Corporate Expenses: A David vs. Goliath Story January 27, 2007
Posted by robzel in Banks, Business, Expense, financial companies, growth, small business.5 comments
If you work in a large corporation, chances are you have come across systems for expense administration. Now, I have a lot of years of experience working in the corporate world and more recently running my own business. What I am about write below is not to refute the importance of expense management. In order to run a successful business, one must keep are careful eye on unnecessary expenses (although this lesson seems to be forgotten when it comes to executive compensation; think Home Depot). What I am going to illustrate through my personal experience is how the creation of corporate bureaucracy can sometimes cloud what are good intentions. By creating inflexible systems with non-thinking bureaucratic employees the goals of any corporate project can be defeated by negative externalities created. In this story I am cast as David. Goliath is played by a senior finance department employee. The setting is one of the world’s largest diversified financial institutions (one of my past employers).
One day the King (the head of the large diversified financial institution) says to his most senior and trusted financial adviser named Goliath, “Expenses are getting out of control. We are spending millions of dollars worldwide on travel, entertainment and other frivolous expenses. I need you to do something about this!” Goliath goes back to his lush office (no cube for Goliath) and thinks about how he can solve this vexing problem. “I know!” he declares, “We will build a new expense system.”
Goliath gathers all the best systems folks from throughout the organization. Never mind that they were engaged in projects that had huge revenue potential. After all, expenses are real right now not possibilities for revenue in the future. Of course since Goliath was so senior in the organization, project prioritization was not necessary. Goliath did not care that his project bumped countless other projects out of contention. That was a small price to pay for saving expenses! Little did he know (or care) about the hundreds of employees who had toiled on their projects over countless hours. Little did he consider the impact on morale or the opportunities lost for future revenue. Goliath was only focused on one thing, saving expenses.
After only 9 months Goliath sat down with the King and exclaimed, “We are done!” Goliath went on to describe the system to the King. “We have built the best expense tracking system in the world as would only befit the world’s best financial institution. I am so proud of the system and the way we built in measures and controls. Let me give you some examples.” Goliath goes on to explain how every item on the expense report needs to be itemized and entered into the system. Each travel and entertainment item has set limits where if the employee exceed the limit the excess comes out of their own pocket, unless of course the employee gains permission from two levels above them in the organization for the excess expense. All receipts get faxed over to a central processing center (newly set up of course) where the receipts are reconciled against the expense report. All reports need to be electronically approved by the employee’s boss and will not be processed until then. And the kicker as Goliath described to the King is that, “I have actually created revenue opportunities for the company from our own employees. Since all expenses are charged on our own corporate credit card, we can collect late fees and interest on unpaid charges. We have actually tracked the amount of time it takes to process expenses on average and it is in excess of 30 days! That means that unless the employee pays the outstanding balance out of their own pocket, we will be able to charge late fees and interest! The King was so pleased with the system and declared, “This is good!”
So the system was rolled out to the corporation. Almost immediately the expense savings were realized (as well as some revenue)! However, unbeknownst to the King the amount of time required to process expenses increased from 30 minutes to 90 minutes. Not only that, but employees got frustrated with the system and morale began to suffer. Important trips were cancelled or never contemplated just because of the hassle of going through the expense process. Overall productivity began to decline and with it so did revenue. Unfortunately, the King had no way to associate the decline in revenue with the new expense system.
About a year after the new system went on-line a new employee named David (aka me) joined the organization. David had never seen such an abominable system during his time in the corporate world. Unfortunately, David was so much lower in the organization than Goliath that there was no way he could change the expense system or make his voice heard. In order to avoid paying interest and fees David used his own money to bridge the gap in time between bills arriving and expenses being processed. The King received no revenue from David!
After two years, David decided to part ways with the company. Unfortunately, in bridging the gap on his credit card for expense processing David had a credit balance on his account. David sent notes to the company explaining the situation and trying to get his money back, but never got any response. After many months David got mad. He thought, “I no longer work for this company and I am no longer afraid to make waves!” In his last correspondence to the company he threatened to contact his State Attorney General.
Well I am happy to report David got a check yesterday for $230 (OK it’s a little victory). The company is in the headlines a lot recently. It seems they can’t seem to organically grow their business. In the latest article the King declared, “We are going to cut expenses by $1B”. It seems the King still has not learned his lesson.
Oops, He Did it Again! January 14, 2007
Posted by robzel in Apple, Business, Innovation, iPhone, Steve Jobs.1 comment so far
Actually, there is no oops about it, Steve Jobs has another potential hit on its hands. In my post on December 21, I talked about how it can be difficult to innovate in a large company. Apple under the leadership of Steve Jobs has had a string of hits the latest being the new iPhone. They seem to have a solution to the large company problem.
The keys to such continued product success are the true leadership and vision that Steve Jobs instilled upon his company. If you have any doubts, just look at the performance of the company with and without Steve at the helm. Unlike the Microsoft example I used in my previous post, Apple products have a purity of form and function that melds together. Their products do not have the clunkiness of solutions developed by a committee, but rather appear to have been developed by a relatively small group of people with a shared vision of the final product. Apple’s stuff doesn’t just work well, but it also looks cool too!
This latest example of innovation reminds me of two conflicting theories of evolution. In the traditional theory, evolution is a continuous process, with incremental change occurring over a relatively long period of time. A more recent theory is called Punctuated Equilibrium. According to this theory (which best supports the fossil record), rapid changes occur over a relatively short period of time, followed by periods of relatively small change. These rapid changes are caused by disruptive events such as severe climate change. Apple as a company represents such disruptive change. While there was a gradual change in cell phone features and technology over time, Apple’s new iPhone represents the equivalent of a climate change in evolutionary terms. With all theories of evolution, such rapid changes in the environment usually result catastrophic results, with the rapid extinction of many species. The question remains: Will the iPhone represent such a disruptive change in the cell phone market?
Other phone makers have got to be nervous. By all appearances, the iPhone is not just another incremental improvement over the existing phone model, but a leap forward. Of course, this is all wrapped up in a temping package with the traditional Apple intuitive interface. It seems that incremental improvement may not be enough anymore, at least in areas that compete with Apple. Stay tuned and find out what happens. I for one am definitely temped to buy the iPhone when it becomes available.
When is Prime Not Prime? January 9, 2007
Posted by robzel in Business, cloning, cows, New York Times, news, News and politics, prime beef.add a comment
No, this is not a post about Prime Numbers but rather a post about cloning. On December 29, The NY Times reported that the FDA declared, “milk and meat from some cloned farm animals are safe to eat”. I don’t know about you, but I am going to run down to the store and buy some cloned animal products. Especially considering the same Times article goes on to describe how some cloned animals, “are born with deformed heads or limbs or problems with their hearts, lungs or other organs”. Yum!
It is only a matter of time before scientists work out the kinks and deformities, and cloning becomes an industry standard. What a great opportunity for dairy and meat producers where every dairy cow is abundantly productive and every beef cow is prime! Or is it? As the saying goes, be careful what you ask for.
I’m sure many of you can remember the first great piece of steak you had, maybe a nice filet at Gibson’s? If you went to one of the upscale steakhouses, chances are you had a very special evening, with great service, great atmosphere and a nice succulent aged prime cut of steak. Because of the price, an event like this was something you would probably do infrequently and so the experience would become something precious.
Now imagine the cloning future: With improvements in technology, cloning becomes relatively inexpensive. ‘Smart’ businessmen run to their nearest cloning lab (these have sprung up all over) to get prime beef cows. These smart businessmen start to pop up everywhere, and so to do the herds of prime beef cattle (of course the scientists already worked out the kinks and deformities). After all, there is no longer any money to be made in non-prime cattle, but lots of money to be made in prime cattle. Or so it seems. In a relatively short period of time, the price of prime beef starts to plummet. Many of the ‘smart’ businessmen go out of business as do many of the cloning labs. For the consumer, prime beef is no longer prime but just everyday beef. Going out for prime beef is no longer a special event and many upscale restaurants go out of business.
Maybe you have heard of the butterfly effect; a butterfly flaps its wings and through a series of events can cause a tornado. In the same vane, who knows what the future will bring with cloning. Will steak taste the same?
Can America Make it in the Car Business? January 5, 2007
Posted by robzel in Big 3, Business, Cars, Chrysler, Ford, Gas Mileage, GM, Honda, New York Times, News and politics, Nissan, Toyota, Volkswagen.4 comments
As part of my morning ritual of reading the NY Times, I came across an article in the business section titled, “Auto Sales at Big 3 Fall Further”. According the article, sales at the Big 3 US automakers are falling while foreign rivals are increasing. Sales of Toyota vehicles are expected to overtake Ford this year, making Toyota the number two brand behind GM. Now I would be a hypocrite in not disclosing the fact that I own two Acura’s (part of Honda Motors). I have found the quality of the vehicles as well as the service superior to others I have experienced (and I have owned a lot of cars of various makes). However, I find it sad that the Big 3 auto companies seem to be falling apart right before our eyes.
Part of the current problem in Detroit can be illustrated by personal experience: In 1998, I had a lease about to expire on a Subaru Outback. The Subaru was a great car, but I wanted something bigger with three rows (car pool considerations) and did not like the stigma of driving a mini-van (the soccer mom image was too much for me). I also wanted to buy an American made vehicle for patriotic reasons. After looking around my wife and I decided to purchase a Dodge Durango. It was the perfect size, had the requisite three rows and was kind of stylish.
I won’t go through my disappointment with the vehicle in great detail, but will highlight just a couple of issues: Day 1 we picked up the vehicle and the steering alignment was off. It was not off a little bit, but the wheel pointed way to the right while driving straight. How did the vehicle pass quality control like that? It took the dealer 2 days the fix the problem. This was not a good start. Fast forward to a drive home from a baseball game; while driving through a not so nice area in Chicago the engine on the Durango starts revving wildly and then almost stalls. I managed to make it home, just barely. Diagnosis: Bad engine module. It took the dealer two days to fix. Sorry, no loaner car unless you purchase an extended warranty. What a pain the #@$! But the coup de grace was the abysmal gas mileage. We averaged 8 mpg city and 15 mpg highway. I expected bad gas mileage when I bought the SUV, but never single digits (I do apologize Mr. Gore!). I do think quality has improved in American cars since 1998. But if you examine my experience, it was not just the quality but also the dealership experience that was disappointing. Poor quality and a poor dealership experience is a disastrous combination. Couple this with poor gas mileage and it’s time to look for a new brand. After the Durango I bought an Acura MDX. I have been pleased with the quality the service and it gets double the mileage of the Durango.
Unfortunately, I see the same short sightedness in the current situation as occurred in the 1970′s during the ‘gas crisis’. Leading up to the first gas crisis in 1972, the Big 3 dominated the market in the US. They built large ‘floaty boaty’ cars and some pretty cool muscle cars. But, there was little to no attention paid to fuel efficiency. As gas prices climbed and gas became scarce, consumers focused attention on smaller more fuel efficient vehicles. Japanese companies like Toyota, Datsun (now Nissan), Honda, and Volkswagen had the perfect vehicles. Over time, these competitors (and others) graduated into building a greater diversity of vehicles, continuing to erode the big 3′s market share.
I guess the lesson from the 70’s was not learned. In our more recent ‘gas crisis’ it became apparent that the Big 3 had put all their eggs in the SUV basket. It is easy to see how these companies lulled by fat profits continued to bet on the sales of SUV’s. Unfortunately, history has repeated itself where foreign rivals have the right vehicle for the times including small fuel efficient models and hybrids. Not only that, unlike the 70’s, these rivals also have product that competes head to head with the Big 3 in the SUV space with better quality and for the most part a better dealer experience. The Big 3 have really backed themselves into a corner.
In examining these events, there are some valuable lessons:
- Hedge your bets: The SUV thing was great, but it had to end some time.
There were many signs that suggested the chapter was coming to a close including increased political awareness of global warming, the war with Iraq, and gas prices that were bound to rise to name a few. The Big 3 were caught short in under investing in small vehicles and hybrid technology. - Monitor your customer experience: I have read and heard a lot of press suggesting that quality is improving with American cars. That may or may not be true, but the quality is only part of the equation. Like it or not, the image of a
car brand is in large part of reflection of the dealer experience. When things go wrong with a vehicle (and they will with any vehicle) loyalty is in large part determined in how a problem is handled. Mercedes Benz as a company has some of the worst quality ratings according to Consumer Reports. Yet they continue to attract and retain customers by offering a superior dealer experience. 
Innovate: In my last post I talked about the difficulty in innovating in large companies. The Big 3 each have large corporate bureaucracies that can tend to stifle innovation. However, there seems to be a light at the end of this tunnel. Chrysler has taken the lead in the innovation department, but both Ford and GM have begun to follow suit.- Don’t Over-Homogenize Ideas: Whenever I think about watered down ideas the image of the Pontiac Aztek comes to
mind (sorry to the few Aztek owners out there). I would call the Aztek the hyena of the auto world; something that looks like it is made from spare parts squished together. One can imagine all the marketing folks getting together with the corporate bean counters to develop a bland vehicle with design elements to appeal to every demographic customer segment imaginable. Instead the end result was a design that appealed to almost no one. The Aztek was a sales flop. At other end of the spectrum are vehicles like the
Infiniti FX. It is a love it or hate it design, but it strikes an emotional chord with people who see it. One can easily see that the final version of the FX is very close to the original concept without a lot of corporate homogenization.
I could go on here, but this post is getting long. It is my sincere hope that the Big 3 can get back on track. My MDX is getting up there in miles and I would love to replace it with a vehicle made by one of the Big 3. However, to earn my business they first need to make inroads into improving quality, the dealer experience and making vehicles that don’t make me feeling like writing a confessional to Al Gore every time I drive.
