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I said right but I meant left!

September 24, 2010

The Bridge Officer screamed “hard a-starboard” – meaning turn this ship left – Now!  But he said it in terms of his training which was from the age of sails. The Helmsman reacted per his training, from the newer age of steam and swung the wheel in the opposite direction, turning the ship right.  Two minutes later, the Titanic entered history.  Then the real crime allegedly took place – the Chairman of the White Star Line, fearing for his company’s reputation and not understanding his true status (his feet were still dry at this point), ordered the Captain to keep sailing, believing his own hype about an unsinkable vessel.  The Captain, also from the age of sails, obeyed, hastening the sinking by several hours; one authority figure, 3 employees, the Officer saying turn the ship to the left, and the Helmsman thinking it mean turn the wheel left , i.e., no common communications system.

Jump ahead almost 100 years and you can understand how American business today is being told to do one thing by their authority figure (the Gov’t, who makes the rules) and another by the on-site regulator’s auditors.  Businesses in turn miscommunicate among themselves about what to do, and so no one does anything rather than pay fines or be named in the news.  The result is not ‘just’ 1500 deaths, but a living death for the 26.2 million workers who are either out of work, involuntarily working part time or who gave up looking for the 4 weeks before the latest BLS survey (September 3rd) was released.

Community banks are the neighborhood residents who used to fund mortgages and had decent credit terms for local businesses, such as allowing them to collateralize their buildings rather than simply perform Balance Sheet analysis since many smaller businesses have seemingly dicey financials, often for favorable owner tax treatments. It’s not unusual for a big business bank to reject a loan but have the community bank understand the real situation and grant it. Reminds me of my uncle, a real NY ‘Garmento’ who’s belt factory barely survived for all 30 years he had the business per his financials.  But he always repaid his creditors, often driving up to the bank in his new luxury car. These same banks routinely rent out on-site scanners to allow immediate crediting of checks to available funds which small businesses find invaluable (avoiding the 2.5 to 5% haircut charged by the credit card companies).  They get those smaller businesses, typically owners of a few stores and trades people with a few trucks.

Under our new ‘we missed it before so I’ll do it twice as hard now’ regulatory system, these banks are being forced to reject loans to small businesses because the government auditors will reclassify the collateral at a lower value, forcing community banks to loan less to keep their capital ratios higher. One Florida community bank took a few million in TARP funds and then made the mistake of loaning about half (only about $2M, by the way) to small businesses, prompting job growth in their neighborhood. The various Gov’t auditors were furious the Bank didn’t keep all the funds in-house to bolster their capital. So we have, once again, the Government playing Bridge Officer saying ”make jobs, loan again” while their  in-field regulatory auditors,  acting as Helmsmen, say “if you do, I’ll come down on you like a ton of bricks”.  The result of lacking a single communications system?  Over 15% of SMB bank customers, very much the community banking sweet spot, are planning on switching banks, where the normal churn is less than 10%, sometimes only 4% in an SMB sub-segment. Given the added costs in attracting new customers over servicing existing customers, it’s reasonable to expect banks’ profits to suffer.  On top of this, the Gov’t says we need SMB’s to provide jobs at the same time they’re starving the very banks who give the loans necessary to create those same jobs.  Only the Controller of the currency and the FDIC, both playing the role of the iceberg, may be the winner here.

Healthcare is undergoing significant, and seemingly beneficial, changes, the first of which took effect yesterday.  We can only hope everyone is using the same communications system.  Will the State Depts.’ of Insurance update their ratios so insurers can survive as a healthy business, rewarding their shareholders (often including their employees as well as your 401K)?  Yes, they can cut Admin expenses down a large measure with technology (go inside most large A&H insurers and the offices are very nice and there does seem to be plenty of staff). So if you force insurers to cover higher risk people without charging ridiculously high premiums, and not keep as much for profit and Admin recovery, you’ve increased their expenses.  Worse, since you’ve had them insure a higher risk population, requiring more statutory reserves, you are further depriving insurers the cash to either expand their business or dividend to shareholders.  Without the authority figure ordering favorable tax treatment for serving the public good by insuring the previously uninsurable, and with the other players using  different communications systems (actually 50 systems; each state has their own viewpoint on board meetings, residency of Directors, reserves, etc.) we once again have multiple differing and conflicting communications systems.

The Government is now debating taxing overseas profits and further regulating transfer pricing.  If the Government’s sole goal is to create US based jobs, including returning manufacturing as a means to restore the Middle Working Class, this makes sense.  This will be a striking change in US business since, for example, IBM gets 65% of its revenues from its overseas operations.  Implying that businesses are a form of US citizen (reinforced by the recent Supreme Court ruling on corporation’s having 1st Amendment protections, as does any individual), it assumes they should not hurt the country by taking jobs overseas.  This flies right in the face of the prevailing view of a Global Economy where companies are transnational, acting to the benefit of their shareholders, allocating capital on a global basis.  To be effective, our communications system has to differentiate between a foreign market and a foreign operation.  For example, China and the US are the two largest foreign markets for Mercedes Benz, but their largest operations are still in Germany.

Back in Undergrad days I began to hear about how all these new environmental rules were going to hurt ‘the shareholders’.  Since this justified why businesses couldn’t spend on cleanups and prevention, I had to assume these shareholders didn’t breather the same air or drink the same water I did, concluding these shareholders had to live on Mars.  It was a great way to pass responsibility to an amorphous being called ‘the market’ or ‘shareholders’, much like there’s no need for personally taking care of what you eat, passing our personal longevity to ‘fate’. Change ‘Mars’ to ‘Global Economy’ and you’re living in 2010.  Should we actually begin to think in terms of what is best for the country and for US shareholders, and not the nebulous Global Economy, this could be the return of managerial accountability to a nation’s citizens, a complete 180 degree change in business culture.  Hopefully the communications systems of the tax codes, Financial Reform, Labor and EPA regulations will all align under a common communications system.  Of course, after K-Street tries to influence the real powerbrokers – the regulation writers, it will be curious if the policy maker’s economic recovery goals will actually come to pass in real life or if we’ll have another set of unaligned communications systems.

In our consulting work we often see the need for one, consistent financial, operations and KPI communication system, which we call a ‘common language’.  While we all do what we can to have common languages as business people, unless the Government joins in at the regulation definition and enforcement agent level, it will remain the Towner of Business Babble and the iceberg will once again win.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years’ experience reshaping companies, Operations, IT and key initiatives. He can be reached at

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