so complicated they would choke a computer. The mind handles these complex problems by assessing the evidence intuitively and compares it to some mental model. If the two match, then the mind concludes that the event is more likely. For instance, to decide if a particular football team will win a game, the mind compares the team to its internal model of what an ideal team is like. If the two models match, then the mind concludes that the team will win. This works well for most of the time but does poorly when the derived conclusion runs counter to the laws of chance and probability.

Availability is a mental short-cut that occurs when people judge the likelihood of something happening by how easily they can call other examples of the same thing to mind. Availability, too, appears to be a wonderful way to tackle complex problems because, in general, commoner events are more easily remembered. However, it does not always work for less well known subjects. For instance - does the letter K appear more often as the first letter in a work or the third letter in a word? Most people judge that K is commoner at the beginning of words because its easy to recall words that begin with K. Actually K appears about twice as often as the third letter in words. People overestimate the probability of large vividly imaginable causes of death and underestimate the likelihood of more common but less dramatic causes of death simple because vivid accidents are easier to picture in the mind.

How do people formulate strategy? They first decide what their opponents are likely to do. Then they decide how they will respond. Then they decide how their opponents will react, and so on. The theory of Representativeness dictates that the more detailed these future scenarios become, the more likely they will seem - since detail makes an account more strongly resemble the real world. But imagine a scenario involving just seven such assumptions, each of which has a 90% chance of being right. Its overall odds would actually be somewhat less than 50-50 (.9x.9x.9x.9x.9x.9x.9=47.8%). Actions that acknowledge a high degree of uncertainty are often very different than actions that don’t.

“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people that have faith that they know exactly what’s gong on!”

Ignoring the Base Rate or background data against which the probability of an event is judged is a common error. People will the odds are in their favor - “it won’t happen to me”. Aids, cancer from smoking, losses in the stock market, criminal activity are all examples of this. This leads to a strong overconfidence effect. This is a classic example of how the human mind suppresses uncertainty. We’re not only convinced that we know more than we do but that we what we don’t know must be unimportant.

The notion that people are “risk averse” as decision theorists put it, has endured since the 17th century and has become a part of many economic models. People tend to avoid risks when seeking gains but choose risks to avoid losses. People need a strong inducement to gamble but they will expose themselves to tremendous risks in order to avoid a loss. The effect is particularly pronounced in jobs and careers, second only to life and death situations. People avoid risks when seeking to save lives, but choose risks when seeking to avoid deaths.

Prospect Theory says that there is something about the human mind that so abhors a loss that giving up some quantity of money, commodity or privilege is never fully offset by an equivalent gain. “Losses loom larger than gains”. People avoid fair bets not because they are “risk averse” but because they are “loss averse” - the prospect of the gain isn’t worth the pain of the loss. People find it easier to give up a discount (forgo a gain) than pay a cost (suffer a loss). A loss seems less painful when it is an increment to a larger loss than when it is considered alone.

Framing is the principle that if a problem is framed (presented in a different manner) then the response will be different, even if the problem has not changed. In general, the frame that takes the broader view of a situation is more easily defended.

If you are a consultant or a programmer, becoming a BPR facilitator can be a very lucrative career move right now as there is an increasing demand for people that can support the analysis and process improvement of businesses - collectively known as being a “change agent” for “organizational change management”.

Today’s global economy, enhanced and hastened by rapidly changing technologies of all types, is putting pressure on companies to increase the efficiencies of all their business processes. Likewise, budgetary constraints are putting similar pressures on government administrative processes. Many organizations around the world have turned to business process reengineering (BPR) as a methodology to achieve these efficiencies. A majority of BPR projects really do not do any “engineering” at all. That is, many BPR practitioners are not using proven quantitative analytical techniques to analyze and design business processes. This defeats the entire purpose of BPR and results in few BPR projects that actually implement new process designs based on a consideration of reliable performance metrics or reliable expected differences between competing alternatives. Instead, all too frequently, BPR projects tend to have decisions based on subjective notions of “what should work well.” This is wrong and often does not work. When it doesn’t work, BPR is blamed for the failure. In fact BPR dictates the “proper” method.

Stumbling Between Vision and Implementation

Intuitive notions about what would work well for a business process can provide excellent frameworks for creating the “vision” of the new process. Every BPR project should have a clear vision (see Barrett, “Information Systems Management”, Spring 1994). However, the vision has to be implemented successfully to realize the benefits. This is where many BPR projects stumble badly - not because implementation is so difficult, but because careful analysis of exactly what to implement has not been done. There are an infinite number of ways to “achieve the vision.” The problem is in selecting the “right design for the new process that, once implemented, can be expected to achieve the desired results with a high degree of confidence.

Unfortunately, most BPR analysts select a design based primarily on intuition or “best practices correlation” (e.g., ABC company implemented a similar process and they are a market leader) without thinking through, and certainly without carefully analyzing, the dozens of details and alternatives associated with implementation inside the subject organization. Some would argue that considering a number of alternatives and/or significant details takes too long and costs too much compared to the benefits received. On the contrary, we argue that considering such alternatives and details is not costly and does not take a long time. In addition, the benefits are enormous - especially when compared to the often hidden cost and risk of project failure.

Lack of Analysis Contributes to Lack of Executive Commitment

End-to end business processes (e.g., customer order fulfillment) are comprised of many (maybe dozens) activities and tasks, utilize a myriad of the organization’s scarce and costly resources, are managed (and non-managed) by a host of written (and unwritten) policies and form the basis for most corporate culture existing in the organization.

Aeronautical engineers prototype their airplanes. Why shouldn’t you prototype your business process planes?

When an aeronautical engineer prototypes an airplane, she must use calculus. She can take pictures of other airplanes and make drawings of her new airplane. She might even use algebra for answers to her design questions. Eventually she must prove to herself her design will produce an airplane that will actually fly. Why? Because top management will want to have a high degree of confidence her airplane will fly before committing time and money to go ahead with the project. Any aeronautical engineer will tell you she must use calculus to help her prove her airplane will actually fly. This is because calculus is the only proven tool telling her how all aspects of her airplane design will interact during simulated flying time. She has no choice if she wants detailed answers with a high degree of statistical confidence.

Exactly the same reasoning applies to a business engineer who wants a reliable business process plan. She must use simulation (actually, real-time discrete-event simulation, as we explain later). She can study designs of other business process planes, make static sketches of new ones with drawing or diagraming tools and personally visit similar business process planes of other organizations. She will also use algebra or spreadsheets to try and get answers to her design questions. She too must prove to herself her design will produce a business process plane that will actually fly. Why? Because top management needs to be confident her business process plan will fly before committing the organization’s time and money to build the business process plane and operate it with real customers.