Telling It Like It Is

THE ENTERPRISE--Dinosaurs Looming

THE ENTERPRISE

It is Indy 500 weekend and the starting lineup portrays an interesting picture of the US auto producers' decline. Of the 33 cars, only 5 are powered by US auto-makers' racing engines (Chevrolet). The remaining 28 are equally split between (want to guess?)--Toyota and Honda! How the times change. The largest part of the decline in the US auto industry is due to its inability (unwillingness) to produce the kind of cars that excite American drivers--myself included. As their fortunes decline, they must cut back on non-essential efforts like building racing engines--which is a form of "applied R & D"--which leads to less innovative engines in future consumer offerings.

Another (large) part of the US auto industry's decline is due to the insane, costly labor contracts negotiated during days when the foreign competition was minimal, and avoiding conflicts (strikes) at all costs was the norm. A big part of those legacy costs are to cover the huge number of "retirees" as more and more jobs disappear from GM & Ford. That is my segue to this week's topics--retiree benefits, but especially pensions.

Pensions--a legacy liability
The pension mess is just the beginning. Can you say "Pee Bee Gee Cee" 3 times fast? That's not a tongue-twister, it is the initials of the Pension Benefit Guaranty Corporation, a government funded “insurance” plan to protect retirees pensions, even if the companies that granted them are unable to fund them or cease to exist. You've probably read by now that US private sector pension funds are $450 Billion under funded, and while many officials are sweating over the $23 Billion that the PBGC is under funded, they might want to calculate what that 20:1 ratio of trouble just over the horizon means. 

If that isn't scary enough for you, there are huge under funded plans in the public sector too. Many of these future liabilities remain not even fully quantified. Who has to pay these benefits, if the employees who “earned” them are to get them? That's right, current wage earners--taxpayers! Is a broad-based pension system collapse coming? No, at least not anytime soon. Why? Because rising stock markets and interest rates will boost pension fund returns, eliminating some of the under-funding, and not all of the under funded plans will collapse at once.

In addition, Kiplinger Forecasts predicts (and I concur) that Congress will shore up the Pension Benefit Guaranty Corporation to ensure the agency has the resources to absorb failed pension plans (near term, partially using taxes to do so). Annual fees for employers will increase, from $19 per worker to $30, as will surcharges on badly under-funded plans. There will be tighter rules and higher/faster payments for firms that fall behind. Don't be surprised if legislators forbid firms from promising better pension benefits to employees in lieu of immediate increases in compensation. Now they "close the barn door"--whoops, it's 30-40 years too late.

And we aren't alone; and there's bigger ones ahead
The fact that Europe has a bigger problem than the US is small consolation when you realize that the retiree health care issue is much larger than the pension problem. The outcome of these issues is that either retired people get less or every taxpayer pays more and here is no "free lunch" in this one. 

This situation sort of reminds me of the Jurassic Park movies. Just as the heroes were evading a fierce dinosaur, a larger, fiercer one appeared. The larger one in this situation is looming retiree health care obligations. But back to the pension problems. Kiplinger Forecasts also predicts that Congress will back a permanent plan based on average corporate bond rates, instead of setting formulas each year or two, and offer tax benefits for making extra contributions in good years to build surpluses as a hedge against market volatility.

But, that won't stop the retreat from defined-benefit plans. These plans are leftovers from a prior era, started in the 19th century to protect the families of soldiers who died in battle, then extended to the soldiers, then to workers, and finally, to almost everybody. But that is history. Now, over 80,000 businesses, mostly small, have already dropped defined benefit plans--they have just become too costly. 30,000 companies still offer them, and most are large ones--75% of the Fortune 500. As a result, the number of participants, counting retirees, has continued to increase over the past decade.

Pensions won't go away--but...
Most employers that still have plans won't abandon them entirely, especially where they are part of Union contracts--except where companies are in bankruptcy and hand them off to PBGC. Many will continue to take steps to slow growth and limit liabilities. Freeze the benefits accruing for current employees to contain costs and offer new hires only 401(k) plans with company contributions. Or convert to defined contribution or cash-balance plans, particularly after some legal questions are resolved.

Bottom line: Companies are still fighting the "smaller dinosaur"--defined benefit pension plans. Our government has its own "dinosaur" to deal with--Social Security. Meanwhile, just over the horizon there is an even bigger dinosaur lurking--health care costs for retirees, for everyone else and of course, Medicare and Medicaid.

Talking about it won't fix it...
Many columnists are writing about this, so I won't--at least not here and now. I've seen at least one new book on this problem that is worth reading--CONSUMER DRIVEN HEALTH CARE by Roger Blackwell (a Marketing Ph. D.) and Thomas Williams (an M.D.). In it, they define and "deal with" a large part of the problem and propose some good solutions. But much, much more must be done--or else someone needs to come up with some new ideas for killing off these BIG old dinosaurs--and not getting killed in the process. 

That's a huge topic, perhaps for future editions of THE ENTERPRISE. For now, recognize the size of the problem, do what you can to advance the good ideas and keep your hand firmly on your wallet, because the only place the additional money to fund these legacies can come from is (directly or indirectly) the taxes on those who earn it. That's you--and me! OUCH.

Best, John

PS: Although the economic news is better this week/month, I still think the economy is plateaued, waiting for something to nudge it one way or the other. "Keep your powder dry."

THE ENTERPRISE--Identity Theft

THE ENTERPRISE

Have you ever had your identity stolen? I certainly hope not, but the news I have for you this week is not good news. CSI Miami's special segment tonight revolved around a murder that grew out of an identity theft. When identity theft becomes a story line on a highly-rated TV crime show, you know it's hit big time. I was notified last year by a company I bought from that their customer records had been "hacked." I immediately cancelled the credit card and had a new one issued. That got my attention.

Then, seven short months ago, the US Attorney's office announced a guilty plea in "the largest identity theft case in the country's history--a scheme to steal up to 30,000 identities!" As the saying goes, "that was then, this is now." In February, just a few months later, data aggregator ChoicePoint admitted that thieves had stolen vital info on 145,000 people. Two weeks later, Bank of America confessed that tapes containing the records of 1.2 MILLION credit card holders were missing--lost in transit--with no tracking or security precautions to fall back on. DSW shoe stores revealed (to the US Secret Service) that (at first) 100,000 credit card records were missing, then upped the number to 1.4 MILLION. Sooner or later, everyone's luck will run out!

I had an exchange of email with a contact of mine who is an expert in this field (having founded and run a company in the field). He cautioned me: "One of the scariest aspects of this recent rash of reported identity thefts has been that they have all been of large numbers of identities stolen en mass from databases. Another scary aspect is that they have been stolen from a wide range of repositories of personal data: blood banks, medical practices, universities, merchants, financial institutions as well as conventional data aggregators."

After the DSW report, there were 180,000 Polo/Ralph Lauren and HSBC credit cards that had been accessed. Ameritrade's shipping vendor lost a tape with personal information on 200,000 clients. One estimate (by Privacy Rights Clearinghouse) is that 4 MILLION people's identities have been compromised. I bet they are low!

This doesn't mean someone is using your charge cards, or applying for new loans using your credit record--and hopefully, no one has tried to steal your identity totally--which is a truly frightening reality for some people. BUT THERE MIGHT BE SOMEONE WORKING ON IT RIGHT NOW. Frankly, corporate America is finally admitting the truth--it cannot safeguard some of its (and your) most valuable information very well at all.

The way my friend the identity security expert puts it would be humorous if it weren't so scarily true: "So far the reaction of lawmakers to the problem is not encouraging. It is akin to a lawmaker coming to the aid of a farmer who has discovered his horse stolen and the lawmaker has joined the farmer outside the empty stall yelling, “I’ve been robbed!”  Lawmakers are behind the curve on this one--badly.

As I continued our dialogue, he reminded me of something I had recently realized (I moved last year and had to update far more records than I ever imagined.) He says, "First, most consumers really aren’t aware of how many places their identity information is stored and the conditions under which it is maintained. Second, security for much personal information is inadequate. Third, when whole databases are compromised it is not only personal information that is compromised, but also authenticating information, such as PINs and passwords are compromised as well."

There was nothing at all comforting in his words, and as he went on, it wasn't any better.  "Armed with hundreds of thousands or even millions of stolen identities and a computer the digital con artist can attempt thousands of crimes at once. His failure rate can be 99.999% and he will still be successful."

One of the richest market for stolen identity information is the need of illegal aliens to obtain credentials and legitimate-looking documents. Credit card fraud is what we worry most about, and even though it is on the upswing, it has not yet reached the epidemic proportions that the thefts have. This sounds a lot like a "ticking time bomb" to me.

His final concern was what brought me to write about this subject in THE ENTERPRISE. While he (and his company) didn't want to be named, he agreed that I could use his words or at least the essence of his message. Think about this one: An identity thief armed with all of a consumer's personal information and (most likely) authenticating information as well, financial institutions, employers, government, airlines can't tell when identity information is being used by a thief or terrorist. They also can’t tell when it is being used by the rightful consumer-owner.

So now what? I'm not an expert in this field, but several conclusions are emerging that seem obvious:
--Identity theft will hinder or harm businesses of all kinds in the near future; perhaps electronic transaction-based businesses will get hurt the worst, but these days, that's most businesses.
--It is time to be particularly vigilant for anything suspicious. The greatest loss of personal information still comes from "phishing" or "social engineering" where someone "cons" the owner into giving up personal information with a mass-mailed or a spam/e-mailed inquiry. The best of them look so legitimate; but they aren't. Don't respond and DON'T GIVE THEM YOUR PRIVATE INFORMATION, either via email or on the phone.
--Shred documents containing personal information before disposing of them...and for me, that means even those unsolicited credit card offers. Dumpster diving is still a simple way to steal private information.
--Change/vary passwords and PINs often and don't use obvious combinations like your birthday, or simple numeric combinations like 1234 or 1111. Include mixtures of alpha and numeric characters in passwords. 
--Don't give out your Social Security Number (or any private number) except in instances where there is no other option. The fewer places those numbers are stored, the fewer targets there are for thieves.
--Whenever you see something suspicious in the statements your receive, or have something odd happen, check it out right away by making an independent contact with the institution involved. If it turns out to be some form of identity theft or fraud, document your case, facts and concerns to the business/institution in writing so you'll have a "paper trail".

We live in an electronic, information age. So many daily activities are simplified by this technology, we forget the "dark side" of it. If this "heads up" only saves one person the grief of an indentity theft, it will have been worth it. Caveat emptor (buyer beware)--in more ways than one.

Best, John

THE ENTERPRISE--A Taxing Thought/ NOP

THE ENTERPRISE

While the past week's economic results might seem counter to my worries of last week, I am still sensing a plateau in the economic recovery. What happens from here with inflation and interest rates could have a lot to do with whether this is a pause before another climb or before a decline.

A taxing thought
I called a friend to wish him Happy Birthday today. Later, I realized that both his and my birthday are past now, so Uncle Sam is probably no longer collecting taxes from us. No, I'm not confused. I know the tax filing deadline was April 15 and that's a month past. I mean "Tax Day" which just occurred recently--April 17.  That's the date on which the average American starts earning for themselves. Until then, we are working for the government, to pay taxes. 

Tax Day was 2 days later this year. Last year it coincidentally fell on April 15, the day on which taxes are due/collected. If history is any guide it will be still later next year. And, if you are unlucky (or unwise) enough to live in a state with higher-than-average taxes (which I am and do), you're probably just getting out of the government servitude and earning for yourself. No, wait, if you are self-employed you are probably still paying both the employer and employee's portion of Social Security and Medicare, so you won't be in the clear until even later.

Pay them in cash? OUCH!
I once knew a CEO who theorized that if taxes in the US were paid the old fashioned "pay window" way, we'd throw out the politicians who assessed them. In the old days, you received your gross pay in cash at the pay window. If you owed the company for anything, you paid them back in cash, at the next window over. If you had to count out the money that goes to the Federal, State and Local taxes each pay period, and actually give it back right then in cash, you'd realize just how big a bite it is. I don't know if he was right or not, but it was an intriguing idea; one that is particularly timely in these days of media debates about Taxes and Social Security.

Media--Old vs.New
In case anyone hasn't checked, the old mass media IS declining--but it's still powerful. Traditional news media is falling while new media (blogs to name just one format) is growing. Newspaper circulation--down from 62.3 MM to 55.2MM; readership getting older, much older: Age 60+ @ 60%; Age 50-64 @ 52%; Age 30-49 @ 39%; Age 18-29 @ 23%. Viewership of network evening news down to 28.8MM from 52.1MM in 1980; median age of viewers--60! 

In 1972, nearly half of those 18 to 22 read a newspaper every day. Now less than a quarter do. 68% of kids 8-18 have a TV in their rooms. 79% of 8-18 year olds have portable CD, tape or MP3 players; 55% have hand-held video game players. Other media-morphing forms: mega-networks like Clear Channel's 1200 radio stations; Sirius and XM Radio's 100+ channels each, and of course, the Internet--which is bigger than ever.

A new party is evolving--the NOP!
President Bush is being crucified at every turn (especially on his Social Security proposals) by the New Obstructionist Party (formerly called the Democratic Party, back when they had any ideas about what TO DO instead of just opposing everything.)

All media--old and new--should like one thing about the New Obstructionist Party (NOP). Like the GOP (Grand Old Party), the NOP is a nice acronym, and best of all, it aptly describes the party line on almost anything proposed by the GOP--"Nope!"  

I think we were better off as a country when we had TWO parties actually debating how to improve government, where BOTH parties brought new ideas and proposals to the table.

Best, John

THE ENTERPRISE--What, Me Worry? "Just a little..."

THE ENTERPRISE

"What, Me Worry?"
In the once famous words of MAD magazine's Alfred E. Neuman, "What, Me Worry?" Yep, I'm worried for General Motors. I'm worried for the entire US auto industry--or rather, what's left of it. GM and Ford's debt rating downgrade by S & P won't finish them off. But their failure to understand what's wrong, and what to do about it will. I'm starting to worry about the economy too.

Consumers are much more discriminating than ever. They know that the Coke icon still means a lot to them, but that Coke isn't "the real thing" any more. It is declining in the wake of so many more drink choices, almost all of which are done better by Pepsi. Go into a convenient store and count the facings in the coolers. You'll see what I mean. In this industry variety is winning.

GM's March to Terminal Mediocrity
But back to GM. Rick Waggoner needs to go to the bookstore and buy, then read two books. Peter Drucker's CONCEPT OF THE CORPORATION written in 1946 and Alfred Sloan's MY YEARS WITH GENERAL MOTORS written in 1964 but spanning Sloan's career as the leader of GM from 1929 to 1946. GM has lost sight of what Sloan used to create the powerful behemoth that was GM. A car focused on each important (that means large enough to support a car brand) market segment.

Each GM brand had a specific identity and market segment associated with it. The cars were nothing alike. While common parts were used (invisibly and sparingly), there was nothing like the meaningless, costly and foolish proliferation that leads GM to create similar vehicles in each of 3-4 different brands, draining resources, diluting focus and continuing its march to terminal mediocrity. Worse yet, we know that confused consumers don't buy mediocrity, even when bribed by $3000 per vehicle price rebates.

The old saying was "What's good for GM is good for America." The reverse is also likely true. GM supports, directly or indirectly about a million jobs. It caved to unions decades ago and saddled itself with totally absurd contracts which, to this day, it has not had either the good sense or intestinal fortitude to renegotiate. GM extends the foolishness by taking new vehicles and forcing them to fit in outdated plants or use non-competitive chassis and drive-train parts because there's no money left to build better ones--it's being spent to put different looking sheet metal on yet another cloned, so-so vehicle.

A lot of things are hurting the economy "just a little"
Unlike Alfred E. Neuman, I am worried because the recovery is hanging on to its good health, but just barely. It's not nearly as robust as it was just a few months ago. Consumers are cutting back--"just a little"--because an extra $20-40 per week is going into the gas tank. Oil prices aren't coming down anytime soon--and hopefully, when they go up again, it'sll be "just a little." When GM start paying more for debt (now), it will hurt the overall economy--"just a little." The difficulty in passing on commodity driven price increases is hurting earnings--"just a little."

And we can't even blame all of this on the Chinese--although China's continued blatant abuse intellectual property rights (counterfeit products and knock-offs) when combined with pegging the Yuan to keep the Chinese job market robust--that hurts "just a little," too. Malls are dying too. New retail formats are killing them off, department stores consolidating like crazy, so that more and more of these huge edifices are starting to look alarmingly like the downtown/ghost towns they once created. Does this kind of progress hurt? Yes, but "just a little," because the shoppers go elsewhere--to more efficient store clusters.

The housing bubble hasn't burst yet, either. But as the Fed keeps inching interest rates back up where they belong, that market too will get hurt--perhaps "just a little"--and hopefully not "a lot." The stock market perceives all of these. That's why it's going nowhere either--but that only hurts "just a little." (This is sort of like water dripping long enough to wear away solid rock--but it does so "just a little" at a time.)

Now what? Back to basics!
Back when I was a "practicing executive," and I went on a rant like this in a staff meeting, one of my people would say to me, "OK, chief, we hear you. But what's the plan?" My answer would be something like, "That's our job to figure out. But we'd better get moving and develop one. So let's go back to the basics and build it up from there." And then we would. And so should you.

Back in 1997 when I wrote THE SHAPE SHIFTERS, I said that the shape of best value is a constantly shifting target, and only those organizations that can become "shape-shifters"--evolve and adapt to those constant changes--can survive and then capitalize on change. It's truer than ever right now.

Best, John

THE ENTERPRISE--Leaders of the Future

THE ENTERPRISE
©John Mariotti 2005

What WILL We Do?
It seems that the most burning question in many people's minds is "what will the US do when all the jobs have been exported or outsourced to low wage foreign countries." Not so strangely, the question has been asked many times in many different countries as the world markets have evolved. The US was once the outsource destination of concern in England. Eastern Europe gravely worried Western Europe as the Berlin Wall fell and Communism waned. And so on.

The fact is that nothing remains the same, and that change is a constant--and the one true source of competitive advantage. If only you can see the way to capitalize on change. The ability to recognize and capitalize on change is, arguably, the one of the most important talents of leaders, past, present and especially future. If you accept that premise, then what kind of leaders do we need for the future, and where will we find them? The answer's to this question was posed to me by my son, Michael, a few months ago. My answer is shown below.

As Mike knows, if he doesn't want the long answer, he has to qualify the request with "just the short answer, Pop." He didn't, so he got "the whole thing." After re-reading that answer, I decided to share it with readers here. Parts of it are certainly open to argument--and I invite dissent, additions, and comments.

(e.g., On my list of "important words" from a prior edition, one of my friends named a word I had missed--a very important one--ATTITUDE. He was right, so please add that important word to the list.)

Leaders of the Future
Leaders of the future must be more globally aware than ever, and it can't be from hearsay...and shouldn't be from being a "business traveler"... who only visits foreign countries under closely controlled conditions. They must spend time "on the ground--in country" in the most important countries of their business.

While English will continue to be the language of global commerce, multi-lingual competency will be a plus; so will having managed and lived in more than one country/culture. Increasingly either the parent company or major parts of the company will be "foreign" to the leader's country of origin. Understanding the difference in cultures will be a critical skill of leaders. Relentless commitment and focus will also be critical. Leaders will have to be more committed to a tighter focus on the right priorities as the universe of potential choices and distractions continues to grow exponentially. 

Complexity kills profits and is a hidden killer.  Information technology must become the leader's comfortable ally and tool, but leaders cannot become slaves to it either. 

Leaders will increasingly have to make difficult decisions on the allocation of scarce resources, but the parameters will be more varied and more difficult to interpret than ever (global exchange rates, varied new multi-national competitors, geopolitical differences, flow of jobs in/out of economic units, economic tradeoffs, market access issues and on and on.

Formal education will still be important, but will merge with specialized education and competency/training in many areas of business. International/cultural education must improve and spread.

People will continue to be the difference-makers, and what will NOT change is that leaders will have to be attuned to the people, the talents/skills and needs of their employees and customers first, and of their suppliers and other stakeholders next. To do this, they must KNOW those people on more than a casual or superficial level. Age is less important than maturity of thought and behavior. But legacy knowledge might be lost to the leaders of tomorrow if it is not respected.

Leaders of the future must be coalition builders and true partners, because no company can be good enough at everything. Partnerships will be even more important than they are now--and they are vitally important now. Everyone will become and must behave more like partners, and that includes the employees whom the leaders must lead. The term servant leadership will mean more and more.  Charismatic leaders who are not truly servant leaders (e.g., Carly Fiorina?) will not survive either--you can't fool the "troops.".

Finally, leaders of the future have a problem. They desperately need to find two things that are rare and difficult to find:  quiet time to think and trusted, truth-tellers as a confidant and counselor. 

Try these tests:
Test 1: If you are a leader, take just 2 minutes now--of total quiet--no phones, no music, nothing. Look at the watch or clock. Do not do anything but think about one topic that is important.  Do it right now. Focus on it. Roll it around in the mind and figure out what is the most important conclusion that can reached about it. At the end of just 2 minutes, stop and marvel at what could be done if a leader just takes 20-30 minutes/day for "quiet thinking time...or even more staggering, takes 2 hours a week--all in one piece--interruption free, to think about the important issues.

Test 2: Who does a leader really confide in? Who can they talk to?" Not superiors, for fear it is a sign of weakness or indecisiveness. Not subordinates, for fear it is a sign of indecision and uncertainty. Not peers, who are competing for the next position up the line. Not a spouse--can't burden him or her with such "work related problems."  Then who? It must be someone who will be brutally honest, with no "axes to grind" and with the leader's best interests at heart. It must also be someone with an equal or greater level of intellect and experience. But where can such a person be found? (clue: That was why I founded The Enterprise Group.)

In summary, leadership, by definition is "taking people to a place they'd be afraid to go alone...and being willing to go along."  This is the pivotal answer to the question of what the US will do next.   This leader needs enthusiasm, optimism, realism, vision, strength of character and an inner strength of convictions (call it principles with a passion?) all of which is perceived by his/her followers. 

Those core characteristics, as hard as they are to define, are the timeless qualities of leadership--now or 20 years into the future. What is different is that the core characteristics of leadership are NOT DIFFERENT at all. This kind of leader will guide us (here or elsewhere) to the future. Seek out that kind of leaders and your business will flourish. Fail to find and choose strong leaders and it will fail. It sounds so simple, doesn't it?

Best, John

PS: The following is a clue as to where to look for new leaders. Look at the young, and surround them with wise advisors to provide the only thing they're missing--experience-based wisdom.

A BONUS:
Leaders Emerge Young:
DDI UK Study Confirms that Leaders Emerge Early in Life

A study of 105 UK executives by Development Dimensions International (DDI) showed that a vast majority had shown leadership early in life, in school (95%), as captains of sports teams (50%), and in other settings (30%). In most cases this involved holding 2-3 different leadership roles while in school or in their youth.

When the executives were surveyed, many (65%) said they wanted to lead, even when they were young, and that they have always been ambitious (60%). Most felt they were good at communicating with and motivating others (55%).

Although they are currently successful, quite a few (40%) hoped to move higher yet, and many are engaged in lifetime learning and in areas outside their core expertise. A majority of them also still exercise vigorously (60%). Perhaps surprisingly, these leaders also exhibit an artistic side, enjoying the arts and entertainment (70%) and actually participating in artistic activities (20%), and others involved in church activities (16%).

Clearly leaders emerge young, grow and become diverse individuals-just what is called for in our intensely evolving global business environment.