Donald J. Patti

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Failed Pilot? Chalk it up as a Win!

In Business, E-Business, management, project management, Software Development, Technology on 14 December 2009 at 8:30 am

You’ve just had a failed pilot, followed by a quick meeting with the Project Management Office (PMO).  Your project was killed and you feel like a failure.

What should you do next?  “Celebrate,” I say, “then chalk it up as a win.”

What? Not the answer you were expecting?  Let me explain…

I spend quite a bit of time in a classroom, whether its to teach a subject or to learn myself.  During one class, the oft-cited Standish Group statistic that measures projects successes reared its ugly head once again, this time citing a roughly 30% project success rate with roughly 45% qualifying as challenged (Standish Group 2009).  Per Standish, roughly 70% of projects fail to meet expectations – a sobering statistic.

A project manager sitting behind me who specialized in pharmaceuticals shocked me when she said, “Gee, I wish our numbers were that good [in our industry].  The odds of a clinical trial resulting in the drug reaching market is 1 in 20, and this is after its cleared a number of internal hurdles to justify a stage I/II trial.”  (A stage I/II trial is early in the process and serves as a pilot).  While I laughed at her comment, I also considered how it related to the Standish statistics and definitions of project success.

By her definition, success meant bringing her product all the way to market, an unlikely outcome by her own estimation and by those of my fellow health sciences colleagues.  But, what if success was defined as, “Accurately determining whether a product should be brought to market,” or “Successfully determining whether a project should continue past the pilot stage”?  Suddenly, many of her projects would be considered successes.  After all, how many drugs don’t work, have ugly side effects, or have the potential to kill their patients?  Isn’t she and her team successful if they keep bad drugs off the market and aren’t we better off for it?

In the software industry, good software methodologies use pilots, proof-of-concepts or prototypes to determine whether a software product is worth fully developing and fully budgeting.  In the Rational Unified Process, the rough equivalent of a pilot is called the Lifecycle Architecture Milestone and its purpose is to confirm that the greatest technical and design hurdles can be overcome before additional funding is provided to the project.  In Rapid Application Development prototyping is embedded in each and every iteration (cycle), while paper prototyping is a part of Agile development.  Regardless of the methodology, these steps are designed to provide results early, but they are also designed to confirm that a project is worth completing, providing an opportunity to change course or shut down the effort when it’s not.

So, maybe it’s time for those of us in the PMO and portfolio management to change they way we measure project success.  Right along side the “projects successfully completed on time/on budget” statistic, there should be two others — “projects successfully killed because their pilots proved they simple weren’t viable,” and “dollars saved by ending unfeasible projects early.”  Because in the end, a pilot’s failure is just as good as a pilot’s success, as long as you listen to its message.

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Dead Babies, Dead-tired Staffers and “Leaving the Zone”: Exceeding the Envelope in Software Development

In E-Business, Ethics and ideology, management, Quality, Software Development, Technology on 12 October 2009 at 10:38 am

I know, I know.  “What do dead babies have to do with software development?” you say.  “Are you playing my heart-strings?”

Sensationalism being what it is, I have to admit that I couldn’t avoid leading with nearly everyone’s horror – dead babies.  Yet, there is a critical tie between today’s three attention-grabbing subjects and software development that makes this entry worth reading.  And, it has implications for how you manage your staff, software developers or otherwise, in the days to come.  Read on.

Leaving the Zone

It’s been more time than I care to admit, but during my senior year of college I learned what it means to be “in the zone” as well as what it’s like to leave it – painfully.  A track and cross country athlete at the NCAA Division 1 level, I was the first finisher on my team for my first four races, finishing in the top five for every race and posting two victories.

Old glories aside, it’s far more notable what happened next – my body crashed.  Though I’d trained hard with the rest of my team by posting a full Summer 80+ mile weeks and even two at 100+, I then took on the World when classes started, signing up for a full slate of five courses and tacking on a full time job managing a political campaign in Montecito, California, fifteen minutes south of Santa Barbara.  I slept less than five hours a night and spent nearly all my time racing from one place to another, which is a sure recipe for a wrecked body.

Back then, I had no idea there were limits to the punishment my body could take, but I found out quickly.  After consistent finishes with the lead pack among hundreds of runners, I finished no better than the middle of the pack in my remaining four races.  Even worse, my team went from three victories in four races to middle-of-the-pack as well, in part because I was no longer pacing them to victory.  At the end of the season, the affects of over-work were readily apparent – an MRI showed three stress fractures, one of the femur, our body’s largest and most durable bone.  Clearly, I didn’t recognize when I was “Leaving the Zone” by over-working myself, but had only just come to realize this.

Dead-Tired Staffers

Amazingly, it took an enormous amount of self-abuse for me to finally start listening to the messages my body was sending me about being tired or over-worked, but the lesson has stayed with me since.  As I’ve spent more time at work leading people, I’ve noticed that lesson also to the work world, where tight deadlines and high-pressure work can lead us as leaders to push for overtime again and again.

Consider your last marathon project with brutal deadlines and lots of overtime: Can you remember seeing these signs of over-work in your team members as they pushed themselves beyond their limits:  Irritability; an inability to concentrate; lower productivity; poor quality; at the extreme, negative productivity, when more work was thrown out than is gained?  Looking back, you’ve probably seen at least a few of these, and if you check out your defect logs from the work produced during these times, you’ll notice a spike in the number of defects resulting from your “more overtime” decision.  But, maybe you’re still denying that over-work will threaten the success of your projects, not to mention the long term well-being of your team members, as you run a dedicated team of dead-tired staffers over the edge.

Dead Babies

If this is the case, you wouldn’t be the first manager I’ve met who doesn’t understand how over-work can actually slow your project down rather than speed it up.  Software developers, analysts, engineers and QA team members, these managers argue, are hardly putting in a hundred miles of physical exertion each and every week, though they may be putting in 60 or 70 hours of work.  These managers counter that mental exertion and sleep depravation are not the same as physical exertion on the level of a college athlete. Or, they accept it in theory, until a project falls behind or a key deadline looms.

Though I found a number of excellent articles and blogs on the subject of software development and over-work and I’ve posted at the bottom of this article, the best evidence of the adverse affects of sleeplessness, stress and over-work on our ability to use our minds productively actually comes from the world of parenting.  In the Washington Post article, “Fatal Distraction: Leaving a child in the back seat of a hot car…”, report Gene Weingarten moves beyond the emotion of a very sensitive subject and asks the telling question of what was going on in the lives of parents who leave their children in cars on hot, sweltering days.  The answer?  Stress, sleeplessness, over-work and half-functioning brains – in many cases brought on by us, as managers.

“The human brain is a magnificent but jury-rigged device,” cites Weingarten of David Diamond, a Professor of Molecular Physiology who studies the brain.  (Weingarten and Diamond deserve all of the credit for this research, but I’ll paraphrase).  A sophisticated layer – the one that enables us to work creatively and think critically – functions on top of a “junk heap” of basal ganglia we inherited from lower species as we evolved.  When we over-work our bodies, the sophisticated layer shuts down and the basal ganglia take over, leaving us as stupid as an average lizard.  Routine tasks are possible, like eating or driving to work, but changes in routine or critical-thinking tasks are extremely difficult.  Even the most important people in our lives are forgotten when fatigue and stress are applied, as Weingarten’s article shows.

If an otherwise dutiful, caring parent can’t remember their own child when sufficiently fatigued, what is the likelihood we’ll get something better than a dumb lizard from our software development team when we push them above sixty hours per week again and again?  And when they’re finished, how high will their quality of work actually be?

So, when considering another week of over-time, think twice.  Sometimes, it’s better to just send the team home.

—–

Gene Weingarten’s Washington Post article can be found here: http://www.washingtonpost.com/wp-dyn/content/article/2009/02/27/AR2009022701549.html?wpisrc=newsletter&sid=ST2009030602446

Other good articles on overtime and software development can be found here:

http://xprogramming.com/xpmag/jatsustainablepace/

http://www.uncommonsenseforsoftware.com/2006/06/planned_overtim.html

http://www.systems-thinking.org/prjsys/prjsys.htm

http://www.caffeinatedcoder.com/the-case-against-overtime/

Why Do People Go to Weddings?

In Family, Love, Personal, Uncategorized on 11 July 2009 at 2:45 am

Why do people go to weddings?  After all, we’ve been through it.  We know how it ends.  Walk one way.  Stand.  Sit.  Kneel.  Stand.  Sit. Kneel.  Stand.  Sit.  Kneel.  Kiss.  Stand.  Sit.  Kneel.  Stand.  Walk the other way.   It differs a little from religion to religion, ceremony to ceremony, but it’s quite predictable, right?

Yet distant relatives, friends of mother’s friends, even strangers crash weddings. Why?  Whether we’re single, engaged, married or widowed, we all have something that draws us to weddings, though in each case, the draw is different.

Perhaps we were single at our last wedding, sitting in the audience witnessing the big event. The excitement, the apparent nervousness, the spoken vows, the commitment of two people to each other – they were all so inspiring. And the couple, the glowing twosome – they were called to be better people because they were now bound together till death – and who can’t admire that?

Perhaps at our last wedding we were engaged.  For us, we could anticipate the big day of our own ahead, we imagined ourselves walking the same steps, our voices quivering but hearts courageous, our long, passionate embrace before hundreds, our life ahead.  It was an appetizer. A teaser. A dream.

Or, maybe we were already married at our last wedding.  We remember standing there; we made the vows so we knew what they meant.  We had lived them and if we were honest with ourselves we knew that we had even struggled, at times, to keep them.  For us, there was a level of courage being displayed that only the wedded truly knew.

When we married folk come to weddings, we also recall the beginning of our marriage, the promise we made and the excitement we felt.  We remember all of the great events since then – the first home, the first child, the second child, (the third child?) The first big scare, the first broken bone, the first big fight, the makeup after the first big fight.  We remember all of the good times marriage brings; we comfort in the strength it brings during bad times; and, we celebrate another pair choosing our path, even though we have walked it less-than-perfectly ourselves.

Or,  perhaps we were widowed at the time we attended our last wedding.  We missed our love and the pain was far stronger than it was only hours before the event, but the good memories were also brought forward.  We remember meeting; we remember staring at each other’s young faces in youthful joy; we remember knees and backs that suddenly didn’t bend well to pick up wee ones; we remember plucking the first gray hairs from each other’s heads in stubborn defiance; we remember  admiring each other’s wrinkles fondly like badges of merit.  We remember our first realization that this would one day end. We remember parting.

So, for the single, marriage brings promise and hope that two humans can commit to each other and keep that commitment, though it may be a path we never choose and it may not be right for us.  For the engaged, marriage foretells the future; it helps us to plan and dream.  For the married, it’s reinforcement that the path we’ve taken is a noble one, a good one, a rich one.  For the widowed, it’s a remembrance of life’s rich pageant and how we celebrated its richness.

Maybe that’s the key.  Single, engaged, married, widowed — we’ve all seen it before. Like a classic movie or Shakespearean Comedy, we know how it ends before the first act begins.  The righteous prevail; the evil are foiled; the boy walks off with the girl.  It’s a great story that’s been touching the souls of men and women for thousands of years.

That is why people attend weddings.  No matter which path we’ve chosen, it inspires us.  It keeps us walking our path with renewed hope. And, no matter how rough the road appears ahead, it lightens our steps along the way.

“But They Said They Understood…”: A Common Mistake with Indian Off-shore Teams

In Business, Culture, E-Business, Ethics and ideology, management, off-shore, Technology on 6 February 2009 at 1:23 pm

If you’re a long-time U.S. IT Manager, you’ve probably already led international teams composed of individuals from all over the globe.  I was fortunate, for example, to have one project with team members from England, Germany, Australia, Singapore, India and all four continental U.S. time zones.  While the mix of cultures and talents can cause conflicts, once the team gels, the results can be overwhelmingly positive.  It’s amazing to see what a team working nearly 24X7 can do when you lead it properly.

One mistake I’ve seen made by U.S. IT managers involves managing Indian off-shore teams, in particular, and has been repeated at three different client sites in the last five years, so it’s worth a good blog entry.  First I’ll explain the scenario and then I’ll explain why it is legitimate – NOT bigoted – to point out this common mistake so it can be avoided.

The Mistake

To explain the situation, you’re running a newly formed off-shore team and you’ve just assigned them a particular set of tasks that make up a deliverable. You ask, in front of the group or over a conference call, “Do you have any questions?”  When no questions are heard, you move merrily on and end the meeting, continuing on with your week’s work until you have your next meeting with your team.

“Is the work done?” you ask.  No.

“How much progress did you make?” None.

“Is it not explained clearly?” Yes, comes a response. Then, silence.

It’s at this point that we leaders usually begin our rant that it is not acceptable to complete nothing during a given week.  We consider terminating people, canceling our contract with the entire team, or trying to recoup costs now that the team is one week late.  As much as all of these actions would be acceptable in our culture given the outcome, this neither the way to deal with the problem, nor is it in the long-term best interest of your company.

The Cause

If you thought the problem was with literal understanding of your words, it’s possible, but unlikely.  Most Indians receive a healthy dose of English throughout their education and can understand it even if their pronunciation doesn’t sound like a Hollywood movie. But if you’ve figured out that the situation above occurred because of cultural differences, you’ve come to a more likely conclusion, though it will help to understand it in more detail than to merely say, “it’s cultural”.   Enter Geert Hofstede, a Dutch researcher and author of “Culture’s Consequences and Cultures and Organizations, Software of the Mind”, which can be found by googling the ISBN 9780071439596 or visiting this page on Amazon.com.  

Mr. Hofstede and his son Gert studied different cultures throughout the World but within the same company, IBM, and determined that there are five key differences in World cultures that can be scored across a continuum.

Individualism v. Collectivism: The extent to which a culture emphasizes speaking up for oneself and taking a unique path in life versus belonging to a group and benefiting from group affiliation.

Masculinity v. Femininity: The degree of emphasis on traditional Western male or female roles, such as assertiveness in males and subservience in females.  (If you don’t like the way I’ve phrased this ladies, I’m sorry. I’ve done my best to make it accurate and fair without losing the message. Alternate ideas on how to phrase this are appreciated).

Power Distance: Power distance refers to the social distance placed between people in authority compared to those who are not.  Because authority is relative (I have a supervisor, but I also supervise others), you can expect a middle-manager to behave just as their subordinates to them, but with their own manager.  As one would assume, the greater the power distance in a culture, the more deference and subservience subordinates display to their superiors; the lesser the power distance, the less deference displayed.

Uncertainty Avoidance: The desire or need to avoid uncertainty in relationships or dealings with others.  Cultures that try to avoid uncertainty have lots of rules.

Time Horizon: Some cultures have a short-term time orientation, while others have a long-term time horizon.  As an example, business leaders in the U.S. tend to manage to maximize short term, quarterly profits, while those in Japan and China manage across lifetimes and generations.

If we compare scores between the U.S. and India, we can better understand (or at least speculate) about why our mistake occurred.  While there are similarities in masculinity and uncertainty avoidance scores between the U.S. and Indian cultures, there are dramatic differences in power distance, individualism and time horizon between us.  The specific scores are here, but it’s important in our situation to note that Indian subordinates are far less likely to speak up when talking to a person with more authority and are far less likely to contradict or challenge someone in front of a group.   So, when you asked, “Are there any questions?” it was pretty unlikely you’d hear any from your team – even if they had them.

It’s probably good for me to note, as well, that these are generalizations. Just as all Americans are different, this is equally true with Indians, so you may well see different behavior from your team members.  The Hofstede’s describe the norm within a culture, not the exception.

A Better Response

Having managed over a dozen projects composed of Indian development and quality assurance teams, I have found that there are better ways to avoid the “Understanding Gap” and prevent it from occurring.

  1. The confirmation question. In our situation, we asked, “Does any one have any questions?” to the group as a whole.  Instead, ask each individual slightly different questions, phrased in a way that confirms they understand specific elements of the task.  As an example, one might ask, “<Name here>, I’m a little uncertain how I’d complete your portion of the work, so maybe you can help me understand. How were you thinking you’d test the <insert name> functionality?”  Or, “You’re most likely to find building the <insert name> component challenging.  Have you thought about the steps involved?”  This approach not only confirms the person’s understanding, it results in better design because the person asked may have a better approach than you do (unless you have a monopoly on brilliance?).
  2. The one-on-one. After asking confirmation questions, if you find one or two individuals struggling, schedule a one-on-one to go through their work and answer their questions.  In a one-on-one, they are more likely to feel comfortable asking pointed questions, and may even propose a better way to complete the work.
  3. The follow-up call. This one is simple.  If you’ve assigned a task, don’t wait one week to check on progress.  Check back with the team at least every other day to make sure they’re making progress and understand what you’ve asked.  Over time, this will be needed less and less, but initially, the follow-up call is a true time-saved
  4. The “you’re among family” reminder. Regardless, of culture, everyone has the fear that a “stupid” question or a mistake will threaten their jobs.  In some cases, the fear is warranted.  Particularly with teams that have just formed, remind the team members that “they are among family” when speaking to team members and that team members are here to help each other.  Even more important than saying, “you’re among family” is to live up to that statement. Do not brow-beat subordinates for small mistakes and do not cavalierly fire people because of a single error.  If you do, you’ll find the two-way channel you need to effectively lead a team is suddenly closed.

Possibly, you’re reading this article before you’ve managed your first global, off-shore or Indian team, so it’s been a good primer.  But there’s far more to know about the subject than can be posted in a single blog entry.  Though it’s very academic in the way it’s written, I encourage you to buy and read Hofstede’s book, referring back to the cultural dimensions the book provides on graphs so that you better understand each team member’s cultural before you try to relate to them using a purely American mindset.  I’d also use the following links for quick reference once you’ve read the book through:

http://www.geert-hofstede.com/

http://www.geert-hofstede.com/hofstede_dimensions.php

Doing so could save your company thousands, if not millions of dollars, keep your projects running smoothly and – most importantly – help you to build a harmonious work environment where people look forward to each and every day.  After all, isn’t that what keeps us from burying our heads in the pillow and hitting the snooze button twelve times?

With Goliath Incentives for Others, Seven David’s Need Stimulus, Too

In Business, Finance, Politics, Small Business, Uncategorized, United States on 29 January 2009 at 12:05 pm

Last Saturday, I received call #7 from a friend or associate starting a business in one of the gloomiest climates since the Great Depression.  Never mind that these seven individuals are figuratively “spitting into the wind” (Jim Croce) by spending time and money in such difficult economic times, their efforts are a telling example of how the U.S. economy recovers time-and-again from recessions.  Despite big businesses shedding jobs and shuddering their windows until the economic climate improves, individuals like you and I come to the rescue with innovative ideas, hard work and untiring faith to renew growth in the most impressive economy the World has ever seen.

Given the repeated successes of America’s Davids (and Davidettes, ladies), I’m surprised and disappointed to see that President Obama has left sizable incentives for small businesses out of the economic stimulus package before Congress.  With mass transit and benefits extensions for the unemployed on the list, there’s definitely been some careful thought put into the plan about who needs help and where future growth should occur.  However, there’s little to nurture the efforts of the seven fledgling businesses contained in President Obama’s package.

Knowing the business models the seven David’s will use to grow, I’ve thought of 5 ways the 2009 stimulus package could be modified to help small businesses get America back on its feet.  These should be targeted at businesses under $5 million in annual revenue and owned entirely by individuals (sole proprietorship, partnerships, S corps, small LLC’s) to prevent larger businesses from launching subsidiaries just to take advantage of the situation:

1. Give a Three-year Tax Holiday on Income Increases to Small Businesses.

Description: Give a three year tax holiday at the Federal and State level for income growth when compared to 2008.  If you made $100,000 net income in 2008 and $250,000 in 2009, the additional $150,000 in income would NOT be taxable.  If you lost money in 2008, then any earnings in the next three years would be untaxed.  The same should apply to 2010 and 2011 when compared to 2008 earnings.

Reason:  This rewards small businesses for taking risks in 2009, 2010 and 2011 to invest in activities that increase growth, which will increase spending and employment throughout the economy.  The alternative is to NOT do this, not see the growth and not collect the tax revenue, anyway.

2. Reward Small Business for Going Green.

Description:  From buying energy-efficient equipment to purchasing fuel-efficient cars to reducing energy consumption to installing solar power, small businesses should be rewarded for finding ways to run lean.

Reason:  An immediate capital investment will boost the economy short term and reduce our dependence upon unstable energy sources long term.  Even better, getting small businesses to think green will encourage them to build this mindset into every avenue of future business, yielding gains decades ahead.

3. Give Incentives To Hire.  Big business is cutting back big time on head count and small businesses will likely follow suit.  Give small businesses 10% of each employee’s salary – up to $10,000 –  as incentive for bringing on new people. Decrease the incentive to 5% in 2010 and 2011.

Reason:  Small companies hiring in 2009 should be rewarded for bucking the trend.  While big businesses could potentially receive the same incentives, small businesses are far less likely to find loop holes in the law to exploit the tax benefits without truly bringing on a live body.

4. Encourage Small Business to Advertise.

Description: For every small business in America, give a 50% tax credit for $ spent on marketing and advertising in 2009 up to $25,000 in total benefits.  The money must be spent outside the business to either market or advertise the company’s products and services and must result in a bulk e-mail, a website banner ad, a radio ad, a newspaper listing, a cable TV ad or something similar that was not done in 2007 or 2008.

Reason:  If there’s one place I believe small businesses chronically under-spend, it’s on marketing and advertising.  Even worse, advertising is often a hit-or-miss endeavor and it takes a few tries to be successful before the appropriate channel is identified.  This type of advertising incentive encourages small businesses to consider how they can grow and the $50,000 investment required to gain the $25K in tax credits will have an enormous impact on the sales of a small business.  That same $50,000 would do little for a big one, which is already advertising at a level well-above $50 grand.

5. Provide Easy Access to Working Capital Loans for Small Businesses.

Description: Through the SBA, triple the number of $25,000-$50,000 loans to small businesses and ease up on the credit restrictions.  Advertise the avalable loans; guarantee the loans issued by banks; and, issue the loan directly if the banks won’t.

Reason:  Many small businesses aren’t expanding because they simply can’t get a hold of the capital necessary to run their current operations on a day-to-day basis.  Working capital enables small businesses to pay employees, cover rent and buy raw materials up front until their clients pay them for services or consumers buy their goods. Yet, banks have shut off the tap to their lines of credit and many aren’t issuing any new credit at all, even if the borrowing business has historically been successful.  Increasing the number of Working Capital Loans will prevent contraction among small businesses and can enable them to grow, once again.

———

I’m not a professional economist (though I have an Econ degree and an MBA), so I honestly can’t tell you how much money, in billions of dollars, these incentives would cost.  I don’t have access to the modeling tools economists use and my pencil isn’t that sharp.  But I can tell you that small businesses have historically led economic recoveries, that a little money goes a long way in a small business, and the seven David’s have some good ideas that will need a break if they are to succeed in 2009.

Chrysler & Fiat — The World’s First Happy Shotgun Marriage?

In Auto Industry, Business, Trends, Uncategorized on 23 January 2009 at 10:49 am

It was not long after I posted my “10 Steps to Save Chrysler” blog that I began hearing rumors about a Fiat/Chrysler merger, which intrigued me.  Autosavant, one of the best auto-industry blogs on the ‘Net these days, scooped many of the traditional media outlets by reporting talks on the 19th in this blog entry by JS Smith that’s well worth reading:  http://www.autosavant.com/2009/01/19/chrysler-may-survive-by-fiat/.

Forced together by anemic – no, paralytic –  auto sales, the global credit crisis and some key strategic mis-steps, this engagement between two auto giants may well turn out to be one of the industry’s happiest marriages.  I decided to look back at my article from last week and see which of my “10 Steps” the Chrysler-Fiat partnership helps to address to see whether this isn’t one of the wisest merger opportunities we’ve seen this decade.

Based on a quick tally, a Chrysler-Fiat merger could effectively address these steps:

1. Original Recommendation: Stop building engines.  Analysis: Initially, I recommended that Chrysler stop building engines because of the enormous development costs associated with engine development, the uncertainty around which powerplant would drive growth in the next decade and my past experience seeing how well engine vendor relationships can work.  While a Chrysler-Fiat merger would by no means outsource engine development and production, it does enable Chrysler to share the economic burden of engine design and development, while giving Chrysler access to some of the smaller, more efficient engines that Fiat has dropped in to their European and South American products so effectively (See JS Smith Article).

2. Original Recommendation: Share platforms.  Analysis: This is also a big win for Chrysler and Fiat because the two can share platforms during design and lower overall product development costs.  Suddenly, Chrysler has access to smaller-framed vehicles at a low cost, while Fiat can eliminate some of their larger platforms and adopt similarly-sized Chrysler platforms.

4. Original Recommendation: Focus on the brand(s).  Analysis: Here’s another big success.  I mentioned in my previous blog that Chrysler lost its brand ladder when it dropped Plymouth, then diluted Dodge and weakened Chrysler.  Consider the brand ladder potentially created by a Chrysler – Fiat merger:  Fiat (small, fuel efficient cars), Dodge (mid-range, family-oriented vehicles), Jeep (off-road, rugged), Alfa Romeo (sporty, high-end, high-performance) and either Lancia or a resurrected Chrysler (luxurious, well-appointed, full-featured).  Positioned effectively, the brand ladder would be complete in a matter of 3-5 years instead of decades.

5. Original Recommendation: Dump the Dealerships, not the Dealers. Analysis:  Another big win, because it addresses the fact that Chrsyler’s dealer network is far too large given it’s product lines and likely future sales. Remember, I said that declining product sales continue to put strain on Chrysler dealerships and it’s time for Chrysler to reduce ranks so some dealers can survive the downturn.  If some Chrysler dealerships are transitioned over to the Fiat brands, this effectively reduces the number of Chrysler dealers and gives Fiat products access to an enormous U.S. Market.  I still believe it’s important for Chrysler to look at other sales channels, including shopping malls (read my original blog) and the Internet, but a merger addresses half of the problem.

Of note, I would caution Chrysler against creating “Fiat/Dodge” or “Fiat/Chrysler” dealerships.  This merely increases brand confusion and makes it difficult for the dealers to cater effectively to their customer niche.  Better to offer Dodge dealerships the opportunity to convert over to Fiat.

For the remaining six recommendations in my previous blog, a Chrysler/Fiat merger does not prevent a merged organization from addressing these issues, but does little to help them.  Chrysler would still have to address quality perceptions, needs to change the underlying philosophy of leadership and explore new channels for delivering its products to customers.  Given this, a Chrysler/Fiat merger has the potential to be a very happy marriage, but it would be unwise for  Chrysler/Fiat leadership to stop there.

As Gun-Shy Investors Turn Away from Traditional Markets, Banks Face Newest Threat

In Banking, Business, Current Events, E-Business, Finance, Peer-to-Peer Lending, Technology, Trends, United States on 16 January 2009 at 4:55 pm

Earlier today, Bank of America and Citi Group posted huge losses, then stood in line with a tin cup held out for more government loans via TARP (16 January 2009, Washington Post, “Bank of America, Citigroup Post Major Losses”).   It’s clear that, despite an injection of $350 billion, the U.S. banking industry is still reeling nearly four months into the credit crisis that has brought down some of the World’s largest banks and investment houses, leaving carnage in its wake.

Yet, at the same time these titans deal with “toxic” loans and absorbing the remains of their recently departed siblings, another threat grows beneath their giant footsteps and between their toes – Peer-to-Peer Lending.  Fueled by the sour credit market, distrust in traditional banks and fear of continued losses in the stock or bond market, once-wary investors are taking their dollars to upstarts prosper.com, lendingclub.com and even virginmoney.com where they can earn superior returns, diversify their investments and know specifically where their money is going.  Though resources in traditional banks are best directed toward immediate financial crises and folding in the business of recently acquired competitors, it’s time for traditional banks to start planning for the coming onslaught from peer-to-peer.

In only a few years, peer-to-peer lending has sprouted from the more-proven micro-lending practiced in developing countries and pioneered by Dr. Muhammed Yunus and Grameen Bank in 1983 (16 January 2009, http://en.wikipedia.org/wiki/Muhammed_Yunus).  Realizing that the loans needed by low-income individuals were far too small, uncollateralized and therefore “too risky” for traditional banks, he began making many small loans via Grameen to under-privileged entrepreneurs, who took the meager sums and made sizable profits, yielding healthy returns for Grameen.  Not specifically interested in making money, Yunus saw how the concept of pooling small sums of money from borrowers to make larger loans or taking larger sums to make many smaller loans had an enormous positive impact on the poor.  This became his business model for Grameen and other micro-lenders like it.

Operated much like the micro-lending Grameen, peer-to-peer lenders match lenders with borrowers on a relatively small scale – often no more than $25,000 for an entire loan and typically in the $5,000-$15,000 range.  Borrowers meet minimum standards for credit-worthiness and credibility, then they post information about their requested loan on line, stating how the money will be used and how much they need.  For most peer-to-peer sites, borrowers approve each lender’s loan offer and terms until the target loan amount is met.

For their part, lenders can lend out as little as $25 to a specific borrower and spread their money around as they deem fit, minimizing the risk that a single lender’s default will cause a huge personal financial loss.  Most often, payments are received on a monthly basis and doled our proportionately to each of the lenders until the fund are repaid.

Peer-to-peer lending sites like LendingClub.com and Prosper.com make their money in a few ways, though the process isn’t entirely consistent between them:  Peer-to-peer lending sites collect a 1-to-3 point service fee on the loan, much like the spread between the amount banks charge their borrowers and the Federal Funds rate at which they borrow.  They may also collect an on-going loan maintenance fee, late payment fees and collection fees if the borrower defaults.  In return, the peer-to-peer brokers screen the borrowers, process the loan, capture legal signatures and may even assist with collections if the borrowers default.

None of this sounds very threatening to traditional banks as of 2009.  The current market for peer-to-peer lending is about $100 billion (www.business-standard.com) and is dwarfed by the total U.S. market of $2.56 trillion (Federal Reserve, http://www.federalreserve.gov/releases/g19/Current/).  But, consider how the credit crisis has created a fertile environment for peer-to-peer lending:

(1)    The spread on a secured consumer loan for a car is 6.88% (7.13% as listed on Bankrate.com – 0.25% Federal Funds rate), far more than the 1 to 3% charged at peer-to-peer lenders. Though rates a higher of unsecured loans in both environments, the difference in spreads is even more dramatic.  (www.bankrate.com and http://www.federalreserve.gov.)
(2)    The yield on a 5-year government bond is 1.47% while the yield on a loan with a similar commitment, an auto loan, can yield 6-9% for the lender – a 4-to-7 point difference (http://www.bloomberg.com/markets/rates/index.html).  Certainly, risk is a partial factor in the large spread, but the other factor is likely the profit margins of banks.
(3)    Traditional lenders are turning away borrowers on all types of loans at record rates in efforts to shore up their portfolios and reduce risk.  Consumer credit dropped in December 2008 for a third straight month and automakers are citing the credit crunch as a reason car sales were off  by one-third between ’07 and ’08 (http://online.wsj.com/mdc/public/page/2_3022-autosales.html).

Traditional banks have some time to respond to the threat posed by peer-to-peer lending sites, but it can be measured in months and not decades.  They are unlikely to be able to compete with them via traditional methods, because the cost of staff, buildings and infrastructure in the brick-and-mortar is simply too high.  But it is viable

(1)    Ignore peer-to-peer lending and hope it fades away – a dangerous way to deal with a tech-savvy threat.
(2)    Acquire a peer-to-peer lending site once the process is refined and market penetration still low, reaping the largest gains by increasing market penetration.  This can be dicey, especially if the market potential is recognized early, driving up the price.
(3)    Develop their own peer-to-per lending capabilities to compete with the upstarts, keeping one of the smaller players from becoming the next “MySpace” or “YouTube” that fetches an exorbitant price on the open market.

Regardless of the path chosen by traditional banks, their spreads are likely to drop, forcing their business practices to change, as well.  A few will under-assess the threat and act too late, bringing them down in the process.  This does not bode well for the people who work for the titans of banking’ they are likely to see another assault on their jobs, just after the “credit crisis” has already dramatically cut their ranks.

Ten Steps to Save Chrysler (Again)

In Auto Industry, Editorials, Uncategorized on 4 January 2009 at 12:49 pm

It’s been nearly thirty years since Chrysler received its last government bailout in 1979 and Lee Iacocca engineered a comeback for the third-player in Detroit’s “Big Three”, but it appears we’re back at the point where investors and citizens have to decide whether to fish or cut bait once again.  Hammered by high oil prices, hurt by the credit crunch and crippled by marginal quality, Chrysler is well on it’s way to the junkyard, not only if the federal government fails to act, but also if the company’s leadership fails to make fundamental changes to the way Chrysler does business.  Never afraid to jump into the foray, here are the key changes I recommend that Chrysler make to survive and even thrive.

1. Stop building engines. It’s paragraph two, but I think I’ve already caused some heart attacks, so I’ll repeat – in all but specialized products, Chrysler should stop building engines and outsource their design and manufacture to competent suppliers.  Give the vendors the product requirements (minimum horsepower, minimum fuel economy, quality/reliability, and needed interface points, such as the transmission coupling), give them a deadline and let them build. A few engines, such as the Viper V10, may need to be kept in-house, but otherwise, engine development should be outsourced and the engine-manufacturer portion of the business spun-off.

There are a few reasons why:  (1) Chrysler isn’t known for building great engines, so it’s not like brand value is being lost by making the move. Sure, they’re engines are good, but I don’t think I’ve ever heard anyone say, “Boy, that Chrysler/Dodge/Plymouth engine ran forever…” (2) The cost of building and designing engines is very high and capital intensive, so both design and manufacturing costs can be lowered by moving this over to another business that already does this well. (3) There’s a great deal of uncertainty about which power plants will move autos in the next few decades, whether it be hybrid or electric or fuel cell, and this transfers the “bet” on technologies to companies that can better manage the risk, and (4) There will be more choices for consumers, who can choose the smaller, lighter Mitsubishi engine with their Chrysler or the higher-revving, more powerful Saab.  Sure, not all auto manufacturers will build engines for Chrysler, but enough will jump in to make for better engines at lower cost.

2. Share platforms. Like chassis, platforms are the foundation for cars used to build the overall vehicle.  Platforms are extremely expensive to design and develop, so auto manufacturers often develop a platform for use in multiple car models over multiple years, up to a decade.  For example, both the Chrysler Sebring and Dodge Avenger are built on the Chrysler JS platform, so are similar, but not identical cars.

Similar to the move away from building engines, Chrysler should share the design & development of some platforms with competing carmakers (like GM) in those areas where competition is more about styling, such as the basic sedan.  Just like engine manufacturing, platform design and development is extremely costly, so sharing these costs across multiple businesses makes sense.  This also neutralizes a competitive disadvantage caused by Chrysler’s lower production volumes – the need to produce cars on a dying platform for more years than competitors, making their products less innovative and less appealing.  It also enables Chrysler to shift its focus to the areas where it really belongs – quality, brand and the distribution chain.

3. Emphasize quality, not quantity. I make these statements without any inside information, so try not to read too much into this: Quality and the perception of quality have not taken hold at Chrysler as it has at other automakers during the past three decades, indicating that the processes necessary to prevent defects before they occur, the mechanisms to reward quality over quantity during production, and the emphasis on automation wherever are possible are not in place at Chrysler to the degree necessary.  One need only look at JD Power & Associates Brand Rankings for initial quality at http://www.jdpower.com/autos/ratings/quality-ratings-by-brand/sortcolumn-1/ascending/page-#page-anchor, which show all three Chrysler brands in the lower third of the auto industry.  If Chrysler as a business is going to survive into the third decade of this century, this must improve.

4. Focus on the brand(s). Currently, the Chrysler group has three brands – Chrysler, Dodge and Jeep – having eliminated the Plymouth brand earlier in the decade.  Though this is subjective, the Jeep brand has the strongest identity and highest brand equity; Chrysler is second, while Dodge is struggling to shed the “Detroit rust-belt automaker” image it garnered in the 1970’s and 80’s.  As Madison Avenue knows, selling products is more about image and perception than about fact, so Chrysler needs to changes it’s brands by:

(a) Re-establishing a brand ladder like the one it had in the past.  A new brand is needed for the entry-level buyer to replace the old Plymouth nameplate.  Modeled after Toyota’s Scion, this brand should build smaller, lower-cost cars that continually update styling based on recent trends.
(b) Ditch Dodge. Though a well-known brand, Dodge needs to be replaced with a more positive brand name in the middle-market, or at least overhauled. Currently, the brand is far too muddled by the presence of sports cars, minivans, mid-market sedans and burly trucks all side-by-side in the same dealership with the same nameplate. Dodge could transitioned into a boutique sports car brand, retaining the Viper and Charger, then adding a convertible and a coupe to the brand to cement the “fast and furious” image. Dodge trucks should be moved under the Jeep brand, where durability and reliability are already well established, while the Caravan and sedans should be moved to the new brand.
(c) Chrysler can remain at the top-end of the market, but some significant effort and marketing dollars will need to be spent to re-establish Chrysler as a luxury brand.  Right now, the top end of the market is very crowded and very competitive, given the presence of Lexus, Infiniti, Acura, BMW and Mercedes to join domestics Lincoln and Cadillac.  The best move may be to shutter the brand until a concerted effort can be made to re-enter the luxury market.
(d) Letting style drive design.  Product development should start in places like Madison Avenue, the Wilshire District, and ?????? not just end there.  And, while, Chrysler has had some innovative product designs in the past two decades, few people put individual Chrysler products at or near the top of their categories for styling.  Plus, with most engine and some platform design moved out-of-house, certain constraints on the product design will push style to the forefront.

5. Dump the dealerships, not the dealers. There’s something about a dealership that is enormously wasteful.  It’s the size, the space, the number of employees and the sheer number of cars sitting idle for months waiting to be purchased.  Sure, in the good times, inventory turnover is sufficient to justify having 30 different vehicles of the same model at once sitting on a lot, but in the bad times, it’s downright debilitating.

Chrysler still needs dealers to sell its cars and it still needs repair centers to repair them, but it certainly doesn’t need the enormous dealer network it has to effectively sell automobiles.  The first step is to pare the number of dealers by 1/3 and convert another 1/3 into authorized repair centers that retain the profit-rich repair business while dumping the profit-poor sales side of the house.  The remaining third become repair, distribution and sales centers for those buyers who can’t adjust to the new distribution model I’ll describe next.

6. Build to spec. It’s not a new concept in the car business, but the last time it was attempted, it was successful.  Some of us remember how successful Saturn was with this model, which dramatically reduced inventory costs while personalizing each vehicle.  A customer drives one of a few demo models, goes back to the showroom, then chooses the features on their car from the ground up – heated seats, fog lights, faux chrome.  If they need a car right there and then, they drive off with a dealer loaner that’s standard-equipped, but they return in three-four weeks to pick up the car that fits them perfectly. One can only wonder why GM insisted upon “absorbing” Saturn into it’s primary business, killing all of the wonderful innovations Saturn brought to the market, but I suppose that’s an entirely different subject for a blog.

7. Sell cars at shopping malls. This may be my most radical idea since the recommendation that Chrysler stop building engines, but let’s see if I can convince you, nonetheless, that the mall can be a better place to sell cars.  Every weekend, our nation’s largest shopping malls represent one of the highest areas of foot traffic in their local area, and those with auto sales experience know that foot traffic matters.  Certainly, these people did not come to the mall to buy a car, but have you ever stopped in the center of a mall to look at one of the three or four cars parked there by a local dealership?  If a new car model showed up at the mall and you had a chance to drive it while you were there, wouldn’t you give it a try?  Months later, when you actually needed a car, would you insist upon going to a dealership, or would a stop by a small retail center at the mall suffice?  This is just a hunch, but you’re probably more open to buying a car at the shopping mall than you think.

Let’s describe the “shopping mall” model, then.  Chrysler signs contracts with regional mall operators, such as Westfield’s, which allow them to display three to four vehicles in the center of the mall.  Chrysler then assigns a dealer from its current pool to run their mall center, and the dealer places a sales person at each of the four cars.  The sales person invites people to sit in the car, shows them the latest features, and if appropriate, takes them on a test drive of a similar car parked out in the mall’s parking lot.  If the person likes the car and is ready to buy, they work with the sales person at a kiosk to build their car from the ground up (see build to spec), answering a few financial and credit-related questions and making a down-payment electronically. At that point, the buyer can leave with one of three or four standard-issue models in the shopping mall lot to drive until their new car arrives at their home, paying a week-to-week lease in the process.  Or, the buyer can wait for their custom car to arrive before starting payments.  Trade-ins are either accepted at the mall or handled by a third party wholesaler who works in conjunction with the dealer. Either way, a shopping mall dealer should only need fifteen or twenty cars at the mall, instead of the hundred-plus needed at a typical dealership.  Supply is replenished on a weekly basis by the regional service, repair and distribution centers.

8. Strengthen the core. Well-structured, modern U.S. businesses have learned that the best way to maintain business stability, accommodate rapid growth and hedge against potential downturn is a core-contractor staffing model.  In most of these businesses, the core represents 1/3 to 1/2 of all workers – those who have specialized skills, difficult-to-find expertise, and long-term organizational knowledge to grow the business across decades.  The remaining 1/2 to 2/3 of workers, though certainly important, work in jobs that are either redundant or do not require specialized knowledge.  These can be outsourced, contracted or trimmed if economic conditions require it, allowing the company to remain agile in a competitive market.  Chrysler needs to adopt the same approach with it’s staffing, making a strong commitment to 1/3 of its union staff, investing in their success with continued training and opportunities at advancement in to leadership and management.  In exchange for commitment to the first third, the union agrees that the second 1/3 of staff are union temps who pay union dues, can be laid off quickly and can also move in to the first third if turnover allows.  The final third is 100% contractor – either on-site or off-site – and is officially employed by another company free to adopt its own staffing model.

Though to some, the core-contractor staffing model seems like a major concession on the part of unions, this change is necessary if Chrysler and its union worker system are to survive into the next decade.  It will also strengthen the bond between union and management, as the ability to honor the commitment and work together long term increases.

9. Make the workers own. This concept is far less radical than some of my previous ones, but it’s equally important.  Every member of Chrysler’s core work force – union and management – needs to benefit from the success of the business via slowly-vested stock ownership.  It’s important that union members, as well as management, consider the question, “If we don’t make this change, what will my stock be worth?” while building it’s value through hard work and innovation.  The ownership percentage needs to be sizable – not ten or twenty shares per worker amounting to a couple hundred dollars, but thousands of shares worth tens-of-thousands of dollars for the most-tenured rank-and-file.  In my humble opinion, this is the best way to encourage the rank-and-file to think holistically about the success of Chrysler from decade-to-decade and not solely about their compensation from month-to-month.  We’ll address management, next.

10. Make the leaders work. In my limited experience in the manufacturing industry, I was surprised to find out how little the desk-jockeys in many manufacturing businesses actually know about the work being done on the plant floor.  Many have never even visited the assembly line, much less spent time working on the line before moving in to a support role or management.  This lack of experience fosters a lack of understanding about the work and a lack of empathy about the people who make the products.

To ensure that this does not happen at Chrysler, the company’s leadership and support staff should be required to visit the assembly facility at least once per month and actually perform work on the line wherever possible, observing in many cases and helping in others.  One area where leaders could work and be relatively innocuous is quality assurance.  Certainly, leadership should not to replace the current QA staff, but instead would add a second set of eyes who review the QA checklists, see actual product quality with their own eyes, and learn about what people look for when they determine the quality of a product.  There are also other areas where the leaders can work productively and safely, but I’ll leave that to tacticians to determine.

….

After reading this far, you’ve probably come to the conclusion that the ten steps I’ve outlined are not over-night cures of the organization, They are long term strategic moves to build a successful business; hey will take years to implement, so there are quick fixes ahead.  But, this is the fundamental way that Chrysler’s leadership and investors should think about the company.  Forget about whether this quarters profits are 2% higher than last quarters or 5% higher than estimates; concentrate on whether Chrysler has a business model that can thrive in 2010, 2020, 2030 and beyond, because this will yield the biggest gains to share-holders and to society.