Monday, March 30, 2009
Flight to Quality
by Tom Bozzo
I wouldn't be mentioning this if there weren't some lessons for the current Troubles herein.
For Ed Montgomery (congrats on the quite possibly thankless new job and Go Maryland College of Behavioral and Social Sciences!), there's a reminder that companies can run themselves out of business by efficiently producing products that cannot be sold for a compensatory price. LEGO's element production and set-packaging operations were famously efficient and automated in the crisis period. As the S+B article explains in detail, the rest of the operation was a disaster. If anything, reducing Danish labor costs was a sideshow for, if not a distraction from, the rest of the restructuring. Which is to say, there's only so much to take out of the hides of the UAW.
A saving grace for the LEGO Group was that its failures mainly were behind-the-scenes; the things that were losing them DKr by the billions largely weren't erosive of their products' reputations, so:
For observers of the Danish model of relatively open markets plus a strong social safety net, there's a warning that it's not necessarily an automatic producer of contentment under all economic conditions. From the Guardian:
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[1] This has very little to do with my recent birthday; official estimates are that there are about 250,000 serious adult fans out there.
[2] I.e., selling cool sets to build from the little plastic bricks.
[3] E.g., the LEGOLAND theme parks, which you know aren't a Company operation in part because an employee of the Schaumburg, Illinois indoor facility was using the colloquialism "Legos" to refer to "LEGO bricks" or "LEGO elements" in orienting a new employee; such talk is supposed to be forbudt for trademark protection reasons.
For a bit of an antidote to Bad News Fatigue, the Guardian has a pretty good article (via The Brothers Brick) on the turnaround of the LEGO Group, which a few years ago was on the brink of bankruptcy and/or absorption into one of the toy megacorporations but now is enjoying double-digit sales growth even in basket-case markets. [1] It's a bit long on ancient company history, but the short version is that under their ex-McKinsey CEO, the company opted largely to stick to its knitting [2], divest various non-core assets [3], and also outsource a good chunk of their production — mostly to Eastern Europe — to cut costs. The über-nerd version from a couple years back, in the supply-chain management magazine Strategy + Business, is here. An interesting additional detail omitted in the former and post-dating the latter is that the company is re-insourcing the outsourced production, though not necessarily returning it to Denmark.
I wouldn't be mentioning this if there weren't some lessons for the current Troubles herein.
For Ed Montgomery (congrats on the quite possibly thankless new job and Go Maryland College of Behavioral and Social Sciences!), there's a reminder that companies can run themselves out of business by efficiently producing products that cannot be sold for a compensatory price. LEGO's element production and set-packaging operations were famously efficient and automated in the crisis period. As the S+B article explains in detail, the rest of the operation was a disaster. If anything, reducing Danish labor costs was a sideshow for, if not a distraction from, the rest of the restructuring. Which is to say, there's only so much to take out of the hides of the UAW.
A saving grace for the LEGO Group was that its failures mainly were behind-the-scenes; the things that were losing them DKr by the billions largely weren't erosive of their products' reputations, so:
Part of this recession-busting feat, Nipper concedes, is down to the fact that in times of trouble, consumers - in this case, parents - turn to "the well-known, the safe, the durable. Lego may not be the cheapest toy, but parents know it has stood the test of time, it will last years, provide hours of quality play, represent good value for their hard-earned money."Ceding reputations for "representing good value" in favor of "having the most cash on the hood" is an obvious failing of Detroit's legacy management, in hand with reactionary product planning.
For observers of the Danish model of relatively open markets plus a strong social safety net, there's a warning that it's not necessarily an automatic producer of contentment under all economic conditions. From the Guardian:
"This town isn't just about Lego any more, you know," observes a woman who asked to be called just Birgita, perching her youngest son on the back of her bicycle outside the supermarket. "It hasn't been for a long time. We're proud of Lego, certainly, but there are lots of other companies, lots of other jobs here now. The good thing was that all that happened when the rest of the economy was still in quite good shape. Heaven knows what it would have been like today, with half the world collapsing."This account is anecdote, sure, but the apparent success of the Danish model isn't its production of armies of the happily unemployed. On the contrary, by both EU and US standards, Denmark has exceptionally high employment and low unemployment rates. At some level, there's no substitute for full employment, and the Invisible Hand does not promise to provide that.
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[1] This has very little to do with my recent birthday; official estimates are that there are about 250,000 serious adult fans out there.
[2] I.e., selling cool sets to build from the little plastic bricks.
[3] E.g., the LEGOLAND theme parks, which you know aren't a Company operation in part because an employee of the Schaumburg, Illinois indoor facility was using the colloquialism "Legos" to refer to "LEGO bricks" or "LEGO elements" in orienting a new employee; such talk is supposed to be forbudt for trademark protection reasons.
Labels: creative destruction, labor, LEGO
Friday, April 04, 2008
Even Worse Than It Looks?
by Tom Bozzo
The U.S. employment report for March, as most of you probably know, stank. But it would have stank more but for this model, which estimated that there were an additional 28,000 jobs in the construction sector, 7,000 in manufacturing, and 6,000 in financial activities jobs. I don't think so.
One of the things that keeps applied economists busy is figuring out whether Sophistimacated Methods are better than simpler ones. In this case the model seems to perform worst exactly at the turns in the business cycle when you'd think policy-makers would want the most accurate reading on employment changes, which is not a great recommendation.
If someone wanted to make the argument to me that the CES Net Birth/Death Model is more trouble than it's worth, today would be a good day to do so.
The U.S. employment report for March, as most of you probably know, stank. But it would have stank more but for this model, which estimated that there were an additional 28,000 jobs in the construction sector, 7,000 in manufacturing, and 6,000 in financial activities jobs. I don't think so.
One of the things that keeps applied economists busy is figuring out whether Sophistimacated Methods are better than simpler ones. In this case the model seems to perform worst exactly at the turns in the business cycle when you'd think policy-makers would want the most accurate reading on employment changes, which is not a great recommendation.
Tuesday, January 29, 2008
Reputational Risk, in Two Modes
by Ken Houghton
The undercurrent is that one of the company's subsidiaries provides payroll services to a lot of companies and agencies.
Now, there are two things a company working through Chimes/Axium can do at that point. So let us compare examples. The first was sent in early January, within a day or two of the bankruptcy announcement:
That is proactive management. There are quick assurances of the strength of the company, the strength of the contract, and ability of the firm to manage the risk it took on.
The second company's e-mail was sent several days later, without warning, and did not necessarily reach all of those affected in a timely manner (i.e., before they expected to receive a check). Let's do this in parts:
So far, so good. So why are several of us reaching to make certain we still have our wallet?
Let us remember that agencies are generally paid net-30, net-60, or net-90, and build that into their cut of the rate. And they extract concessions from consultants (who often work through an agency primarily because they want to smooth cash flows) on the basis of assuming that risk.
That "would" is worrisome, since any reasonable firm has alternative means of covering the gap—and any other one is suggesting that their risk-management skills, for which they are being compensated by their consultants, is not so good as advertised.
There was, you will note, absolutely nothing in this note so far indicating that the currently-expected payment was not being made. Nor, given the normal timeframes of payment, would there be any expectation that checks in January for December work would be withheld.
I believe this translates to "you should keep working, but we won't pay you."
The reputation of Chimes may be salvageable.* That of the second company appears to be another matter.
*As part of a larger organization, now:
The headline news is that fraud may have destroyed a company.
The largest creditor of Axium International Inc. sued the company's former principal owners on Tuesday, alleging massive fraud and theft a week after the Hollywood payroll service provider filed for liquidation bankruptcy.
In a lawsuit filed in federal court in Los Angeles, investment firm GoldenTree Asset Management said Axium's former principals, John Visconti and Ron Garber, treated the company "as their own personal piggy bank to finance their extravagant lifestyles."
The undercurrent is that one of the company's subsidiaries provides payroll services to a lot of companies and agencies.
Also on Tuesday, Ehrenberg, the bankruptcy trustee, said he had identified potential buyers for the assets of Axium and one of its subsidiary companies: Ensemble Chimes Global, or ECG, a provider of contract workers and other personnel services.
ECG's assets will be auctioned in U.S. Bankruptcy Court in Los Angeles on Jan. 23, Ehrenberg said. The opening bid for the company is $7.5 million. Last year, Axium paid $80 million in cash to acquire Chimes Inc., which was combined with another Axium subsidiary to form ECG.
Now, there are two things a company working through Chimes/Axium can do at that point. So let us compare examples. The first was sent in early January, within a day or two of the bankruptcy announcement:
I wanted to update you on a situation that has recently arisen. As of yesterday, CHIMES has filed for bankruptcy and has closed their doors at all their clients, including ******.
I am writing this email to let you know that while this situation is being sorted out, your assignment at ****** is still intact and you will continue to be paid weekly by *******. We are a large company that can afford to pay employees.
Please continue to focus on your assignment and if you have any questions, please direct them to me and not your ***** manager.
****** will continue to partner with ****** and provide them our assistance as they work through this situation.
As more information becomes available, I will be sure to reach out to you directly to provide you with any relevant updates. [emphases mine]
That is proactive management. There are quick assurances of the strength of the company, the strength of the contract, and ability of the firm to manage the risk it took on.
The second company's e-mail was sent several days later, without warning, and did not necessarily reach all of those affected in a timely manner (i.e., before they expected to receive a check). Let's do this in parts:
By now you are no doubt aware of the recent developments regarding Ensemble Chimes Global's Chapter 7 filing. We are currently in touch with each client that has been using Chimes as their consultant payment system. They have each told us that they are in the process of evaluating the situation and have asked us to please allow them time to determine how to move forward.
So far, so good. So why are several of us reaching to make certain we still have our wallet?
However, we feel that we must inform you of the possibility that monies caught in the gap of being paid to chimes and not paid to ****** or monies not paid yet to Chimes prior to the time of their Chapter 7 filing are in some jeopardy. We sincerely hope that this jeopardy will be eliminated as soon as possible.
Let us remember that agencies are generally paid net-30, net-60, or net-90, and build that into their cut of the rate. And they extract concessions from consultants (who often work through an agency primarily because they want to smooth cash flows) on the basis of assuming that risk.
Therefore we are encouraging our clients to pay ****** directly and pay Chimes ONLY the fee that they are entitled to and nothing more. This would enable ****** to keep all payments due consultant contractors up to date.
That "would" is worrisome, since any reasonable firm has alternative means of covering the gap—and any other one is suggesting that their risk-management skills, for which they are being compensated by their consultants, is not so good as advertised.
They will keep us abreast of all decisions, and we in turn will contact you with the updates. Our payments to your firm are "based upon remittance of funds to ****** from the client covered by that Purchase Order". ****** has reached out to each client for them to provide a guarantee of payment, so that our future payments to your firm will not be held up.
There was, you will note, absolutely nothing in this note so far indicating that the currently-expected payment was not being made. Nor, given the normal timeframes of payment, would there be any expectation that checks in January for December work would be withheld.
We are committed to partnering with you to minimize the impact of this sudden event, while at the same time ensuring that the client's operations are not adversely affected.
I believe this translates to "you should keep working, but we won't pay you."
The reputation of Chimes may be salvageable.* That of the second company appears to be another matter.
*As part of a larger organization, now:
Richard White, president of Beeline, said in a statement that the firm will work closely with Chimes' customers. "We are aware that many Chimes' clients have suffered recent disruptions to their operations due to Axium's bankruptcy filing. We are ready and able to jump in and provide the resources and solutions necessary to get these clients back online and operating efficiently."
Labels: labor, Risk Management, TheoryoftheFirm
