Service and the Business Cycle

May 19th, 2009

Categories: Banking, Business Cycles, Forecasts, Government, Management, Manufacturing

In today’s guest post, Frank Paine a retired international banker, regulatory official, and the author of “The Financing of Ship Acquisitions,” tackles a thorny issue. Do those who lead the institutions that serve us–corporate, philanthropic, and governmental or otherwise–properly prepare themselves to address the inevitability of downturns in the business cycle?

He predicts that, “There may even come a time when organization directors will be held personally responsible for the adequacy of the analysis underlying their decisions.”  And adds, “That wouldn’t be such a bad thing…”

Do you agree with his analysis, and if so, with his conclusion?

In one sense or another, every organization exists for the purpose of giving service.  Corporations exist to provide goods and services desired by the market place: auto companies to provide the cars that we all know and love; electric utilities to provide the “juice” for all the appliances that we can’t seem to do without; ships, trains and trucks to transport those goods; “head hunters” to help companies staff themselves;  insurance companies to help everybody manage their risks; non-profits to raise funds for good causes and support the arts, and industry associations to promote their industries and provide networking opportunities that would not otherwise be possible; and schools and universities to provide educational services for our next generations.

The beneficiaries of these services are always multiple. Business organizations service their customers, their shareholders and their employees. Non-profits benefit their members, their particular causes, and, yes, their employees.  Educational institutions benefit their students, their faculties, their administrations, and everybody depending on them to provide well-educated people to the market place, and conduct vital research.  I could go on…

I want to make a plea to anybody directly or indirectly involved in providing service (and that should be pretty much everybody) to think seriously about the impact of the business cycle of the sector they are involved with.  We are now going through the worst recession that many of us have ever seen, and so the evidence of failures to understand business cycles are all around us.  We may be close to seeing the death knell of American automobile production.  We are seeing our banking system being challenged as it never has been in our time.  And non-profits everywhere are seeing their fortunes suffer from whatever is affecting their largest sources of funds.  And so on…

I am getting very tired of hearing organizations acknowledge their failure to see it coming, usually with very self-serving explanations.  I remember having a major oil company acknowledge that throughout its history, it had failed to properly understand when it should order tankers.  Over 30 years ago, I myself correctly analyzed the forces that would cause General Motors to be on the brink of bankruptcy today.  I also correctly predicted the failure of a Brazilian bank two years in advance.  There were plenty of people that foresaw the current banking “crisis” several years in advance.  Etc., etc., etc.

Trust me, I am not a genius-I simply had my eyes open.

It is not true that business cycles cannot be analyzed and understood, but it does take patience and time.  And much of the expertise can be bought-there is an army of analysts, many of them very good that are begging for work.  And there is the body of research provided by universities.

The people who most need the benefit of this analysis and understanding of the business cycle are the Board of Directors/Trustees (or whatever), and the most senior management.  How many times have you found that investments, projects, etc. can only get board approval at the top of the cycle?  It’s so easy to say, “This is a hot market and we need to be in it,” without taking the time and trouble to determine when the investment will actually produce results.

And so, in order to preserve service capacity, boards of organizations should be “opening their eyes” further to fully understand their business cycles, and make decisions in accordance with that understanding.  Who knows? There may even come a time when organization directors will be held personally responsible for the adequacy of the analysis underlying their decisions.  That wouldn’t be such a bad thing…

5 Responses to “Service and the Business Cycle”

  1. Jeanne Byington Said:

    Frank,

    I can’t pinpoint the time when my clients no longer mentioned five or 10-year plans—maybe five or 10 years ago? [These were terrific for marketing purposes.] Apart from your General Motors example, [you predicted today’s outcome 30 years ago], was it about that time that corporations no longer paid for nor conducted their own forecasts and when management looked maybe a year ahead—perfect timing for a CEO and other top type to get a juicy bonus and take off to another, greener pasture?

    As a stockholder who has been duped more times than I care to admit, especially in the past five to 10 years, I’m not feeling very warm and fuzzy about statistics or the value of corporate brands that were once stellar. I’m hungry for a period of accountability, information presented clearly, so I can base my decision to invest on firmer footings.

  2. Artemius Blodgett Said:

    Frank has put forth a chunk of hard thinking that is tough to chew upon and not easy to disgest.

    Sometimes there isn’t time to analyze before one decides. Also, from personal experience I know the people “at the top” become isolated from reality, and those who work for them, in self-interest, tend to feed them what they think they want to hear. No one dares voice the unthinkable.

    Then we have the problem of the thoughtful, careful reporter for the “New York Times” who writes a “think piece” on an important subject. It goes through “blogging” uptating, editing and more updating and more editing at the paper. By the time it reaches the President’s desk, it’s been distilled from 500 words to two sentences written and rewritten by five more people, and nothing useful is left to educate even the President’s pooch.

    Great leaders need curiosity, carisma and courage, common sense, self-confidence and good timing, and above all else, great luck!

    I’m all in favor of analysis. But all the analysis in the world would not have kept us out of this mess. Frankly, like Frank, I saw what was about to happen to us some years ago, but I didn’t have the whatever “special” I needed to take advantage of the obvious. If Frank and I knew what was going to happen, a lot of others did also, including many in positions to wield power, but for whatever reason, they didn’t act either.

    As for Jeanne’s points, people are still debating what caused the collapse of the Roman Empire. We are too close to events to see them clearly. We need time before we can conduct an acurate postmortem on what is bringlng down our civilization. Be patient and wait a millenium or two. But if you want my guess in advance, our downfall has been caused more by demographics, the abandomnment of ideals, and rampant cynicism brought about by misguided, but well-intentioned public policies, than by greed on high.

    Art

  3. Lucrezia Said:

    My sympathies go to Frank, who like many of us have been taking an undeserved beating in the last few months, or even longer. I would like to see a more ordered and safer society where one is not losing ones shirt for having done nothing wrong, but this will never happen.

    I learned as a very young child, through untrustworthy adults, that trust, when misplaced, is a costly luxury, which not only empties purses but wreaks havoc on emotions. Since there is little which can be done regarding events over which we have no control, my tactic is to ride with the punches, while seeing oneself as facing a series of challenges which may be beaten one issue at a time. Any chronic card player (I’m one) will tell you that when facing disaster, creativity along with a proper measure of bluff often saves the day. Life is not necessarily meant to be fun or safe, so it’s up to the individual to make the best of it using all available tools. While there are no guarantees on this planet, rewards exist, even if one is occasionally forced to invent them.

  4. RP Said:

    Frank, Your article was simply dead on point…everytime I re-read it I come away with something new.

    Thanks so much,

    Ray Pursifull
    Publix District Manager (Retired)

  5. Edward Baecher Said:

    I truly believe that running a government is no different than running a business, whether you are manufacturing and selling the latest high tech microchip or shoes.

    Many argue that we went from inflation to recession due to the paranoia of inflation. I think it’s the “Roman Syndrome.” We are too fat, lazy, and arrogant.

    A good part of the population believes that we are owed a living, mansions and gas- guzzling SUV’s; that the government has to save us from ourselves; that poor people deserve just what wealthy people own.

    Our economic dilemma is not the fault of highly-paid CEO’s. There are many reasons, and many of us are to blame. Some circle the Wal*Mart parking lot five times, wasting time and fuel, so as to park closer to an electric “fatty cart,” even though they are not handicapped—just too lazy to walk. Public schools are adopting new rules so mentally challenged students can pass the grade and not feel left behind. Working people pay $12,000 a year for health insurance with severe restrictions, in comparison to others who don’t work who receive carte blanche care [and will, no doubt, be most likely to sue because they were not given a translator in the emergency room to inform them that they have a hammertoe.]

    The straw that broke the camel’s back was in 1998 under the Clinton administration with a Republican-controlled senate. They deregulated banking, in the words of Barney Frank, “In order for the underprivileged American to have affordable housing, we are going to have to roll the dice on this one.”

    How stupid can we get? Ten years later the banking industry began to swoon, and guess who is going to pay for it? The American worker. Workers are the first to lose their jobs, the first to be taxed, the first to be called “rich” and the first to have to put off retirement another ten years. “Yes we can” ….. pay for the whole shooting match.

    The sorry thing about this is that we need a full-blown recession– America is in bad need of a reality check–to bring us back to brass tacks. The problem is the time factor—it will take time and we are not patient. I do not believe that WW 2 pulled us out of recession–it was fiscal Mother Nature.

    I am on my 20th year of gainful self-employment. I have almost lost my business twice, mostly for over-spending, over-paying, and not watching out for the most important person, The Customer. Things today are tough, but I am running a tight ship. I watch spending, always anticipate that slow times are around the corner, if I can’t pay for something, I do not buy it, and when a client comes through the door we all pucker up. Now I run a much better business.

    The exact same philosophy should apply to our government. Our Democratic administration is on an aimless crash-coarse with fiscal destruction. Most Americans do not want to face the music and believe that smooth-talking will pull us out of this disaster. The Republican Party, blinded by public disapproval, is wandering around aimlessly, with neither direction nor answers.

    The answer is so plain and simple. We are all so blind.

Leave a Reply