ThoughtStorm Strategic Capital - Thinking About Deals

Too much data? Be decisive.

2008-03-11T15:49:00.003-04:00

This article & discussion from Lifehacker.com includes an excerpt from a new book, CrazyBusy. The author, in that excerpt, talks about how we often get entangled today by a desire to have all the data before we make a decision.

In our experience, this is not a side effect of the modern world, of the increasing availability of data. It is human nature to try to make good decisions, and the goal for certainty is underscored not by data but by poor management and worse leadership. Good leaders understand that people make mistakes and that data paralysis is to be avoided. Good managers help train people to understand what data is important and what is required to make a good decision (not necessarily the right decision). We can all look back at decisions we made that turned out to be right or wrong. That set isn't the same when we divide them by well-made vs. poorly made decisions.

Where do people learn about decisiveness? I know where we learned: the Army. As a young lieutenant, at the same time as we were teaching this concept to NCOs and junior enlisted soldiers, senior officers were teaching us. We left the Army with a well-tuned ability to figure out what kinds of information were required to choose among alternatives, how much information we needed to choose, how uncertainties in one area could be compensated by good information in another: actually making that choice, in an imperfect environment, we called decisiveness.

As junior officers, we were corrected more often for failing to make a decision than for choosing an alternative that turned out to be incorrect. We all had the opportunity to do plenty of pushups in places like West Point, Officer Candidate School, or Ranger School in the course of learning that lesson. That is one reason former junior military officers have often a bias for action, as we term it.

So, when you're faced with a data glut, do what your average 2LT would: figure out what you need to absolutely make the decision, assess how much information you have and how reliable it is, determine what the failure modes are based on incorrect or missing information; then, mash all that up in the supercomputer we call a brain and spit out an answer. After all, you're not just going to sit there, right? You *might* be wrong, but without intervention, the world *will* go to hell in a handbasket: it's Newton's Second Law.

Parents vs. kids

2008-02-25T11:34:00.002-05:00

Most people approaching middle age from well-to-do families or with professional careers are looking forward to a time when they can make themselves independently wealthy: having enough money, in your control, to create passive income sufficient to meet your needs.

In working with various families through our relationships with businesses of all sizes, we have come to recognize that there's a different model that many wealthy parents pursue: they want to make their children "dependently wealthy." By holding the purse strings, failing to nurture, mentor, or teach skills, and by allowing themselves to intrude on significant life decisions (marriage, home ownership, career development), these parents maintain control over their childrens' lives just as if they were still teenagers. We know of families that have this relationship with grown children who themselves have children!

Dependently wealthy -- it really doesn't help your children grow up, especially when they're 35.

Math doesn't lie

2008-02-24T16:58:00.003-05:00

The linked article from the New York Times purports to reveal how hedge fund managers are profiting from inside information (the term of art is "material nonpublic information"). In this case, the secrets refer to pending PIPES (private investment in public equities). If, as the article suggests, a pending PIPES deal is likely to cause a stock to drop, then a trader with advance knowledge should be able to take advantage of that information.

Here's the money quote:

To be sure, not every PIPE causes a company’s stock to drop. Measured Markets, a Toronto research firm that looks for anomalies in stock trading, examined PIPE’s valued from $100 million to $250 million that companies on the Nasdaq or the American Stock Exchange issued in the first half of this year. Only half — 9 of 18 — had their shares drop in the 30 days leading up to the deals. (One of the company’s stocks stayed flat and the other eight rose.) Of those that fell, the average decline was 8.6 percent. Of those that rose, the average increase was 20 percent.

So, if we're right and math doesn't lie, what's the value of this strategy? I bet $100 on each deal. I win $8.60 nine times, break even once, and lose $20 eight times? That's a return of about $1800 + $77.40 - $160 = STUPID. Who needs to prosecute people for using inside information if this is actually what happens to them? The market is punishing enough.

Well, the NYT might say that these inside traders can reduce their exposure with options and margin and other things, but the fundamental nature of those numbers is that making all short bets is a loser, pure and simple. Unless this hypothetical trader can figure out which deals are going up and down, which was the point of the exercise, you have to be exposed the same on all of them. Maybe an investor will decide to hedge the downside, but that hedge has to cost money too, and so without specific evidence that it was possible at the time, we're sticking with the simple math.

What's the right question? Why does the NYT consider this story as proving anything, in spite of the plain calculations they present? All it does is highlight the question of why people don't know this: most inside information isn't. Rumors are already public knowledge by the time they get to you. Unless you start the rumor, it's almost certainly not worth trading on (and then, of course, it is more plainly illegal market manipulation). The rationale that we find likely is that it makes hedge funds sound even worse to say that they are making money on the misfortune of others, since many people aren't bothered by hedge funds making money when stocks go up.

What's an even better question? Why not investigate the people who are betting that PIPES stocks will rise, since they're making 20% returns on those bets! It makes us glad that we've become journalists looking for the story behind the story.

MSFT-YHOO: what does it mean?

2008-02-09T12:59:00.000-05:00

The linked article from the NY Times argues that Microsoft's offer to buy Yahoo signals Microsoft's failure in growing a profitable, competitive online business organically. This might be true to the extent that Google is unmistakably the biggest dog in the fight, but it's not the whole story.

A significant problem for companies as large as Microsoft is simply how to engineer sufficient growth to be meaningful. After all, creating a new $1b business from scratch, a fantastic achievement in the business world, would give Microsoft a seemingly paltry 2% growth on $51B of 2007 revenue. Certainly Berkshire Hathaway was not upbraided for noting in its 2006 Annual Report [PDF, 962kb] that large gains "will come only if [they] are able to make large, and sensible, acquisitions."

The law of large numbers encourages, almost requires, market participants the size of Microsoft (market cap $265B) and Berkshire (market cap $213B) to acquire large companies to meet growth expectations from Wall Street.

Google (market cap $162B) has made a few large acquisitions, but they have not been primarily focused on acquiring revenue or profits; rather, many of Google's deals have focused on buying the equivalent of billboard space: opportunities for it to present more ads both directly and indirectly.

Microsoft - Yahoo: working against the deal

2008-02-09T00:53:00.000-05:00

A number of stories since the Microsoft bid have discussed what Yahoo might do to avoid Microsoft's offer. Too few stories have explored what Yahoo actually has to do: the board's fiduciary duties require it to maximize shareholder value. Anything less than that opens them up to suit for breach; the business judgment rule will protect them a long ways, but there are limits.

Our position has always been that the company belongs to the shareholders, who pay the directors and officers to handle things on a short-term and day-to-day basis. The long-term basis is covered by shareholders directly by voting for the board, responding to offers to sell their shares, and by voting on other significant decisions.

The linked article laments how Yahoo is "light" on anti-takeover provisions. But that completely misses the point. Shareholders don't have to sell -- that's all the takeover protection any company needs, and officers and directors who push for classified boards, poison pills, golden parachutes, and change of control provisions run the risk of conflicts of interest when these mechanisms serve to perpetuate the control over the firm that these fiduciaries exercise. (As an aside, we are reminded of a financial advisor that established a dynasty trust for an ultra-high net worth family and conveniently selected the advisor's affiliate company to serve as the trustee in a jurisdiction less favored than Delaware, to be sure.)

Between the market cap of a company like Yahoo, the sheer size of the float, and restrictions on ownership accumulation matched with disclosure obligations, there are plenty of obstacles to eliminate the opportunities for an acquirer to "steal" a company without a chance for shareholders or the board to push for a high-enough price to include a control premium.

There have also been many reports, starting with what some might consider an ill-advised blog post by Google's general counsel, referencing possible antitrust concerns raised by the prospective merger. Of course, when one considers Google's dominant market share in search-based advertising, even when compared to a merged Microsoft-Yahoo, Google seems less concerned about preserving competition than preserving its advantage.

Microsoft puts Yahoo in play

2008-02-04T13:47:00.000-05:00

The big news on Friday was Microsoft's bear hug letter to Yahoo's board. The news was announced before market open on Friday, and the >60% premium in Microsoft's offer was quickly arbitraged away, leaving a much smaller spread (<10%) Wired today notes that the cultures might not be as far apart as everyone thinks. What will be key in this culture match, we predict, will be the drive to combat Google's dominance in search advertising and related fields.

Perhaps Microsoft saw this article about the lopsided market valuation of Yahoo in relation to its various operating businesses and minority interests. This sort of arbitrage, calculating the break-up value of companies, doesn't necessarily lead to the idea that a company will or should be broken up. For Yahoo, the key point might be that its minority interests are separate enough from the core business that they can be sold off for cash with little or no change to the value of the core. Similarly, looking at those minority interests and smaller segments is important for a strategic buyer such as Microsoft because that's where opportunities for synergies come from. Sure, "reducing back office costs" is a common-enough source of cost savings, but companies with significant goals need to look for ways to improve the top line as well. In another context, we've told more than one small-business client: "you can't cost-cut your way to growth."

We will try to put together a post on the merger-arbitrage opportunity for Microsoft-Yahoo to further illustrate that aspect of the hedge fund business. The challenge for us will be to eliminate discussions of our proprietary modeling factors while still providing value for our readers. But we'll try. Finally, the interesting way to analyze this deal will be the effect on Google. Clearly, Google is subject to surprisingly large swings in its price, 5 or 6% at a time. That is a huge volume of money given the market cap. If Microsoft and Yahoo sign a deal, what does that mean for Google? One could argue that Google is already competing against these two companies and so there is no real change; neither Microsoft nor Yahoo seems to have a viable strategy lacking only the resources to execute it; they are far, far behind in market share. What does a merger really open up in terms of competitive power? That is the $6,400,000,000 question (about 4% of Google's market cap).

Long Hours in the Business World

2008-01-08T10:11:00.003-05:00

Our two previous posts on the effects of long hours on errors and reduced productivity focused on two professions, doctors and lawyers. We picked those two rather than further explore the issue in the military because long hours for doctors and lawyers are purposely selected by managers whereas soldiers work long during wartime or training for wartime. This choice to impose long hours implies acceptance of the costs and benefits that result; the professions also have higher duties to the public, not just their patients and clients, that are codified in various ethical codes as well as actual statutes.

The original article sparking the discussion, however, came not from the professions but from the business world, and so we thought it would be helpful to discuss these issues in light of two additional fields where long hours are already on the table: consultants and business in general. We think that exploring the reasons why long hours in these fields might not be so readily discovered as a source of problems will help design appropriate experiments for firms to undertake as they seek continuous improvement.

Let' start with consultants. We have had substantial experience with the consulting world, and long hours are almost a badge of honor in the field. Travel is an additional duty for consultants, and an extra 10 hours a week of travel is not unusual, even for those who work all week at a single client location. If long hours reduces productivity and increases the likelihood of errors, why aren't these problems apparent or acknowledged by consultants?

First, like lawyers, consultants typically bill by time (even if their firms do not, consultants are tracked by hours per project). This hourly approach creates, if not a perverse incentive, the complication that it is hard to distinguish between lots of optimal work and lots of inefficient work. This lack of clarity affects the consultant, the firm, and the client, all without any bad faith. Indeed, benchmarking one consultant against another to compare the time taken for various tasks would likely show the same sorts of performance losses and hence be taken for normal performance. In other words, two folks performing at 80% would each give the appearance of 100% if matched against one another; of course, that's the wrong question.

Second, unlike doctors, whose "mistakes" often have immediate effects, any errors caused by consultants may never be discovered or be revealed to have any effect. (Of course, the counter-argument is that if a mistake doesn't have any ill effect, it's not a mistake.) But the lack of revelation is different from the actual mistake. For example, imagine a spreadsheet that contains errors in formulas used to support part of a decision analysis. If the right decision doesn't get made, in part because of the spreadsheet calculations, it may be invisible to the participants, but the end result will not be. Companies regularly miss earnings projections (at least they would if they weren't so heavily managed) and often fail to earn their cost of capital. Those are certainly "mistakes," broadly construed, and virtually impossible to connect to a specific action.

It's clear that this second point is the one most likely at work in the corporate world. Once we moved most work from factory or manufacturing work that is relatively easy to measure to much fuzzier knowledge work, we exposed ourselves to productivity problems and cures of all kinds, all equally undefinable and unreliable. In the same way that it is difficult to determine the effects of fatigue on productivity, it is difficult to sort out what benefits in performance may be expected from other changes. This disconnection is one reason that usability experts are still focused on getting businesses to implement changes that are easy to measure, such as intranet structure for common activities.

If it's hard to observe and measure real-world effects of chronic fatigue and long hours, where can we get evidence about the likely effects that is convincing enough to allow leaders to implement changes, or at least tests, in their organizations? Well, some of that research already exists and was referenced in the original article. The Belenky article describes the pattern of failure from sleep deprivation. Performance slowly degrades until a critical failure is reached because the time available to make a decision or analysis arrives while the decision-making process is not complete. "Thus, a gradual decline in performance during simulations or laboratory studies maps into a long period of apparently adequate, if not good, performance in actual operations, and then, suddenly, failure. " This paradigm is supported by our personal experience in Ranger School (described in the article as 3.6 hours of sleep -- we wish we saw that much every day!), in military training, in Ivy League graduate school, in careers in professional services organizations, and in our current roles leading our own portfolio of businesses.

Is knowledge work like that described by Col. Belenky? We think so. The dichotomy between the sustained ability to complete physical tasks and the degraded ability to maintain situational (or strategic) awareness, the context for those physical tasks, describes very well the difficulties facing people in the corporate world. It remains possible to read and type, to even modestly edit and review presentations and spreadsheets and documents, but the strategic viewpoint, the stream of constant background analysis that is the hallmark of good decision-making, is lost. This continuing failure to appreciate the big picture, if it affects all those folks involved in strategic decision making as a result of long hours at work over time, could explain the almost random performance of corporations and the failures we have seen to make even the most basic decisions right on a consistent basis, namely ensuring that the firm earns its cost of capital.

This degradation results in a constant watering-down of analysis since the simple tasks are done and the obvious connections made. But the competition can be assumed to make the same simple connections as well. Working smarter, not harder, has been a theme for the last 15 years, since automation and knowledge management become more accessible through the ready availability of information technology resources to almost all workers. While that may be true, What we're learning, however, is that working harder is almost certainly not working smarter.

Big law firm hours explained - competing interests

2008-01-06T11:02:00.000-05:00

This is the second in our series of three posts relating to the idea that long hours, substantially over 40 hours per week, lead to reduced cognitive function and poor performance, most notably lower productivity per unit of time.

Our first post reframed and rehashed these arguments in the context of the medical profession, notably the long hours of medical residents, which some medical groups now suggest should be limited to an average of 80 hours per week.

We wrote how even if you exempted malpractice in the legal, actionable sense from the discussion, professional ethics should lead doctors to reduce hours for residents. (Question: are all hospital administrators practicing physicians? Certainly shareholders are not.) The next profession we are going to analyze is the legal profession. Not only do we have direct experience here, we have also been in the position of law firm client (too many times, most would say). The situation for lawyers is akin to that of doctors: malpractice is an actionable claim for injured clients; professional ethics create obligations governing one's practice.

If you accept the general premise that lengthy hours have a dual effect of both reducing productivity and increasing the likelihood of mistakes, then lawyers, and by extension their law firms, are probably committing professional errors (meaning a breach of the general code of ethics requiring competence), if not actual malpractice, by increasing billable hours per associate. Various times throughout the last ten years (and obviously much before that as well), first-year lawyers have been the recipients of dramatic increases in salary. Of course, there's no such thing as a free lunch, and the tradeoff for associates has typically been increased billable hour requirements. Firm have typically chosen to increase the hours of associates and partners rather than maintain the hour requirements and increase the numbers of lawyers. This increase in hours is driven by the increase in salaries, which in turn drives tuition hikes.

So, where are the studies that show the increase in mistakes for lawyers, like the ones for doctors? They don't exist. Why is that? Several reasons:

Big law firms typically bill clients by the hour for legal services. If productivity declines and it takes longer to resolve matters, the first and most obvious result in increased billable hours. So, rather than poor medical outcomes for patients, which are noticeable to those outside the hospital, we have larger bills, which are certainly noticeable to the clients but not distinguishable from "business as usual."
Errors that would lead to malpractice seldom lead to actual malpractice claims. Not only are errors often caught by other lawyers involved in a matter, but the errors themselves are harder to identify as errors, since they seldom have immediate effects and the true outcome may not be known for months in a transactional matter or even years in a litigation. Many errors are harmless because the circumstances that would trigger them fail to arise; a choice of law clause only becomes relevant when litigation is contemplated. Even when matters do turn for the worse, the idea that a negative outcome could be traced to a single error, which could then be traced to acute or chronic sleep deprivation, is harder to imagine.
It's possible that even when operating at a sub-par level, the types of lawyers who work at big firms may still perform at the standard of care, which is more generally based on lawyers overall. This argument has a lot of assumptions and perceptions built into it, which should be made explicit:

Associates who go to big firms are commonly perceived (at least among those seeking to go to big firms and among the big firms hiring them) to be of higher quality than those who aim differently following law school. They are perceived to be generally more capable legally.
Associates at big firms are perceived to be harder workers, or at least to have worked harder, in terms of more hours, during law school. Big firms prize law review membership and high grades, assuming that the former's hourly commitment combined with the latter's intellectual performance will translate well to the firm environment.
One of the key skills for lawyers is attention to detail, and that is another one of the skills for which good grades and law review time are supposed to be proxies.

Another difference between medical practice and legal practice, related to point #1 is that because of the fee-sharing restrictions in legal ethics codes, lawyers still run their own practices. Not always from a day-to-day perspective, where smarter firms are hiring non-lawyers to manage the business while leadership is to be provided by senior lawyers. The medical field has not had such a restriction in a very long time, exacerbated perhaps by early concerns about the effects of medical malpractice exposure to individual doctors. That led to the ability to restrict professional liability and to growth to spread risk. Many of those larger entities became public entities with shareholders and other investors. While it is obviously common for hospitals to be run by doctors, it is not required. The key argument for why law firms should not be owned by non-lawyers is that the profession does not want lawyers to be subject to people who did not have the same ethical obligations as the lawyers. Where this tension currently exists, however, is in corporate legal departments, and the complications are clearly there.

So these assumptions might explain why the rate of error would be lower, but does it really make any sense that lawyers would actually err less than doctors? Doctors constitute a much smaller universe than lawyers, and few lawyers who would claim that medicine is an "easier" field for those with less powerful intellect. If doctors can make apparently clearly measurable errors, wouldn't it make sense that lawyers make at least the same number of errors? If anything, the type of errors committed and the circumstances have a greater impact on what outcomes are measured and the perception of those errors.

Do firms have an ethical obligation to reduce attorney billable hours to reduce risk of poor performance? Do they have an ethical obligation to reduce billable hours to reduce low productivity, which results in larger bills for the same work? What about clients? Certainly the primary clients of large law firms are large corporations, who might be more knowledgeable than individuals about these effects. Also, given the outside legal budgets of large corporations, they probably experience low-probability events on a regular basis and so can expect that there is some harm to them from these issues. Does anyone know of large corporations that have firm restrictions on the number of hours that may be billed to them by a single lawyer, or by such a lawyer in a week, month, or year?

We are attempting to identify some future research opportunities in this field. Does anyone have connections inside a legal malpractice insurer? We would be interested in tracking claim experience by firm size and hour requirements. Similarly, we are preparing a proposal for corporate counsel at large commercial firms to evaluate lawyer performance in light of these issues.

Business people inside corporations and acting as consultants are our next area of inquiry in this sleep deprivation/overwork trifecta.

Fatigue - Doctors Would Know Better With More Rest

2008-01-04T23:07:00.001-05:00

The IGDA is the International Game Developers Association, which includes all those people who create videogames, from programmers to testers to artists and many, many more. The linked article is a quasi-response to another post in which someone said to be the spouse of an Electronic Arts employee said that programmers were working mandatory 87.5 hour workweeks. The author of the article writes, not strictly about videogames, but about workers in general. He refers to several items in the history of the 40-hour workweek, tracing the development and changes in hours over time. The takeaway: the perception that hours can be costlessly increased for salaried knowledge workers is false, and in a big way. Productivity declines rapidly, such that the work done in 8 60-hour weeks actually approximates that completed in 8 40-hour weeks. That's a pretty amazing drop-off, and it's one that deserves further study beyond what's cited in the article.

A profession is defined by three things: specialized knowledge, a public trust, and an ethical code enforced by self-government. In this first of three posts related to the fatigue brought on by long hours and little sleep, we explore the article as it relates to the medical profession. Doctors have been debating the issue of 24-hour shifts in earnest over the past several years. Doctors are almost certainly committing professional errors, by which we mean breaches of ethics codes governing the profession, if not actual malpractice, by rigidly sticking to the 24 hours on/off rules and long hours for interns & residents. While that field is slowly asking the right questions, they don't seem terribly concerned about moving on, even for the sake of the patients. Nurses work similar odd schedules, typically 3x 12 hour shifts and then overtime after that. Both argue that continuity of care is a moderating factor, and so that should indeed be taken into consideration, but the number of accidents is certainly a knowable number, even if the alternative isn't. But given the number of institutions in the country, and the world, there should be some comparative data.

This article http://www.ncbi.nlm.nih.gov/pubmed/15509817 notes that residents made substantially more errors when on a 24-hour shift schedule. We think this is reason enough for the public to demand changes, but the real concern is why aren't doctors and hospitals taking this more seriously. Since this article was published, there have been articles in the medical journals and related forums outlining the risks, and the AMA has taken some steps to recognize the problems, although they are too slight to be described as mitigating the potential harm to patients (the proposed maximum is 80 hours/week. From a professional ethics perspective, particularly one that starts with thou shalt do no harm, we don't understand why doctors don't feel compelled to make the necessary changes. The arguments for the long shift are weak when measured against preventable harm: continuity of care is a common excuse, and "toughening" up residents is another.

Continuity of care makes more sense with nurses, who often work three 12-hour shifts per night, and can be assigned in ratios as low as 1:1. Doctors, on the other hand, are typically running from patient to patient on rounds in-between emergencies and urgent consults. Similarly, nurses typically have more varied work duties, allowing them to somewhat tailor their current task to their alertness level whereas residents can be called on to make the most difficult decisions of their shift at anytime, whether hour 1 or hour 21.

Toughening up residents is a faux argument. The grueling schedule is entirely man-made. This is not a situation at all like military special operations training courses, such as the US Army Ranger School, where sleep deprivation is a specific part of the program to increase stress and help these future leaders learn how they and their soldiers react under some of the conditions they will face on the battlefield. But that's training, and no military leader would deliberately handicap troops in battle by depriving them of sleep in the absence of a mission-critical requirement. The more you sweat in training, the less you bleed in combat.

(We contemplated asking family members who are now at the chief resident level, but we decided it was a little too combative to call them unprofessional to their faces.)

Eisenhower Quote on Planning

2008-01-03T16:02:00.000-05:00

"In preparing for battle I have always found that plans are useless, but planning is indispensable."

We use this phrase a lot in two contexts: first, we freely admit, and accept, that our plans may not work out as expected, which is a risk. We then discuss how we manage that risk by a thorough planning process that takes into account the existence of scenarios as opposed to a singular rosy vision of the world. In other words, good plans identify probabilities of various events and then seek to plot a course that is responsive to the array of possible futures. In other fields with different problems, this approach is sometimes described as game theory.

The second context in which we find ourselves repeating this maxim is when we review business "plans" of startups seeking our help either through our Coordinated Market Entry service offering or through our affiliated investing entity, Namahagi Ventures. A startup seeking millions in investment needs a real plan, if only to provide evidence to investors that when the plan turns out to be wrong, the founders will have already thought through the issues and tradeoffs and will be immediately prepared to undertake a new course of action.

Scenario planning is one project we often undertake where this quote could be shortened to "planning is indispensable." It is the embodiment of planning in an environment of uncertainty, in which no one know what is actually going to happen. Please note that there is a difference between business plans and scenario planning. Good business planners plan for the expected and are prepared for the unexpected. Scenario planning takes that process further into the future by preparing for likely changes based on expectations about macroeconomic trends and similar big-picture events that should trigger a change in, or at least a review of, strategy.

GiveWell fiasco -- what's different?

2008-01-03T13:13:00.000-05:00

Well, the time to start an organization related to "charity ratings" in any way: not right now. GiveWell, mentioned in an earlier post, has admitted to astroturfing charges. (Astroturfing is when you pretend that there's a grassroots supporters of your business or cause. Basically, one of the founders asked questions under a fake name and then answered them under a different name.) What a mess, and what a shame.

Perhaps this episode highlights the key distinction between GiveWell's approach: rather than think that we know better than the nonprofits themselves how to solve the problems they're working at every day, we believe that unlocking and sharing their knowledge, and revealing that to donors in a coherent manner, will reveal the better ways to solve the problems. What does that actually mean? It means that while we think we know better than most how to present and compare information, we're not likely to try to substitute our judgment for someone else's -- which makes the GiveWell activity much less likely for us just in terms of underlying incentive. In other words, when you think you're smarter than other people, you start wanting to make decisions for them. Our approach is founded in the most historical American notions of freedom: the freedom for everyone to make up her own mind. Also, we have specifically decided to preserve the strategic element in our comparisons by only discussing & comparing organizations in each strategy within a sector.

By presenting the information we receive from organizations in a standard format, we hope to work from the other side of the river from WhatWorks.org, building a bridge that should eventually join the two projects. While they are creating standards and forms, an idea we support, we recognize that harnessing the wisdom of the organizations by the organizations has immediate potential for impact. In other words, isn't a nonprofit more likely to adopt a strategy knowing it has worked elsewhere than through a standard or form that describes or implements that same strategy? It shouldn't be that way, but it is.

Operational excellence is evolutionary -- it is refined by recurring methodical review of what went well, what went wrong, and what should be changed as a result. Our goal is to capture information organizations in different stages of those reviews, collate it into a cohent body of work, and share it openly, allowing it to be review and commented on by the community. Why should there be a community approach rather than a top-downish (and we don't mean that in a perjorative way) approach like Whatworks.org? The right answer is that the system needs both. We've always assumed that after the collection of "practices" in a sector, we would actually draw out the "best practices" identified by the community, create a workable plan primarily by ourselves, and then expose that plan to the community for further comment.

There is a lot of discussion about evaluations and their cost. That problem is one triggered by the top-down approach. We're saying something similar and something different. The first point is that we absolutely agree that evaluations have to take place or we all risk wasting an awful lot of time. The second is that it makes sense, from an efficiency perspective, to see what organizations are doing themselves to evaluate their efficiency and effectiveness. That much the GiveWell folks have right: the proxies often touted are primarily useful for identifying waste, not for identifying true program impact. If that weren't true, then why would the Robin Hood Foundation expend the time and money to create an evaluation system? Wouldn't they just use the financial data umbrella sites? The fact that those smart people with money to spend, just like similar programs at other large foundations, want to spend it wisely. Some of them, more than one, have decided to evaluate impact in some way. We want to support that by making it easier, rather than harder, for nonprofits to engage donors in those evaluation discussion.

Measuring Nonprofit Performance - other approaches

2008-01-01T13:26:00.000-05:00

In refining our vision for the Wolfhound Fund, we've come across different ideas that are relevant to our plans but don't capture the entire idea. In this post, we'll discuss some other approaches, but note that we will not go over what we've already discussed, namely Robin Hood.

The NYT recently published an article on GiveWell, a new organization that seeks to collect information about measurable results obtained by charities and uses that information to rank charities it has evaluated. They are incredibly open in their approach and vow to make the information, the evaluations, and their methodology available to the public. We think this is absolutely the right approach. The most disturbing thing they reveal is that many of the larger foundations they contacted would not disclose their rationales, decision-making process, or grant recipient information to the GiveWell parent foundation. We are shocked; we have been hoping to, in the course of developing our metrics in an open platform that we would be supported by foundations who have presumably spent a lot of time evaluating various programs. We have not yet contacted these organizations to "seed" the discussions with existing metrics, but it's certainly on the list.

The WSJ recently published an article on due diligence on donations. They note the typical first step of evaluating along standard financial measures, using the excellent resources that make those results, and the Form 990s from which they are derived, available. Notably, they identify GiveWell as one of the new organizations helping evaluate charities in a different way. The article mentions several other groups that take a similar approach to evaluating measured results. One theme is that many organizations do not attempt to research and measure their results; this statement does not surprise us given our experience with organizations.

First, for-profit businesses seldom actually evaluate whether they are creating value, and the myriad financial publications seem almost unwilling to identify those companies that are regularly destroying value -- not just those that are actually losing money or not producing cash, but those that are underperforming by not earning the cost of capital. This notion led us to believe philosophically that many nonprofits were not instituting similar rigor in their operations.

Second, our personal experience in forming nonprofits and advising founders indicates that often, the same fervent belief and desire to help that sparks the impulse to start an organization and bear those early burdens also negates the natural skeptic within those same founders; they start organizations because they believe. This mindset isn't to be ridiculed; it's to be understood. All organizations, whether for-profit, nonprofit, family, or recreational, start with some leap of faith, however small or large. Our response and reaction to this circumstance is to rely on a liberal arts education and quote Milton: "I can not praise a fugitive or cloistered virtue;" our second response: "The unaimed arrow never misses." More melodramatic is Socrates: The unexamined life is not worth living.

WSJ also gives a sidebar mention and link to The Center for What Works. They provide a variety of benchmarking materials to nonprofits, and even provide basic education about benchmarking and how the process works. They give a great introduction for their audience, who typically doesn't come from a big-firm corporate culture where benchmarking, the development of Key Performance Indicators, and a dashboard/balanced scorecard/3x5x15 report to track it all are more common. While WhatWorks has benchmarking information, it does not

Their initial work on developing a standard taxonomy (PDF) for various types of outcomes is exactly the type of thing we want to create. Building on this standardization effort by adding domain/sector-specific metrics is one way of visualizing the Wolfhound Fund's approach. In addition, they've taken this general taxonomy and actually applied it to 14 specific program areas, revealed at this page. If anything, these magnificent efforts clearly show the way and exemplify the type of standardized tools we believe should be produced for, and more importantly by, nonprofits and the extended community of stakeholders, including donors and program recipients.

What separates the Wolfhound Fund from these organizations who have already started collecting research and making evaluations? Three things: first, we come from a strong background combining military leadership with traditional financial analysis, which has made us experts in the tools, language, and very idea of converting strategy into action through leadership, training, execution, and management; second, we believe that the organizations that are measuring their results are the best place to start the discussion -- we hope to build on the thousands of internal discussions in dozens of organizations who have already addressed these questions rather than seek to substitute our judgment for theirs; third, we aim to collect this information from a broader cross-section of the charitable universe so that donors interested in a sector, such as homelessness, can evaluate charities with different strategies that are not directly comparable. That second order decision, of choosing a strategy to combat a problem, is not the primary inflection point the Wolfhound Fund seeks to influence but one that we hope to illuminate just the same.

Fundamentally, we believe that an open-source, continuous improvement model is the best way to create self-correcting, self-improving, and self-proving tools for creating positive change. This is a small part of the overall problem, and we in no way compare ourselves, sitting alongside board members and donors, as remotely as committed as those who actually run homeless shelters, who show up to hearings for protective orders, who perform surgeries in developing countries, who counsel and guide troubled youth. Our goal is to help the outsiders find those people who do these jobs better than everyone else and who have built programs to put themselves out of business.

Freedom of Contract

2007-12-31T18:01:00.000-05:00

Cerberus Capital, a well-known private equity fund, recently won a short trial in the Delaware Chancery Court allowing it to terminate its acquisition agreement with United Rentals and pay the $100 million termination fee set forth in the contract. The WSJ article spells out the details and the background well, referencing the actual parties and the negotiations backdrop. The critical item of analysis, missing from much of the commentary we've seen [link to WSJ law blog?], is an analysis of the points on which the opinion turns. (For simplicity, we'll generally refer to all Cerberus defendants as Buyer and United Rentals as Target.)

Reviewing the actual opinion, here is the critical language relied on by Cerberus from Section 8.2(e), part of the termination provision:

In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall [Buyer] ... be subject to any liability in excess of the Parent Termination Fee for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including
breaches by [Buyer] of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the [Target] seek equitable relief or seek to recover any money damages in excess of such amount from [Buyer] or any of their respective Representatives.

(NB: the opinion is available here: WSJ link.)

The language United Rentals suggested was controlling involved a specific performance provision (Section 9.10) of typical structure allowing for the seeking of injunctions to compel performance, but specifically exempting Section 8.2(e) from its purview (and Section 8.2(e) specifically notes that it supersedes 9.10).

The opinion first describes why the interpretations of the parties are both reasonable, eliminating the opportunity to resolve the case by summary judgment. Then, the opinion describes the extrinsic evidence about the shared intention of the parties, concluding essentially that the Buyer consistently rejected the specific performance remedy and that Target eventually acquiesced to edits that Buyer believed eliminated that remedy. The case might indeed be one that turns on procedure as much as anything else; Target had the burden of proving Buyer's intent and was unable to meet that burden; the opinion notes that the matter is an "exceedingly close question" in some respects. Also, the use of the forthright negotiator principle indicates that openness in negotiations actually can be rewarded: since Buyer's belief that the termination fee was Target's only remedy was well-communicated to Target, Target's failure to respond with its interpretation of the contract language during negotiations works against it during litigation.

The key point for business and lawyers to remember is that a party is captain of its offer; that is, the party making the offer to the other has the right to set whatever conditions it wants on the offer and acceptance (short of public policy violations). In other words, it's perfectly reasonable for Cerberus to reject any specific performance remedy in the contract and, by extension, perfectly reasonable for United Rentals to reject a deal that allows Cerberus to walk away. Moving to a deeper level of analysis, the meaning of contracts is tied inextricably to the remedies afforded in the event of breach. Both risk and reward are equally linked in this
respect.

A wise deal champion, listening to experienced counsel, will strive to create deal structures that are either self-enforcing, such as dead-hand provisions operating to implement conditions subsequent or covenants, or are clear about what the downside looks like for both parties. Discussing risk during the negotiation of a contract is not weakness; it's sophistication. Experienced deal participants know that deals break down in a variety of ways for a variety of reasons. Ignoring these possibilities to appear to be "positive" or "trusting" or "a team player" is foolish; only by harping on the negative do you eliminate those perceptions. It's often been said, and often repeated by us, that good deal structures don't require one party to trust the other; they make the deal support the development of trust between the parties by getting out of the way of that trust rather than relying on it.

In a later post, we'll discuss this concept of proper structure in light of the actual costs of small-business litigation, the sort of <$250,000 claim that can arise in any number of businesses.

Also, the discussion that the deletion of the offending specific performance provision rather than the circuitous "subject to" language would have been less ambiguous reminds us to discuss the practical effects of simply working too much. We assume that Buyer's counsel worked an incredible amount on this transaction and probably many others as well. More to follow.

Introducing the Wolfhound Fund

2007-12-31T16:14:00.000-05:00

Michael Princi and Rick Colosimo announce the founding of The Wolfhound Fund, a nonprofit entity, whose mission is to help nonprofits and their officers and directors with increasing the returns on the social capital invested in and by the organization. This ROSC measure corresponds to the use of ROIC for for-profit entities. In general, ROSC seeks to account for all the inputs of society to an organization, from donations to volunteer time to the federal tax shield, which are transformed by the organization into outputs including services, cost of services, and operating expenses in much the same way that ROIC describes how a for-profit company increases revenue, turns invested capital into revenue through capital efficiency, and turns revenue into operating profit through operating efficiency. It is our deep experience investigating and understanding this foundation, the operating performance of traditional companies, in hundreds of examples that has led us to the realization that similar performance metrics for nonprofit organizations would greatly enhance strategic review by nonprofit boards and improve transparency for donors.

The Wolfhound Fund will oversee the collection, creation, collaboration, and refinement of metrics for effectiveness and efficiency for nonprofit organizations, allowing entities to benchmark themselves against organizations pursuing similar strategies. For example, legal aid groups that represent the homeless in government benefits litigation should not be compared, from an operational prospective, against those groups that provide typical homeless shelter benefits. While donors and organizations may debate the relative merits of pursuing different strategies, our goal is to assist the management, the officers and directors, of these organizations assess how well they are executing their chosen strategy. In our personal and professional backgrounds, we have always presented our advice thoroughly grounded in the operational world, and that's the level at which the Wolfhound Fund itself will operate.

As we've noted, we are building on the funding selection and program evaluation frameworks created by the Robin Hood Foundation, and we applaud them for making their decision and evaluation processes available.

To make as much of an impact as possible in the shortest time, we would like to launch using a wiki format, which would allow stakeholders to provide information on metrics and measurements as well as provide a forum for discussion as the information is reviewed. [As an aside, while our primary webhost finalizes its support for Mediawiki, we're looking for a fairly priced private hosting solution that will allow us to host the wiki under the wolfhoundfund.org domain and migrate it if we choose to do so; recommendations are welcomed.] We'll start scouring the universe of nonprofit resources to seed the discussions with strategy trees for the various issues as well as piecing together metrics for each strategy and disclosed measurements for nonprofits revealing such information.

We're excited about this and hope that we can help spotlight those nonprofit entrepreneurs who are changing the world for the better by wringing every benefit out of every hour and every dollar.

Gates, Buffett, and sour grapes.

2007-12-27T15:00:00.000-05:00

We recently came across this brief interview from a "political philosopher." Of course, that's not going to mix well with our nothing-but-the-fundamentals view of business and achieving goals. (We tend to leave the philosophy for the goal-setting.)

In brief, the gentleman says that Warren Buffett's generous gift to charity, rivaling the US's most revered benefactors, is broken for a couple reasons: first, we should have more foundations rather than fewer; second, the Gates Foundation will be a monopoly, which isn't good for it or for philanthropy; third, Buffett has no right to use his money for private charity unless he does better than the public, i.e., government sector.

Here are some of the other points that concern us about the article:
1. The statement that "All wealth is derived from the commonwealth" gets us in a tizzy. It brings to mind a quote from one of our well-read lawyers: "I think we fought a war over that once." The reference should be to the Declaration of Independence: "--That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed." Governments exist because we choose to give them money and power and to reasonably submit to their will. The state is the charity, not the free market.

2. The fellow also seems to misunderstand why the free market is generally considered to be a good thing by proponents. No one really cares about there being a multitude of market participants serving the marketplace. A fragmented market is no guarantee of quality. However, if firms can evolve because of competitive pressures, then multiple companies will (and ought to, in the prescriptive sense) go out of business as failures. All that's required to make this work is competitive pressure; you don't really need a plethora of firms in the market. Hint: that's why the DOJ/FTC are concerned about "market power" and not concentration. If it's easy to enter a market, competition does not have to be real to be felt and responded to. Well-run companies improve their products and services before competition can harm their businesses. Self-cannibalization is the smartest path; we recall a book title along the lines of "eat your own lunch before someone else does."

3. " Bundling software and hardware, a kind of monopoly, was a bad thing for Gates' Microsoft. That's why the government sued." We're just confused by this, which makes us wonder why someone would write it. Our understanding is that it's pretty clear that monopolies price higher in a way to maximize their benefit, to the detriment of society. This is the first time we've heard of the argument that it's a bad thing for a monopoly to be a monopoly. It's possible that this argument would make sense if you made a few assumptions, such as that the company had no other ideas about how to deploy capital and so research and development efforts languished. That begs the question of whether companies need to perpetuate their existence. Schumpeter would probably disagree that there's any inherent benefit to companies qua companies continuing to exist. That's a different question from dislocation effects that are experienced (or suffered, depending on where you stand) from creative destruction. The whole point of a monopoly might be to extract capital from society, redistribute it to stakeholders and investors and then let reinvestment take the "let a thousand flowers bloom" approach. If monopolies are efficient at turning revenue into profit, then that isn't a ridiculous idea.

4. The government sector's efficacy notwithstanding, there is a long tradition in America of doing more than the government does. For example, some people might say that the federal government should not fund an activity, such as a church. So private persons elect to do that. The next step is to recognize that some people think the government should spend more money on an activity, such as environmental protection. So private persons elect to do that. We balance the income and expenditure issues at the federal, state, and local levels through the miracle of politics (the balancing of competing interests is the essence of politics), and then people operate against that backdrop.

Now for the efficacy question: we often read about factors that seem like they are related to charitable efficacy and efficiency, but they are really stories about things that are proxies at best for those things. For example, administrative expenses as a percentage of overall expenses is a common item used to rank/evaluate charities. Clearly, money spent on administration is not available for charitable activities. However, does anyone believe that operating without administrative expenses is likely to increase actual efficacy, the securing of positive results, however measured, from the charity's activities?

The issue of separating efficacy from efficiency from proxies for those items is a question that has interested us for nearly two years now, and we are finally ready to do something about it. We are completing an article detailing the issues surrounding the problem as well as finalizing plans for the launch of a nonprofit organization to guide the creation, collection, collation, and synthesis of measures of charitable efficacy for various types of organizations. Notably, the Robin Hood Foundation (http://www.robinhood.org/index.cfm) undertook some of this type of investigation (http://www.robinhood.org/approach/metrics.cfm) to support and tune (http://www.robinhood.org/approach/results.cfm) its own grantmaking, but we believe a comprehensive approach would benefit society -- recipients of charitable activity, donors, employees, officers, and directors of charitable organizations, and indeed, those organizations that do better than others. As a society, we should want to reward those organizations that are making a difference from those that are not.

Clearly, an apples-to-apples comparison is required; it makes little sense to compare Habitat for Humanity's impact on homelessness to that of a legal aid foundation that represents the homeless from an advocacy group that drafts, comments on, and challenges legislation. While reasonable people may disagree and debate the wisdom of different allocations of funds among those various efforts, that debate is much more complicated and unlikely to be resolved by our project. What we hope to do is clarify whether "hovels for humanity" is more or less efficient at implementing the same anti-homelessness strategy as Habitat. We'll soon create a separate post to draw the parallels between our current financial analysis approach to for-profit companies and this evolving approach for analyzing non-profits. We are currently investigating wiki platforms for the initial launch of the project so we can start moving while we finalize the plan.

Finding a lawyer or law firm

2007-12-23T20:36:00.000-05:00

We see (and get) emails like this all the time (NB: one of us is a former practicing corporate lawyer):

Subject: Looking for good business attorney
I just started at a small XYZ firm/company and am looking for a referral to a good business attorney for general legal matters. We're looking for a good balance of local experience, expertise with small companies, and reasonable rates.

Rather than continue to draft responses, we've decided to put most of our advice here so that folks can get much closer to what they're likely to want or need.

Some general advice:
1. What do you need? Before you pick a lawyer or firm, you need to have some idea of what your legal needs are, in terms of practice areas, volume of work, and level of difficulty. For example, if you are starting up a small business, you would likely select a different firm than if you were forming a $100m venture capital fund. Similarly, if you need help with a one-off project, you might overlook certain considerations that won't affect you on the practical level.

2. Fees -- everyone wants reasonable rates. We want reasonable rates, yet we know that our JD partner billed out at over $300 per hour as a 5th year associate many years ago. Law is a profession; skill and efficiency are not guaranteed; you are much more likely to get what you pay for, or less. You'll seldom get more. Think about your own business and how you think about why your prices are justified. Lawyers bill by the hour because unless you're doing a cookie-cutter type of project (such as "file these pre-drafted forms" or "file our quickie divorce"), it's notoriously difficult, if not impossible, to accurately assess how much time a specific project will take. So fees are open-ended, and you will have to figure out what happens when the budget you set is going to bust. The only way that you will actually get a break on rates is by being accommodating on point #3, payment.

3. Payment -- most lawyers will ask for a retainer, which protects them from not getting paid because you change your mind after 20 hours of work, etc. (High legal costs are one reason for this; go figure.) Do not expect an experienced lawyer to waive a retainer for the "privilege" of getting your future business. There's no way to lock you up as a client and no real reason for the lawyer to take on the risk of your success. Also, don't expect any but the largest firms to waive or defer fees for start-ups. After the dotcom bust took out several Silicon Valley firms, those that remained learned their lessons. If you give a lawyer a pretty full-sized retainer, guaranteeing the lawyer that she'll get paid, many will give you a further break on fees. Finally, you should not generally worry about losing the money that you pay as a retainer: lawyers are generally required to keep your retainer in a special trust account so that it's available to you if it's not used for legal fees. Most states have a special program or insurance fund to compensate clients who lose funds from an attorney trust account.

Have you thought more precisely about what legal needs you have? For example, you might very wisely select different folks to give you generic corporate advice (e.g., form of entity & structure), to create form agreements for use with customers, or to handle disputes. If you can give me some guidance about what you think you need, I can give you some different options.

In general, as you're evaluating other referrals you might get, we think that you'll want to stay away from a larger firm (anything over 20 lawyers) unless your business is already well beyond the "just-started small IT consulting firm" phase. You should probably aim for a group of under 10 lawyers, getting a corporate generalist to handle those matters and one litigator to write letters and advise you on disputes. (Note that you should expect not to actually litigate anything unless there's well over $50k at risk, since the costs of litigation are just too high.) What you want on that litigation front is good advice more than an available trial team. Finally, depending on your accountant, you may benefit from having a tax lawyer in the group to give you more high-value tax advice.

Excess capital and negative spread

2006-03-29T08:33:00.000-05:00

Geoffrey Colvin, the star of our last post, is once again delivering basic finance concepts to the masses in his all-too-short article on the AT&T- BellSouth merger. Believe us, basic is the level that many corporate finance & management teams are working at, so Colvin is doing shareholders a favor (we can assume a broad overlap of share owners with Fortune readership).

Colvin adds up the invested capital of the two businesses (a total of $280 billion) and uses their WACCs to calculate the weighted capital cost for the combined entity. Unfortunately for shareholders, he calculates that cost to be $25.5 billion a year. (NB: Colvin uses NOPAT, and in a future post, Mike Princi will comment on the differences for this analysis between using NOPAT, as Colvin does, and NOPLAT, which ThoughtStorm typically uses.)

More simple math follows, which has apparently escaped everyone whose bonus doesn't rely on the completion of this deal. Since both AT&T and BellSouth are woefully underperforming, there's little evidence that the combined company can get a 200% improvement in operating performance (currently $8.5 billion) out of the merger. We'd have to do a lot of digging, but if anyone can find a large company merger that produced anywhere this kind of operating synergy, please drop us a line.

It may be obvious and "simple" analysis, but Colvin's matter-of-fact approach has impressed us in this article. These truths are apparently not self-evident, and he does a great service to the investing community.

Speaking of investments, what might an equity investor (long or short) do in the face of this analysis? Well, classic merger arbitrage strategy says short the buyer (AT&T) and go long on the seller (BellSouth). In fact, Colvin notes that AT&T's share price is down since the announcement. Merger arbitrage, in spite of its one commandment, seems to be pretty successful: we've come across more than one fund using this strategy that has been able to convince investors to pay hedge fund rates for this advice.

Cash, Debt, and WACC

2006-03-06T20:29:00.000-05:00

A recent Fortune article by Geoffrey Colvin discusses the relatively low percentage of debt in the capital structure of a large percentage of US public companies (he cites that "25% of the Russell 3000 have no debt or negative debt"). His primary point is that by not having "enough" debt, companies are suffering from a higher WACC (weighted average cost of capital). His rationale for why many companies are choosing to not use as much debt as might otherwise be indicated is that reduced debt leads to reduced volatility in a company's finances and hence, the stock price. He assumes that CEOs prefer the reduced stress from lower stock price volatility.

In comparison, McKinsey recently published an article, "Making Capital Structure Support Strategy," suggesting that companies should select a capital structure (debt/equity split) to support the corporate strategy rather than merely to seek tax advantages (because the interest on debt capital is deductible whereas dividend payments on equity capital are not). The McKinsey authors focus more on how a company might select a specific level of debt based on corporate strategy and likely future scenarios, but they nevertheless indicate that companies with extremely low levels of debt can generally increase value by increasing debt to "typical levels."

As a practical matter, most of the companies with low or zero debt use additional cash as a replacement for a revolving line of credit to fund A/R or smooth out the effects of variation in sales or inventory purchases. So, to "increase" the debt on the balance sheet of such companies to reduce WACC, these companies first need to reduce their cash. (After all, taking on debt with the sole effect of investing that additional capital as cash or cash equivalents would be pretty annoying to most investors.) The goal is not to increase the amount of invested capital in the firm but simply to reduce the WACC. So, for any amount of debt raised, invested capital must be reduced on a corresponding basis.

How can companies reduce their invested capital? Well, for the class of companies we're discussing here, the most obvious method would be to use up some of their cash. They could make an acquisition, declare a dividend, or implement a stock buyback. An acquisition would not have the effect of reducing invested capital. A dividend, even under current lower tax rates, still has the effect of reducing the value of the wealth transferred to shareholders. A stock buyback is the most efficient scenario for using the company's excess cash in a manner that reduces invested capital. After the buyback, the company is free to raise debt capital to replace the cash previously held. If all works as planned, the company's WACC should decrease because the cost of the debt used to replace the cash will be substantially lower than the cost of equity for the cash that was held.

What other factors, beyond those suggested by Colvin, might account for the apparently excessive amounts of cash on company balance sheets? Our economist friends would probably suggest that the firms have a more pessimistic view of the future than outside analysis would seem to suggest. I think that one contributing factor is that some analysts habitually back out the effects of excess cash when calculating ROIC. In effect, they say that since the firm could reduce its invested capital by dividends or stock buybacks, you should analyze the company as if it had divested the excess cash. Of course, this approach is more than just a white lie because the firms really are holding the cash and somebody, somewhere, has to get paid for the cost of that capital. In addition, financial advisors and consultants probably favor more exotic reductions in working capital such as factoring, inventory management systems, and similar techniques because it is much harder to structure a seven-figure fee for an engagement around "declare a dividend."

Finally, I've just seen a reference to another article on this point, and we'll generate a follow-up post.

2004-05-03T15:22:00.000-04:00

Center for Army Lessons Learned - Public Web Page

2004-03-09T17:03:00.000-05:00

NVCA Model Financing Documents

2003-09-22T18:10:00.000-04:00

WSJ.com - Real Time: "Friendster has various community-related plans to make money off the network. But we can see some other applications. For instance, Friendster could license its service to law enforcement. Forget the photos pinned on the corkboard: Just plug in profiles for all the major players, and see connections that weren't obvious before. Corporate governance could get a boost as well. Steve serves on the compensation committee of a company whose CEO's husband invested in his start-up? Outrageous! And here's the Friendster network to prove it."

This ties in with my idea of using similar software to track criminal conspiracies by matching up people and connections, with the added angle of tracking the connections against a time-dimension as well.

2003-09-03T03:00:00.000-04:00

Techdirt:Should You Sell Your Personal Data?

2003-08-14T20:56:00.000-04:00

WPI Military Science: 9 Principles of War: "9 Principles of War
The nine Principles of War, as defined in the Army Field Manual FM-3 Military Operations:

PRINCIPLEDEFINITION
Mass Concentrate combat power at the decisive place and time
Objective Direct every military operation towards a clearly defined, decisive, and attainable objective
Offensive Seize, retain, and exploit the initiative
Surprise Strike the enemy at a time, at a place, or in a manner for which he is unprepared
Economy of force Allocate minimum essential combat power to secondary efforts
Maneuver Place the enemy in a position of disadvantage through the flexible application of combat power
Unity of command For every objective, ensure unity of effort under one responsible commander
Security Never permit the enemy to acquire an unexpected advantage
Simplicity Prepare clear, uncomplicated plans and clear, concise orders to ensure thorough understanding "

MacArthur: Duty, Honor, Country

2003-08-14T20:55:00.000-04:00

Another quote that has stayed with us since the days of required knowledge at USMA and OCS:

"Duty," "Honor," "Country"—those three hallowed words reverently dictate what you ought to be, what you can be, what you will be. They are your rallying points to build courage when courage seems to fail, to regain faith when there seems to be little cause for faith, to create hope when hope becomes forlorn.

2003-08-14T20:54:00.000-04:00

Troop Leading Procedure:
1. RECEIVE MISSION
2. ISSUE WARNORD
3. MAKE TENTATIVE PLAN
4. INITIATE MOVEMENT
5. CONDUCT
RECONNAISSANCE
6. COMPLETE PLAN
7. ISSUE OPORD
8. SUPERVISE