|Endcom: Worldcom CFO Scott Sullivan
|Enron, Xerox, Global
Crossing, and Merck aren't indications of the rot in capitalism.
Nor are they simple accounting scams. They are signs that capitalism
is probably working too well for its own good.
don't know whether you remember an article featured in the mid 1990s
in that magazine that strives to make business management look as
complex as quantum mechanics, Harvard Business Review. The author
was Gary Hamel-don't be concerned if the name isn't familiar; this
column is targeted primarily at people who haven't heard of him-and
he presented a passionate argument on why operating effectiveness
could never be strategy. I'll make it simpler for our mutual benefit:
OE, as management wonks refer to the term, is nothing but plain
old-fashioned efficiency; strategy is the big idea that gives a
company that bit of the something-unique-a great product, a fundamentally
different marketing plan, even a radical way of looking at boring
Over the years, argued Hamel, managers had stopped
worrying about strategy and were concentrating on getting the most
out of their operations. He couldn't have known it then, but this
obsession with internals has come back to haunt corporate USA, that
most rarefied of business clubs. The problems in Enron, Xerox, Global
Crossing, and Merck aren't, as some would like to see them, indications
of the rot in capitalism (born-again socialists would do well to
remember that before rushing out of the woodwork). Nor are they
simple accounting scams. They are signs that capitalism is probably
working too well for its own good.
Efficiency, as most of us learn in middle-school physics, is simply
the ratio of output to input. Enhancing the first, or reducing the
second increases efficiency. For some time, that's what managers
did-there were huge gains to be had by simply tweaking a company's
internal processes, and tweak them they did. This was far easier,
they realised, than going for the big push with an innovative product
or a new marketing plan. There's a problem with efficiency, though,
and they soon discovered this: it is limited by definition. When
they could no longer wring out improvements from processes, managers-not
all, but going by the number of accounting scams that have come
to light in the US, an increasing number-simply redefined input
and output parameters. They weren't breaking any accounting laws,
but they were violating them in spirit.
The stockmarkets encouraged-not overtly, but
by their passiveness-this practice. Aggressive accounting policies
found favour with analysts who preferred to rate stocks on revenues,
earnings, and EBITDA (earnings before interest, taxes, depreciation,
and amortisation). Suddenly, fundamentals meant a handful of financial
ratios, not the intrinsic strengths (read: strategy) of a business.
Eventually, though, even the most accommodating (and the most credulous)
investors demand to see the colour of their money. When that happens,
as Global Crossing's former Chief Financial Officer Scott Sullivan
will vouch if he's in a talkative mood (I'm told he wasn't during
a Congressional hearing), it's a sign that things are over.
Only good can come from the accounting pox.
The men who effected numerical sleights-of-hand may have done so
from selfish motives but they were, in effect, showing investors
what they wanted to see. They were simply stretching capitalism's
efficiency-mantra (heard through the 1990s) to an unsustainable
extreme. The wave of conservatism that'll now undoubtedly sweep
through the corporate world should put an end to that. And capitalism's
agenda will move from the classification-heavy world of internal
efficiency to the exciting and boundless universe of strategy. Surely,
all that creative energy that was expended on window-dressing financial
statements should result in at least an innovation, maybe two. I
spy exciting times ahead.