Posts Tagged ‘finance’

Risk is risk: an idea for spotting emerging asset bubbles

Thursday, January 21st, 2010

One of the causes of the recent financial meltdown was a bubble in the value of housing assets that emerged over a number of years. Some people saw this while it was happening, but could do little to impact things. When the bubble burst, institutions and individuals suffered tremendous damage that is still hurting people today.

An important question is this: can asset bubbles be spotted earlier, and, if so, can measures be taken that can minimize the impact of these bubbles? Sendhil Mullainathan of Harvard Business School thinks to the answers to both questions is yes. In one of the 10 Breakthrough Ideas discussed in the current issue of Harvard Business Review, Mullainathan postulates that, as structural engineers can design buildings to withstand much of the force of earthquakes, a well-designed system can help absorb and dampen the negative effects of asset bubbles.

bubbleHe proposes an “early warning system” composed of a committee that could look at markets and see when contrarian views are underrepresented (according to Mullainathan, this happens often during bubbles – investors betting against the prevailing views are eventually chased from the market as prices rise inexorably). By publicizing this situation, and even, perhaps, placing counter bets, the early warning committee can help dampen prices and keep bubbles from overinflating.

I have a lot of questions on this approach – for one, wouldn’t investors create political pressure for such a public group betting against price rises? But, nonetheless, Mullainathan’s proposal deserves careful study. Because anyone who’s lived through this last bubble (John Paulson excepted) doesn’t want to relive it.

(Photo by Viking_79 via Flickr creative commons)

Nuts & bolts: a simple collections procedure

Wednesday, January 6th, 2010

[Nuts & Bolts is a new category focusing on basic business practices for the entrepreneur or established business. Look for new Nuts & Bolts posts approximately weekly.]

I saw my brother-in-law over the holiday, and he mentioned a friend who had started a business selling duck calls. This friend was having trouble collecting from his retailer customers, with the result that he had outstanding receivables of $20,000. Did I have any advice as to how he could collect better?

Collections is the lifeblood of any small business. It’s easy to get intimidated by big customers’ payment processes, or get distracted by other urgent matters in the business. You can also lose confidence in the value you’re delivering to customers. The result is tolerating slow-payers, short-payers, or no-payers. I have three words of advice for you if you’re in this situation:


At my last full-time job I ended up being the collector of last resort, which was a bit stressful, but also rewarding when I was able to collect on a long-overdue, big invoice. I also helped a lawyer friend unstick a bunch of payments tied up in the bureaucracy of his state government customers.

My experience taught me that collections is 1/3 attitude (If I give you service, you need pay me), 1/3 strategy (invoice timely, and don’t delay on collections activities), and 1/3 raw tactics.

I wrote up a simple procedure for my brother-in-law to share with his friend, and I thought it might be useful to print here.

Simple Collections Process:

Recommend setting these reminders automatically in QuickBooks. Be especially vigilant of new clients, with whom you don’t have a payment history. The longer you take to collect, the less chance you’ll collect 100% of your invoice. This process stops, of course, when you receive full payment for the invoice.

Day 1: Invoice, net 30. (If payment terms are shorter or longer, adjust timing of following steps accordingly.) Send invoices by email if possible, rather than snail mail, to save some time.

Day 20: Courtesy letter/email. “Making sure you got invoice; any questions, any disputes?”

Day 30: Call. Payment now due. Have you sent it? If not, what is holding up the process? Any questions? When will you send it? Try to ask closed-ended questions to eliminate ambiguity, such as: “You’re telling me, then, that the payment has been approved and a check is being cut Tuesday?” Ambiguity in payment processes helps the payer, not the collector. [If client blames his accounts payable process for the delay, ask him/her to detail that for you. Who approves what? What is the next step? Etc. Then you can follow up on individual steps… but if the amount is not large, say less than $10,000, you shouldn’t have to get involved in this level of complexity.]

Day 45: Follow-up Call. Where is payment in process? When can I expect it? What if anything is holding it up? Is there anyone else I need to talk to to get this moving? (The last question often spurs people to action.)

Day 60: Letter. Demand payment. Reinforce that you have provided value and that value must be repaid. Refer to contractual terms (ability to terminate contract, cease providing services) if appropriate.

Day 90: Registered letter. Demand payment immediately. Make it clear that you will not service clients who don’t pay. Don’t sell any more to this client (assuming your contract allows this) until all old amounts are paid. If they hold unpaid inventory, demand that it be shipped back to you. Consider moving past due amount to bad debt.


— if client wants new products or services from you, make sure payments are up to date before shipping new product or doing any new services. Make new shipments contingent on receiving past payments.

— if client promises to send a check “Monday,” call on Monday to ensure it was sent as promised.

— the client’s cashflow issues are not your problem. If they bought your product, got value from it, they need to pay. It’s the most basic transaction of business. Let them short-pay someone else.

— always assign payments to oldest outstanding invoice. That is, don’t let them pay the current invoice but keep the older ones unpaid. If they send a payment, they pay the oldest ones first.

If you have any suggestions or recommendations to improve this process, please post them in the comments. Businesspeople everywhere will appreciate it.

Risk is risk – the specter of cybertheft

Monday, January 4th, 2010

Welcome to a new category of posts. My 2010 goal (resolution?) is to post each Monday on the impact of risk on businesses small and large.

My recent vacation reading included a daily dose of USA Today. Among the bar charts was this very interesting article on cybertheft.

According to the article, malicious links hide in official-looking emails, online ads and web pages. Clicking on these links download programs that scan your computer or log your keystrokes to find account numbers and passwords. And while consumers are by and large protected in the case of a fraudulent funds transfer, business are not. According to the USA Today article:

…consumer-protection laws require banks to fully reimburse individual account holders who report fraudulent activity in a timely manner. However, banks have taken to invoking the Uniform Commercial Code — a standardized set of business rules that have been adopted by most states — when dealing with fraud affecting business account holders. Article 4A of the UCC has been interpreted to absolve a bank of liability in cases where an agreed-upon security procedure is in place and a theft occurs that can be traced to a compromised PC controlled by the business customer.

“It’s time for small business to wake up and understand the true risk of online banking,” says [Gartner analyst Avivah] Litan. “If the bank thinks you were negligent, they do not have any obligation to pay you back.”

Here are some documented losses from cybertheft (some of these losses have been recovered, and in some cases the victims are suing the banks for more reimbursement):

Bullitt County, Kentucky: $415,000
Western Beaver County, PA, School District: $700,000
Cumberland County, PA: $479,000

The lesson here is to take great care when banking online. At minimum, use a PC dedicated for online banking and do no other web browsing or email on that PC. Look into accounts that offer better protection (they’ll cost you). Or, perhaps, consider writing plain old checks again.

UPDATE: Brian Krebs, the great IT security blogger referenced twice above, has left the Washington Post as of 12/31/09. Fortunately, he’s still blogging on security at his own website.

Customers are talking: the stories of credit-card customers

Friday, May 29th, 2009

There’s a great post over at Verbatim, the Communispace blog, by Karen Barone, discussing a project she did some years ago interviewing customers who had stopped paying their credit card bill. A major finding–people wanted to find some way to connect with their credit-card provider to address their situation. (Sadly, it’s not clear that the companies Barone worked with did anything with the information she provided them.)

The credit-card providers have millions of customers that they treat like indentured servants. In addition to restraints on their business practices via the recently-passed reform legislation, the bill is finally coming due (”Consumer Credit: The Next Crisis” by MacMillan and Jarvis, on for their history of hard sell, easy credit and swift punishment.

I think credit-card processors could do a lot to turn their reputations and the futures of their businesses around by collecting some stories and, unlike Barone’s experience, acting on them.

Duncan Watts: “If it’s too big to fail, it’s too big”

Wednesday, May 20th, 2009

(Funny, my wife made this point months ago.)

Duncan Watts, principal research scientist at Yahoo Research and expert on human networks and complexity, makes this point in the June Harvard Business Review (”Too Big To Fail? How About Too Big To Exist?“).

Watts looks at the financial market as a complex system and compares it to another complex system: the power grid. As an outage in one power plant can cascade and cause outages regionally, so the financial system failures (such as the collapse of Lehman Brothers) cascaded to a general meltdown in credit and prompted unprecedented governmental intervention.

He points out that in a complex system, the actors (financial firms, power system components) affect each other to the point that one’s own risk profile can change dramatically depending on what happens to others. Meaning, your risk department’s calculations are dependent on assuming the other guy is stable and rational (risky assumptions those are).

Government coming in after a disaster and resuscitating the surviving firms is one approach. A better approach, according to Watts, is to make certain that each actor is small enough that its failure has a limited effect on the other actors.

This discussion reminded me of the evolution of robustness in computer systems in the past thirty years. In the 1980’s, the best way to achieve robustness was to build a huge computer with redundant components and very complex software. Such computers were protected in military-style data centers with concrete walls and fire suppression systems. In case a piece of the computer failed, the software helped the machine use other pieces to continue operating. Tandem (now part of HP) was the market leader here.

Of course, relying on one huge computer (too big to fail) exposed you to lots of other risks. For example, what if the power went off? What if there was a localized weather disaster? etc. There were limits to the “too big to fail” computer architecture–exposed most notably in the 9/11 disaster, where reliance on Lower Manhattan data centers put the stock markets and other financial markets on hold for days till their data services could be relocated.

Another approach to computer redundancy was created in the internet space, perfected by Google. Rather than having one or two huge servers with complex software managing redundant everything, Google has created a worldwide network of hundreds of thousands of small, pretty dumb servers, and software that allows transactions to be moved across those servers depending on their health. If a Google server goes down, nobody notices because its traffic is quickly spread over the remaining zillion servers that are working.

And that seems like a better model for our financial systems, too. I agree with Watts: too big to fail is too big.

Related post:
On Duncan Watts’ “Big Seed Marketing” idea

Time to “unload the guns” with the finance industry

Tuesday, March 24th, 2009

I took a very good sales training class a number of years ago. The instructor was a French-Canadian guy (let’s call him Jacques) who used lots of interesting expressions, including “platform speaker.” That was his ambition–to some day be a platform speaker (or public speaker), which to this day strikes me as a strange sort of ambition.

Another expression this guy used was “unload the guns.” In sales, after the engagement is over, there are sometimes hurt feelings. Perhaps you went around someone who was blocking your access to a decisionmaker. Perhaps one of the customer representatives supported a competitor of yours. Perhaps you lost the deal. Jacques emphasized that “unloading the guns” was critical at this phase.

By this he meant re-engaging with those people who might have ill feelings or discomfort with you personally (or vice versa), and re-establishing a respectful, working relationship. Unloading the guns is tricky; it means coming to terms with what seems like unfairness, and acknowledging (at least tacitly) that you may have acted in ways that cause the other party to view you similarly. But without this you impede recovery–imperiling the delivery of the deal if you won, or harming your chances to compete for the company’s business another day.

I’ve been thinking about this because of the interesting response this week to the vilification of bankers that we’ve been involved in since the financial crisis began last fall. (I’ve participated in the vilifying.) A headline in today’s WSJ reads, “Obama Dials Down Wall Street Criticism.” And Fred Wilson on the AVC blog posted on the subject yesterday. Wilson reiterates the bad choices made by bankers and financiers that helped lead us here, but also writes:

…there’s plenty of blame to go around; the politicians who created the political environment for the housing bubble, the regulators who didn’t regulate, the borrowers who didn’t think about the ramifications of paying too much and borrowing too much, and I could go on and on.

Not all of us are complicit in the making of this mess but certainly a lot of us are.

And the thing that concerns me is we need our financial system to get us out of this mess.

Wilson is right. Going back to a barter economy is not an option. We need the banking system to support our economy. The government can’t and shouldn’t replace it. And we’ve spent enough time laying blame.

Time to unload the guns.

From the Mistake Bank: Ken Lewis’ “Taking that much bailout money was a mistake” is not authentic

Tuesday, March 3rd, 2009

Since I’ve been working on The Mistake Bank, I’ve kept a sharp eye out for public mistake stories. Many have found their way into blog posts and really have added to the first-person stories users have contributed.

So when the Financial Times reported that Bank of America chairman Ken Lewis said that his taking $20 billion in bailout money from the US Treasury was “a mistake,” I eagerly looked for the original story so I could excerpt it here. Despite the terrible decisionmaking, greed and denial in the financial industry about its months-long meltdown, there has been little in the way of authentic apologies or even honest reflection.

Sad to say, reading Lewis’ story was disappointing. From the video on the FT site, starting at the 2′25″ mark, here’s what Lewis’ words are:

I wish we had not taken uh…as much as we did, because put us in a league too far out of some of the others who had not taken as much. And clearly we were doing that in an abundance of c…caution, so… uh…if I had to admit a… tactical mistake, I would have taken less than we took.

This story is in my opinion from someone who has not fully reflected on the mistakes he made. This feels like a marketing positioning statement, and March 2 was not the first time he had distanced B of A from Citibank, a very troubled institution. (”Ken Lewis sent out an internal memo explaining why Bank of America is much healthier than ‘our competitors,’ which obviously means Citi,” from a story published on February 24, a week before the FT story.)

One clue is in the words: “If I had to admit…” is a phrase used by someone who is cornered, not someone who has reflected and come to grips with his decisions. “Tactical” is another weasel word–it’s meant to signify “unimportant.” Lewis is like the job interviewee, who, when asked for his most significant weakness, tries to find the most innocuous failing to preserve his chances of getting the job.

As we know, that tactic often has the opposite effect.

3rd Annual Top 5 HBR Breakthrough ideas

Friday, January 23rd, 2009

… in which we winnow down Harvard Business Review’s yearly list of 20 breakthrough ideas to a manageable 5.

1. The Business of Biomimicry, by Janine M. Benyus and Gunter A.M. Pauli. Many of the most important new innovations we’ll see in 2009 and beyond will involve borrowing and inspiration from nature’s processes.

2. Institutional Memory Goes Digital, by Gurdeep Singh Pall and Rita Gunther McGrath. What will happen when every word, gesture, etc., of business interactions are recorded and stored? [I'm most interested in the subset of this involving intentionally captured and signified narrative information for knowledge sharing. The Mistake Bank is an early stab at this idea.]

3. How Social Networks Work Best, by Alex Pentland. New research shows that collaborations work best when social networks are used differently for discovery and integration activities.

4. The Ikea Factor, by Michael I. Norton. Having a hand in building a product leads to a stronger emotional connection with it. [Does this say anything about self-service gas stations and supermarkets?]

5. Forget Citibank, Borrow From Bob, by John Sviokla, and Consumer Safety For Consumer Credit, by Elizabeth Warren and Amelia Tyagi. It’s inevitable that the fallout of our financial crisis will be a radical restructuring and reinvention of the financial industry. And it’s about time.

Related posts:
2008 Top 5 Breakthrough Ideas
2007 Top 5 Breakthrough Ideas

Sometimes crowds aren’t wise

Saturday, January 17th, 2009

I like Surowiecki’s book, a lot, and I have experienced many instances where the collective judgment of a group was far better than even an informed individual. But the “wisdom of crowds” catchphrase is dangerous–oftentimes crowds are not wise at all.

We are experiencing right now an era in which crowds are really dumb. I’m referring to the financial markets and the related economic recession. The financial markets and news affecting the financial markets have merged into a massive echo chamber, wherein bad news begets pessimism which keeps prices down which begets another cycle of bad news.

We’ve seen this in reverse, of course. Do you remember 1998-1999, during which time everyone was watching CNBC or checking Yahoo Finance all day long, in real time assessing the value of their stock portfolios? Oversubscribed IPOs begat good news, which kept prices high, which begat more buying, etc., until it all came crashing down.

I thought it was clear to everyone that market groupthink, which afflicts us in good times and bad, obscured the true value of securities, and therefore paying close attention to news items in order to make sense of the markets and our economy was, at best, a waste of time.

But no. Felix Salmon, in his Portfolio Market Movers blog, points to a Financial Times article introducing us to a service from Reuters that collects news items and alerts traders when news trends indicate potential market movements.

In other words, lean into the echo chamber, and listen real hard for signals you can use to make decisions. Um, it’s only January, but I will bet there’s not a stupider product idea introduced for the rest of 2009.