Coyote Blog

The title was my first thought when I saw this over at Kevin Drum's:

The Gates Foundation has spent about $200 million since 2010—in addition to other sources who kicked in about $400 million—on an education initiative designed to increase student performance:

The school sites agreed to design new teacher-evaluation systems that incorporated classroom-observation rubrics and a measure of growth in student achievement. They also agreed to offer individualized professional development based on teachers’ evaluation results, and to revamp recruitment, hiring, and placement. Schools also implemented new career pathways for effective teachers and awarded teachers with bonuses for good performance.

They helped out all teachers; fired bad teachers; promoted good teachers; and paid bonuses to effective teachers. So how did it work out?...

Long story short, there was no improvement at all in student achievement, despite the fact that funding was far greater than it would be in any real-life reform of this nature. There may have been some other successes in this program, but if the ultimate goal is better students, it was a complete failure. Whatever the answer is, rewarding good teachers and firing bad ones sure doesn’t seem to be it.

The organizations around these teachers must really suck because no reasonable person would expect that, in a service business, increasing employee accountability and upgrading the employee base would have no effect on customer service.

I have written before about how bad, senescent organizations destroy the value of good employees.  For example, in the context of the General Motors bankruptcy:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Postscript:  From some experience with private schools, I would say the biggest difference is that private schools set higher expectations.  Even starting in kindergarten, my kids were doing WAY more advanced work than in public schools.  I understand that public schools are public and thus tasked with teaching everyone, so there is pressure to pace the work to the slowest student.  But the slow pace of public school starts even in the early grades before the school reasonably knows who the slowest kids are.  Public schools that have low expectations for student performance are not going to be suddenly improved by better teachers.  Putting Gordon Ramsey behind the counter at a Long John Silver fast food restaurant is not going to make the food suck any less.

The other day I wrote:

[Cars owned by African-Americans in Ferguson] are stopped at about a 6x higher rate for "equipment" deficiencies than whites.  Nitpicky regulations on car conditions (in Arizona your licence plate frame cannot cover any part of the word "Arizona" on the licence plate) are the great bugaboo of the poor and a nearly unlimited warrant for the police to stop minorities.  Mexicans here in Phoenix will tell me "woe to the Mexican who drives around here with a broken tail light -- he will be pulled over 3 times a day to have his immigration status checked".  In Phoenix, at least, stops for equipment issues are roughly the equivalent of pulling someone over for "driving while brown."  Even beyond the open-ended warrant these silly violations give the police, the fines and court costs create meaningful indebtedness problems for the poor which are hard to overcome.

Alex Tabarrok highlights some numbers from Arch City Defenders

A new report from Arch City Defenders, a non-profit legal defense organization, shows that the Ferguson municipal courts are a stunning example of these problems:

Ferguson is a city located in northern St. Louis County with 21,203 residents living in 8,192 households. The majority (67%) of
residents are African-American…22% of residents live below the poverty level.

…Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city, a total of $2,635,400. In 2013, the Ferguson Municipal Court disposed of 24,532 warrants and 12,018 cases, or about 3 warrants and 1.5 cases per household.

You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”

If you have money, for example, you can easily get a speeding ticket converted to a non-moving violation. But if you don’t have money it’s often the start of a downward spiral that is hard to pull out of

I can testify to that last point.  I worked in the Emerson Electric headquarters for a couple of years, which ironically is located in one corner of Ferguson.  One of the unwritten bennies of working there was the in house legal staff.  It was important to make a friend there early.  In Missouri they had some bizarre law where one could convert a moving violation to a non-moving violation.  A fee still has to be paid, but you avoid points on your license that raises insurance costs (and life insurance costs, I found out recently).  All of us were constantly hitting up the in-house legal staff to do this magic for us.  I am pretty sure most of the residents of Ferguson do not have this same opportunity.

A Wall Street Journal article today looks at problems at Sears in their critical appliance business.  I have no problem believing that Sears is in trouble, and at various times over the past decade (full disclosure here) have held small short positions in Sears.  The author argues that the Sears appliance business has had a number of missteps, and is contributing to Sears growing losses, propositions with which I cannot argue, in part because there is no data provided to confirm or deny the connection between problems in the appliance business and Sears' profitability woes.

The other theme of the article is that recent missteps in the appliance business, particularly the 2009 switch from Whirlpool to Samsung and LG to manufacture its in-house Kenmore brand, is hurting its market share in the retail appliance business, and leading the the growth in market share at Home Depot and Loews.   But the author's own data belie this conclusion.  Here is the market share chart she includes:

While Sears may have lost a couple of points of market share since 2008, and 2013 does not look like a particularly good year so far, the vast majority of its market share loss occurred from 2002-2008, long before most of the recent problems profiled in the article.  In fact, its more likely that the loss coincided with Sears reorganization with Kmart a decade ago, events referred to only briefly in the article.

Look, I have no insider knowledge here, just a pet peeve that trends referenced in an article should match trends in the data.  But Sears is a tired old retailer.  Many of its peers from the same era are dying or dead.  People are shifting their shopping away from the malls where Sears is located.  Lowes and Home Depot were both juggernauts during this period.  I would have said that a story could equally well have been written that despite all the confusion in their business, they have done a pretty descent job arresting the decline in their market share over the last five years.  Of course they are likely dead in the long run.

Postscript:  Oddly, I witnessed a similar Sears private label fracas when I worked for Emerson Electric over a decade ago.  For years and years, Emerson (not the folks who make the cheap radios and TVs) manufactured many of the Sears Craftsman hand tools and power tools.  Sears got tough one year, and negotiated a better deal of some sort with someone else, and an entire division of Emerson saw its sales basically going to zero.  So Emerson bought a bunch of orange paint and plastic, went to Home Depot, and cut a deal for a private label tool line at Home Depot (Emerson separately owns the Rigid tool company, so a lot of the items were branded Rigid).  Emerson ended up in potentially better shape (I did not stay long enough to see how it turned out), partnered with a growing rather than a declining franchise.

This is a strategy that I think makes a lot of sense (via Overlawyered)

Vowing no longer to be Mister Nice City (assuming it ever qualified as such), Chicago is now willing to pay $50,000 to fight (successfully) a police-misconduct case it could have settled for $10,000:

Even though the city stands to lose money litigating every case under $100,000, a spokeswoman for the law department said that recently compiled figures showed the strategy seemed to be saving taxpayer money by dissuading lawyers from suing the police unless they are confident of victory.

I used to work for Emerson Electric, a company that amongst its divisions made both ladders and table saws, two sure-fire litigation magnets.  We got ladder suits, for example, from some guy who propped the base of the ladder up on 6 stacked paint cans and then leaned the top of the ladder on some high voltage lines, all during a hurricane and got hurt, and immediately sued the ladder manufacturer for making a defective product.

Emerson decided early on it was going to be a hard target.  It hired in-house legal staff and fought nearly every single suit all the way to court if necessary.  If attorneys had a good case of a real defect or negligence, fine, they could win their day in court.  However, if they were looking for a quick percentage of a settlement, they needed to look elsewhere.  Turned out there were a lot of the latter.

As someone who once spent nearly a hundred hours to defeat a $20 Department of Labor claim, mainly to fight the precedent, I can sympathize 100% with Wal-Mart spending millions to fight a $7,000 OSHA claim.  Note that despite all the OSHA wailing about not understanding why Wal-Mart is fighting so hard and causing them so much trouble, they admit at the end that they are trying to set a precedent for future actions.

For several years I worked for Emerson Electric, which among its many divisions owned a ladder manufacturer.  If there ever was a product that simply is what it is, totally WYSIWYG, it's a ladder.  But it turns out in this age of personal responsibility that anyone who ever gets hurt using a ladder, usually doing something stupid, will sue the ladder manufacturer for his or her injury.  Emerson fought every one, all the way to trial and sometimes appeal.  Lawyers said they were crazy, that in any given case, it would be cheaper (considering legal fees) to just settle.  But Chuck Knight (Emerson CEO) knew that these were not individual cases, they were multiple events in an ongoing "game," and game theory gives a different answer.  Fight enough of these, and tort lawyers looking for a quick buck with little work and cost will choose to spend their time elsewhere.

On any number of occasions from October through February, I predicted that this recession would top out at perhaps 9% unemployment at the most, and would probably not be as bad as the recession of the early 1980's.  My logic was that we had a mortgage-driven banking crisis, but that the crisis was perhaps not as bad as that of the late 1980's and that many fundamentals (e.g. interest rates) were looking way better in this recession than in the early 1980's.  I honestly thought that Bush and Obama Treasury and Fed officials were declaring the sky was falling more from the danger to their beloved former employers on Wall Street than due to any economic fundamentals.

Well, obviously I was wrong.  Unemployment has topped 10% and could be headed higher.

So the question is, do I accept that others saw something I did not, or do I crack open the self-serving excuses.  Well, at the danger that this will fall into the latter category (I will leave that to readers to decide) I do think some things have changed since late last year that have contributed to worsening the economy.

Businesses are reluctant to invest when the returns on their investment are wildly unpredictable, particularly when future income changes are more driven by changing acts of Congress rather than fluctuations in the market.   Over the last year the Congress and Administration have:

• Printed trillions of dollars of new money, raising the risk of future inflation
• Borrowed trillions of dollars, sucking capital out of private lending markets
• Run up deficits that pretty much guarantee future tax increases
• Toyed with health care bills that will substantially increase the cost of labor
• Toyed with climate bills that will substantially increase the cost of fuel and electricity
• Demagogued industries with average to below-average profitability for making obscene profits that must be reduced (e.g. health insurance companies who make 3-4% of sales)
• Taken over whole industries (autos, banks) and run them to the benefit of favored political constituencies, even when it violates the law (e.g. trashing for secured creditors of auto companies in favor of the UAW).
• Demonstrated a disdain for money-making by imposing populist compensation limits on executives of out-of-favor companies and industries.
• Spent money in the stimulus mainly to add government jobs, every one of which is generally focused on making my life running a business harder.  If you do not understand or believe this, you have not run a business that employs people.
• Shown a general philosophic hostility towards markets and capitalism

I am sure this is just a subset (Louis Woodhill has more in this vein here), but these all have negative effects on investment.  My company for one has backed out of several planned expansions this winter for four reasons:

1. Half of my costs are labor, and I don't know how much Congress is going to increase my labor costs.  Current health care bills will increase it at least 8% -- given that my typical margin in 5-8% of sales, a government action that increases half my costs by 8% is worrisome.  Worse, my smaller competitors will not bear this expense under certain versions of the legislation.
2. My second highest expense is fuel and electricity.  I have no idea right now how much Congress may raise these expenses.
3. Capital for small businesses is gone.  I can get secured equipment financing, but that is it.
4. Assuming I make any money from these investments, I have no idea how much I will be able to keep.  I would not be surprised at all if Obama pushes my marginal rates over 50% -- and investments in my business are just too much work and risk to keep less than half if I make any money.

I used to work as for several years in St. Louis as VP of Planning for Emerson Electric.  I worked for a guy named Chuck Knight, who could be a real pain in the *ss to work for, but was a) brilliant and b) always willing to speak his mind without the typical filters a lot of other executives apply.  It appears that his successor Dave Farr, who I also knew at Emerson, is following in this tradition:

Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas."Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing," Farr said today in Chicago at a Baird Industrial Outlook conference. "Cap and trade, medical reform, labor rules."...

Companies will create jobs in India and China, "places where people want the products and where the governments welcome you to actually do something," Farr said.

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. Emerson, which Farr said employs about 125,000 people worldwide, has eliminated more than 20,000 jobs since the end of 2008 to lower expenses.

"What do you think I am going to do?" Farr asked. "I'm not going to hire anybody in the United States. I'm moving. They are doing everything possible to destroy jobs."

Politicians in both parties are generally clueless about this kind of thing, because very few of them have ever run a business or even even been in a real business position other than as lawyer or lobbyist.  Just look at how George McGovern feels now that he has run a business.

But the Obama administration is almost scary clueless.  In defending their promotion of a good business environment, they cite the most hostile item on their agenda:

"This administration has made a significant commitment to U.S. manufacturing, including reforming the country's health insurance system to bring down costs and make American companies more competitive globally," Griffis said.

Not. One. Single. Clue.

Actually, I think the Obama administration may believe this, which just accentuates their preference for a corporate state wherein "business friendly" means support for the top 20-30 corporations in the country.   In the context of a few old-line corporations with politically powerful unions, health care reform is helpful in that it dumps a bunch of the corporation's commitments to present and past workers onto the taxpayers.  But these are not the companies that grow the economy -- they are just the ones with out-sized power in political elections.

The very essence of business decision-making is prioritization and trade-offs.  The same is true in the government, its just that the objective function is reversed:

GM is warming up the propaganda engine for the next run at Congress. "Look, the first thing we had to cut was our electric car program!".

And here I thought that because GM has still, after 30 years, failed to realize their business model needs to change that maybe management there were slow learners.  But they seem to be very, very adept at learning the government game.

When I was in the corporate world, if I wanted extra funds for my projects, I would have to go in and say "Here are all my projects.  I have ranked them from 1-30 from the most to least valuable.  Right now I have enough money for the first 12.  I would like funding for number 13.  Here is my case."

But the government works differently.  When your local government is out of money, and wants a tax increase, what do they threaten to cut?  In Seattle, it was always emergency services.  "Sorry, we are out of money, we have to shut down the fire department and ambulances."  I kid you not -- the city probably has a thirty person massage therapist licensing organization and they cut ambulances first.   In California it is the parks.   "Sorry, we are out of money.  To meet our budget, we are going to have to close down our 10 most popular parks that get the most visitation."  The essence of government budgeting brinkmanship is not to cut project 13 when you only have money for 12 projects, but to cut project #1.

I can just see me going to Chuck Knight at Emerson Electric and saying "Chuck, I don't have enough money.  If you don't give me more, we are going to have to cut the funds for the government-mandated frequency modification on our transmitters, which means we won't have any product to sell next month."  I would be out on my ass in five minutes.  It just floors me that this seems to keep working in the government.  Part of it is that the media is just so credulous when it comes to this kind of thing, in part because scare stories of cut services fit so well into their business model.

So of course, with billions of dollars of waste, absurdly high labor costs, stupid-large executive compensation, etc., GM chooses to cut funding the project that is most important to Congressional Democrats and the new Obama administration.

TJIC quotes Scott Rafer:

Rafer's Rule #1: "˜Un-sexy' is good business. This is a riff on a market
principle Rafer picked up from a couple of his ancestors back east: one
who ran Rafer's Kosher Meats; and his grandfather, who ran Rafer's Army
Navy Surplus (both were in business in the 1950s, long before Rafer was
born.) The idea here is that there is potential in furnishing a
(seemingly) boring business that plenty of people need, but which few
people want to do - a.k.a. stuff that ain't sexy. Which also means
you're likely to have a reliable market for your business, and might
not have so much competition - good!

I absolutely agree.  I have been in sexy and I have been in boring, and from a long-term profit perspective, boring is better.  Here is the way I put it to friends:  "Avoid any business where there are substantial non-monetary reasons why people might want to start a business there."  For example, the bankruptcy roles are littered with brew-pubs.  Guys have a male fantasy of owning their own bar and brewery, and, shazam, there are way too many of them.  Many parts of aerospace are the same way, filled with guys who love aviation more than making money.

From reading the press, it would seem that what the world is short of is "bold new visions."  But in fact bold new visions are a dime a dozen.  I had to try to sell a number of them when I was in the Internet world.  I would argue that what is in fact in desperately short supply is managers and companies who can focus, day after day, ruthlessly on operational excellence.  I worked for years for a company called Emerson Electric in St. Louis, a conglomerate that owned the world's greatest collection of boring businesses.  In their prime, under CEO Chuck Knight, they were unbelievable at blocking and tackling in boring businesses.

This point about boring and sexy is so important that when I was at Harvard Business School, the first two classes in the first year competition and strategy course hammered these points home.  Class one was the story of Rockwell Water Meters.  Class two was the story of some go-go semiconductor business (maybe Fairchild?)  These two cases epitomized "cool" and "uncool", but in the end it turned out the semiconductor firm never made a return on capital, while the water meter business had stratospheric returns.

The common response I get to this is, "but what about all of those Internet millionaires?"  With a few exceptions (Amazon, eBay), most of the folks who made millions in the Internet did not make them from operating profits.  They made them with timing, selling out inflated stock to the public or to a bigger sucker (e.g. Yahoo) before the whole Ponzi scheme crashed.  Does anyone really think that Maria Cantwell created real value in the marketplace?

This post actually takes me back to the roots of this blog, roots that most new readers probably have not seen much of.  I originally started this blog as place to share my lessons learned in starting, running, and growing a small business.  I still do some of that, but not nearly as much as I would like.

My company has about 25 line managers who each run the operations for one recreation area (these are spread over 13 states).  I give these managers nearly complete P&L authority.  I set base labor rates and most fee levels, and we have a very clear management process everyone follows.  However, line managers have the responsibility to do all the hiring for their area, as well as most purchasing.   One issue that comes up a lot for us as we grow is how much we should centralize some of these functions for efficiency, most significantly HR and purchasing.  In general, I have resisted efforts to centralize.  Here is why.

Human Resources

Several of my competitors, even ones smaller than I am, have centralized their hiring functions.  They have one person (or more) at central HQ who does all the hiring for the company's operations.  My managers often come to me and say "wouldn't it be more efficient to do this hiring in one place?" 
I say no.  The reason is one of accountability.  I want my managers fully accountable for their operations, and poor-performance excuse #1 is always "well, we're struggling because you saddled us with some bad employees."  No one uses this excuse in my company.  If you have an employee that sucks, you hired him/her and you have to deal with it. 

What I did instead was centralize the Human Resource support for our managers, making their lives easier without relieving them of accountability.  So I invested in some new web sites that capture potential workers and drive them to an application database that collects 10 resumes a day  (I am results 1,3, 4 &8 on Google for camp host jobs and results 5, 6, & 7 for campground jobs).  Then I built a system where all my managers can access these resumes.  I also centralized the HR record keeping and payroll processing.

Purchasing

Centralized purchasing has been a harder impulse to resist, but I still do so.  We order a lot of the same supplies in our various locations, and with more and more stores, many of the same goods for resale.  But I still have my local managers buy most of that stuff for themselves.

Am I crazy?  Well, I would have thought so when I was in business school.  After all, its fairly easy to demonstrate that vendors will give better rates for larger orders, and surely it's inefficient from a labor standpoint to disperse purchasing and to duplicate efforts.

First and foremost, though, I am still a stickler for accountability.  Much of my thinking was shaped by Chuck Knight at Emerson Electric, who was nearly always willing to trade centralized cost savings for accountability.  I would much rather my managers have no excuses than save a few pennies on toilet paper purchases.

However, there are a few things we can do.  We are starting to build a shared supplier database, where managers can share particularly good supplier deals with their peers.  We also have centralized purchasing of uniforms and forms, but even here we have been burned.  In the past, we assigned this task to a central person, who eventually built up a huge warehouse of crap it has taken us years to clean out.  Though we don't get quite as good of a deal, we now have printing and uniform contracts with negotiated corporate rates based on our combined corporate usage, but where managers place their own orders and shipping is directly to the field (rather to a central location for reshipment).  Net, we saved thousands in labor, shipping, and inventory getting out of the central break-bulk business.

For our resale items, I get a lot of presure from individual store managers to let them do purchasing of so-and-so product for the whole company in order to get quantity discounts.   I have allowed this in a few cases, but it may cause more problems than it is worth.  I immediately started getting complaints from manager A that manager B was buying all the wrong stuff, or whatever.  Soon, the folks doing the central purchasing started demanding that they needed more and better information, and started asking for written inventory reports from various store managers each month.  Eek! 

I think instead that I am going to mostly stick with the approach of negotiating corporate deals, and having local managers continue to do their own ordering using these deals.  I also work hard to make sure managers understand that in most cases the corporate negotiated products are optional, and that they may buy other products if they think those are better for their locations (I can guarantee that visitors in Northern California, Nogales Arizona, and Central Florida want different things).