In a great posting by Paul Kedrosky explains why the financial industry is just like a traditional mattress. Must educate those exuberant crony capitalists to abstain? Should chill the water bed? Ah platform engineering.
Category Archives: business modeling
Chart Room
I skimmed the book Control through Communication. The book is about firm size. As we learned to manage information and communication at larger and larger scales the size of firms grew. Which is all fine, but the aspect of the book I enjoyed was the schemes and gadgets. Mostly the gadgets. At one point the boss managed his communication with grid of pigeon holes, one for each day. This scheme evolved; getting larger and larger until you could buy single unfolding desks, the size of a modern SUV, with hundreds of pigeon holes.
This picture shows the Dupont executive chart room. Using charts to illustrate the status of the firm’s many operation was, at some point in time, an innovation. About the same time Dupont started to use crude modern financial modeling, ROI and such. Somebody at Dupont was sufficently enthusiastic about charts to have this marvalous contraption built.
The executives would sit in those chairs shown in the foreground, and as each portion of the operations came up for review their assistants would slide forth the handful of charts illustrating what’s happening with that. It reminds me of a dry cleaners.
On theme in the book is how the meer idea that information should flow up and down the corporate hierarchy was innovative. And then that these communications would become formalized was yet another. I don’t know if the word innovation, rather than say enivitable, is the right term. The book disappointed me, but then I only skimmed it, beacuse it doesn’t really engage with the two questions I’m interested in.
First how did firms manage the puzzle of how to negotiate out what should be communicated and how hierarchtical that communication ought to be. It was interesting to realized that the the practice of highly hierarchtical communication may well have emerge almost entirely because that was what the technology could support. The complexity of printing and it’s scaling characteristics meant that the central office could execute communication acts that the periphery could not. If so the xerox machine must have created a bloom of lateral communication.
Second how much did this wipe out smaller businesses. Was this really a major driver to the condensation where single large firms displaced smaller firms. The roll up that happened in the telephone industry reprised in multiple other industries; but it’s a provocative thought that it happened for almost identical reasons: communication based network effects.
These two questions interact in some cases. When railroads merged the operational rules of the dominate player would have to displace those of the weaker one, and in many case the stronger one had more effective communication and control schemes.
Looking at that picture I’m reminded of a reporting framework that a new senior manager once deployed into a firm I was working at. The frame work was extremely standardized, N slides, M panels in each slide, with rules about what was expected in each slot. It wasn’t a bad scheme, and it certainly made his job much more efficent. Which was good because it allowed him to cut thru a lot of middle management and see deeper into the organization. But yet, it tended to eliminate from discussion anything that didn’t fit. If the slide lacked a slot, say for employee morale, then an issue was invisble. To exagerate it was as if he was looking at the company thru a straw. I’d say it created a puzzle for those who wanted to signal something up stream. You had to get it into the straw’s narrow view. I suspect his scheme was the direct decendent of that chart room.
Blow Up Rich
I’ve been trying to think about the financial structures around processes that exhibit highly skewed distributions. The insurance industry is a great place to find the examples. We buy insurance to hedge against the small but awful. Most of our houses don’t burn down, but it does happen. The chance of a fire is scale free, the insurance company protects it’s clients at the scale they care about, but who protects the insurance company against the rare event the burns down the entire town. There are three ways the insurance industry handles that scenario: they don’t cover it (excluding acts of god for example), they reinsure into a yet larger pool, or they avoid it by not insursing in certain venues. Over here at Bronte Capital is a posting arguing that Warren Buffet, who moved into the insurance industry in a big way over the last few years, has been working this third angle.
When process with a highly skewed distribution delivers it’s rare but powerful shock into the system, it’s black swans, everything designed to work with the median shocks is blows up. I’d be interested to know how the insurance industry handled the New England hurricane of 1938. I’d be interested to know how the insurance industry in Thailand handled the AID’s epidemic.
Another place I’ve been musing about exceptional, but inevitable, events is where you situate your career planning. I’ve a friend who likes to say that almost all the people he knows who made a fortune in their life “fell off a log into a pile of money” thru no special merit of their own except in some cases they consciously picked a good log to sit on. On the other hand a lot of people just fall off a log sooner or latter. It would be nice if, as you plan your career, you had a better sense of what the chances are in the trade you pick, in the economy at large. The fetish people have for presuming that career path probablities are entirely a matter of personal merit seem wreckless. I was quite impressed when an acquantance of mine with a degree in biology explained he was moving into lawyering because, well he didn’t put it this way, the climate was more predictable.
Recently I’ve been trying to explain how wily US cell phone pricing is. They sell monthly plans with N minutes and then when the exceptional crisis comes down the pike, you fall in love example, they charge you huge over charges. The typical plan delivers minutes at about five cents each and forty cents a minute. Better, at least for them, is that as little crissis come and go your start changing your plan to buy more minutes, which in the absense of a crissis you don’t use. That in turn raises the real cost of even you noncrisis minutes. It’s a very impressive pricing scam isn’t it! I recomend prepaid (t-mobile for gsm, pageplus for cdma on verizon).
If we ignore prepaid cell phone service, the cell phone contracts with a bundle of minutes every month are a bit like lousy insurance policies. You buy the option to use five hundred minutes, not because you need them, but because your insuring against the risk that you’ll run over and get stuck with the over charges. That’s great, and I mean that sarcasticly, they are selling you insurance against a risk they created.
It amuses me to wonder what would happen if everybody in the country could be coordinated into using all those free minutes one month. I very much doubt the phone companies can fufill that promise.
The options contracts implicit in those monthly cell phone contracts are analogous to the insurance pools. If we could coordinate the month of the phone it would be the analogous to a hurricane or a plague, at least from the point of view of the phone company.
That scenario has been playing out with the internet service providers, at least for the incompetent ones. For example Comcast sells me a package with certain assurances about what bandwidth I get into the Internet. Unsurprisingly the consumption patterns of their customers is highly skewed, and I’m one of the higher users since this site runs over that connection. Inspite of 20 plus years of history showing that Internet consumption grows extremely fast and quickly grows to fill the pipe provided Comcast was suprised when more users actually exercised the option they had bought. It is not relevant what these users are doing with the bandwidth (P2P, video, voice over IP, spam) because if it hadn’t been one of those it would have been something else.
This last example, the ISP’s problems, is not actually an example of pricing design in the face of a highly skewed distribution. It just looks like one at first blush. The real problem the ISPs face is the rapidly rising tide of usage. They thought they had a slower growing usage situation, something more like what is seen with the cell phones, but they were wrong. When they discovered some of the users were consuming all the bandwidth they thought they had purchased the ISPs presumed those users were little trouble makers rather than early movers. But that’s a mistake, soon everybody will consume all the bandwidth they can get.
Gridlock Economy
Michael Heller’s new book looks interesting. Heller was, for the last decade, been working to introduce a bit of balance into the discussion down stream from the idea that goes by the name “Tragedy of the Commons.” He originally called his idea “The Tragedy of the Anticommons.” Those who public goods coming to tragic ends often prescribe a dose of property rights. Heller is interested in situations where too many property rights create grid lock.
His Authors@Google talk is a good introduction. About a half hour long it touchs on various coordination failures with substantial social costs that arise from an abundance of property rights: Drugs that don’t get developed, families displaced from their legacies, urban development frustrated, air traffic congestion, foul ups in the post soviet privization programs. Good stuff, and he is reasonably straight forward about how societies should be more aware about the balance they strike when they architect their property rights schemes.
That last point is of particular interest to me, since it goes to the question of how you shape the power law curves. Is the single property owner who frustrates the urban developer the hero of the long tail; or is he just the worse case of ground cover strangling urban vitality? Guess I’ll need to read the book.
I’m bemused, or confused, by the realization that both these tragedies arise because some coordination problem blows up when too many parties have simultaniously have rights. I guess you might say the anticommons goes down the tubes when one player says no (or more often just lies silent) while the commons blow up when too many people say yes. After a bit I can’t see these as really different, it’s back to the group forming coordination problem.
New search engine makes you look fat
Brett Porter wrote up a nice summary of his first impressions of that new search engine, Cuil. He had exactly the same experience I had, and my wife had. You ego surf only to discover they have a very odd model of your internet presence. Feeling disappointed you then wander off. We learn from this is that any new search engine better make us all appear even more above average than we already do.
Kleptocracy
Having recovered the lamp the genie offers you a wish. Having rescued his daughter the king grants you a wish. Having suffered the tortures of the damn’d you can slip anything you want into the final draft of the industrial standard. What do you ask for? During his short time at Harvard I gather that Bill Gates mused that it would be nice to own the traffic lights. I call that owning a standard. We oft see patent trolls pop up after a standard builds it’s installed base claiming to own the right to tax the traffic. Gates built his monopoly the old fashion way. That is somewhat more ethical.
Patents are only one way that the king can grant his minion’s wishes. The crude example: no-bid contracts are good, and why bother to audit them? Clever wishing runs along the lines of Bill Gate’s thinking. Own a piece of the transaction flow. Find a place with a high traffic standard and get the option to take a piece of the action. And so I’m very impressed by what Eaton industries managed to pull off in the UK. They got proprietary ownership of a new light bulb socket, it’s written right into the building code. The socket’s aren’t that expensive, but the bulbs that go into them! Twenty dollars a bulb in excess profits! And you have to admire the crust of greenwash (the intent of the standard was to increase the use of high efficency bulbs).
Institutional failures like this should be fixed. There should be ways to taking the wish back. While we wait for that, daring individuals can hack their sockets.
Trash Picking Coupons
In service of one of my jobs I once attempted to draw a diagram showing how transactions unfold. It started out simple: the customer gives cash to the vendor and he hands over the goods. My goal was to illustrate how transactions acreet additional events. For example bills, rebates, warrenties, service contracts, coupons, trial periods, six month discounts, and recycling. Pretty soon I’d managed to clutter up an vast whiteboard and everybody cept me had lost interest. It’s was an essoteric interest probably shared only with the most fastidious of accountants, though the intent was to search for business oportunities.
I still find all this stuff far too interesting. Particularly the ways that vendors structure all these aspects of the transaction cycle to their benefit. For example this week Target is has some cell phone prepaid refill minutes on sale: two $25 cards for 42$. Which sounds like a deal. But it’s not since it’s really two 150 minute cards for 42$ and the $50 card gives your 460 minutes.
So given this essoteric interest I laughed outloud when I saw this business. RecycleBank‘s business model requires them to sell four players: the trash company, the town, the citizens, and finally advertisers. They use technology to measure how much each household is recycling. They do that with bar codes on the recycle bins and scanners on the trucks. Citizens, who sign up, are then “rewarded” with coupons from advertisers in proportion to how much they recycle.
I love how this glues a sales & marketing function onto the very tail end of the transaction cycle. I love how they glean (sic) exactly which customers are high volume consumers with a high preference for thrift – e.g. the perfect target for coupons. And I just roll my eyes at the gloss of green combined with the personal data collection. And finally, as I learned from the stamp script, coupons are all about increasing transaction velocity – and isn’t it wonderful how this injects the coupon at exactly the moment when there is space opening up inside the house?
Which makes me wonder, why I’ve never seen coupons on toilet paper?
This Year’s Question
I’ve noticed something in my current job search. People keep asking the same question. Sometimes they ask it in an aggressive way; as if they were giving an exam question. Sometimes they ask it in a humble way; as if they assume I know and they would love to be educated. Sometimes they ask as a kind of test of tribal membership; dropping a nominal answer while clearly inviting me to agree that is in fact the answer. Sometimes it’s part of their start-up’s value proposition, even most of it; i.e. one of the keywords on the tin of their plausible premise; like “new” or “family sized!”
A few years ago the question that filled this role was “What’s up with this Web 2.0 thing?” I’m not sure we ever actually settled, collectively, on an answer to that question. We do seem to have agreed there was something to it. Maybe less than the hope, but still there was something there. Something about richer user interface, and something about web services & ajax.
Since this new question get’s asked in the midst of a job search I suspect my answers so far are muddy. Colored by the necessity of giving an answer that will work well on the primary goal of moving the job hunt forward. If the founder is chasing his vision it’s kind of lame to confuse the quest with a chaff of alternative visions.
I guess I really ought to puzzle out what my thoughts are about this question. That’s hard for the usual reasons. There are some vendors who have grabbed a chunk of mind share. There is a large incentive to deploy the idea to get with the current venture capital enthusiasms. I’m, like we all are, a bit blinded by some of my favorite insights that are nearby. The temptation to frame it as nothing new is always a good dodge.
But for the record the question is “What’s up with this cloud computing thing?”
see also: new frontier, evolving, godzilla, energy, stormy weather, condensation
Bad Profits
Back in the 1970s my bank called me. One of my checks had bounced. They were very nice about it. Didn’t cost me a cent. These days deep in the fine print of my bank account’s rules there is a 30$ fee. But it gets worse.
Over the years main street banking has become more despicable in how they make their money. The reasonably straight forward model of pooling funds for investments and then paying you a bit of the earnings fell apart when they noticed they could compete on the interest rate and make up the loss on fees.
The banks are now dependent on a business model that runs off fees and charges. Which means that they sit in conference rooms to architecture their systems to maximize the fees. The product managers walk a thin line between alienating the customers in the long term, and capturing profits on their stumbles in the short term.
For example let us say you pay 2 thousand dollars in bills, but you only have 13 hundred in the account. The bank can maximize the bounced check charges if they delay paying your bills so they can batch up as many checks as possible. That let’s them pay off the larger checks first, so as to increase the chance of draining your account. With luck they will then have a dozen tiny little checks; these all bounce. Fees Maximized!
There is a nice term of art for this behavior: Bad Profits. His list of examples is fun. Unsurprisingly many of his examples are pricing games. If your a product manager the question you ask of each of those examples is how bad will it be? How many customers will I loose. If the answer is not many, or even not many while I’ve got this job, then the behavior’s not so bad from your point of view.
My bank regularly sends me email about the status of the game we are playing. They send me solicitations for other products in the mail. But if I were to bounce a check they wouldn’t notify me. And unsurprisingly the check can bounce multiple times.
Better data, fewer customers
Here’s an amusing business tactic: lock out the customers. You know the drill. You visit the website, log-in, and the vendor inserts an extra page forcing you to provide your missing zip code, or what ever. “Our data quality is more important than your time.”
So this company, a health club, locked their patrons out of the club. If they went to the desk they were told that their account was missing their email address.
It’s always good to keep things neat and tidy, but it’s impossible to get across how much this kind of thing drives customers away. Particularly because it drives off the most lightly connected customers. The ones that are hardest to model. The ones you desperately need going forward. There is probably some deep design principle here. You need to design the system to maximize the amount of chaos in your data. Homogeneity is a false God.
Meanwhile, if you enjoy keeping account data tidy you might want to drop by the Useless Account web site. Sign up! Edit your account profile to your hearts content.