Enterra Insights

Building Credibility and Trust When Starting a Business

Raman Kumar, vice-chairman and chief executive officer of an Indian healthcare business process outsourcing (BPO) business called CBaySystem, wrote this about entrepreneurs:

"Dictionary definitions are rather clinical at best. No soft side to them, no deep meaning, just the facts. Take the definition of the word 'entrepreneur. Its essence is in its simplicity.

"en·tre·pre·neur - one who organizes, manages, and assumes the risks of a business or enterprise. The entrepreneur is commonly seen as a business leader and innovator of new ideas and business processes.

"When you break the definition down into its key elements, what you get are three operatives.

"Innovator: The one with the big idea that may change how we see things and how people live or maybe simply challenge convention to create a new more efficient way of addressing a common issue.

"Organizer and Manager: The person who takes charge of setting the idea up as a business.

"Risk Taker: This is probably one of the most critical aspects of creating and running a business. Many businesses are begun on start-up funding from family, friends and savings. This can put personal relationships and even one's own future at risk.

"It is these basic elements that make a good business a great one. However those are precisely the factors that will stunt growth if they’re not checked on from time to time and kept relevant in the context of future growth." ["Equity Dilution and Your Business," Wall Street Journal, 19 August 2010].

Although I agree with Kumar as far as he goes, a good entrepreneur is also a builder of trust. You simply can't do all of the other things an entrepreneur is supposed to do if you can't get others to trust you. Trust begins with credibility. Aniisu K. Verghese, head of internal communications for India at Sapient Corp., offers some advice about how entrepreneurs can gain credibility ["Building Leadership Credibility," Wall Street Journal, 14 September 2010]. He writes:

"It isn’t easy these days being a leader. With trust, confidence levels and credibility dropping rapidly among employees leaders face an uphill task in rallying staff, conveying messages and moving forward toward the organization’s goals. The usual grouse is that leaders don’t show up, are not putting value on communication, aren't straightforward, don't listen, and don't take feedback seriously."

Although Verghese focuses on internal aspects of leading a company, establishing credibility is just as important when dealing with individuals and organizations external to the company. He notes that in a recent survey about leadership, Asia-Pacific leaders didn't fare well on questions dealing with ethics and a willingness to admit mistakes. Although it's true that a lack of ethics and an unwillingness to admit mistakes can adversely affect internal company operations, they can also be devastating when an entrepreneur goes looking for capital. Verghese laments the fact that surveys continue to report "that trust among CEOs and leaders is eroding. People tend to believe experts and people like them (peers) instead of leaders." He continues:

"It is not enough anymore for leaders to take decisions among themselves. Employees are seeking inclusion and transparent methods of decision making. They aren’t convinced if leaders are only visionaries and strategists. They expect them to gain their trust and walk the talk. Building leadership credibility is also about being available, wearing multiple hats for the varied scenarios that exist within an organization and from the expectations of the role. To substantiate that point, the 2010 Great Place to Work Survey indicates that two-way communication, managers’ competence, and the integrity and reliability of management are keys to employees’ viewing the organization as trustworthy."

Since good communication skills are absolutely essential to increasing credibility, Verghese offers his recommendations on how those skills can be improved. He writes:

"Make communication your mantra: Often communication is the last resort when it comes to reviving flagging morale or addressing a crisis. Employees are not only expecting to get clarity on a host of topics such as revenue and growth but they also want to know what leaders are doing about attrition, engagement and social responsibility. Their interest is about the honest, transparent practices within the organization, how we treat our people, how leaders listen and engage with stakeholders."

I reiterate that what's good for internal communications is also good for external communications. Stakeholders obviously include board members and investors as well as employees.

"Be available: In a recent conference on great workplaces, most representatives shared how their leaders were approachable via chat shows, e-mail and face to face sessions. It seemed like a privilege for employees to meet with their leaders. It shouldn’t be. Rather than hear, 'the leader only shows up in a crisis' or 'never seen the leader around,' all leaders must be available when your employees want them to be."

Although Verghese makes a good point about being available, entrepreneurs know that during the early years of a company they are more likely to be found on the road drumming up business or raising capital than in the office schmoozing with employees. That doesn't mean that the leader can't be available. After all, we live in the information age. I've held plenty of staff meetings where I had to call in from the road. The secret is staying in touch and letting employees know that you are approachable.

"Have your voice: Employees appreciate hierarchy but are open to seeing it as a structure for better governance rather than a platform for manipulating people. As a leader, you are expected to communicate to those you find yourself in front of, be focused on the future, and articulate personal opinions and vision. By focusing on the future, you are also setting an expectation for your employees to look ahead at the upside rather than at any current downsides. Cultivate your personal voice so it is valued through periodic internal communication, be it a monthly report, a weekly blog or a daily tweet."

Periodic internal communication, although important in a start-up company, becomes even more important once a company begins to grow. To learn more about the challenges associated with growth, read my blog entitled Beyond Being a Start-Up.

"Align your managers: Research points to your middle managers as key to the success of any initiative or organizational goal. Getting managers to walk the floors is the most effective way to engage and gain trust. Be it a change in policy or a crisis scenario, it is important for leaders to be present to address concerns. In reality everyone is a leader and your employees must see their immediate supervisors as leaders. However, you must set expectations on what they can approach you with and what they must deal with up front themselves. Every level of the organization needs to add value to the information you are sharing. Hold managers accountable for the communication they do or don't do."

Once again this is seldom a problem during the start-up phase of a company. Once a company gets so large that you require name tags at corporate functions, alignment is probably something you should have already addressed.

"Check in on your organization's health periodically: While the annual engagement survey will give you a sense of how the morale of your organization is, it helps to keep a regular tab via direct feedback mechanisms and by face to face connections."

It also helps to have a trusted advisor who can help gauge the company's health. Often leaders are isolated from the truth because people worry that their jobs will be at risk if they raise problems they see. If you can't get straight and honest answers from your employees, your value as a leader is greatly diminished.

"Solve problems directly: Your employees expect to see you taking action on bottlenecks or concerns that impact their lives daily. Hosting a page with all the feedback and the actions you are taking goes a long way in building transparency and trust. Acknowledge if there is a gap, show intent and talk of the risk of failure. Then address the issue with your honest opinion. Discuss the pros and cons of the issue, air the solution and seek an amicable resolution."

Being a "hands-on" leader is seldom a challenge for an early stage entrepreneur. It becomes a much greater challenge as the business grows. In the blog mentioned above, I discuss the fact that entrepreneurs often find it wise to turn day-to-day operations over to a professional management team once the company gains traction and begins growing. If that happens, it is the leader of the professional management team who needs to be seen as the problem solver. This could create culture shock among plank owner (i.e., original) employees since they are accustomed to the founder being the problem solver. As an entrepreneur, you need to help make the transition go smoothly by empowering the new management team at every opportunity.

"Tap experts and personalities: Do you have personalities within your organization who are experts and respected? Leverage their support as communication champions and change agents. Work through these personalities to reinforce messages and empower them with information they can use."

I've seen past studies about organizational change that conclude middle manager support is essential if desired changes are going to successful. It was probably a middle manager who said, "I am learning that criticism is not nearly as effective as sabotage."

"Be prepared to be scrutinized and treated as equals: With information freely available and the speed at which it travels, organizations need to understand that leaders can no longer be exempt from public scrutiny. What they do at work and outside will always be questioned and monitored even if it has no direct relevance to the company’s business. Be it in their neighborhoods, the supermarkets they frequent, the clubs they visit and the schools their children attend."

It has been pointed out that the Internet has become the great equalizer. The opinion of a middle school student can carry just as much weight as a college professor in some circles. If I were to categorize Verghese's final two recommendations, I would place them under the heading of "beware of social media."

"Manage personal image and morals: ... I foresee leaders leveraging the services of internal image consultants to reinvent themselves, not just to understand themselves but to better define their images. Personal image audits will come of age. Tiger Woods and his escapades were splashed across the world’s media and are a reminder of how corporate leaders need to manage their images, too."

Reputations are much more easily destroyed than created. That is why today's leaders need to understand the power of social networks.

"Leaders and social media usage: With the growing importance and power of social media, leaders will have no choice but to embrace this new media or flounder. Today, leaders' adeptness in understanding what employees discuss beyond the work firewall will be a measure of success. Leaders who are yet to get into the social media world will need to quickly upgrade their skills or be lost in the chatter."

Although Verghese is focused on leadership, it is good to remember that corporations also have reputations that can be enhanced or destroyed on social media sites. It is much more difficult today for a company to control what is said about it. Rajiv Dingra, founder and CEO of the social media agency WATConsult, believes that an entrepreneur should deliberately develop an aura of confidence to help foster trust and credibility ["How to Generate Confidence, Quietly," Wall Street Journal, 24 August 2010]. He writes:

"One of the key roles of entrepreneurs is to inspire and motivate people so that they work as passionately for the company as the founders do. This takes some doing. Not all entrepreneurs are great at everything. ... The challenge in being an entrepreneur is that your limitations, mistakes and bloopers may seem magnified to the people in your company. Often as an early entrepreneur you are pushing the boundaries of what’s possible and failing more often than succeeding. As an innovative entrepreneur you will go through this no matter what stage of the company’s growth you are in. Failure is part and parcel of entrepreneurship. But the challenge in this process is that if you fail in front of your employees and seem vulnerable and disturbed, which is a natural reaction to failure, it can affect your team. This impact is further magnified when the team is small and during those early days when the vision of the company is still not clearly defined."

Unlike Verghese, who focuses on building credibility in mature companies, Dingra specifically focuses on entrepreneurial leadership in the early stages. He continues:

"Before someone reads this and feels that I am against transparency, I must clarify that I am not. All I am suggesting is a delay of sharing of thoughts and ideas until they are well defined inside the entrepreneur's head. I'm suggesting that an entrepreneur should listen more than speak. I'm also suggesting that entrepreneurs try to create auras around themselves that makes their teams look up to them. This can be done by having two or three people as a layer of management through which the entrepreneur communicates with the rest of the company. In an early-stage company, even one person is enough. This aura should be created by the entrepreneur’s expertise. Each entrepreneur has some area of expertise, be it knowledge, negotiation, sales or something else. This should be clearly illustrated through his or her daily work. If you stick to what you are best at doing and let others work on the rest, people within your team will appreciate your efficiency, performance and delivery. It will not strike them that you are just doing what you love. Aura creation for entrepreneurs ensures that their people are inspired and motivated."

Frankly, I'm not sure that creating an "aura" is as important as demonstrating competence. I agree with Dingra on that point. No one internally or externally is going to trust someone they perceive as incompetent. That doesn't mean you can't make mistakes -- as Dingra point outs, entrepreneurs make plenty of them -- but you must deal quickly and competently with those mistakes. Dingra concludes that creating an "aura" is "about being self-assured in a way that instills calmness and stability about the future of the company in employees' minds." I believe that is exactly what demonstrating competence does.

Summing up the discussion, no start-up company can survive if its leadership fails to foster credibility and trust in stakeholders -- which include employees, board members, and investors. Credibility and trust are generated through good communications, ethical behavior, and demonstrated competence. Concentrate on developing those traits and, as Spock would say, you can "live long and prosper."

Better Hospital Management -- Better Health Care

In a post entitled Hospitals and Supply Chains, I discussed cost savings and improved patient care resulting from better planning and management in progressive hospitals. A study conducted by researchers from the London School of Economics recently concluded that hospital management plays a critical role in providing better health care. The study's authors identified "five simple rules for running a first-class hospital" ["How to save lives, The Economist, 21 October 2010]. The article reports:

"Measuring good health, in patients and hospitals alike, is one thing. Finding the causes is harder. ... From America to Sweden, the best hospitals in a rich country outperform the rest. But how? Stephen Dorgan of McKinsey, a consultancy, and John Van Reenen of the London School of Economics have tried to answer this. They studied almost 1,200 hospitals in America, Britain, Canada, France, Germany, Italy and Sweden, using techniques more commonly applied to identify excellence in manufacturing industry. The hospitals with the best management practices (analysed as if they made things rather than curing people) also ranked best on a standardised measure of medical success: death rates among emergency patients experiencing heart attacks. That score works across countries and cultures, and has unambiguous results."

Although patients might not like being thought of as goods proceeding through a manufacturing process, the fact is that almost every human activity involves some kind of process. Improve the process and you improve the outcome. The article reports that "researchers found five characteristics associated with the management of successful hospitals": competition, size, ownership, training, and staff autonomy. Those may not sound like they have much to do with health care (except, perhaps, good training), but each characteristic plays a subtle but important role. The article first looks at why "competition—or at least the perception of having competitors" turned out to be an important characteristic.

"Hospital managers who named more than ten institutions that they competed with scored more highly on their management practice than those who saw fewer alternatives for their patients to choose from."

Although the article doesn't go into why that may be the case, the answer is obvious. When a business has competitors, it must differentiate itself from them in order to be successful. When it comes to health care, the best differentiation takes the form of better service and better care. The next characteristic (size) may sound counterintuitive. The study claims that having more and smaller hospitals doesn't translate into better health care. The article explains:

"Having lots of small providers vying for patients will not on its own raise standards. The researchers also found that bigger is better when it came to good management. Hospitals employing 1,500 or more staff are better run than those employing more than 500, which, in turn, outperform those with more than 100 staff. Hospitals with less than 100 people working in them are particularly badly managed."

One would intuitively think that the more facilities there are available and the smaller the patient load of those facilities the better care each could provide. Although the article doesn't explain why bigger is better, I suspect it has to do with the fact that patient needs don't change whether they are being cared for in a small or large facility and, therefore, the larger the facility is the more likely to have the kind of trained specialists available to provide the best care when that care is required. In addition, larger facilities can lower costs by taking advantage of economies of scale and cutting better deals with insurance companies. These are advantages that also have an impact on the next characteristic -- ownership.

The article reports that, "Private ownership is another factor helping hospitals score more highly." That's all the article has to say on that topic -- which seems highly unfair to publicly-owned facilities. It comes as no surprise to me that a privately-owned hospital can offer better care than a publicly-owned one because public hospitals accept all comers and are generally burdened with a higher number of uninsured patients. Sometimes access to care is just as important as the quality of the care. In the U.S., at least, it looks like there are going to be fewer publicly-owned hospitals ["Cash-Poor Governments Ditching Public Hospitals," by Suzanne Sataline, Wall Street Journal, 29 August 2010]. Sataline reports:

"Faced with mounting debt and looming costs from the new federal health-care law, many local governments are leaving the hospital business, shedding public facilities that can be the caregiver of last resort. ... More than a fifth of the nation's 5,000 hospitals are owned by governments and many are drowning in debt caused by rising health-care costs, a spike in uninsured patients, cuts in Medicare and Medicaid and payments on construction bonds sold in fatter times. Because most public hospitals tend to be solo operations, they don't enjoy the economies of scale, or more generous insurance contracts, which bolster revenue at many larger nonprofit and for-profit systems."

The next characteristic that differentiates a great hospital from a good one is training. The article explains:

"Only in Italy must hospital managers have clinical degrees. That seems a good rule: institutions that employ clinically qualified staff in management score better than those that do not. Overall, Britain performs badly by this measure: in Sweden, 93% of hospital managers are former doctors, nurses or other clinical staff. In America, Canada and Germany, the proportion is 71-74%. In France it is 64%, and in Britain just 58%."

Since the study was looking at management practices, it naturally looked at who was managing hospitals rather than who was actually providing the care. Education and training is going to be critical in the future in order to provide the number trained professionals needed to provide care to an aging population. In posts entitled Let's Talk Jobs, Part 1 and Let's Talk Jobs, Conclusion, I pointed out that health care is one economic sector that is anticipated to create a significant number of jobs that can't be outsourced. In another post entitled Shortages of General Practice and Family Doctors are Impacting Emergency Health Care, I noted that economic factors are forcing more doctors into specialties and out of general practice. One way to help close the gap between general practice needs and available providers is to train more physicians' assistants and nurse practitioners. Will that happen? Probably not. Not only do many doctor oppose that course of action but James Ledbetter reports that the U.S. has claimed to have had a shortage of nurses since the 1950s ["Maybe it's job retraining that needs to be retooled," Washington Post, 1 August 2010]. Ledbetter admits that there are, however, mixed signals on this subject. He explains:

"According to the U.S. Bureau of Labor Statistics, the job category that will grow the most over the next decade is nursing; nearly 600,000 new registered nurse positions will be created by 2018, increasing the size of the potential nursing workforce by 22 percent. Yet it is hard to see how America will be able to fill those jobs, since apparently we can't fill the nursing jobs we have now. Various health-care associations estimate that there are 135,000 nursing vacancies today. Experts place the blame for this shortage on the burdens created by the aging baby-boom generation, but that is only part of the story. ... At the same time, USA Today last month cited a "rare glut of nurses" as a reason that recent nursing grads can't find work. Is it possible to have a shortage and a glut at the same time?"

Ledbetter answers his own question by noting that need estimates for jobs reflect theoretical constructs rather than real jobs. In other words, "The shortages aren't real." He explains:

"When medical organizations speak of shortages, they are measuring current workforce levels against a theoretical number per capita. Just because health professionals say they need more employees doesn't mean that the market has the capacity to support them. This would explain why we appear to have both shortages and gluts, and why retrained workers don't always find positions."

Whether enough trained staff will be available or not, the McKinsey/LSE study indicates that, whatever staff is available in hospitals, they will only be able to provide improved care if they have the autonomy to make decisions. The Economist article explains, "Good staff ... need the freedom to exercise their own judgment: managers with the most autonomy fare best."

Given those five characteristics (i.e., competition, size, ownership, training, and staff autonomy), it might surprise you that university-associated hospitals ranked high in the study. The article concludes:

"Hammersmith Hospital is one of five such institutions run by Imperial College, London. Stephen Smith, who is responsible for the hospitals, is also principal of the faculty of medicine. In America, Johns Hopkins is not merely a highly rated university based in Baltimore, but its medical arm also runs a hospital of high repute. Big, professional, autonomous, mostly independent and ferociously competitive: elite universities seem to offer all five important characteristics for saving lives."

The CEO of IDEO, a well-known design firm, believes that innovation is "no longer limited to new physical products but includes new sorts of processes, services, interactions, entertainment forms, and ways of communicating and collaborating" ["Change by Design," Bloomberg BusinessWeek, 24 September 2009]. Although you wouldn't immediately think of using a design firm to help change management practices, Kaiser Permanente did. Brown reports:

"In 2003, Kaiser set out to improve the overall quality of the health-care experience from the point of view of both patients and medical practitioners. My design consultancy, IDEO, proposed that rather than hire a slew of internal designers, the existing staff should learn the principles of design thinking and apply them themselves. Over the course of several months we conducted a series of workshops with nurses, doctors, and administrators that led to a portfolio of innovations. One of them—a project to reengineer nursing staff shift changes—involved a strategist with a nursing background, a specialist in organizational development, a technology expert, a process designer, and a union representative."

If you are unfamiliar with IDEO "principles of design thinking," you might want to take a few minutes and watch the following ABC Nightline piece called "The Deep Dive." Although the clip is about redesigning the humble grocery cart and not health care practices, the "deep dive" process is what is important.

Brown continues:

"Working with frontline caregivers at each of four Kaiser hospitals, the core team identified the problems that occur when shifts change. Departing nurses routinely spent 45 minutes briefing the arriving shift about the status of their patients. The procedures were unsystematic and differed from hospital to hospital, and methods used for compiling information varied from Post-it notes to numbers scrawled on hospital scrubs. Knowledge was often lost, and many patients felt the shift change created a hole in their care. What followed from these observations were the now-familiar elements of a robust design process—videotaping, brainstorming, role playing, prototyping—carried out not by professional designers from IDEO but by Kaiser's own staff. The result was a complete change in approach. The first prototype, built in only a week, included new procedures and simple software that enabled nurses to call up previous shift-change notes and add new ones throughout their shifts. More important, patients were now part of the process and could bring up additional details important to them. Kaiser measured the impact of this change and found that the mean time between a nurse's arriving on shift and first interacting with a patient was more than halved. The innovation also had an impact on how nurses felt about their job. In a survey, one commented: 'I'm an hour ahead, and I've only been here 45 minutes.' Another admitted: 'This was the first time I've ever made it out of here at the end of my shift.' The new procedure had an impact on patients and nurses but on its own was a long way from achieving the desired goal of a systematic improvement in the overall quality of health care at Kaiser. To achieve that, the core team of nurses, development experts, and technologists went from carrying out their own projects to acting as consultants to the rest of the organization. Through the Kaiser Permanente Innovation Consultancy, the team now pursues the mission of enhancing the patient experience, envisioning Kaiser's 'hospital of the future,' and introducing innovation and design thinking across the Kaiser system."

What Kaiser-Permanente learned was that staff autonomy improved hospital management as well as the care provided to its patients. Because the staff was not only involved but took ownership of the changes, staff members avoided the culture shock that often accompanies change. Change, however, can be good. One last example of how change can improve health care in hospitals comes from Canada ["The Ottawa Hospital’s Supply Chain Transformation," by Steve Banker, Logistics Viewpoints, 5 October 2010]. Banker writes:

"The Ottawa Hospital has three campuses and about 1,200 inpatient beds. The hospital began a supply chain transformation in 2004, which was aided by the province of Ontario’s willingness, starting in 2005, to fund operational excellence initiatives in back office and supply chain operations. This transformation was based on a Supply Chain Strategic Plan the hospital developed to improve the efficiency of delivering Material Management services, as well as to achieve a benchmark cost profile within the industry. The strategic plan was organized around seven key initiatives aimed at reducing supply chain management costs and providing customer-focused service to support quality patient care. ... In effect, the hospital wanted to get leaner by ordering and stocking only what it truly needed. This transformation could create larger opportunities for The Ottawa Hospital. There are 17 hospitals in the region and they are exploring the possibility of leveraging their total procurement spend to realize savings. Once TOH has transformed its internal processes, it will play a leading role in regional sourcing."

Banker, in interviewing people at The Ottawa Hospital (TOH), confirmed what the McKinsey/LSE researchers concluded about the importance of size in improving hospital management. He went to describe how the supply chain worked in the hospital system and what changes were made. He continues:

"In hospitals, quality patient care is the ultimate goal. But quality care can often be achieved at a lower cost. TOH put in place a Product Evaluation Committee to ensure new products are reviewed by all interested stakeholders prior to being ordered and placed in inventory. No product can be ordered unless it is on the approved list managed through the Product Evaluation Committee. If a doctor wants a new product to be sourced, they must make their case to the committee. The committee looks at whether there are already similar SKUs available and then balances clinical need against costs. The hospital’s business case outlined a four year payback, longer than what most companies achieve when implementing supply chain programs. However, its goal was not only to reduce supply chain costs, but also to enhance patient care. This program delivers the right products, in the right quantities, to the right clinical locations. ... TOH’s supply chain was interesting, but its discussion about implementing best practices was even more interesting. In preparation for this project, the hospital examined supply chain best practices in both private industry as well as leading hospitals in Europe."

Banker reaches the same conclusion that the McKinsey/LSE researchers reached -- better management practices means better health care. Better management practices also mean lower costs, which will become increasingly important in the years ahead.

Fears Grow Concerning Possible Food Price Increases

The Thanksgiving holiday in America is celebrated in November following the harvesting of crops and before the onset of winter. It seems like a good time to reflect on the global food situation. You might recall that back in 2007-2008 riots were spawned around the globe over food shortages and rising prices. A number of events colluded this year to create new concerns that food prices might once again begin soaring ["Fears grow over food supply," by Javier Blas and Simon Mundy, Financial Times, 3 September 2010] Blas and Mundy note that these fears resulted in Russia extending its grain export ban and in wheat prices soaring. Riots have already started erupting in some places in Africa, They continue:

"[In September,] Russia announced a 12-month extension of its grain export ban, ... raising fears about a return to the food shortages and riots of 2007-08 which spread through developing countries dependent on imports. The announcement by Vladimir Putin came as the United Nations’ Food and Agriculture Organisation called an emergency meeting to discuss the wheat shortage, and riots in Mozambique left seven dead. The unrest in Maputo, in which 280 people were also injured, followed the government’s decision to raise bread prices by 30 per cent. ... Although agricultural officials and traders insist that wheat and other crop supplies are more abundant than in 2007-08, officials fear the deadly Mozambique riots could be replicated."

As you might recall, severe drought and devastating wildfires took a toll on the Russian wheat crop earlier this year. Simon and Mundy remind us that "Russia is traditionally the world’s fourth-largest wheat exporter, and the export ban has already forced importers in the Middle East and North Africa, the biggest buyers, to seek supplies in Europe and the US." The Financial Times prepared a nice interactive site [What’s driving the wheat price spike?] that lets you explore in more detail why wheat prices have risen so dramatically.

Continued increases in October pushed food prices closer to the levels seen in 2007-2008. As a result, the UN’s Food and Agriculture Organization's (FAO) price index for "a basket of wheat, corn, rice, oilseeds, dairy products, sugar and meats" jumped nearly 5 percent over September prices. ["Food price rises stoke riot fears," by Javier Blas, Financial Times, 2 November 2010] According to Abdolreza Abbassian, an FAO economist in Rome, "Prospects for improvements are very limited." Blas reports that the FAO's gloomy outlook marks a turnaround from its previous position. He explains:

"Until recently, the FAO had predicted that food prices would fall soon, but now officials are concerned that high costs could continue well into next year or even rise further. Wheat planting in the breadbasket region of the Black Sea is well below expectations, prompting forecasts of another low crop in 2011."

In a follow-on article, Blas reported that "the bill for global food imports will top $1,000bn this year for the second time ever, putting the world 'dangerously close' to a new food crisis" ["Fears of new food crisis as prices soar," Financial Times, 17 November 2010]. This "bill" represents a 15 percent rise over the bill for 2009. Blas continues:

"'With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011,' the FAO added. In the 10 years before the 2007-08 food crisis, the global bill for food imports averaged less than $500bn a year."

Blas reports that rising food prices are not just affecting the developing world. McDonald's and Kraft Foods have already announced that the cost of their products will rise next year. According to Greg Farrell, "At a time when the global consumer economy is still in the doldrums, a surge in the cost of wheat, milk, meat, cocoa and other staples of the world’s daily diet is increasing the pressure on manufacturers and retailers to pass the rises on to cash-strapped consumers across the US, Europe and parts of Asia" ["Consumers: Soon to feed through," Financial Times, 6 August 2010]. He concludes:

"Overall, then, how much of the rise in input costs will feed its way through, and how soon? 'Food companies have had success passing along commodity inflation in the past,' says Judy Hong, a Goldman Sachs analyst. 'It's going to be more challenging to pass through commodity inflation to the consumer this time around. You have to look at it much more on a category and company basis. There are categories where the competitive pressure is more intense,' she adds, pointing to cereals and soup as two. The pricing increases will eventually be passed along to shoppers, predicts Susan Anderson at Citigroup, but it will not happen quickly. 'There will be a six-month lag instead of a one- to two-month lag,' she says. If nothing else, that provides some reassurance for Christmas."

The only person who doesn't seem to be sounding the alarm is Tom Vilsack, U.S. Department of Agriculture Secretary ["Vilsack: Food Costs Won't Surge," by Brian Baskin, Wall Street Journal, 18 November 2010]. Baskin reports:

"Skyrocketing prices in the agricultural futures markets won't translate into as big a bump in food costs for consumers, U.S. Department of Agriculture Secretary Tom Vilsack said on [17 November]. 'I'm not sure that commodity prices necessarily translate directly and proportionately into food costs,' Mr. Vilsack said in an interview, adding, 'They go up and down all the time.' ... Farmers aren't reaping the full benefit of higher prices, and consumers don't pay the full cost, Mr. Vilsack said. 'There are a lot of people in the food chain that are taking a bite out of the apple,' he said. Food prices rose only 0.1% in October, the Labor Department said on Wednesday, even as corn futures shot up nearly 20% and sugar futures rose 15%. But large food producers, including General Mills Inc., have said recently that they will soon scale back promotions that have kept consumer prices subdued. The USDA estimates food prices this year will rise by between 0.5% and 1.5%, the smallest increase since 1992, although the rate is expected to pick up to a more normal 2% to 3% in 2011. Businesses across the agricultural sector also have low debt levels, making it easier to weather volatile markets, Mr. Vilsack said."

Volatility in food prices is a subject that is likely to capture a lot of attention if a food crisis does emerge next year. A Financial Times editorial asserts, "A second food crisis in as many years is a wake-up call" ["The importance of global food security," 5 September 2010]. It concludes:

"Focusing on food security is sensible. The link between food and political stability in the developing world is clear. The crisis of 2007-08 sparked widespread riots, bringing down governments in Haiti and Madagascar. [October’s] unrest in Mozambique was provoked by a sudden 30 per cent hike in the bread price. Things can be done. Most importantly, there is a need for greater investment in irrigation and other measures to improve land quality as well as crop resilience. Developed countries have focused too much on food aid rather than providing development assistance. The US, for instance, spends 20 times more on the former than the latter in Africa, according to a report last year from the Chicago Council on Global Affairs. This balance needs to change. Steps should be taken to mitigate the severity of crises when they strike. Bigger reserves will probably be needed, as will international rules to clear up the circumstances under which countries can suspend agricultural exports. This will take more than fine words."

Joachim von Braun, director of the Center for Development Research at the University of Bonn and former director-general of the International Food Policy Research Institute, believes the time has come to regulate the agriculture sector ["Time to regulate volatile food markets," Financial Times, 9 August 2010]. He writes:

"With the current extreme price increases for wheat, we are observing potentially the early stages of another global food-price crisis. Even if this does not evolve into something as dramatic as the crisis of 2007-08, when prices of major agricultural commodities from corn to rice shot up to record levels, triggering food riots from Bangladesh to Haiti, it is a stark indication of the perilous state of the world food market. Some lessons have been learned from 2008, but too little has been done to prevent future crises. In particular the malfunctioning of world grain markets has not been addressed – a failure now haunting world markets. The fixing of international food prices today is the result of three forces: expectations on future supply and demand; the growing role of speculators in commodity markets, and the importance of food prices for political stability in countries such as Egypt."

Von Braun is concerned because he believes that "low-income countries and the poor are actually more vulnerable [today] than before the last food crisis." He claims that the last food crisis "was in part the consequence of long-term neglect of investment in agriculture in developing countries and poorly thought-out agriculture subsidising policies in industrialised countries." Add in a little bit of bad weather and lack of regulation and, he claims, you have the recipe for crisis. In a globalized world, he notes that it is impossible to isolate one market from another. "Not only are food and energy markets linked," he writes, "but also food and financial markets have become intertwined." He continues:

"A food price crisis is not of great significance for the relatively rich. But for the bottom 3bn it poses a nutrition disaster with appalling long-term health consequences. The number of undernourished people has increased against the backdrop of economic recession. The poor, however, do not take extreme price crises calmly any more, as the 2008 price spike revealed. ... Policymakers have come to understand this tipping point and try to act long before it is reached. Now we must distinguish between necessary measures that should largely be the preserve of national governments and those best handled at the international level. The food price volatility must be addressed at a global level. It is essential to ensure open trade and transparent, appropriately regulated market institutions."

Although von Braun also believes that "excessive speculation in food commodities should be curbed," he believes that "simply excluding food from speculative futures markets would be wrong, as these activities also play a useful intelligence role." He concludes:

"The improved functioning of markets must be accompanied by accelerated public investment in agriculture. China, India, Brazil and parts of Africa have done well on that score since the 2008 food crisis. Also, corporate and investment funds are paying more attention to crop land. Internationally co-ordinated policy must ensure these investments are sound and sustainable, which they currently are not. Spending on international agricultural research and development is among the most effective types of investment for promoting growth and reducing poverty. Current resources are not enough to work at the frontiers of new science. At the same time, international support for initiatives such as improving early childhood nutrition is needed in low-income countries. Finally, action is overdue to establish a global architecture for policies on agriculture and food. The current system lacks accountability, effectiveness and innovation."

To get a better picture about the challenges associated with the feeding the world over the next four decades, read my series of reports on the future of agriculture and food security [Agriculture Old and New, Agriculture: The Bumpy Road Ahead, Agriculture Production and Prices, Feeding the World While Watching the Environment, The Gherkin and the Olive Tree, and Eating and the Environment].

Happy Thanksgiving 2010

Edward Sandford Martin once wrote, "Thanksgiving Day comes, by statute, once a year; to the honest man it comes as frequently as the heart of gratitude will allow." Today in America, we pause to ponder about the things for which we are grateful. The past couple of years have been difficult for many families and the store of things for which they are grateful is undoubtedly thinner than in the past. The true test of gratitude comes during hard times. Fifty-four years ago a man named H. Gordon Green published a story in The Reader's Digest that reminds us that we can find things for which to be thankful even when the larder is bare ["The Thanksgiving I Don’t Forget," Reader’s Digest, Nov. 1956, 69–71].

Mr. Green grew up on a farm in Canada. As you know, even in the best of times, farming can be a difficult way to make a living. For children of farmers, especially in years gone by, many of the leisure activities enjoyed by other children must be put off so that daily chores can be completed. Mr. Green was aware of things he was missing, but his father taught him to understand the importance of work and of family. For farm families, harvest time is all-consuming. After the harvest is in, however, it is generally a time of great joy and celebration -- truly a time for giving thanks. In Mr. Green's home, his father celebrated Thanksgiving by taking inventory of all the family had and sharing this information with his family. He wanted them to know that, despite any circumstance in which they found themselves, they always had something for which to be grateful.

On Thanksgiving morning, the elder Mr. Green would lead his family into to the cellar and together they would count the treasured bounty found there -- barrels filled with apples, bins full of beets, bunches of carrots buried in cool sand, and sacks of potatoes bunkered against the cellar walls. Also found in the cellar were the bottled goods carefully preserved by Mrs. Green -- peas, corn, string beans, jellies, strawberries, and other preserves. Everything was carefully counted. The elder Mr. Green would then march the family out to the barn to calculate how much hay and grain the family had to help them make it through the next year. The animals were all counted -- the cows, the pigs, and the fowl (chickens, turkeys, and geese). All of the things that had been accumulated through hard work were now there to be appreciated. When finally the family settled down to its Thanksgiving dinner, they had a much greater appreciation for the things about which they offered thanks.

Among the Thanksgivings filled with plenty, however, was not the one that Gordon Green remembered as the most unforgettable. That Thanksgiving Day was celebrated during a year when there seemed little to be thankful for. According to Mr. Green, the year started off like many other years. They had a store of hay, sufficient seeds, and four litters of pigs. Mr. Green's father even had a little money set aside to buy a hay loader. He really wanted that loader. It would save him hours of backbreaking work. Another technology, however, intruded into his plans. That year electricity was made available in the area. The Green home didn't have electricity. Wiring the house and buying fixtures was an expense that the family couldn't afford -- unless the hay loader wasn't purchased.

What changed the elder Green's plans was watching his wife struggle with the daily wash using her old wash tub and washboard. He said, "You spend more time doing the wash than sleeping. Do you think we should break down and get electricity?" The hay loader was put on hold and family wired up as soon as the electrical line was strung along their street. Along with electricity came light fixtures that dangled from the ceiling of every room and a magical washing machine. Gone were the oil lamps and the task of filling them with oil, trimming their wicks, and cleaning the soot they left behind. They were banished to the attic.

According to Mr. Green, electricity was about the last good thing that happened to the family that year. Severe weather, mostly in the form of rain, wiped out their crops. They replanted only to see more rain destroy the new plants. Even their potatoes rotted in the mud. The family had to start selling livestock to make ends meet -- but so did everybody else. As a result they received little in return for their precious animals. Mr. Green reported that all the family was able to harvest that year was a patch of turnips. That was the state of the family affairs when Thanksgiving Day arrived. Mrs. Green said, "Maybe we’d better forget it this year. We haven't even got a goose left." Her husband, however, never considered cancelling the family's Thanksgiving plans. He probably would have agreed with Henry Ward Beecher, who wrote, "The unthankful heart ... discovers no mercies; but let the thankful heart sweep through the day and, as the magnet finds the iron, so it will find, in every hour, some heavenly blessings!"

That Thanksgiving morning, the elder Mr. Green awoke earlier than usual and went looking for the Thanksgiving feast. Except for some turnips that had managed to survive the storms, the cellar and barn were bare. He managed to shoot a jackrabbit and requested that his wife cook it. Mrs. Green, still feeling the pangs associated with a difficult year, reluctantly took the rabbit but indicated that it would take hours to make that tough bit of meat palatable. Along with the rabbit, she prepared some of the turnips. When the meal was finally placed before the children, they refused to eat. That was the last straw. Mrs. Green began weeping.

That's when Mr. Green decided that it was time to remind his family that, despite the hardships of the year, that they had things for which they should be grateful. He journeyed to the attic and recovered one of the old oil lamps. Returning to the table, he asked the children to turn off all of the lights in the house as he lit the old lamp. The children marveled at how dark the room was despite the light being cast from the oil lamp. They could hardly believe that they had spent so many years living by that dim light. Arlo Guthrie wrote, "You can't have a light without a dark to stick it in." The elder Mr. Green saw a darkness creeping into the hearts of his family, and he stuck the light gratitude into that void.

The family's new gratitude brought with it a new attitude. The family gave thanks for the jackrabbit and the turnips, and this time everyone ate. Following dinner, the family sat quietly in the light of the lamp. Mr. Green wrote:

"In the humble dimness of the old lamp we were beginning to see clearly again. ... It [was] a lovely meal. The jack rabbit tasted like turkey and the turnips were the mildest we could recall. ... [Our] home, ... for all its want, was so rich [to] us.'"

Whether this Thanksgiving Day finds you with abundance or scarcity, I hope you take time to reflect on something about which you are thankful. As J. Robert Moskin wrote, "Thanksgiving comes to us out of the prehistoric dimness, universal to all ages and all faiths. At whatever straws we must grasp, there is always a time for gratitude and new beginnings."

Making a Call from Mount Everest

Conservative business analyst Holman W. Jenkins, Jr., asserts, "Except for computers and the Internet, the idea that we're experiencing rapid technological progress is a myth." ["Technology = Salvation," Wall Street Journal, 9 October 2010]. Jenkins doesn't make it clear whether that assertion is his or simply the view of the subject of his article, Peter Thiel, a co-founder of PayPal and an early investor in Facebook. Jenkins continues:

"Look, [Thiel] says, at the future we once portrayed for ourselves in 'The Jetsons.' We don't have flying cars. Space exploration is stalled. There are no undersea cities. Household robots do not cater to our needs. Nuclear power 'we should be building like crazy,' he says, but we're sitting on our hands. Or look at today's science fiction compared to the optimistic vision of the original 'Star Trek': Contemporary science fiction has become uniformly 'dystopian,' he says. 'It's about technology that doesn't work or that is bad.' The great exception is information technology, whose rapid advance is no fluke: 'So far computers and the Internet have been the one sector immune from excessive regulation.'"

If you didn't detect it in his last comment, Thiel has strong libertarian leanings. His lament about technological stagnation isn't aimed at technology but at politicians he believes are undermining America's (and other countries') entrepreneurial spirit. "All sorts of things are possible in a world where you have massive progress in technology and related gains in productivity," he says. Those best situated to see future possibilities Thiel claims are university professors, entrepreneurs, and venture capitalists. By the way, Thiel himself is now a venture capitalist. Having struck it rich through his involvement with PayPal and Facebook, he now runs a global macro hedge fund called Clarium Capital. Jenkins concludes, "You don't have to agree with every jot to recognize that [Thiel's] view is essentially undisputable: With faster innovation, it would be easier to dig out of our hole. With enough robots, even Social Security and Medicare become affordable."

As Thiel noted, however, people now seem increasingly concerned about the darker side of technology. Many people are even asking whether or not technology is inherently good or evil ["Is Technology Good or Bad? Yes.," by L. Gordon Crovitz, Wall Street Journal, 23 August 2010]. Crovitz writes:

"'The optimist proclaims that we live in the best of all possible worlds,' observed satirist James Branch Cabell. 'The pessimist fears this is true.' The oldest debate about technology is the most basic: Is it a force for good or bad? A summer spent catching up on the many arguments by dueling Internet optimists and pessimists makes clear that the answer is ... both."

Certainly that is not a surprising answer. Technology is intrinsically neither good nor evil. Only when the intent of those who use it is applied does technology assume a moral character. Isn't that grist of many a Hollywood film plot? Normally the storyline has a kindhearted, but naive, scientist creating what he hopes is a technology that will save the world only to see it co-opted by evil military personnel and power-hungry politicians who turn that technology into a weapon.

Crovitz goes on to note that pessimists, like Nicholas Carr, fear that technology is re-wiring our brains and making us shallower thinkers. "[Carr] cites studies showing that the online medium 'promotes cursory reading, hurried and distracted thinking, and superficial learning.' He also points to the science of neuroplasticity, which is showing that even the biology of the brain is changing in people who spend a lot of time online." Crovitz also points that "information overload has become a common affliction. A recent advertisement for the fashion brand Kenneth Cole reads, '12% of people check their emails in their place of worship ... OMG.' Oh my God, indeed." To learn more about Carr's position, read my post entitled The Mind -- it is a-changin'. Crovitz points out that pessimists have always had their concerns about advancements. He writes:

"Plato doubted his era's innovation of the written word. In 'Phaedrus,' the god Theuth boasted that his invention of writing would improve the wisdom of people compared with the oral tradition. King Thamus responded, 'The discoverer of an art is not the best judge of the good or harm which will accrue to those who practice it.' The risk is that people 'will receive a quantity of information without proper instruction, and in consequence be thought very knowledgeable when they are for the most part quite ignorant.'"

Although I admit that people have written evil and immoral things, Plato was too pessimistic. The benefits that writing has brought to mankind far outweigh the evil. As I wrote in a previous blog, "unrecorded spoken words cannot stir generations since they have no lasting impact. That is why reading and writing are humanity's greatest inventions. ... A Japanese proverb says, 'One written word is worth a thousand pieces of gold.'" Based on that argument, I suspect Crovitz is an optimist. He concludes:

"Adam Thierer, president of the Progress and Freedom Foundation, ... calls himself a 'pragmatic optimist,' which seems like a sensible position. 'The Internet and digital technologies are reshaping our culture, economy and society in most ways for the better, but not without some serious heartburn along the way,' he told me last week. 'Were we really better off in the scarcity era when we were collectively suffering from information poverty? I'll take information overload over information poverty any day.' Whatever the mix of good and bad, technology only advances and cannot be put back in the bottle. So Clay Shirky, a New York University professor ... [and] optimist, gets the last word: 'As with previous revolutions driven by technology—whether it is the rise of literate and scientific culture with the spread of the printing press or the economic and social globalization that followed the invention of the telegraph—what matters now is not the new capabilities we have, but how we turn those capabilities, both technical and social, into opportunities.'"

The opportunities created by technology are what I want to focus on for the remainder of this post. New York Times' columnist Thomas L. Friedman believes that technology is about to unleash the energy and potential of the world's two most populous countries, China and India ["Do Believe the Hype," New York Times, 2 November 2010]. He writes:

"The Hindustan Times carried a small news item the other day that, depending on your perspective, is good news or a sign of the apocalypse. It reported that a Nepali telecommunications firm had just started providing third-generation mobile network service, or 3G, at the summit of Mount Everest, the world’s tallest mountain, to 'allow thousands of climbers and trekkers who throng the region every year access to high-speed Internet and video calls using their mobile phones.' ... This is just one small node in what is the single most important trend unfolding in the world today: globalization — the distribution of cheap tools of communication and innovation that are wiring together the world’s citizens, governments, businesses, terrorists and now mountaintops — is going to a whole new level. In India alone, some 15 million new cellphone users are being added each month."

What is really going to make a difference, according to The Economist, is that mobile phone users are going to become internet users as well ["The next billion geeks," 2 September 2010]. According to the article, "the mobile internet will transform the BRICI countries." For those not familiar with the term BRICI, it stands for Brazil, Russia, India, China, and Indonesia. The term more broadly represents all of the world's more advanced emerging market countries. The article notes that today "only 81m Indians (7% of the population) regularly use the internet." Broad penetration of smart phone technology, like finding a 3G system near the summit of Mount Everest, will change that statistic. The article continues:

"In other developing countries, too, there are many more mobile phones than internet connections. In Brazil, Russia, India, China and Indonesia (the so-called BRICI countries), there are 610m regular internet users but a staggering 1.8 billion mobile-phone connections, according to the Boston Consulting Group (BCG). In a report called 'The Internet’s New Billion', BCG predicts that by 2015 there will be 1.2 billion internet users in these countries—dwarfing the total in America and Japan. These new internet users will mostly log on via their mobile phones."

How will these new internet users affect the global economy? The article concludes:

"The stakes are high. In developing countries, every 10 percentage-point increase in mobile-phone penetration yields an extra 0.81 percentage points of annual economic growth, according to a 2009 World Bank study. The mobile internet could be even more powerful. The unemployed will search for jobs online. Farmers in remote areas will find customised advice on crop planting."

The article notes that "the drawback of the internet is that you have to be literate to use it. That is a huge problem in India, where the literacy rate is only 60%." Nevertheless, the poor are being helped by the spread of mobile technology ["Mobile phones help to transform the lives of India’s poor," by Joe Leahy, Financial Times, 19 January 2010]. Leahy reports:

"Before he got a mobile phone seven years ago, Vijay Navle, a small Mumbai fish trader, spent much of his time and scant income travelling on buses and trains. Every day, he would make the five-hour round trip to visit fishermen living on the Arabian Sea on the north of the city to see if they had caught any of the prawns and large fish that he sells to exporters at south Mumbai’s Sassoon Dock. Today, like a growing number of Indians, rich and poor, Mr Navle and the fishermen have mobile phones. Fishermen call him when they catch something and he arranges the pick-up and delivery to customers by phone."

Leahy writes, "For hundreds of millions of people across India such as Mr Navle, the rise of mobile telephony has led to changes in their lives as profound as the advent of the fixed-line home telephone was for rich consumers in the west." Leahy agrees with Friedman and The Economist that an even more profound change will come when the poor get access to the mobile internet. He continues:

"The [mobile phone] industry is looking to 3G for growth. With fixed-line internet penetration in India estimated at well under 10 per cent, 3G could provide the first contact with the world wide web for many Indians. For it to be successful, however , it will have to overcome many hurdles, such as the need for cheaper smartphones. ... To aid the spread of 3G, operators will also have to come up with more commercially useful applications for lower-income people, many of whom are illiterate. Examples include enabling online money transfers or crop pricing and trading for farmers. ... While mobiles can change lives for the better, advances in technology can also be a double-edged sword, as fish trader Mr Navle is discovering. The mobile initially gave him an edge. But recently, his income has declined as customers have begun calling around to get a better price."

Returning to Tom Friedman's column, Friedman writes:

"Having traveled to both China and India in the last few weeks, here's a scary thought I have: What if — for all the hype about China, India and globalization — they're actually underhyped? What if these sleeping giants are just finishing a 20-year process of getting the basic technological and educational infrastructure in place to become innovation hubs and that we haven’t seen anything yet?"

Friedman provides readers with an example of an Indian start-up company that has turned the combination of mobile phones and mom-and-pop kiosks into a virtual banking system. He concludes:

"India today is this unusual combination of a country with millions of people making $2 and $3 a day, but with a growing economy, an increasing amount of cheap connectivity and a rising number of skilled technologists looking to make their fortune by inventing low-cost solutions to every problem you can imagine. In the next decade, I predict, we will see some really disruptive business models coming out of here — to a neighborhood near you. If you thought the rate of change was fast thanks to the garage innovators of Silicon Valley, wait until the garages of Delhi, Mumbai and Bangalore get fully up to speed. I sure hope we’re ready."

Friedman didn't say whether all of this innovation coming out of emerging market countries would be good or bad for the developed world. He simply wondered if the developed world would be ready for it. There is no reason that all of this innovation should be a bad thing. Innovation flowing from developed countries into developing countries was a good thing. I see no reason why a reverse flow should be a bad one. Is that Everest ringing or opportunity knocking?

Beyond Being a Start-Up

Every entrepreneur begins a new endeavor with dreams of success. Some entrepreneurs, however, never ask themselves what success will look like. Everyone has his or her own idea of what success looks like. Generally, however, success for a business means profitability and continued growth. At some point, a start-up company either fails (i.e., goes out of business) or becomes sustainable business. Financially successful businesses often face several challenges associated with growth. Those challenges include: scalability, fundraising, maintaining equity, increased hiring, new management, and so forth. Each of these areas has its own challenges and thinking about those challenges before they become a crisis is a good idea. Let's begin the discussion with equity ownership. Raman Kumar, vice-chairman and chief executive officer of CBaySystem (a leading provider of healthcare business process outsourcing) provides some thoughts on that subject ["Equity Dilution and Your Business," Wall Street Journal, 19 August 2010]. He writes:

"When faced with the prospect of scaling the business and raising funds, the looming fears of dilution and losing control over the business come to the surface. While most founders are concerned about dilution and control, they do not really understand them. Let’s consider the issue of dilution. Any infusion of additional capital in exchange for equity results in dilution. That means one ends up owning less of the whole. However that’s only half the story. The founder must analyze if he is economically diluted. As long as the new equity is sold at a higher valuation to that of the founder’s shares, the founder is better off economically even though he or she has a smaller percentage holding in the company."

Deciding how many shares represent full ownership of a company is never easy. Most investors will think that the founder has over-valuated the worth of the company while the founder will try to protect as large an equity position as he can. The most common scenario is offering a lot of shares (so that the founder can hold on to a significant number of them) with some portion of those shares initially sold at a low price to make them attractive to investors. The promise for early investors is that each subsequent round of funding will see an increase in the asking price of shares. When all goes well, investors are happy because their shares are worth more and the founder is happy because his financial position continues to improve even as his equity position is diluted. What about scenarios where that doesn't happen? Kumar continues:

"Often new equity dilution happens at a lower price than the previous rounds of funding which isn’t always bad. If the 'down round' of equity financing reduces risk and brings in cash to grow the business to achieve the founder’s business plan and vision, then the overall economic value of the company increases. However, most entrepreneurs overlook the deeper value creation in these cases because they dilute ownership and erode financial value for the early investors."

Even if you don't "overlook the deeper value creation" of a down round, convincing early investors that a down round is a good idea is problematic. Kumar reports that he was once involved in a down round that involved acquiring a company that was seven times the size of the company he founded. Because the acquisition represented significant long-term value added, he "went ahead with an equity round at a lower price than the previous round." He explains why:

"The economic value of the company changed dramatically within a year of that transaction. The lesson is that dilution is often for the greater good. Moreover in economic terms, it is all relative. A founder’s 10% stake post dilution can often be worth a lot more than his or her 100% was before strategic investors came in."

Kumar notes that financial positions are not the only considerations that come into play when equity is diluted. Pride and ego also play a role. He explains:

"The problems some have with losing control over a business they grew from the ground-up is often driven by emotional factors and a lack of trust in outsiders. However you need to look at raising funds in the context of spreading your risk. A strategic investor can bring great value to the table in terms of providing a long-term vision, domain knowledge and most importantly a proven track record of growing businesses. Losing control is less about not being able to make autonomous decisions and more about creating a support system that can guide a business through those decisions and take it to a new level of growth."

Sometimes entrepreneurs are better at coming up with ideas than they are with running businesses. When that is case, turning over day-to-day operations is probably a good, if difficult, idea. In a follow-up article, Kumar talks about the challenges of turning over management to someone else ["To Manage or Not to Manage," Wall Street Journal, 26 October 2010]. He rhetorically asks, "What are the dynamics involved in founders handing over the reins to a qualified and experienced team of professional managers who are adept at managing the changing needs of an organization?" Kumar, who lives and works in India, goes on to note that "there are many instances of business dynasties whose founders have struggled to abdicate operational control, resulting in unwarranted business feuds and consequent stagnation and erosion of stakeholder value." He continues:

"There are different phases in the evolution of every company. A business is started by a group of like-minded people with a shared vision and commitment. The key members then divide key functions and responsibilities such as finance, operations, legal, and assume different roles within the organization. While no clearly designated hierarchy exists initially, by natural selection a CEO emerges in the first few months — someone who is first among equals. In the next phase, the company expands and new employees are hired, making the founders increasingly busy dealing with the dynamics of a growing enterprise. The changing business requirements dictate the need to hire industry experts to catapult the company into a new phase of growth. History bears testimony that, in many cases, the founder group fails to put in place best-of-breed expertise in certain high growth areas of the company. This phase is a typical litmus test for the founders. The juncture can generate conflicted mindsets in the founder or founder group as they perceive the appointment of an external manager as a threat to their position. Most start-ups flounder at this stage. Rifts develop within the founder group, leading to ego battles. The company’s focus shifts from customer satisfaction to investing precious time in dealing with infighting among founders. If things are not resolved at this stage, eight out of 10 start-ups fail to reach their full potential or just close down."

Understanding why turning over "the baby" to someone else can be heart-wrenching is not difficult. Emotional attachments remain strong. The vision that started the company remains clear. Admitting that someone else can move that vision forward better than you is hard to swallow. It's not just a matter of taking the money and running. Kumar continues:

"In the process of building a business, many entrepreneurs often forget that loyalty and competence are not inter-related and that it is necessary to differentiate the two. 'Creating maximum stakeholder value' must be the business gospel for an entrepreneur and one must be willing to hand over the reins of the company to more experienced and capable hands as the needs of the business dictate. Hiring professional management to run the company has many benefits. They are able to incorporate industry best practices, add deep sector experience, streamline processes and lend a new vigor to the business. Further, a professional management has an objective and neutral outlook towards the company; which complements the company’s growth objectives. Moreover, the founder’s stepping down from running the company does not necessarily mean his absence in shaping the company’s future. There are ways to integrate founder involvement and professional governance by letting the manager run the company and having the founder don a strategic role as chairman or director with scope for intervention on matters of critical decision-making. This practice ensures that strategy and execution are well demarcated in terms of the division of work and there is a way to ensure collaboration between the two."

Although Kumar is undoubtedly correct, you had better believe that turning over a company to professional management is easier said than done. Founders need to anticipate that the new managers will quickly move to assert their authority. After all, employees need to understand who is now in charge. Long-time employees will have almost as much culture shock dealing with the transition as the founder. Kumar insists that, in the end, the pain of transition will be worth the move. He concludes:

"In a nutshell, excellence in business is a function of excellence in management and this should be the driving principle for founders to shape their company’s future. It is important for a founder therefore to view success in the right perspective. If creating maximum wealth for shareholders and building a valuable company is the ultimate goal, founders will not view their stepping down from a top managerial position as a failure. It is this attitudinal shift that makes or breaks an enterprise."

In another Wall Street Journal article, three executives explain how they coped with the transition when their companies moved beyond the start-up stage ["Small No Longer, Start-Ups Learn to Adapt," by Piu-Wing Tam, 21 October 2010]. Tam writes:

"With many Silicon Valley start-ups in growth mode post-recession, some have found they aren't small firms anymore. At what point does that change happen? We talked to three current and former start-up chief executives, two of whom have been beefing up their work forces and one whose firm was recently acquired by Google Inc. Each discussed when their start-up went from small to big, and what they did to cope with the change."

The first executive interviewed by Tam was Bob Tinker, CEO, MobileIron. MobileIron is a smart-phone management that employs in excess of 80 employees. Tam continues:

"Among the changes [Tinker made in how he managed his business], he decided he could no longer personally interview every new employee who came through the doors, and that the company needed more structure. Last month, MobileIron introduced a 'new-hire boot camp' to orient new employees. And the firm has bought more video-conferencing technology and wireless microphones so workers—especially those who aren't at headquarters—can better communicate. 'Early stage start-ups are allergic to process,' says Mr. Tinker. 'Now we have to structure things a little bit more.'"

The next interviewee was Seth Sternberg, CEO, Meebo Inc, another Mountain View-based company. The Internet-communications company has grown "from fewer than 80 people last year to around 130 now." Tam continues:

"Mr. Sternberg says that in hindsight, Meebo made the leap to bigger company at around 80 employees. 'Getting past 80 is hard because everyone doesn't know everyone else anymore,' he says. 'Now we need name tags at a company picnic.' To manage the change, Mr. Sternberg says he promoted or hired a new level of manager dubbed 'senior director' to add more structure to the company. Mr. Sternberg says he also worried about 'tribalism' emerging among various groups—such as sales and engineering—and now holds conversations with each department every six weeks or so 'to maintain empathy.'

What Sternberg calls "tribalism" is the beginning of what most business analysts call silo thinking. Long-time readers of this blog know that I believe that companies need to break down silo thinking whenever they come across it. It might surprise some people to realize that silo thinking takes place even in small- to medium-sized companies. The final executive interviewed by Tam was Max Levchin, former CEO, Slide Inc., the company acquired by Google in August. According to Levchin, the Internet company, based San Francisco, "stopped feeling like a small operation at around 65 people." Tam continues:

"'Once a founder of a company doesn't immediately know an employee, that's when you go from a small company to a big company,' he says. Mr. Levchin says he quickly moved into a 'tree structure' at the company, a top-down structure where he had seven to eight direct reports, who had their own direct reports and so on. Mr. Levchin adds that as Slide grew, what he spent his time on shifted from being largely about the 'true substance issues' to what he dubs 'all kinds of other issues,' such as personnel and administrative matters. 'In a small start-up, the latter class is pretty small' while at a bigger company, the other issues 'start encroaching,' he says."

I daresay that most entrepreneurs don't start businesses hoping they eventually end up dealing with "all kinds of other issues" instead of "true substance issues." That's another good reason that founders might want to consider turning day-to-day management over to a professional management team. In an excellent article on this subject, Jonathan Moules asserts that entrepreneurs need to ask themselves, "Am I a Dyson or a Dell?" ["Should founders be left to run a business?" Financial Times, 15 November 2010] Moules, of course, is referring to Sir James Dyson (famous for his vacuum cleaners) and Michael Dell (famous for his computers). He reports, "While Dell is chairman and chief executive of his business more than 25 years after it was founded, Sir James handed this role to one of his employees, Martin McCourt, in 2001, and now uses the title 'chief engineer'. In spite of the column inches devoted to entrepreneurs such as Dell, most founders follow the Dyson route." That is certainly something to think about if you are just starting a company. In a companion article by Robert Craven, managing director of a consultancy called, The Directors’ Centre, notes that the founder of a start-up company seldom goes from "the kitchen table to a great chief executive." ["Great leaders know when to retreat," Financial Times, 15 November 2010].

Although many entrepreneurs begin companies expecting to run them until they retire, serial entrepreneurs look forward to the day when they can sell the company and move on to the next challenge. If you are looking for a big payday, you might want to hold off selling your company for a while ["Businesses Put Up for Sale Smack Into Harsh Reality," by Sarah E. Needleman, Wall Street Journal, 14 October 2010]. Needleman writes:

"Small-business owners banking on a big payoff when they sell their establishments may have to settle for a lot less than planned. A combination of tight credit, skittish buyers and business owners unwilling to sell at rock-bottom prices—factors similarly affecting home sellers—has left the small-business marketplace at a standstill. ... Just 1,117 small businesses were sold in the U.S. in the third quarter, the same number as in the year-earlier period, reports BizBuySell.com, an online marketplace for small-business acquisitions in San Francisco. By contrast, there were 1,462 small businesses sold in the third quarter of 2008, according to BizBuySell. ... One of the problems, experts say, is that business owners are proposing prices greater than their companies' true value."

Most of the businesses that Needleman is discussing are traditional small businesses rather than start-up companies developing new technologies or products. Whereas small businesses have lost value, many technology start-ups have continued to climb in value (although not as quickly as before the recession). My only advice -- be realistic when it comes to selling your company. You can increase your company's valuation by putting it on a good business foundation and ensuring that you have a competent and dedicated team in place.

Corruption Around the World

In numerous past posts that focused on development, I have stressed that progress can seldom be made when a country is weighed down by corruption. Corruption is perhaps the single most corrosive factor that keeps developing countries mired in poverty. Corruption also affects developed countries since it unproductively siphons off resources. Each year Transparency International publishes a Corruption Perceptions Index in which it ranks how well or how poorly countries are doing when it comes to eliminating corruption. If you click on the link provided, it will take you to an interactive map and a table that provide a full listing of 178 countries. A quick glance at the map (a static version is shown below), shows that most of the countries that my colleague Tom Barnett places in the "non-integrating gap" (or "Gap" countries) remain extremely corrupt.

In fact, the bottom 16 countries (i.e., the most corrupt) can all be found inside the "Gap." They are (corruption score in parentheses): Tajikistan (2.1); Democratic Republic of Congo (2.0); Guinea (2.0); Kyrgyzstan (2.0); Venezuela (2.0); Angola (1.9); Equatorial Guinea (1.9); Burundi (1.8); Chad (1.7); Sudan (1.6); Turkmenistan (1.6); Uzbekistan (1.6); Iraq (1.5); Afghanistan (1.4); Myanmar (1.4); and, Somalia (1.1). Had not Russia appeared near the bottom the list, well over the bottom third of the world's most corrupt countries are found in the Gap. For anyone unfamiliar with Tom's map, I've included it below. The shaded area represents the Gap.

Commenting on the release of the list, the Wall Street Journal singled out Russia: "Russia became more corrupt in the last year, placing alongside Haiti and Tajikistan in an annual corruption index despite President Dmitry Medvedev's pledge to battle graft" ["Russia Sinks in Corruption Ratings; Somalia Ranks Worst," by Ira Iosebashvili, 26 October 2010]. Who fared best on the list? The top 25 countries (corruption score in parentheses) included : Denmark (9.3); New Zealand (9.3); Singapore (9.3); Finland (9.2); Sweden (9.2); Canada (8.9); Netherlands (8.8); Australia (8.7); Switzerland (8.7); Norway (8.6); Iceland (8.5); Luxembourg (8.5); Hong Kong (8.4); Ireland (8.0); Austria (7.9); Germany (7.9); Barbados (7.8); Japan (7.8); Qatar (7.7); United Kingdom (7.6); Chile (7.2); Belgium (7.1); United States (7.1); Uruguay (6.9); and France (6.8). With the exception of Qatar, Tom included every one of those countries in his list of fully integrated or "Core" countries (he noted that Singapore was trapped by geography inside the boundaries of the Gap along with Israel, while North Korea was a Gap outlier).

You might be wondering how Transparency International comes up with its rankings. The Report states:

"Transparency International (TI) defines corruption as the abuse of entrusted power for private gain. This definition encompasses corrupt practices in both the public and private sectors. The Corruption Perceptions Index (CPI) ranks countries according to perception of corruption in the public sector. The CPI is an aggregate indicator that combines different sources of information about corruption, making it possible to compare countries. The 2010 CPI draws on different assessments and business opinion surveys carried out by independent and reputable institutions. It captures information about the administrative and political aspects of corruption. Broadly speaking, the surveys and assessments used to compile the index include questions relating to bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts. For a country or territory to be included in the index a minimum of three of the sources that TI uses must assess that country. Thus inclusion in the index depends solely on the availability of information. Perceptions are used because corruption – whether frequency or amount – is to a great extent a hidden activity that is difficult to measure. Over time, perceptions have proved to be a reliable estimate of corruption. Measuring scandals, investigations or prosecutions, while offering 'non-perception' data, reflect less on the prevalence of corruption in a country and more on other factors, such as freedom of the press or the efficiency of the judicial system. TI considers it of critical importance to measure both corruption and integrity, and to do so in the public and private sectors at global, national and local levels. The CPI is therefore one of many TI measurement tools that serve the fight against corruption."

Just because a country finds itself near the top of the Index doesn't mean that it can let down its guard. Both the United States and the United Kingdom, for example, are moving in the wrong direction ["Corrupt Countries: Somalia Most Corrupt, US Slips in Rankings," by Andrey Volkov, The Epoch Times, 27 October 2010]. Volkov reports:

"The United States ... dropped from the 19th spot last year to 22nd out of 178 countries this year, with their index also falling by 0.4 points. The U.K., ranked 20th, posted an all-time low score of 7.6, a slight slip from last year’s 7.7, but a huge fall from their rating of 8.6 four years ago. ... 'These results signal that significantly greater efforts must go into strengthening governance across the globe,' Huguette Labelle, chairwoman of Transparency International said in a statement. 'With the livelihoods of so many at stake, governments' commitments to anti-corruption, transparency and accountability must speak through their actions,' she added."

Among the various international rankings that have a bearing on economic development, TI's Corruption Perceptions Index and the World Bank's Doing Business Index are perhaps the most influential. Although there has been noted progress in business reforms around the globe, the latest results concerning corruption show little progress is being made. As I wrote at the conclusion of another post on corruption:

"Corruption is a drain on the economy of every country in the world. Former Miss America and consumer advocate Bess Meyerson once said, 'The accomplice to the crime of corruption is frequently our own indifference.' British singer/songwriter Ray Davies wrote:

Money and Corruption
Are ruining the land.
Crooked politicians
Betray the working man,
Pocketing the profits
And treating us like sheep.
And we're tired of hearing promises
That we know they'll never keep.

"Although Davies' lyrics are a modern lament, corrupt politicians have been around since governments were first formed. An Assyrian clay tablet written around 2800 B.C., contained the following inscription: 'Our earth is degenerate in these latter days; bribery and corruption are common; children no longer obey their parents; and the end of the world is evidently approaching.' The world might not be ending, but when it does, corruption will be one of the last things that die."

Gap countries, of course, are not the only nations that have significant corruption problems. Many emerging market countries are also rife with corruption. I've already mentioned Russia. Other members of the so-call BRICI countries (Brazil, China, India and Indonesia) also have their problems. Brazil ranks 69th in the Index, tied with Cuba. China ranks 78th. India ranks 87th, tied with the likes of Albania, Liberia, and Jamaica. Indonesia is tied at 110, with a miserable Index score of 2.8.

Corruption in India is getting so bad that it now captures more headlines than the morass of bureaucratic red tape as a factor slowing India's progress. Yesterday, for example, the Indian edition of the Financial Times published a story about corruption in India's parliament ["India warned over parliamentary corruption," by James Lamont, 21 November 2010]. Lamont reports:

"Leaders of India’s opposition parties have warned that deepening corruption among parliamentarians in the pay of big business poses a severe threat to the credibility of the world’s largest democracy."

The best way to deal with corruption is to shine the bright light of public attention on it. That is exactly what Transparency International is trying to do.

An Update on Microfinance

Having written a number of posts concerning the benefits and pitfalls of microfinance, I continue to monitor the subject with some interest. Muhammad Yunus, who is credited with developing the microfinance sector, started offering micro-loans to impoverished Bangladeshi women when he came to the realization that without a source of credit those women would never break poverty's stranglehold. Because it costs as much to administer a loan for $50 as it does a loan of $50,000 dollars and because micro-loans are often secured only on trust, interest rates on micro-loans are generally higher than traditional personal or commercial loans (i.e., interest rates normally vary from 24% to 39% annually). Inevitably, these higher rates of return attracted the attention of "for-profit" investors and the commercial microfinance sector grew rapidly. As I wrote in an earlier post, "While mostly good things have resulted from a growing number of microfinance institutions providing microcredit, sometimes too much of good thing can bring bad results." [The Ups and Downs of Microfinance]. More than a year on from that post, both the promise and peril of microfinance can still be seen around the globe. The country of greatest concern is India where in October the country's "microfinance industry ... warned of a potential surge in non-performing loans to the country's commercial banks." ["Indian microlenders warn on bad debt," by Amy Kazmin, Financial Times, 17 October 2010]. Kazmin reported:

"India’s microfinance industry, once a largely charitable activity, has been growing on average by 60-70 per cent a year over the past five years, and now has about 30m borrowers. Microfinance institutions typically loan money to rural villagers and urban slum dwellers – who do not otherwise have access to the financial sector – at rates of about 30 per cent. The industry says these rates are required to cover their costs of funds and the high cost of reaching out to small borrowers over a wide area."

A little over a week later, Kazmin indicated that the crisis was deepening ["Microfinance warns of collapse over credit freeze," Financial Times, 26 October 2010]. She reported:

"India’s microfinance industry has warned it is being pushed to the brink of collapse, as a result of a bank freeze on credit to microlenders triggered by a political crackdown. India’s commercial banks, which normally provide about $133m a week in credit to the microloan industry, have frozen those disbursals for the past two weeks, as companies wrestle with a backlash in one of their biggest markets, the state of Andhra Pradesh. Industry executives ... warned that if the uncertainty does not end, and credit flows do not resume, many companies could be forced to close in the next few weeks. ... India’s microfinance crisis began in Andhra Pradesh, where microlenders have about $2.7bn in outstanding loans to 6.7m borrowers. That accounts for about 30 per cent of India’s total microlending portfolio. After a series of suicides that local politicians blamed on harassment by microfinance debt collectors, state authorities passed an emergency ordinance to crack down on the sector, including an abrupt order to suspend collections. ... Despite a court ruling ... permitting companies to resume collecting operations, industry executives say they are still being obstructed by local authorities, police and political workers. Many borrowers appear to have stopped repayments in the expectation of an imminent loan waiver. ... India’s commercial banks, including state banks, private banks such as ICICI and HDFC, and foreign banks such as Citibank and Standard Chartered, have a total exposure of about $6bn to the microfinance sector – equivalent to 20 per cent of the Reserve Bank of India’s daily interbank clearing volume."

Kazmin admits that "the rapid growth of the microlending sector ... has boosted rural liquidity, helping support a rural consumption boom that has buoyed India’s economic growth." But as I commented in another post, "Credit is a double-edged sword. Muhammad Yunus began Grameen Bank because he understood that credit means financial power -- a source of power normally denied to the poor. On the other hand, as the credit crisis in America has demonstrated, extending too much credit can cause an entire economy to falter."

One of the commercial banks caught in India's microfinance morass is "SKS, which started lending as a commercial company in 2006. It now has 6.8 million customers and a loan portfolio of 43 billion rupees ($940 million)." ["Sun Co-Founder Uses Capitalism to Help Poor," by Vikas Bajaj, New York Times, 5 October 2010] As that headline notes, one of the principal investors in SKS is Vinod Khosla, a billionaire venture capitalist and co-founder of Sun Microsystems. Khosla's motivation for investing in SKS was to help the poor; although it did make "him richer by about $117 million." That money, Khosla claims, will be invested in "other ventures that aim to fight poverty while also trying to turn a profit." The microfinance crisis in India represents a conundrum for individuals like Khosla, who believe that private investment and capitalism are better avenues to help the poor improve their lot in life. Bajaj reports:

"Mr. Khosla plans to start a venture capital fund to invest in companies that focus on the poor in India, Africa and elsewhere by providing services like health, energy and education. By backing businesses that provide education loans or distribute solar panels in villages, he says, he wants to show that commercial entities can better help people in poverty than most nonprofit charitable organizations. 'There needs to be more experiments in building sustainable businesses going after the market for the poor,' he said in a telephone interview from his office in Menlo Park, Calif. 'It has to be done in a sustainable way. There is not enough money to be given away in the world to make the poor well off.' Mr. Khosla’s advocacy of the bootstrap powers of capitalism is part of an increasingly popular school of thought: businesses, not governments or nonprofit groups, should lead the effort to eradicate global poverty."

Bajaj reports that "Mr. Khosla draws inspiration from the astounding global growth of microfinance — the business of giving small loans to poor entrepreneurs, of which SKS Microfinance is a notable practitioner." But his report was published before the crisis in India erupted. After the crisis broke out, the Wall Street Journal reported, "More than 20 employees of microfinance companies, including SKS Microfinance Ltd. and Spandana Sphoorty Financial Ltd. have been arrested for violating the rules which are aimed at protecting borrowers from being overwhelmed by microdebt and harassed by collection agents." ["India's Microlenders Still Struggling," by Eric Bellman, 25 October 2010]. The incident was considered so severe that "local police said they were also planning to arrest SKS's chairman and founder, Vikram Akula, as well as Spandana Managing Director Padmaja Reddy, contending they are responsible for the three agents." ["Backlash in Microlending," by Eric Bellman and Arlene Chang, Wall Street Journal, 22 October 2010]. Bellman and Chang report, "An SKS spokesman said the company is still investigating whether any of its agents had used pressure tactics that are expressly forbidden by the company to collect loans." Khosla is undoubtedly appalled that individuals associated with SKS were arrested (or threatened to be arrested) for harassing the poor. Nevertheless, where microfinance institutions were once viewed as saviors for the poor, some of them are now viewed as predators.

One of the responses made to this backlash was agreement among microfinance institutions to cap interest rates at 24 percent ["India’s microlenders cap rates," by Amy Kazmin, Financial Times, 5 November 2010] Kazmin reports that institutions were trying to ease tensions with customers and government officials, including the police. She reports that "more than 100 field officers from various companies have ... been detained overnight, which ... created a 'fear psychosis' among employees." The crisis in microfinance in India developed very suddenly and was unexpected ["Discredited," The Economist, 4 November 2010]. The Economist reports:

"This was meant to be the year when Indian microfinance came of age, thanks to the listing in August of SKS, the country’s biggest microfinance institution (MFI). Optimists hoped that an infusion of private capital would spur even greater growth in credit to India’s rural poor, nearly 27m of whom are already microfinance clients. Two months and a messy collision with the realities of local politics later, Indian MFIs are reduced to talking about something more basic: survival. ... Does microfinance have a case to answer? Interest rates of 20-30% may seem high but so are recovery and loan-servicing costs in remote villages. According to Mary Ellen Iskenderian of Women’s World Banking, a network of MFIs, a more pressing problem is likely to be over-indebtedness, fuelled by rapid growth in a sector with no formal credit bureaus."

Frankly it would be a shame if the crisis in India discredits microfinance institutions globally where they remain important partners in helping the poor improve their lives. One organization involved in microfinance, Kiva, is even expanding its services into the United States ["Kiva Expands Microlending Reach to U.S. Businesses," by Sarah E. Needleman, Wall Street Journal, 22 October 2010]. According to Needleman, Kiva "is working to broaden its reach to struggling small businesses along the U.S. Gulf Coast." Proponents of micro-loans are now wrestling with the challenge of providing credit without also risking over-indebtedness. Many of them blame commercial banks for ruining a good thing ["Banks Making Big Profits From Tiny Loans," by Neil MacFarquhar, New York Times, 13 April 2010]. MacFarquhar reports:

"In recent years, the idea of giving small loans to poor people became the darling of the development world, hailed as the long elusive formula to propel even the most destitute into better lives. ... But the phenomenon has grown so popular that some of its biggest proponents are now wringing their hands over the direction it has taken. Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more. 'We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,' Mr. Yunus recently said at a gathering of financial officials at the United Nations. 'Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.' The fracas over preserving the field’s saintly aura centers on the question of how much interest and profit is acceptable, and what constitutes exploitation."

The debate over interest rates has even refueled the debate over whether micro-loans do what proponents claim they do. MacFarquhar continues:

"Underlying the issue is a fierce debate over whether microloans actually lift people out of poverty, as their promoters so often claim. The recent conclusion of some researchers is that not every poor person is an entrepreneur waiting to be discovered, but that the loans do help cushion some of the worst blows of poverty. 'The lesson is simply that it didn’t save the world,' Dean S. Karlan, a professor of economics at Yale University, said about microlending. 'It is not the single transformative tool that proponents have been selling it as, but there are positive benefits.' Still, its earliest proponents do not want its reputation tarnished by new investors seeking profits on the backs of the poor, though they recognize that the days of just earning enough to cover costs are over."

MacFarquhar notes that even widely admired non-governmental organizations like CARE have been caught up in the debate. He explains:

"Making pots of money from microfinance is certainly not illegal. CARE, the Atlanta-based humanitarian organization, was the force behind a microfinance institution it started in Peru in 1997. The initial investment was around $3.5 million, including $450,000 of taxpayer money. But last fall, Banco de Credito, one of Peru’s largest banks, bought the business for $96 million, of which CARE pocketed $74 million. 'Here was a sale that was good for Peru, that was good for our broad social mission and advertising the price of the sale wasn't the point of the announcement,' Helene Gayle, CARE's president, said. Ms. Gayle described the new owners as committed to the same social mission of alleviating poverty and said CARE expected to use the money to extend its own reach in other countries."

There are still plenty of people who believe that micro-loans can help entrepreneurs in developed countries pull themselves out of poverty's grip. One country that has been singled out is Haiti. As of today, more than a million people still live in tents because their homes were destroyed in the January 2010 earthquake. Promised international help has not come as swiftly as hoped leaving people to struggle on their own to rebuild their lives. New York Times' reporter Daniel Costello asks, "Can Microlending Save Haiti?" [13 November 2010]. He reports:

"The country’s economy is expected to contract by as much as 9 percent this year. ... Especially hard hit are the tens of thousands of small-business owners, known as ti machann, who sell everything from heating oil to school uniforms from their homes and are often the sole breadwinners for their families. Because Haiti’s credit markets remain frozen, people ... would have had almost no chance to rebuild if it weren’t for microbanks like Fonkoze, Haiti’s largest, which gave loans to the women in Léogâne. In the best circumstances, sustaining a 'bank to the poor' is no easy feat, but in Haiti after the earthquake, the challenge has been extraordinary. Even before the quake, 80 percent of the population lived on less than $2 a day. Today, while some 50 nations and organizations have pledged a total of $8.75 billion for reconstruction, less than 15 percent of the total promised for 2010-11 has arrived. (The United States has not yet paid all the $1.2 billion in reconstruction funds it pledged.) Haitian microbanks provide a crucial lifeline to the poor, but their financial situations are sometimes nearly as precarious as those of their clients. Moreover, the banks are operating in a country that lacks many of the basic building blocks for businesses — reliable transportation, communication and supply networks — thus making the challenges all the more complex. Their importance to hundreds of thousands of Haitian borrowers and savers gives these little institutions an outsize importance, making them 'simply too big to fail,' said Greta Greathouse, a consultant with the United States Agency for International Development’s microsavings and lending program in Haiti."

Pakistan is another country where micro-loans are making a difference ["Here’s a Woman Fighting Terrorism. With Microloans." by Nicholas Kristof, New York Times, 13 November 2010]. Kristof writes:

"An old friend of mine here fights terrorists, but not the way you’re thinking. She could barely defeat a truculent child in hand-to-hand combat, and if she ever picked up an AK-47 — well, you’d pray it was unloaded. Roshaneh Zafar is an American-educated banker who fights extremism with microfinance. She has dedicated her life to empowering some of Pakistan’s most impoverished women and giving them the tools to run businesses of their own. The United States should learn from warriors like her. Bullets and drones may kill terrorists, but Roshaneh creates jobs and educational opportunities for hundreds of thousands of people — draining the swamps that breed terrorists."

I'm sure that Kristof realizes that none of the terrorists who attacked the United States on 11 September 2001 came from the "swamps" of poverty to which he refers. Their backgrounds were more middle class than lower class. The terrorism to which Kristof refers generally takes place within a country rather than on the international stage. Ms. Zafar has adopted the same philosophy as Vinod Khosla. She claims, "Charity is limited, but capitalism isn’t. If you want to change the world, you need market-based solutions." Kristof continues:

"That’s the point of microfinance — typically, lending very poor people small amounts of money so that they can buy a rickshaw or raw materials and start a tiny business. ... Microfinance is sometimes oversold as a silver bullet — which it's not. Careful follow-up studies suggest that gains from microloans are often quite modest. Some borrowers squander money or start businesses that fail. Some micro-lenders tarnish the field because they're incompetent, and others because they rake in profits with sky-high loan rates. Microfinance has also generally been less successful in Africa than in South Asia. Yet done right, microfinance can make a significant difference."

Kristof provides some anecdotal evidence of how lives can be changed. He admits his examples are atypical, but they still prove a point. He concludes:

"The larger message is universal: helping people start businesses, create jobs and support education is a potent way to undermine extremism. We Americans overinvest in firepower to defeat extremism and underinvest in development, and so we could learn something useful from Roshaneh. The toolkit to fight terrorism includes not only missiles but also microfinance and economic opportunity. The antonym of 'militant' is often 'job.'"

I'm confident that microfinance is here to stay. I'm not as confident that it will be provided in an ethical and business-like way. The Wharton School is trying to develop a generation of leaders who can responsibly move the sector forward ["The bigger picture for microfinance," by Alison Maitland, Financial Times, 29 March 2010]. Maitland reports that Wharton’s Aresty Institute for Executive Education has begun offering a one-week workshop in partnership with Women’s World Banking (WWB), a New York-based global network of microfinance providers, to provide microfinance "executives an opportunity to focus on strategic thinking, scenario planning, talent development, risk management and personal leadership skills." According to Maitland, "The industry is suffering from a dearth of qualified managers, and women managers in particular, to lead institutions through this period of rapid change and growth, she says. This prompted WWB to establish a Center for Microfinance Leadership, which also runs courses for women in leadership and for middle managers." Maitland concludes:

"Ensuring that women do not lose out in access to microfinance as institutions grow is vital, [Mary Ellen Iskenderian, president and chief executive of WWB], argues. 'There are 30 years of data showing that women put more of their loans than men do into education, health-care and nutrition, that their children stay in school longer and have longer life expectancy.' Small loans can be hugely empowering for poor women in developing countries, because it may be the first money they have had in their own name to use to support their own and their families' lives.'

One of the reasons that I hope the microfinance industry gets it house in order is because it has such an important impact on the lives of women in many developing countries. The faster countries empower their women the quicker they will be on the road to a better future. I suspect that shareholders in SKS also hope the crisis is quickly and successfully ended. Since the troubles in India started, the value of SKS has plummeted by over 50 percent ["SKS Says That Debt Collections Are Suffering Amid New Rules," by John Satish Kumar, Wall Street Journal, 18 November 2010]. The primary reason for shares falling is that some Indian politicians have encouraged the poor to stop paying on their debts. With $6 billion dollars at stake, these ignorant politicians are risking a set-back for the Indian economy and a set-back in the microfinance sector in India could result similar backlashes elsewhere. If the microfinance sector falters, it won't be the rich who suffer -- it will be the poor.

Two Views on the Future of RFID Tags

Back in August of this year, I wrote a post entitled RFID Tags: Where They've Been and Where They're Going. The overall message of that post was that the future of RFID tag technology looked pretty good. I concluded, however, "One of the things that could hold up widespread implementation of RFID is, ironically, standards. Right now there aren't any. If RFID tags are to become as ubiquitous as barcodes, those standards must be forthcoming." Shortly after that post was published Dan Gilmore, Editor-in-Chief of Supply Chain Digest, wrote an article that supported the notion that the future of RFID tags looked bright ["Suddenly, RFID is Hot Again," 17 August 2010]. Gilmore began his article by providing some history about RFID tags:

"Well, it only took seven years. It was in 2003 when WalMart made its first announcement relative to a supplier 'mandate' for RFID-tagged pallets and cases, and then a year or two of mania as the RFID-industrial complex saw the potential for a few years of 'gold rush' style sales levels coming from the WalMart program. Then it didn’t happen. The WalMart program went sideways, then stalled, then almost completely went away. Other retailers and manufacturers waiting for WalMart to make it happen first found the whole consumer goods-to-retail RFID concept not only lagged, but ultimately retreated from where it was in 2003. People who were focused on RFID at their companies went on to other things. Venture capitalists and others who had bet big on a WalMart gold rush lost their shirts. RFID went from being like the main topic at many conferences and events in 2004 to less emphasis in 2005 to hardly on the agenda if at all by 2007."

Gilmore comments that "the original mania [for RFID tags] was clearly too much at the time." He excuses the enthusiasm, however, by noting that "there was something very exciting about the interest in a new technology that was thought to be a real game changer – and which would drive lots of spending for new technology and create many career opportunities in manufacturers and retailers." Apparently, not much has happened in the RFID tag arena in the past three years, but Gilmore insists that enthusiasm felt back 2003 "might be coming back." He explains:

"WalMart’s announcement of a new RFID initiative, this time focused on apparel, has RFID technology providers getting quite excited again – and this time on much more solid ground. ... The fact that this will be an item-level initiative is said to mean some 250 million tags will be required annually for WalMart’s needs alone, just in the men’s jeans and basics categories it is focusing on first. Billions more annually if the program expands. America Apparel is in the midst of a chain wide item-level roll out. JC Penny is soon jumping on too, and other apparel and footwear retailers are likely announce RFID programs soon as well. In fact, all this may cause a bit of a mad dash to not be the last apparel retailer in the boat. The value prop looks pretty darn good."

Growing enthusiasm for RFID tags is good for companies that manufacture them as well as good news for companies that produce "readers and printers and software both at the apparel retailers and their suppliers." Gilmore concludes:

"The good times for at least parts of the RFID industry may actually finally be here. Will this be the catalyst that then ultimately drives RFID back into the more basic consumer packaged goods area where EPC really started? Just maybe. But for the near term, RFID in retail is back, and this time it is sticking."

That optimistic view of the future of RFID tags is not entirely shared by Malory Davies. In a post entitled "Has it all gone wrong for RFID?," Davies recalls that "RFID was the technology that would turn the supply chain on its head," but didn't and she wonders why. [Supply Chain Standard, 21 October 2010] She writes:

"Forget paper systems, scrap messy error-prone barcodes - you would just need to wave an RFID reader at the warehouse to get a full and accurate reading of everything in there. The trouble is, of course, it hasn't happened like that, prompting the question: what went wrong for RFID? Terran Churcher, chairman of Codegate points out that RFID remains the most talked about, but least adopted, of all auto-ID technologies. Was it all just hype? 'It is quite evident to me that way too much hype was made around RFID,' says Clive Fearn, marketing director at The Barcode Warehouse. 'A lot of people spent a lot of money on the hype and it cost a lot of manufacturing companies millions of pounds in research and development.' But Pierre Bonnefoy, director of global RFID solutions at Psion Teklogix, argues: 'We should ask what went wrong with RFID in the supply chain sector? In fact, the RFID approach in the supply chain was wrong, because of very dogmatic statements. Just remember the Wal-Mart mandate. The logistics domain is used to working with 100 per cent proven systems. Proposing a non-mature technology was a big cultural jump, even if some ROI can be obtained with non proven technology. It is more or less the failure of marketing, having over communicated the benefits, and forgotten the culture of people working in warehouses and the diversity of the logistics processes. How could it have been successful, proposing a unique way of capturing the data?'"

It certainly comes as no surprise that a spokesperson for barcodes would diss RFID technology or that a spokesperson who favored the technology would defend it. What is interesting is that the defender of the technology points to poor marketing rather than shortcomings in the technology for its poor market penetration. Davies continues:

"The approach was far too dogmatic and monolithic, [Bonnefoy] argues. 'The automotive industry took the right approach to RFID, [the] supply chain did not. The automotive industry has been using RFID for more than 15 years, firstly for cycling pallet control and now for vehicle tracking along the assembly chain.' Arguably, what we have seen is typical of the path taken by emerging technologies."

Despite arguments that the technology was simply marketed poorly to supply chain managers, there is more to the story -- cost probably being the biggest drawback to widespread RFID tag implementation. More on that subject later. Davies continues:

"Kurt Mensch, RFID principal product manager at Intermec, says: 'RFID is gaining acceptance and growth within specific, focused applications because value-added resellers have built value-based solutions around the technology. Customers are no longer on their own to try to integrate a new technology and now have the components for a full system available to them, built around specific process improvements, including hardware, software, and integration tools.'"

With claims by Bonnefoy, Mensch, and Gilmore that enthusiasm for RFID tags is growing, Davies asks, "Is now the moment to go back and look again at the technology?" She answers:

"Well, opinions are split. Mark Dale-Lace, director of Mobexx, believes that organisations should look at RFID with an open mind. 'RFID and barcodes are in simple terms a means of positive identification. There will be applications where RFID is the best choice - high value items, items not in line of site, high-speed identification, and so on. And, there will always be applications where barcode is the number one choice.' And Martin Port, managing director of Masternaut Three X, says: 'Many organisations are beginning to see the value of RFID. Ringway Jacobs, for example, is using RFID as part of its wireless vehicle and asset management solution. This combines real-time, live online tracking of vehicles and RFID tagging of portable equipment with PDA-based service management software. This helps to manage the logistics for its emergency response teams.'"

Davies then turns to the matter I raised above -- cost. She asks, "Are companies ready to make large-scale investments in the technology?" Even supporters recognize that cost is a hurdle. Davies continues:

"Bonnefoy points out that it is quite difficult taking the investment decision of installing 20 dock doors in a warehouse when you are not sure of the benefits. 'Starting to integrate a few mobile readers, to your existing process, and within your existing team, is a more reasonable and easy decision, a realistic path toward RFID adoption. Then, when the RFID tags and mobile readers are in place, fixed readers can be used in combination, to optimise the data capture."

Supporters of barcode technology understand that as RFID technology costs decrease, use of the technology will increase. Some barcode supporters have therefore started promoting the idea that the two systems can live happily side-by-side. Davies explains:

"Matthieu Delporte managing director of Baracoda highlights the fact that there is now an understanding of what RFID can not achieve. 'More and more businesses are interested in solutions with richer information, or solutions using the reading/writing capabilities of RFID systems. Many businesses are also combining barcodes and RFID, with barcodes on the products and the boxes, but RFID tags on the pallets which can be used several times for transport. Another example in a warehouse, where picking is controlled by an RFID system and operators are preparing orders by scanning barcoded products placed in tagged basket. The mobile workforces, technicians, sales guys etc, are also more and more using mobile AIDC applications running on PDAs or smartphones. These types of applications are quite recent, unlike traditional applications for warehouses, and are not really mature yet. But companies understand the potential of these new applications and especially the new RFID ones as such kind of workers are more likely to use richer information.'"

One of the advances in barcode technology that may ensure it survives alongside RFID technology is its use in advertising. As an article in the New York Times reports, "Bar codes, the tiny black and white boxes that have been popping up in magazines, on posters and on some billboards, are arriving on television." ["Bar Codes Add Detail on Items in TV Ads," by Elizabeth Olson, 26 September 2010]. Davies agrees that "barcodes should not be written off." She continues:

"[Clive] Fearn, [marketing director at The Barcode Warehouse], says: 'Still today it is evident that the barcode can and is being used to drive a significantly higher return on investment for the vast majority of businesses. If you just take the logistics sector, we are working with companies replacing pen and paper systems with data capture solutions based around the barcode in the warehouse and now for the first time also getting rid of paperwork in the drivers' hands and giving them mobile computers for electronic proof of delivery, again based around the barcode.' Ultimately, of course, it is return on investment that will be the ultimate decider when it comes to choosing whether to use barcodes or RFID."

Davies goes on to point out that barcodes add little to no cost to a product, while passive a RFID tags can add anywhere from 3 to 8 cents to the cost. In addition, she points out that RFID readers can cost as much as ten times more than barcode readers. She continues:

"Terran Churcher points out, ... 'Barcodes require line of sight reading, you need to be able to see the bars to scan them, whereas RFID can be read by scanning within the range of the reader. The application may require information to be written to the tag at various stages of its progress through the process, which would preclude the use of barcodes.' ... [In addition,] Churcher highlights the fact that mobile phone and smartphone manufacturers are starting to include Near Field Communications [NFC]hardware into their models. ... 'By enabling potentially millions of mobile and smartphones to interact, assuming the mobile applications are written, will open the NFC floodgates. This consumer-led wave of adoption will undoubtedly spread to the commercial market giving huge cost benefits associated with this volume of use.'"

Of course, smartphones already have barcode scanning capabilities as well. So I'm not sure that adding RFID technology to smartphones provides RFID tags with a major competitive advantage. Nevertheless, Churcher claims that "NFC will be the biggest development to affect the auto-ID sector over the next five years." Davies concludes:

"Port agrees: 'The development of augmented reality and mobile apps for smartphones such as the Apple iPhone will no doubt drive further uptake of auto-ID. It will mean that more businesses will be able to take advantage of combined vehicle tracking and RFID solutions. Mark Dale-Lace also points to the development of web-based applications and the ability to transmit a wireless signal to and from the RFID tag. 'This will open up new possibilities for the technology,' he says. 'And RF tags with embedded location technologies can open interesting opportunities.'"

Although many of the supporting arguments for RFID technology sound like hype at the moment, the fact is that all of the potential advantages of RFIDs are already technologically possible. It is easy to see why enthusiasm for RFID technology is growing. The only thing that will temper that enthusiasm will be continued high implementation costs that prevent users from receiving a good return on investment.

Some Thoughts Concerning Sales & Operations Planning, Part 2

In yesterday's post, I provided a bit of a primer on Sales & Operations Planning (S&OP) by focusing on some thoughts that Lora Cecere wrote in her blog Supply Chain Shaman. Lora concluded that S&OP is only as good as the data that is collected and the use to which that data is put. In this post, I want to continue the discussion about the importance of S&OP and how some other supply chain analysts believe its needs to evolve. I'll begin with some thoughts provided by Trevor Miles, who works for Kinaxis ["S&OP needs to evolve – I’m frustrated with traditional thinking!" The 21st Century Supply Chain, 6 October 2010]. Miles writes:

"Much has changed in the business environment, let alone the technology environment, since the origins of the term S&OP by Oliver Wight nearly 30 years ago. From a business environment perspective we have only to look at the rise of the BRIC countries – Brazil Russia, China and India – let alone the rest of Asia first as a source of cheap labor for the Western world, but now source of demand that is expanding far more quickly than Western economies. Many of the companies that used to be sources of cheap contract manufacturing have now developed their own brands and market presence, such as Huawei, Lenovo, and Acer, competing against Western brands not only in Asia but also in the Western economies. One of the biggest shake ups in the pharmaceutical industry is the rise of manufacturing of active pharmaceutical ingredients and generics in India in particular. The same is true of many other industries. The greatest change for the Western brand owners is that the majority of their supply chain is external to their organization, and therefore external to their ERP system. And yet they are as dependent on an effective and efficient supply chain for good financial performance as they ever were before outsourcing. The rise of interest in S&OP is largely driven by the need to regain control of these global, multi-tier, multi-enterprise supply chains."

Not many management practices or terms have lasted 30 years. But, as Lora Cecere pointed out in the post I discussed yesterday, S&OP has lasted as a management term because businesses are still involved with sales, with operations, and with planning. Although I'm sure that Miles would agree that S&OP has evolved over the past three decades, he is obviously frustrated with the pace of that change. He takes us back 30 years to remind us what the business landscape looked like when the term S&OP was first coined.

"Microsoft was incorporated in July 1981, a month before IBM announced its first personal computer. There was no 'PC industry' back then, just tools for hobbyists. And because IBM didn't think the PC was a serious product, it made the biggest blunder of its history: It left control of the operating system to tiny Microsoft and the central processor chip to Intel Corp. While IBM is still a strong and viable company, its business and revenue streams have changed dramatically since the early 1980's. Microsoft Windows was first released in 1985, but it wasn’t until Windows 4.0 that widespread adoption occurred. Microsoft released the first version of Excel for the Mac in 1985, and the first Windows version in November 1987. The key point is that S&OP predates Excel, which many advocate as the technology of choice to support S&OP."

It's always interesting to reflect on how the world has changed over time. I've met people who long for "the good old days" when life was simpler. Few of them, however, would really like to rid their lives of most of the technological advances that make them more productive, keep them in better touch with others, and enliven their lives with possibilities. Although the price of a gallon of gasoline was $1.25 in 1981, inflation was a crippling 10.35%. Other interesting events of 1981 included the election of Ronald Reagan, the birth of the first test tube baby, and the discovery of the wreckage of the Titanic. That year was also a turning point for another reason; it saw the first mention of the Internet. Based solely on those limited facts from 30 years ago, it's easy to see why Miles believes that S&OP hasn't kept pace with the times. He continues:

"While the history of the internet can be traced back to the 1960's in terms of communications protocols used by the US military, but in the early 1990's it was still a niche used by the US military and a few research organizations, with broad adoption only beginning in the mid-1990's. And yet 10-15 years later we have the rise of cloud computing, the emergence of terms such a social media, and the rise of brands such as Google, Facebook, and Twitter, all of which are changing the manner in which we communicate and exchange data. The FAX was invented because postal services were too slow, but the items exchanged where still paper, only the delivery mechanism changed. Now we exchange not only the details electronically, but increasingly we also exchange the meanings and nuances of the spoken word through electronic means because they are both more efficient and effective. And yet much that is written about Sales and Operations Planning harks back to its origins nearly 30 years ago. Without a doubt the biggest challenges of S&OP are still related to process and people. What I am continually surprised by is that the S&OP process advocated by many of the process consultants is rooted in what was possible 30 years ago, when S&OP was first performed on paper using double-entry concepts borrowed from accounting. Clearly there were strong limitations on the amount of data that could be analyzed in a timely manner, even given that S&OP used to be run on a quarterly basis. But the very sequential process of demand planning, supply planning, pre-S&OP consensus, and executive S&OP meeting reeks of a process that was developed at a time when the technology available to support S&OP was double-entry accounting paper. In case there is any misunderstanding, let me repeat that I have no question that successful adoption of S&OP is about process, people, and technology, in that order. I think it is time to rethink the S&OP process. Actually, let me rephrase that: It’s time to think of the planning process as a continuum across time, product, and functional dimensions. S&OP is the process to drive this 'unified theory' of planning."

It appears to me that Cecere and Miles agree that S&OP is about a unified theory of planning. Planning done in isolation simply fosters the kind of industrial age silo thinking that burdens companies trying to operate successfully in the information age. Miles continues:

"Recently Tom Wallace commented that 'Cross-functional collaboration is not a pre-requisite for successful S&OP: it's a result'. I agree, though I imagine that the CEO had more concrete objectives in mind when approving the adoption of an S&OP process. And yet the five step S&OP process being advocated by many process consultants only provides for monthly cross-functional collaboration in 'consensus' meetings. No, no, no. How can Marketing decide on a promotion plan without close consultation with Finance, Sales, and Manufacturing early on in the process? What if the drop in revenue for a particular product line being observed by Marketing is due to a capacity shortage leading to customer service issues and consequently a drop in market share? But all too often Marketing will make a decision to run a promotion, not because they are stupid, but because they don’t have ready access to all the information and they have no way of discussing and evaluating the impact of their decisions in a timely and cross-functional manner."

You can sense Miles emotional connection (mostly frustration) to this subject. He is shouting using the written word. He's shouting because he doesn't believe enough people are listening. Miles correctly asserts that monthly meetings are "way too slow for most industries, particularly the high-tech/electronics industry where prices can drop as much as 5% over a month, new products are introduced every 3-6 months, most of the supply chain is external to the brand owner, and supply lead times have been extended because of off-shoring and outsourcing." Like Cecere, Miles believes that S&OP has to be part of a real-time sense-and-respond supply if it going to succeed in 21st century business environment. The decision speed he thinks is required can only be obtained through technology. He continues:

"Let us use the advances in technology, particularly the Internet, to redefine the S&OP process to be more collaborative, more consensual, more timely, more dynamic. Let’s get to the point of assuming collaboration as a base requirement and drive S&OP to delivering real tangible benefits. As long ago as 2003, Charles Poirier included the following diagram in his book. It is time we put this into practice and make S&OP a truly collaborative process throughout the cycle, not just on select days during the month."

Frankly, it's difficult to fathom that a decade into the 21st century people must still be convinced that collaboration, both internally and externally, is a better way to do business than using siloed divisions and silo thinking. It obviously frustrates proponents of collaboration, like Miles and Cecere, that they have to continually mount a soapbox to make their case. Miles asks, "Given that the technology is available, why are [collaborative processes] not carried out on a continual basis?" That question is a good segue to a post written by John Westerveld ["The endless debate: Is S&OP about technology?" The 21st Century Supply Chain, 25 October 2010] Westerveld writes:

"I recently saw [a] twitter post which linked to an article by Steve Banker at Logistics Viewpoints titled 'S&OP is not about Technology. Wrong!'. This position clearly aligns with my thinking about the place of technology in S&OP. There was once a time when everyone believed that S&OP could be done in Excel. In fact, some S&OP guru’s still believe that S&OP can and should be a process that is detached from the planning and execution system. Proof is starting to accumulate that this thinking is clearly misguided."

I certainly hope that this 2-day discussion of S&OP has convinced you that the kind of collaboration needed to support today's supply chain management requires more than a team that can deftly manipulate an Excel spreadsheet. Westerveld continues:

"Once your business grows to any size of consequence, you will need more than basic tools to be effective in S&OP. Steve raises three key points in his post describing why a manufacturer needs technology to achieve a robust S&OP process:

1. "A strong S&OP process requires collaboration. This requires that all parties need to be able to see and modify a common set of data. Not an easy process to manage with basic tools like Excel.
2. "You need to be able to see potential misalignments between the plan and defined goals. When those misalignments exist, you must be able to try different resolutions like promotions, while ensuring that you have the manufacturing ability to back it up. This means being able to identify and resolve issues at the mix level even when planning at the volume level.
3. "Your supply chain operates in units, but your executives operates in dollars. Your S&OP tool must be able to easily move from units to dollars and dollars to units."

Lora Cecere has used similar arguments to encourage collaboration. She argues that if every corporate division tries to maximize its key performance indicators there are going to be inevitable internal conflicts between division strategies that ultimately hurt the bottom line. Only when division heads collaborate to make trade-offs does the bottom line improve. In today's fast-paced business environment, a company simply can't collaborate effectively without the right technology. Westerveld writes, "Traditional S&OP tools simply don’t allow you to react fast enough when you need an S&OP level decision very quickly." He concludes:

"Now, don’t get me wrong. I’ll never say that technology alone will make for a robust S&OP process. I’ve written on this before in my post Is Excel the right tool for S&OP. In it, I identified the three pillars of S&OP: Process, Executive Commitment and Effective S&OP tools. An S&OP project that ignores any of these pillars will fail. The best tools without process will not work. The best tools and the best process without executive commitment will result in great answers that are ignored. An effective process and executive commitment without proper tools will result in sub-optimal performance and frustration amongst the team. I’ll say it again. You need all three elements for effective S&OP: Process, Executive Commitment and Effective S&OP tools."

Have you noticed that two terms -- collaboration and trade-off -- continually assert themselves into the discussion? In another post, Trevor Miles compares his views of where S&OP should be heading to the views of Kevin O’Marah, Group Vice President of Supply Chain Research for Gartner [S&OP: Where’s the technology? Right here!," The 21st Century Supply Chain, 9 November 2010]. Miles begins by quoting from a post written by O'Marah:

"Kevin writes that:

Good S&OP does a lot more than just reconcile mismatching supply and demand. It allows the business to make conscious trade-offs between customers, financial plans and physical reality.

We are in absolute agreement. S&OP must mature from being a unit based activity localized in operations to a business-driven activity crossing many functions in the organization, particularly Finance, Marketing, Sales, Engineering, and Operations."

Miles, however, doesn't agree with everything that O'Marah writes. He continues:

"Where we disagree is when Kevin makes the statement that:

Perhaps this is why the best often do it with nothing more sophisticated than a rigorous process and a raft of spreadsheets.

Wow. Really? Maybe in very early stages of S&OP maturity. I agree about the rigorous process. But a spreadsheet-based approach does not offer proactive analysis, cannot integrate across the business, suffers from poor data integrity and consequently delivers weak reporting. All of this happens alongside the customary issue that spreadsheets, especially a raft of spreadsheets, are notoriously difficult to maintain. How does one have a rigorous process in today’s multi-tier, multi-national, multi-enterprise, outsourced supply chain without at least rudimentary technology support beyond 'a raft of spreadsheets'? How does one capture and consolidate assumptions made about business drivers and market conditions? Beyond very high level and possibly trivial statements, that is. How does one test alternative risk strategies? Or timing of new product introductions? I’m referring here to feasible plans, not ‘finger in the air’ wishes."

I've got to side with Miles on this one. O'Marah statement seems pretty simplistic; especially coming from a Gartner analyst. Miles goes to note that he is not alone in his thinking. He concludes:

"Don’t take my word for it. Read the article titled 'Sales and Operations Planning Maturity: What Does It Take to Get and Stay There?' published on Nov 1, 2010 by Jane Barrett and Micheal Uskert of Gartner (paid subscription required). In the article they make the 3 statements below (my highlights) about the role of technology in moving from stage 2 ... through stage 3 maturity in their 4-stage S&OP maturity model.

1. While technology alone will not be the key to maturing the S&OP process, it plays a critical role. To get from Stage 2 to Stage 3 requires good, clean, credible planning and metrics data and a 'single version of the truth.' So there is a need for underlying technology and systems to support this. Typical Stage 2 tools are statistical forecasting, supply chain planning and inventory optimization. Foundational elements are data quality, master data management (MDM) and the necessary integration.
2. As the culture matures toward Stage 3 and there is more transparency and business owner participation, the process must be supported by the ability to make decisions faster through timely information, and more efficiently through exception and alert-based workflows. Typically, technology is required for this. In Stage 3, the dialogue shifts to what-if and scenario analysis, and to advance these capabilities and get into Stage 4 requires analytics and modeling tools. The term 'rapid planning,' as well as the tools to support it, is emerging as a requirement to get through Stage 3.
3. Two companies we spoke to said that they focused on the process, not the technology, and now the lack of technology is holding them back from getting beyond early Stage 3. But what got them into Stage 3 was all about change management and the critical cultural shift.

From the description of the key capabilities above I doubt that Jane and Michael had spreadsheets in mind when writing this article. And I think a raft of spreadsheets exacerbates rather than alleviates the problem."

Technology is what helps an organization discover where division strategies are in conflict and what trade-offs must be made in a collaborative environment to improve the enterprise's bottom line. But, as noted above, technology is only one of three important parts of an S&OP framework. Although Miles and Westerveld use different labels, they both agree that successful S&OP systems must include process, people (i.e., executive commitment), and technology (i.e., effective S&OP tools). I prefer Miles broader "people" category to Westerveld's more narrow "executive commitment." Although Westerveld is correct that "without executive commitment ... great answers that are ignored," those great answers can only be developed when people on the S&OP team use good technology wisely.