BerlinPacific.com Blog

There’s a recent Forbes article on “Why Amazon Can’t Make A Kindle In the USA”
http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/

It is quite interesting and people can learn a lot from Steve Denning about management. The article is a bit problematic though. The issue is probably more that the tone and content are misleading than that the fundamental ideas are totally off.

For one Dell makes a lot more money than Asus in profits and has as many employees. Its market cap is still much larger than Asus.

The implication of the article is that the Kindle probably couldn’t be made in any one country. (Interestingly too Germany still makes the machines that make the machines. Japan and the US do too.)

The classic essay ‘I, Pencil’ from 1958 talks about how no one can make a pencil.
http://www.econlib.org/library/Essays/rdPncl1.html
This is true about the international economy.

Apple is winning because it banks on designing its products in California and getting them built abroad. I don’t think they’re an exception at all. They’re the exemplar.

The author is right about throughput accounting though. Most companies don’t realize that this is an important way to help the align their business with customer demand. People should learn more about the Theory of Constraints www.scribd.com/doc/24192653/TOC-and-Mises . They’ve shown that many management theories apply bad economic theory - though they don’t approach it from the perspective of economic theory. (They complement the Austrian School quite well.)

I think his article is a bit misleading. It is true companies should not give up their core competency. However Dell could have grown more by creating more products that wow consumers and outsourced much of the production. That’s what Apple does.

He doesn’t seem to fully account for opportunity costs. Dell can find only so many workers. It is wasteful to use them to make things Asus can make IF it can find other useful thing for them to do. On a national scale this is true - expanding companies will bid up the price of US workers. This makes companies in older technology sectors less willing to hire many of them. U.S. Manufacturing is still huge - it just requires less workers. Also many workers may be vital but don’t count as traditional manufacturing workers. How would you count a bunch of highly paid engineers who manage a highly automated factory?

His point too is really about management - not so much manufacturing.

The key is not so much decreasing costs, as increasing the productive capacity of your assets to produce more goods and services that people will pay for. That’s throughput accounting and his real point. (In a sense though this can imply decreasing costs by finding unproductive uses assets and re-allocating those assets.)

Sometimes that means outsourcing though. Microsoft has or had a very profitable group that had few employees - they designed keyboards and mice etc. and outsourced all production. It was a good use of Microsoft’s assets to outsource.

Hopefully more people will be inspired by the article to learn more about throughput accounting and theory of constraints and put the focus on aligning productive assets with consumer demand.

Today’s news shows that Allstate is suing Countrywide (owned by Bank of America) for misrepresenting the mortgage investments Countrywide sold Allstate.

You can read a good analysis here.
http://www.zerohedge.com/article/how-allstate-used-sampling-confirm-bofacountrywide-lied-about-virtually-everything-selling-m?goback=.gde_40850_member_38750536

Allstate claims to have had no idea what is was really buying, just like most firms have no idea what they’re really buying from their telecom vendors and if they could or should have paid less.

The root problem was that Countrywide apparently systematically did not collect valid information. (Many loans were ‘liar loans.’) Lacking good information Allstate bought investments it didn’t actually want (it wanted AAA securities.) Similarly Countrywide apparently did not report that many approved mortgages (around 20% sometimes more) were ‘exceptions’ to Countrywide’s underwriting standards. Countrywide management appears to have been aware that their loans didn’t meet their underwriting standards and information about the borrowers income, value of the home, etc. was often false but they didn’t do anything to disclose this to investors.

You can read the allegations here
http://www.scribd.com/doc/46005151/12-28-10-1
It is a very interesting document.

It is interesting to learn that the exact same problems (lack of visibility, lack of information, use of misleading aggregates) that we see in our clients’ spend on vendor purchases also plagued institutional investor spending on purchases of investments. However this mortgage mess was apparently systemic outright misrepresentation by the underwriters. We find vendors simply don’t provide the information clients need to make an informed decision, and they’re certainly under no obligation to provide it. A huge moral difference on the part of the sellers, but as far as the buyer is concerned the outcome is the same. Interestingly in both cases some important information isn’t even readily available to the sellers let alone the buyers.

Apparently Allstate went to the trouble of checking out many of the individual loans and found huge discrepancies between the reality of the applicants and what Countrywide had stated about the quality of the applicants. This is similar to what we do, our goal is to check EVERY single service to make sure it is adding value and is not misbilled, underused, or overpriced.

One has to wonder though why no one at Allstate did any due diligence sampling of the underlying loans before they bought them…

Presumably because they were too busy and they had no reason to suspect anything was wrong. Too bad they were wrong.

(more…)

[Download a Copy]

Rockefeller and Standard Oil gave the world inexpensive refined oil by continual improvement –decreasing the cost of even the humble stopper in a barrel of oil while maintaining quality. Japanese called this process Kaizen and using it gave consumers cars renowned for not breaking down.
Many firms see telecom expense management (TEM) as a process of bill processing and auditing, along with periodic contract negotiation. They do not see the opportunity for continuous improvement through lowered costs and better service year after year.
Continual savings do not come from periodic contract negotiations every few years or looking for billing errors that shouldn’t be there in the first place. Best practices require looking for continual improvements as prices decline, superior solutions come to market, and business needs diverge from current services. Firms that put in place these best practices realize savings of 20-50% compared with firms that do not implement these best practices.

Three Approaches
There are three primary ways to cut costs, all of which require a firm understanding of the company’s current infrastructure and bill detail. The three approaches are bill validation, infrastructure optimization, and contract management. This means that every single service must be individually scrutinized to ensure that the service is being billed for correctly, the service still serves a business need, and the service is billed for at market rate.

(more…)

[Download one pager on Visibility.]

Visibility is the key to managing any cost, including network costs.

Surprisingly even smaller firms have network management systems that give visibility in to the network and make tight management possible, yet they aren’t provided with network cost management systems that give them visibility it to their costs. This makes optimal management of the costs impossible and excess spending inevitable.

With networks especially much of the cost is a sunk cost - the capital spent on buying and deploying fiber and equipment. Carriers, whose network is their business, are conscious of the need to maximize dollars of profit per unit of capacity. (Interestingly some accounting practices aren’t congruent with this goal, more on this in a future post.)

Many people might assume that all telecom carriers have only labor costs once the equipment is installed. This would be wrong. In today’s world carriers are constantly interconnecting and have recurring carrier and equipment vendor costs of their own. Wireless firms need a way to backhaul traffic from their cell towers, and use local low cost providers rather than building their own capacity every time. In order for us to make long distance and international calls, many carriers need to be paid. In addition the equipment itself needs support and maintenance from the manufacturer. All this creates recurring costs.

Without Visibility

We know our important services. We usually know what bills pay for services, but little else.
A service can be anything, including a support and maintenance contract, or a voice or data line.
Vendors don’t provide consolidated bill break down with a single pane of glass for all vendors.

Note: Network Management vs. Network Cost Management

Interestingly most firms have a network management system. They know full well what services and device they have and whether they go up and down. Operations has a very clear view in to all their devices and carrier services connecting them.

What the systems don’t do is tell you the recurring monthly or annual cost of the circuit or the support and maintenance contract associated with the device and whether you’re still being billed for something that is off your network.

With Visibility

Bills are consolidated and broken down.
We can see connections, without always having to look at multiple files, or worse yet flip through paper bills.

Note that there was a service the firm was paying for that no one wanted, at least not anymore. This happens more often than one would hope. We regularly find expensive items buried in bills that serve no business purpose.

Given the poor quality the data received by carriers or enterprises from many if not most of their vendor’s, creating visibility can be quite a task in any area, not just networks. One of the reasons firms use us to help manage their costs is because they have no one on staff with the time and expertise to take the data they have and put it in a proper database. Often additional data has to be requested from the vendors themselves.

Since nothing can be managed without visibility, it is usually worth the effort to create it even for $100,000 a year vendor categories.

With Visibility

We can manage each cost by:

1. Eliminating or consolidating unused and underutilized services
2. Fixing billing errors
3. Renegotiating rates

In the above example we assumed there were no billing errors. We were able to remove the unused service saving a significant amount. We routinely find many unused services for our clients, saving a significant portion of their budget. Many costs in the IT and telecom world have also fallen dramatically, including of course voice and data services. It is also possible to get lower costs on many IT Support and Maintenance contracts with OEMs like Cisco. With our connections in the market place we’re able to routinely roll over and re-negotiate contracts for our clients at a much lower price point.

We’ve seen how with visibility one can manage costs. While the 50% savings above may seem like an exaggeration, we routinely find those kinds of saving for clients by giving them visibility and managing their costs for them. Even 20% savings, low for our clients, is a substantial win with a large enough budget.