Investile Dysfunction

Federal Government Suffers from 11 Year Bout of Fiscal Dysfunction

CFO Magazine's March 2008 issue has an article titled "Thriller: The Federal Government's Annual Report is Not for the Faint of Heart" which paints a fairly frightening story of our government's fiscal condition based on its issuance of a 2007 Annual Report.  And the government seems to know this as evidenced by David M. Walker's comment that "If the federal government were a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company's management and directors needed a major shake-up."  What's notable is that Walker is the Comptroller general of the United States and head of the U.S. Government Accountability Office (GAO).

The government ran a budget deficit of a mere $163 billion which is 1.2% of GDP.  This is supposedly good news as it is 1/2 of the forty-year average which stands at 2.4% of GDP.  But let's not let forty-year averages make us feel good.  The story gets scarier as the article details.  The most alarming thing is that "For the 11th year in a row - that is, for each year the federal government has prepared consolidated financial statements and submitted them for an audit - the GAO could not express an opinion on the government's books, primarily because of material weaknesses in financial reporting.""Of the 24 federal agencies that fall under the aegis of the CFO Act of 1994, 19 did not produce a clean set of books...The worst offender by far is the Department of Defense.  The GAO said that the agency could not accurately account for its property, plant and equipment, which make up 69% of the government's total." Walker who seems to be a straight-talking sorta guy adds, "It seems clear that our nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time." And finally, the article's author, Edward Teach, concludes by saying, "What the Financial Report of the United States Government makes crystal clear is that the growth of federal mandatory spending - now more than 62% of the total budget - is unsustainable in the long run.  The same clarity about the government's discretionary spending, however, won't emerge until the Pentagon drains its financial-management swamp.  Who knows what horrors lurk therein?"

So here are some thoughts based on this pathetic situation:

• The government should hold itself as accountable as it aims to hold corporations.  While it won't garner as many headlines as going after big bad corporations, it smacks of a bit of a hypocrisy to not practice what you preach.  And we're all probably owed this accountability given our tax money goes into this blackhole.  (sorry - that is more political than I like to get in this blog but that is not a partisan perspective and it seems this fiscal dysfunction has been going on for a long long time)
• Our federal government needs portfolio management to understand this supposed non-discretionary and discretionary spend better.  Three things will be revealed:
  1. Much of what is non-discretionary probably is actually discretionary
  2. A good portion of this money is probably going to projects of uncertain or dubious value
  3. Overall, the government has a very poor resource allocation process which is highly decibel-driven and siloed

When I talk about portfolio management, I'm not talking about the software and other consultant elixirs out there which are mostly or almost all bunk.  I'm talking about portfolio management in the context of an overhaul of resource allocation practices with the aim of creating a discipline to consistently and continually making better decision-making.  It is not an easy 6 month journey where some simplistic scoring framework or software panacea will save the day but one which will require many if not all of the following:

1. Education within the government about the value of more optimal resource allocation and the losses/impacts of suboptimal resource allocation today
2. Active championing by senior government leaders who get it and not people who give the idea lip service
3. Arriving at a definition of what is a discretionary investment or project
4. Developing a standardized means of valuing projects and investments especially those with non-financial returns
5. Creating methods to track investment performance so that promise can be compared with performance and people held accountable
6. Enabling methods to move resources (money primarily) within and between departments in pursuit of the best opportunities.  This is what is known as optimizing the portfolio.

While much of the above may seem to be a pipedream, I'm encouraged by discussion about portfolio management which is going on with the public sector at least in small parts.  If the conversation veers towards better decision-making as a means to optimizing resource allocation, the government may benefit over the medium- to long-term and we might all know where and why the government is doing what they do.  That might be wishful thinking but maybe we'll begin to at least understand where our money is being wasted to start.  Ultimately, we might actually make the spend more efficient.

Comcast: For Once, I Actually Recommend Listening to the Street

BusinessWeek's March 24, 2008 issue has an article about Comcast CEO, Brian Roberts, entitled "Deal or No Deal" and the supposed "fork in the road" that he is at.  Wall Street and numerous significant stockholders are hoping and pushing for Roberts to stick to Comcast's knitting (content distribution) and not go for media mogul-dom.  I'm sure investment bankers are pushing for the big sexy acquisition of a large entertainment company.  As you may remember, Roberts did make an unsuccessful overture to Disney several years ago.

For once, I think the Street is really getting this right.  There is no reason aside from ego or shear boredom for Roberts and Comcast to go after an acquisition especially one so outside it's core business.  Every few years, the distribution vs content debate emerges with people arguing that one is more important than the other and then people rushing to buy whatever is "hot" at the time.  AOL Time Warner was an attempt at this, right?  Wildly successful, eh?

But the main point here is not that these deals don't work.  No actually, that is the main point.  M&A really doesn't work esp when trying to smash two businesses together that aren't that similar and for which the rationale for the smashing are ever-elusive "synergies".  So I hope Mr. Roberts continues to focus on his 'core' business and grow that and not give into the temptation of becoming a media mogul.

The other assertion made in the article is that the cable business is a low-growth utility.  Ultimately, there should be plenty of room for Comcast to develop new, innovative ways to distribute content.  Pursuit of these efforts would serve to strengthen Comcast over the long-term and at considerably less risk.

If Comcast does pursue the mega-deal by acquiring a content play, does anyone want to bet it will destroy shareholder value?  Any takers?

For a Limited Time Only: Economists Gone Wild!!!!

So are we in a recession? Or aren't we? Who knows? Economists have a different view, and despite a track record as good as your local weatherman, we still listen to them for some reason.

But now a whole host are coming out with their wisdom after the fact not adding much to the dialogue but somehow their "insights" get picked up by the media. The first one is Lakshman Achuthan.  Achuthan is the managing director of the Economic Cycle Research Institute and feels the Fed didn't act quickly enough when it begn cutting key interest rates last fall. The economic stimulus package also came too late, he said. (article link)

"If they had done all this in the fourth quarter … we might not have had a Bear," he said in reference to investment bank Bear Stearns which collapsed last week.

"I think we'd be having a different discussion," Achuthan said.

Achuthan pointed to the end of 2007, when inventories were low, as the time to act. A boost to the economy then would have spurred consumer spending and resulted in increased productivity, he said.

"There was an opportunity that was wasted by policymakers because they didn't understand those dynamics," he told CNN.

Thanks Lakshman. Where were you about 15 months ago?

The other economist who is also crying is John Ryding of Bear Sterns economics squad. In a note issues last Thursday, Ryding and team suggest "that the failure of the Federal Reserve between 2003 and 2006 to adequately raise the federal-funds rate to a more normalized level in part contributed to the downturn the market is experiencing - and by extension, the collapse of Bear Sterns." (quote from 3/22/08 Wall Street Journal)

While I understand that it  must suck to be a Bear Sterns employee these days, I doubt Mr Ryding was arguing too much with the Fed's actions when money was cheap and Bear Sterns stock price was above $100.

Being a Monday morning quarterback sure is easy, ain't it?

Want Better Performance? Hire Women.

As reported in Entrepreneur Magazine, a 2007 report by Group and Organization Management found that "women have a positive stock effect on a firm's short-term performance, three year stock price growth and growth in earnings per share."

Now you know.

Jetting back to school

This posted on blog Footnoted.org is a pretty nice example of resource allocation gone awry.  Looks like Edward Mueller, the CEO of Qwest Communications (Q) has received approval to have his wife and stepdaughter use the company jet for their personal use as revealed in the company's amended employment agreement which the company filed late Friday.

Per Footnoted.org, The stepdaughter attends high school in California and Qwest is based in Denver. “The amendment reflects a great appreciation for his family situation as his daughter wraps up her current schooling in California,” Qwest spokesman Bob Toevs told the newspaper. My guru on all things corporate jet-related estimates that this perk could cost Qwest as much as $600K, assuming normal charter rates for the Falcon 2000.

Quite a length to go to demonstrate a "great appreciation for his family situation."  I assume there was little to no discussion around this investment of Qwest resources?  Perhaps the more pressing question is how does his stepdaughter get to the mall?

More on Liz Claiborne - 16 brands on the hit list

So the Wednesday, July 11 issue of the Wall Street Journal expanded on Liz Claiborne's strategy (as I mentioned in my last posting about the closure of Mexx).  Apparently, Claiborne is 'shedding' 16 of its apparel brands which represent "$800 million of its $5B of annual revenue."

What would drive the decision on which 16 brands to give up?  Perhaps it would be the expected growth of the brand, e.g., keep those brands which are growing the fastest?  Or perhaps its the size, e.g., shed those units which are the smallest which take up a large portion of resources while not contributing much to the top and bottom line?  Or maybe it's about strategic fit, e.g., keep those which have some strategic synergy with the other brands and which have similar customers perhaps? 

And a wise decision might consider all these factors (and probably more) to determine which to keep and which to get rid of.  So why did Claiborne decide to get rid of these 16 brands?  Here is what the Journal's article had to say:

The 16 brands on Claiborne's hit list aren't necessarily its slowest growing.  "It was a matter of which ones we could bite off and grow within the time frame that the Street would need us to perform" per William McComb, CEO of Liz Claiborne.

Let those words sink in - "It was a matter of which ones we could bite off and grow within the time frame that the Street would need us to perform."

Sure there are strategic, financial and risk considerations when making a major organizational change like that of Liz Claiborne, but why bother with all that when you can just think make your decisions based on appeasing the Street?