Communication in the Information Age

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Johannes Gutenberg’s invention of the printing press in 1440 heralded the start of mass communication – for the first time, text could be reproduced quickly and inexpensively for a large audience. Of course, very few people could read in those days and many authorities were against it, fearing the impact of mass uncontrolled communication on their rule, so it took a few hundred years for this to spread.

The introduction of broadcast radio from 1920 started to spread information even more quickly and widely, marking a significant jump in the speed of communication.

But it was the Information Age which has really accelerated global communication.  Widely accepted to have started in the 1970s with the advent of the microprocessor, it took the introduction of the Internet Browser in the early 1990s for the Information Age to really become as integral to life as it is today.

And yet, it seems, the Information Age is just a quicker way to spread the same sort of information as before. Certainly our main sources of news seemed to have missed the point – news bulletins rely on “sound bites” or their video equivalents to relay information with the result that this is often inaccurate or, at best, unbalanced. Newspapers, too, have not really worked out how to embrace the digital age fully – you either get print (almost as in 1440, albeit more quickly), or the same articles available online, missing the opportunity to have summaries of stories and the ability to drill down for more information.

This is the key – we’re bombarded with information from multiple channels but have not developed the tools to effectively sift it. Long messages are often ignored as we don’t have time for them, while short messages are frequently taken out of context missing the real point that was being made. What’s needed is the ability to capture the essence of a point in a short burst and then enable people to get more information as they require it – almost an inside-out onion, with successive layers giving more and more detail.

Twitter is a great example of the modern communication paradigm – 140 characters to get the basic message across, including a link to more detail, which you can access if you wish. That more detailed message, in turn, could have links to other sources for even more information, and so on…

Nowhere, perhaps, is this communication problem more evident than in politics. There’s no argument with the fact that the UK, like many other countries globally, has woefully overspent and has to completely revisit its bloated public sector spending (how can a majority of the workforce be civil servants – effectively paid for by the minority?).  And yet it, like so many others, is facing widespread revolt at the prospect – look at the pension reform issue, for example…

Why?

Primarily because the government is incapable of effective communication. White papers, government statements and debates are far too long and not suitable for the news media or the viewing/listening/reading public, so people simply don’t understand the issues. I absolutely believe that the vast majority of people are decent, willing to work hard to get ahead and happy to help those less fortunate (but NOT those that are not prepared to help themselves).

But, for as long as governments cannot get the message out in a way that the media can carry without distortion and people can understand in just seconds, they will be unable to implement the changes that are needed, worsening the financial state of their countries, prolonging the agony and the economic downturn.

It’s time to turn traditional communication on its head and embrace “the 140 character world.”

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When Will Interest Rates Rise?

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With the Bank of England having revised the growth rate down to 2.7% this year (from a previous forecast of 2.9%) and inflation rate up to peak at 5% in the fourth quarter (previously 4.5%), expectations are again growing for an interest rate rise in the near-term.

Of course, the classic economic theory is that a rise in interest rates reduces inflation as spend decreases and so demand-driven price rises are no longer a factor.

However, we’re not living in classical times. This economic slowdown – it can’t be called a recession as we’ve not had a further 2 quarters of negative growth – is persisting and there’s no real expectation of a marked change to lacklustre growth rates throughout the developed world. So it’s not demand that’s driving inflation but rather a number of external forces, including climatic conditions and wars, that have pushed up commodity prices. These won’t respond to a rise in interest rates.

So, given this, let’s understand who benefits from the current scenario and what this means for interest rates.

The main beneficiaries of the sustained low bank rate are:

  • The banks themselves – don’t confuse low bank rates with low interest rates for borrowing money. Certainly, the rates are lower than they were before the crash, but not as low as they should be, given the drop in the bank rate. In fact, looking at interest rates charged to companies and individuals for borrowings, the bank’s margins are extremely high. A margin of 3% to 3.5% (the difference between bank rate and lending rate) is normal – today it’s running somewhere between 5% and 7%, depending on your financial profile. The banks are, quite literally, “coining it” – just look at the new bonus rounds for evidence of this.
  • The government – the massive government debt attracts interest costs (they have to borrow the money). Historically, governments borrow money at, or extremely close to, the bank rate, so by keeping this low, the government reduces the amount of its budget spent on interest to service its massive debts.

Yes, homeowners can benefit to a degree, too – but the advantages tend to be a lot smaller in real terms for most people due to the structure of mortgages and the costs associated with moving between fixed and tracker rates, together with the fact that many people can’t change to take advantage of lower rates due to not having enough equity in their properties following the decline in values. And don’t forget that homeowners repaid a record additional £24 Billion on their mortgages last year – getting their mortgage values down ahead of any possible rise to cushion the impact.

So who benefits from higher inflation?

  • In a word: government. It comes back to the massive government debts that have been rung up in the past 10 years. One way to reduce the effective value of them is to allow moderate inflation into the system – simplistically, 5% inflation over 5 years reduces the effective size of the debt by 25%. Couple this with the increased tax receipts that come with inflation and you have a model to get government debt down much more quickly than would otherwise be the case.

So, given that inflation won’t respond to a rise in interest rates as this is not caused by high demand, and that the government and banks are the primary beneficiaries of having a slightly higher inflation rate and a sustained low bank rate, is it likely we’ll see an interest rate rise soon?

I think not – although I suspect the impact of a rise in bank rates may be felt less than generally expected. In fact, it might well lead to lending rates not going up at all as the banks would use this as a way to try to woo customers from each other, keeping lending rates where they were before – let’s face it, they have more than enough room in their margins to absorb a few modest rises in the bank rate.

Capitalism – What the Future Holds

Wall Street

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The world is in a state of flux.

With the economic downturn lingering far longer than most people expected, governments are under growing pressure to kick-start economies. However, a growing number of countries with looming debt crises and a consequent unwillingness or inability of governments to spend more money hampers this.  And, as the northern hemisphere weather warms up, we can expect to see growing numbers of demonstrations by people wanting jobs or, at least, a reduction in job cuts.

All of which leads to the question – is the capitalist system doomed?

I don’t believe for a moment that this is the case – history shows that capitalism is the most effective way for countries and people to grow their wealth – but I do think we’re going to see some far-reaching changes.

Back in September 2009, I suggested in my post, “The Perils of Quarteritis” that the short-term thinking so prevalent in recent years had contributed significantly to the crash, and that businesses would move to a longer-term, more strategic model.

The March 2011 edition of Harvard Business Review has a wonderful paper, “Capitalism for the Long Term,” by Dominic Barton, Global Managing Director of McKinsey & Company where documents his findings from 18 months of research and hundreds of meetings with business and government leaders. In this paper, Barton makes 3 points to support his conclusion that capitalism must survive, but that it needs to change, too:

  1. A return to longer-term thinking by companies, investors and politicians alike – he refers to this as “The Tyranny of Short-Termism” (my version was Quarteritis).
  2. That there is no difference between serving the interests of shareholders and of stakeholders – in spite of a more recent belief that serving stakeholders made shareholders poorer, managing for long-term value growth benefits not only stakeholders and society but shareholders, too.
  3. Company executives and boards need to act more like owners, not temporary care-takers – as by doing so they will naturally look to the long-term and so benefit the company, its shareholders, its stakeholders and society as a whole.

Basically, it all comes down to taking a longer-term view of business (as well as the economy, in the case of government) and a consequent change in leadership style, too – see my post of November 2009, “Leadership for the New Business World.”

This longer-term thinking and more inclusive leadership approach will ultimately be to the benefit of all – investors, executives, employees and society as a whole.

What do you think?

Update (31Mar11): Read the Leadership Interview with James Quigley of Deloittes, just out at N2growth.com – leadership is about trust and looking to long-term sustainability.

Can Mergers & Acquisitions be More Successful?

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Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?

In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.

The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.

Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.

I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.

It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.

The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.”  But how many companies actually carry this through?

Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.

As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.

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Can Twitter Really Drive Investment Decisions?

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A group of hedge-fund managers are launching a multi-million dollar hedge fund next month, using Twitter as its market indicator to determine sentiment and to thereby make investment decisions.

This information came from a recent article on CNBC / Yahoo Finance which quoted Derwent Capital Markets – a London-based hedge fund – as saying it had successfully marketed the new venture, officially called the Derwent Absolute Return Fund, to high net-worth clients and had attracted over £25 million in investments.

The company is confident it can achieve returns of at least 15-20% per annum by analyzing information gathered from over 100 million tweets each day, which the firm brands as “The 4th Dimension.”

On the face of it, this may sound like a risky, or even crazy, venture – but is it?

Let’s face it, the concept of rational markets has been comprehensively debunked during the last few years of economic crisis, and the global growth in wealth came to a dramatic end largely through a change in general sentiment. We’ve also seen plenty of allegations – many apparently backed by evidence – of collusion between those in research and those in investment banking to pump stock prices of certain companies at various times. In fact, based on this and my own experience, it seems that relying on the “experts” to manage your investments is no greater guarantee of success than simply using a general market-tracking fund – and often provides worse returns.

Furthermore, most people agree that we won’t see real growth return this cycle until consumer confidence picks up. Isn’t that really just about general market sentiment?

So contrary to some of the views on this fund, I would argue that this is a smart bunch of people – what they’re doing is using current technology to gauge market sentiment and make investment decisions from there.  Instead of listening to a small group of people to try to understand what “the man in the street” is saying, they’re tapping into the collective feelings of millions.

I see this as the start of a whole new way of tapping into societal collective wisdom and sentiment. What do you think?

BAA Humbug – The short- and long-term effects of greed and ineptitude

BAA staff work feverishly to clear the snow at Heathrow

Image via yfrog: BAA staff work feverishly to clear the snow at Heathrow

I’m going to try not to make this too much of a rant, but I’m both extremely disappointed and annoyed – not for me personally (thankfully I wasn’t directly affected), but for the thousands of people who’ve had their holiday plans, reunions and Christmas spoilt through a combination of woeful ineptitude and greed.

And, I think, there’s a real danger of this ineptitude and greed having long-term effects that are several orders of magnitude more serious for the country as a whole.

I’m talking here, for those of you who’ve not yet guessed, about BAA and Heathrow.

How can a company entrusted with managing the world’s busiest international airport be so unprepared for winter? It’s certainly not through lack of money – BAA is on track for an operating income of nearly £1 billion this year, and yet their total expenditure on preparing for snow and winter conditions this year was just £500 000…  (an amount the board has just allowed to be increased to £10 million – still only 1% of their operating profit!). In my view this is a typical case of short-term profit focus, at the expense of long-term sustainability (see my post: The Perils of Quarteritis).

It’s not as if they didn’t have warning. The first cold snap hit at the end of November and there were already warnings that heavy snow and icy conditions could be expected for the rest of the year. Granted, by then it was probably too late to have been able to source much new equipment in time (although they should have learned a lesson from January & February), but they put no contingency plans in place at all.

What about a deal with farmers nearby to use their tractors and grading equipment in an emergency? What about stockpiling grit, salt, glycol, etc.? Then they compounded things by turning down offers of help to clear the runways and taxiways from the military.

And, on top of this, they apparently gave out poor information to airlines such as BA which could have operated more flights than they did, and so reduce the backlog somewhat.

So, this corporate greed and ineptitude directly ruined the holidays for thousands of people, apart from costing hard-pressed airlines a good deal of money (can they sue BAA?)…

But the long-term effects could be even more serious. With some 30 million people a year visiting Britain, annual tourism expenditure of some £90 billion and almost 8% of jobs supported by tourism, this is a vital sector of the economy. However, the unreliability of British airports – especially one as important as Heathrow – is bound to make travellers think twice about using Britain as a stopover point, or even as a destination.

And airports in the Middle East such as Dubai and Qatar are eager to take these passengers. For example, Dubai is already the 4th busiest international airport in the world, with huge expansion already underway, and one of the youngest fleets in the world (and a flexible one, as Emirates was apparently able to put on 3 extra flights a day to clear their backlog once Heathrow reopened).

The impact of a diversion of disgruntled passengers from Heathrow to Dubai, for example, would have an enormous impact on Britain and on the struggling BA.

BAA needs to wake up, stop being so greedy and to accept proper responsibility for its role in running strategically important airports – or it needs to be replaced by a company that will do so, and quickly.

What do you think – should the company, its leadership, or both be replaced?

Who Controls Your Brand?

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The old order is being turned on its head; companies used to being in control of their customers and their brand are now finding customers are wresting control from them and that they need to adapt or face obscurity.

The enabler behind this is, of course, social media. Customers are now able and willing to discuss their experiences with friends and followers around the world, and companies ignore them at their peril. And yet, it seems to be more common for companies to ignore what is being said on Twitter, on Facebook, on LinkedIn, on YouTube, and on all the other social platforms around the world.

Even though some two thirds of Fortune 500 companies have a Twitter account, and more than half have Facebook and YouTube accounts, they’re just not listening – reports indicate that 43% of all companies have never responded to a single Tweet, while only a quarter of companies respond to a comment posted on their Facebook page.

All this does is reinforce the view that companies are not interested in their customers. Better to have no presence at all than a presence where you don’t respond (the same goes for “customer-service” telephone lines and email addresses!).

However, the fact of the matter is that nowadays you HAVE to listen to what your customers are saying and you MUST respond. That’s the best way to turn customers into brand advocates – and isn’t that what every business wants? What’s more, it’s worth remembering that your products and services are only as good as your customers think they are and that they’re prepared to pay for; it’s much better to know they’re unhappy sooner than later, so you can fix the problem.

Word of mouth has always been the strongest way for businesses to grow – or shrink – and all that social media is doing is enabling this process to operate more quickly, and a lot more widely.

Companies that have embraced this – think Zappos and Starbucks (or Threadless, the T-shirt company that went from startup in 2000 to $30M in revenue last year) – are rewriting the rules for customer service, marketing and the way they’re perceived. Ask Comcast, who went from ignoring social media to an advocate and transformed the company’s image.

While the positive impact is clear and quick to see, the negative impact on companies that do it wrong will take longer to be really apparent – they suffer a slow, steady decline in brand image with all that follows from this – so the good news is there’s still time to adapt, but they shouldn’t wait too much longer.

As Jeff Bezos said, “Your brand is what people say about you when you’re not in the room.” If you’re not in the social media room, you’ll never know – and what you don’t know, you can’t fix.

By embracing social media, having conversations with your customers and other stakeholders, you will greatly strengthen your brand and your company.

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