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October 31, 2007
Competitiveness Index
The World Economic Forum has released its 2007-2008 Global Competitiveness Report. Not surprisingly, the US come out on top, with Switzerland, Denmark, Sweden, Germany, Finland, Singapore, Japan, the UK and the Netherlands close behind. What I find interesting, however, is how closely these countries are usually ranked. There is not a huge difference - which is surprising when one considered the difference in public policies in the various countries. The top ten has a mix of more economic laissez faire, interventionist, "old Europe" and the Nordic model.
New this year is a survey of corporate leaders regarding each country’s business climate. According to the Financial Times, this "impressionistic" may cause problems:
This year’s annual ranking exercise will confuse avid WEF watchers as a change in the methodology has promoted some countries such as the US and Germany far above last year’s published league table positions, while demoting Finland, once almost always top of the tree to sixth place.
I've always found the Global Competitiveness Report to be a useful study. But, like any other analysis and ranking, it needs to be taken with a grain of salt. These surveys of business climate have always struck me as one of those things that need to be taken carefully. Worthwhile, but certainly not the definitive answer on how well we are doing.
UPDATE: Here is the Wall Street Journal's take on the other changes in the methodology:
The U.S. jumped to first from sixth place last year, according to the ranking by the World Economic Forum, a Swiss institute best known for hosting a big annual meeting of business and political leaders in Davos, a ski resort, each January.
However, that sharp climb was due to a change in methodology that gives more weight to market-related factors in the survey, relative to the fiscal and public-policy criteria on which the U.S. is weak. Under the new methodology, the U.S. would have topped the rankings last year too.
"The U.S. does amazingly well on innovation and markets, but on the macroeconomic stability pillar it ranks 75th," out of 131 countries included in the survey, said Jennifer Blanke, the Forum's chief economist and a co-author of the report. "This still reflects a very serious problem that could hurt the U.S. in the future." Fallout from the recent credit crisis is an example of that risk, according to the survey's authors.
Posted by Ken Jarboe at 10:14 AM | Comments (0) | TrackBack
Overrun by information
I'm a bibliophile. As a child I was a voracious reader. The World Book Encyclopedia was one of my favorite toys. Not only were the words and pictures fascinating, the heavy books made a great building material for forts and other construction projects. Having been a voracious reader of the small library at home, my first reaction to a public library (in my case, the school library in my Catholic elementary school) was a shock. How in the world was I ever going to read all those books?
That is the same reaction I had when I read Anthony Grafton's essay in the latest issue of the New Yorker -- Future Reading: Digitization and its discontents:
In fact, the Internet will not bring us a universal library, much less an encyclopedic record of human experience. None of the firms now engaged in digitization projects claim that it will create anything of the kind. The hype and rhetoric make it hard to grasp what Google and Microsoft and their partner libraries are actually doing. We have clearly reached a new point in the history of text production. On many fronts, traditional periodicals and books are making way for blogs and other electronic formats. But magazines and books still sell a lot of copies. The rush to digitize the written record is one of a number of critical moments in the long saga of our drive to accumulate, store, and retrieve information efficiently. It will result not in the infotopia that the prophets conjure up but in one in a long series of new information ecologies, all of them challenging, in which readers, writers, and producers of text have learned to survive.
Learning to survive seems to be an appropriate operative condition. More and more I feel overrun by information. I find it harder and hard to find the piece of information I am looking for on the web, when the search engines return thousands of items to my queries. Grafton's essay is a wonderful history of our fight to stay ahead of the tide. He also describes the role of books as physical artifacts -- full of annotations and such which provide insights into the social life of the information.
As the essay points out, we will continue to be overwhelmed with information. That seems to be a defining characteristic of the I-Cubed Economy. Coping mechanisms include new information technologies. But there will still be the old fashioned bibliographic version of shoe leather approach -- wading through tons of not-so relevant information. The flip side of that is the strong positive: the joy of discovery!
BTW - Grafton has also provided an online companion to the essay -- Web Sightings: Adventures in Wonderland -- which contains a wealth of links and reference points.
Posted by Ken Jarboe at 09:04 AM | Comments (0) | TrackBack
October 30, 2007
Services trade with China
I've always been impressed that when the editorial board of the Wall Street Journal gets it wrong, they get it wrong big time. The latest is their attempt to down play the trade deficit, especially with China -- A Services Surplus. In that editorial they celebrate our surplus in services trade and "gains America reaps from doing business with China" from "doing a booming business -- in services as well as goods." In other words, everything is just fine.
As the regular read of this blog knows, I publish the monthly breakdown of our trade in services and intangibles (see last month's numbers). One of the keys to that analysis is to separate out the types of "services" that are reported in the data. The other is to put that data into context.
First, the issue of what are "services". Trade data on services includes five major categories: travel, passenger fares, other transportation, royalties and license fees and "other private services." So, in other words, when a foreign good is shipped into the US, part of the cost of that imported good shows up as a "service" export.
To get a clearer picture, I use only the last two: royalties/fess and other private services. The latter is a catch all for a large number of services: education, financial services, insurance services, telecommunications, and business services. International trade in services has been rising steadily. Our surplus in these financial and business services was $72 billion in 2006. But what the Journal's editorial failed to mention that, in 2006, US imports of "other private services" grew faster (17%) than exports (14%). Our $3.575 billion surplus in these services with China in 2006 was only barely higher than our $3.50 billion surplus in 2005. More worrisome, our imports of services from China grew much faster than our exports (but still at a low level).
Second, the context. That $72 billion financial and business services surplus in 2006 is less than 10% of the $838 billion deficit in goods. And that $3.575 billion surplus with China is 1.5% of our $232.6 billion deficit with that country in 2006.
Trade in intangibles, including business and financial services, is important and growing. But to think that our trade in services is going to offset our deficit in goods -- and proves that everything is just fine -- is more than wishful thinking. It isn't even whistling past the graveyard (to use the Halloween rhetoric). It is simply irrelevant.
Posted by Ken Jarboe at 10:22 AM | Comments (0) | TrackBack
October 29, 2007
Intangibles and Iraq
From today's "Department of Human Behavior" column in the Washington Post -- One Thing We Can't Build Alone in Iraq:
Ideas related to social capital have many applications to U.S. domestic challenges but are especially instructive to the situation in Iraq, because they suggest that the model of reconstruction the United States has pursued there is fundamentally flawed.(Note: Putnam is the author of the influential book on social capital - Bowling Alone)
The problem with an external agent handing down largesse -- building bridges, roads and schools, for instance -- is that it runs counter to everything known about how social capital grows, [Robert] Putnam said. And without social capital, societies fall apart, even if the roads are smooth and the trains run on time.
But the problem of building social capital is not unique to Iraq (although the process is under more stress there than elsewhere). Intangibles like social capital are often overlooked, I feel, in most development projects. Even macroeconomic policies don't take these human intangibles into account (after all, even the idea that institutions matter is a relatively new idea in modern, mainstream economic thought). For example, the shock therapy that worked in Poland's return to capitalism failed in the Russian case where social capital is seen to be much lower.
The situation with respect to social capital and development is slowly changing, as the story points out:
Michael Woolcock, a sociologist at the University of Manchester in England who worked for years at the World Bank, said one development project in Indonesia suggested that external agents might be able to help build social capital.
The trick, he said, was to make no centralized decisions at all, whether in Jakarta or, even worse, Washington. The Kecamatan Development Project has aimed more than $1.3 billion at more than 40,000 villages, but every decision about how to use the money has come from democratic decisions at the village level, where funds are released only if diverse groups can show they are willing to work together. It has sometimes been described as a democracy project disguised as a development project.
The World Bank has been thinking about how to build social capital. In fact, they have done a lot of research on the subject and have a website devoted to the topic. The problem, as with many things, is implementation. Bricks and mortar (roads, bridges, and buildings) are easy to measure and show off. Making progress in building social capital, like other intangibles, is more difficult. But ultimately, it is the intangibles that make the bricks and mortar work.
Posted by Ken Jarboe at 11:03 AM | Comments (0) | TrackBack
Green to China - or green by China?
One of the standard responses to the trade deficit with China is to point to the opportunity to sell China green technology. The US, it is said, can export advanced technology to China to solve their environmental problems. While I have always thought that green technology is a good opportunity for US companies, I have been a little wary of the claim about solving our trade deficit that way. In part, there has been this nagging in the back of my mind that this assertion assumes the old paradigm of trade: advanced countries develop the technology at home and then export the second generation to the "developing" nations. This assumption is failing to meet the new reality test of the global technology development.
The latest on this comes from a story in today's International Herald Tribune --
GM plans a research center in Shanghai for hybrid technology:
General Motors announced here Monday that it would build an advanced research center in Shanghai to develop hybrid technology and other designs, in the latest research investment in China by a foreign automaker despite chronic problems with purloined car designs.
. . .
Planned for weeks, the Monday announcement coincidentally came right after the Chinese government's powerful National Development and Reform Commission disclosed Friday that it was drafting stringent local content rules for alternative fuel vehicles to qualify for likely government subsidies. The rules will require that key components be manufactured in China.
"They don't want to give big incentives just for people to import stuff," said Nick Reilly, a GM group vice president who runs the company's Asia-Pacific operations.
The Chinese government's move is aimed partly at Toyota, which assembles Prius gasoline-electric hybrid cars in China but ships the critical components in sealed boxes from factories in Japan.
Clearly, the Chinese want to go green by producing and developing the technology at home – rather than simply importing it from others. And apparently, Toyota and the Japanese are working on a strategy for making sure that they create home-country exports out of these sales abroad – beyond just the royalty stream. It is not clear the American's have figured out how to do either of these -- or if whether they should or not.
Posted by Ken Jarboe at 10:48 AM | Comments (0) | TrackBack
October 25, 2007
Understanding contagion
I think I'm beginning to slightly understand the credit market melt down. The issue isn't the collapse of the subprime mortgage market - although that is a part. The real issue seems to be the leverage built on top of that subprime mortgage market, especially the banks’ Special Investment Vehicles (SIV). SIV are off-book entities banks have set up to hold some of these assets. As a recent Wall Street Journal story explains:
There's nothing special about how SIVs invest their money. They own the usual assortment of bank debt, mortgages and other asset-backed instruments. What's striking is how they are set up, with huge amounts of leverage on a slim capital base; with bank sponsors that don't own them but instead collect management fees for running them; and with their funding derived mostly from short-term commercial paper.Or as another story says:
Put those three factors together, and it's clear that SIVs can make tidy profits for banks when things go well. But they are vulnerable to a liquidity squeeze if the commercial-paper market dries up. That's what happened this summer.
SIVs sell short-term debt and then use the proceeds to buy longer-term, higher-yielding securities. But SIVs have had trouble in recent months selling debt, and some of their roughly $350 billion in assets are backed by U.S. mortgages -- a market that has seized up amid the housing slump and subprime-lending shakeout. Typically, money-market funds, municipalities and other risk-averse investors buy SIV debt.
But when these investors stop buying and the short term debt comes due, the liquidity problem sets in. To compound it, prices of the long-term investments drop in the thin market. Caught between an inability to raise new short term cash and an inability to sell their long term assets, bankruptcy (either official or unofficial) is the result.
I point this out because of the relevance of the subprime market fiasco to the monetization of intangible assets. Like the mortgage market, intangibles such as brand names have been packaged into special purpose entities and bonds backed by those assets sold as securities. In both cases, the cash flow from the original assets -- the mortgage payments or the brand royalties -- is what backs the original bond. With the rising defaults in the subprime market, that cash flow to support the subprime mortgage backed bonds became unstable. But that is not what caused the panic. Properly treated, that was containable. Owners of those bonds would have simply taken as right off of some portion and move on. But this only works if the owners don’t need to sell these assets to cover other debt. So what caused the panic was the banks high-low game of essentially interest rate arbitrage using the subprime backed bonds as the vehicle on the high end (and the commercial paper market on the low end).
So far, I don't know if any intangible asset backed bonds have gotten into any cash-flow problems recently. There have been some in the past. But unlike the covenant-lite deals with subprimes, these intangible asset backed deal have all sorts of trip-wires and covenants to deal with cases of inadequate cash flow.
Having said that, the subprime and SIV meltdown will certainly have a negative impact on any future intangible-asset backed securitization deal. Guilt by association is likely to be the rule. The trick of those trying to push the concept of intangible securitization will be to convince investors that these assets are different. That may be a very hard row to hoe.
Posted by Ken Jarboe at 10:21 AM | Comments (0) | TrackBack
Design moves ahead
The CONNECTING’07 World Design Congress - Connecting to People and to Ideas was held last week and according to the write up of the conference by Business Week - Making Connections By Design - the design community is in a buzz:
Designers, not regularly hailed for their shyness or lack of confidence, were in their element. The atmosphere was ebullient and the consensus clear: Design's moment is now.
I would like to think that is true. But in order for that to happen, "design" needs figure out what it wants to be now that it has grown up:
How exactly designers might take advantage of business' new-found interest in using design to improve bottom lines was, however, less clear. "The design community is faced by unprecedented opportunity to chart a new course—and most of us aren't sure what to do with that opportunity," admitted Peter Mortensen of Jump Associates, the San Mateo (Calif.) innovation consultancy, which sent eight people to the conference. "We've spent so many decades arguing with businesspeople that we need a seat at the table. It was a war to make that case. And now we've won the war, people are struggling with how to win the peace."
For me, design has to move well beyond "cool" and certainly beyond simply coming up with new gizmos and gadgets -- however cool or useful. (BTW - if you are into that aspect of innovation and design, see GizMag.
Fortunately, there are signs that the design community is way ahead of me:
Academic figures Patrick Whitney, director of the Institute of Design at IIT and Roger Martin, dean of the Rotman School of Management in Toronto, were on hand to elucidate how designers can learn to speak the language of business. In quite possibly the highlight of the conference—certainly the only keynote to provoke a spontaneous standing ovation—British academic adviser and creative ambassador Sir Ken Robinson outlined the need for all members of an organization to be encouraged to think creatively, to bridge the divide between the "creatives" and the "suits."
Sounds like the right direction to me.
Posted by Ken Jarboe at 10:05 AM | Comments (0) | TrackBack
October 24, 2007
Counting on intangibles -- not in DC
Yesterday, the DC City Council voted on a plan to support a local hospital in danger of closing -- see Hospital Deal Gets Financing From D.C. - washingtonpost.com. This vote came in spite of a last minute warning by the city's Chief Financial Officer. Part of the warning in the CFO's Fiscial Impact Statement is because the hospital's "liabilities exceed tangible assets by approximately $34 million." The company's financial statements carry $34 million of goodwill.
I'm not an accountant and I haven't seen the company's financial statements. Thus, I am in no position to argue one way or another on the CFO's bottom line concern that "should the business plan fail, it is likely that additional funds of substantial amounts will be needed to keep the Hospital running." I think that is probably a truism -- if any business plan fails, additional investments are probably needed to keep the operation going. The risk that city is taking is that it is potentially signing on to a long term hospital subsidy (but that is exactly the risk they may need to take to provide health care -- a question well beyond my job description).
I do find the CFO's reliance on only tangible assets of specific interest. Again, without having looked at the company's financials, I can't make a call here. Many financial sins can be hidden under the category of "goodwill" (which is exactly why FASB eliminated pooling and requires companies to break out intangibles from goodwill in acquisitions). But I have to believe that that well-run hospitals have a huge amount of intangible assets.
The Post story gets to this point:
One of [CFO Natwar] Gandhi's main points of contention involved Specialty's claim of $34 million in "goodwill" assets, which the company expected the city to accept as proof that it could cover its liabilities.
"Goodwill" is an accounting term used to characterize assets that are not tangible -- the value of a company's name or its customer base, for example. In Specialty's case, the goodwill referred to the value of its two other D.C. hospitals, which provide skilled nursing and long-term acute care. The company maintains that the facilities are worth more than the simple value of their medical equipment.
But Gandhi decided that goodwill represents "intangible assets" that should not count toward Specialty's ability to meet its liabilities, government sources said.
[Company representative George] Lowe disputed Gandhi's analysis. He said Specialty had $84 million in gross receipts and turned a profit of $14 million this past year. He noted that its hospital in Southeast sits on 66 acres appraised at $35 million, and its Capitol Hill facility is worth $15 million for its business operations alone.
"The company is not insolvent," Lowe said. "The company is performing very well."
Audited financial statements back up its claims, he said.
(Apparently those audited financial statements were never made available to the city's CFO).
Earlier this year, I posted an item on the new rules for account of state and local intangible assets.. Again, without having seen the company's financial statements, and not being an accountant, I can't say whether applying these rules would result in a different outcome by the CFO.
The other part of this transaction that concerns me is whether the intangible assets were included in the deal. Not having seen the details of the deal, I can’t speak to whether any of the company's intangible assets might be used as collateral to backstop the city's investment. But if the company is going to claim intangible assets as a major part of their asset base, the city should have a claim on those assets if the deal goes south. It appears from the CFO's analysis that the only backstop for the city (outside of being a standard unsecured creditor) is part of the real estate.
Given that hospitals are a prime example of a knowledge-based, intangible-heavy institution, there was a missed opportunity here. Completely excluding intangible assets results in an incomplete picture of the company (and the investment proposals) and in a failure to capitalize on those intangibles as part of the deal. The fiscal impact statement should have included an analysis of the intangible assets and the deal should have been structured to incorporate those intangibles into the financial arrangements.
Posted by Ken Jarboe at 09:31 AM | Comments (0) | TrackBack
October 23, 2007
Snippets on the role of patents
From Business Week - A Life in Invention: Xerox's chief scientist Robert Loce talks with Jessie Scanlon:
On collaboration:
These days it's hard to come up with a really useful widget. You have to integrate what you're doing into a system. And when you're working with a system you have to work with experts in multiple fields. So, for instance, I'm an imaging scientist, but I might need to work with experts in sensors and programming and actuators. To have an invention that's really critical, you need people with different skills working together.
On the innovation process:
Occasionally I'm part of the product team that actually helps develop a finished product. Other times I've invented something, and thrown it over the wall to good engineers who improve my idea and get it to work. Finally, if a Xerox product team isn't interested, I work with the Xerox licensing department to find an outside organization interested in the technology.
On defensive patenting:
A patent is really a contract you have with the government to prevent others from doing your idea.
. . .
in the late 1980s, Xerox was issued a patent on one of my inventions that sat dormant for quite a while. At some point I told a person in our legal department to not bother paying the maintenance fees on that patent because it did not seem to bring Xerox any value. But it turned out that a competitor had approached us on this patent. For some reason we did not work out a licensing agreement. As a result, this competitor didn't fully implement the feature that they desired. Also it took quite a while for them to bring their scaled-down version of the feature to market. So, our patent seems to have blocked their use of a technology and might have resulted in longer development to work around our patent.
From a public policy point of view, I agree with everything except the last point. I take defensive patenting as the dark side of the process -- in order to spur innovation (by providing monopoly incentives) we have to give someone the right to throttle innovation (by granting that monopoly).
An interesting system.
Posted by Ken Jarboe at 10:00 AM | Comments (0) | TrackBack
Does reputation matter?
Apparently, the intangible of reputation is not as important as we might have thought on Wall Street. From Dennis K. Berman’s column in today’s Wall Street Journal - Stakes Change Rules on Value Of Reputation:
But it turns out that there are natural limits on how reputation -- the esteem with which one is held by others -- can affect behavior. We're seeing those limits now, as the world's credit crisis plays out before our eyes.
"Reputation matters until you get to some serious pain," says Edward Rock, co-director at the Institute of Law & Economics at the University of Pennsylvania. "It matters if the stakes are low. Somewhere between $25 million and $1 billion, it shifts."
How else to explain how banks, private-equity firms, bond salesmen, boards of directors, and hedge funds are wheedling, reneging on and resetting all sorts of business contracts and promises.
"I would love to say yes, that reputation matters," said one top deal maker on Friday. "In principle it does. Still, the line is not as bright as that implies." Indeed, the breadth of this current crisis has created what might best be described as a reputational free-fire zone.
. . .
"People can plead that 'I'm not a bad actor. I haven't broken my word if everyone else is doing it,' " says Lisa Bernstein, a legal scholar at the University of Chicago who has studied the role of reputation among tight communities such as cotton and diamond traders. "It's going to give quite a bit of cover."
Ms. Bernstein has found that reputation-enforced business networks work best among tight-knit groups. Once these networks expand, business people are forced to rely on formal legal contracts. The irony is that these contracts -- hundreds of pages thick -- are often no more effective than simple informal agreements based, essentially, on reputation.
That's reflected in the larger structural changes on Wall Street. In 1907, it was J.P. Morgan himself who helped calm a dangerous credit crisis, putting his good name behind a rescue plan. Today, J.P. Morgan Chase & Co. is an immense and largely faceless institution of 180,000 people, full of committees and project teams. Its reputation is harder to pin down because it's difficult to assign responsibility in the first place.
It's also easier to engage in reputation-damaging behavior if there are few competitors looking to take away business. By all indications, it would be very hard for both corporations and private-equity firms to lock out J.P. Morgan and Bank of America because they balked at funding the $25 billion acquisition of student lender Sallie Mae. The two banks simply have too much sway in the market.
In other words, when money talks, reputation walks. At least on Wall Street.
Posted by Ken Jarboe at 09:38 AM | Comments (0) | TrackBack
The subprime mess and securitization
One of the projects I am working on is the monetization of intangible assets -- essentially, how can companies (and individuals) raise capital based on their intangibles. Part of the process is looking at the securitization of certain intangibles, specifically trade names/brands and patents. With the recent fiasco in the subprime mortgage market, the entire process of securitization has been under scrutiny. Rating agencies actions on these mortgage backed bonds are being questioned and as is the process of trying to divide up the risk of these bonds into tranches (a mechanism that appears to have failed miserably as a risk reduction technique).
Now, there is a new twist in the attempts to police the securitization process -- the assignment of liability. One of the concerns raised by the mortgage process is the lack of accountability for abuses. The securitization process removes the actions of the loan originators from any negative consequences. They collect their fee and someone else holds the loan. So there is no market incentive for the originators to avoid pushing too risky loans on consumers who are ill-equipped to handle them.
Likewise the securitizer is not necessarily accountable for the failure of the loans, since they just package the loans and sell them to investors. There is a market risk -- the securitizers can and have gone bankrupt as the value of their portfolios evaporates. But the securitizers do not have a strong incentive to scrutinize the original loans as long as they are given an investment grade rating.
Yesterday, three Congressmen, including House Financial Services Committee Chairman Barney Franks introduced mortgage lending reform legislation to tighten up standards and practices. That bill includes a provision to assign limited liability to loan assignees, including securitizers, for rescission of the loan and the consumer’s costs. Now, this liability is very targeted. Here is the important kicker: it only applies if the loans do not meet certain standards. And it does not apply to pools of loans.
As such, the provision will not provide a great incentive for securitizers to increase their analysis of individual loans. It will provide an incentive for the adoption of the mortgage standards called for in the legislation. After all, why expose yourself to additional liability when you can easily avoid it by only dealing with loans which conform to the standards.
The debate over the use of liability to encourage the adoption of mortgage standards -- and over the standards themselves -- will be very instructive for the issue of intangible monetization. One of the barriers to monetization of intangibles has been their one-off nature. Each deal is almost unique. There is little standardization. How standards might be created and enforced in this area is likely to take a cue from what happens in the much larger mortgage-back asset market.
UPDATE: This morning's papers have the beginnings of the debate. See Bill Allowing Mortgage Lawsuits Expected to Stir Fierce Opposition - New York Times, Finance Panel's Chairman Seeks Overhaul of Mortgage Regulations - WSJ.com, Proposed mortgage rules face hurdles - Los Angeles Times, and Bill Would Tighten Mortgage Standards - washingtonpost.com.
The Wall Street Journal piece spoke directly to the liability issue:
The issue of assignee liability will likely be one of the more controversial aspects of the legislation. Federal Reserve Chairman Ben Bernanke has said limited and clearly defined assignee liability could prove beneficial, but Treasury Secretary Henry Paulson has said assignee liability could scare away investors.
The Washington Post story had a critique from the other side:
[Mike] Calhoun [President of the Center for Responsible Lending] also said the bill does not go far enough in holding the secondary market liable for loans gone bad. Investors failed to correct abuses and in some cases actively supported them, he said. It's unclear if the provision that allows borrowers to sue is enough to help borrowers who are wronged. "Will it simply become the cost of doing business?" he asked.
The House Financial Services Committee will hold a hearing tomorrow (Wed) on Legislative Proposals on Reforming Mortgage Practices
Posted by Ken Jarboe at 07:57 AM | Comments (0) | TrackBack
October 22, 2007
Update on Harman buy out
Last month I posted a piece of the failed buy-out of Harman Industries. Here is the update --Deal Is Struck to End Harman Buyout - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
Kohlberg Kravis Roberts and Goldman Sachs agreed to terminate their merger agreement with Harman International Industries on Monday and reinvest in the audio speaker company.
The settlement ends another dispute over an ailing deal, a situation that has cropped up with increasing frequency as the buyout boom has lost steam.
According to the terms of the deal, the buyout agreement struck in April will be dissolved, with no litigation or payment of a termination fee. Instead, Kohlberg Kravis and Goldman Sachs will buy $400 million of notes with a 1.25 percent interest payment, which are convertible at a price of $104 a share. (Shares in Harman closed at $86.40 on Friday.)
Brian F. Carroll, a member of Kohlberg Kravis, will also join Harman’s board. The company said it would use the proceeds to buy back stock.
Looks like KKR decided that Harman -- with all that R&D -- is a good investment after all. Or maybe they just want to avoid a messy lawsuit.
Posted by Ken Jarboe at 10:50 AM | Comments (0) | TrackBack
October 21, 2007
Brands in crisis
Jon Entine and Rick Miller at the American Enterprise Institute (AEI) have written a short paper on Managing Brands Under Siege. The paper lays out a three-pronged approach:
* Employ due diligence to assess potential liabilities and take action. The assessment should be completed before a crisis occurs. And, it should be done in conjunction with a company's manufacturing organization, legal and communications counsel, and insurance carrier.
* Aggressively take responsibility for the problem. If your brand is on a product, it's your problem in your customers' eyes. This is especially true when a company makes products for children. Parents are fanatical about their children's safety--and rightly so. Go above and beyond what is required by law to protect the brand by adding a margin of review, such as independent testing, which Mattel and Disney have announced they will begin. This may offer a huge opportunity for more high profile brands. Although they are the most vulnerable because their products are easily identifiable, bigger brands have more resources and technical expertise to monitor the train wreck that is China's supply chain, and subsequent recalls, and cultivate public trust.
* Establish a credible narrative with customers and the media, and put a human face on the issue. In a recall, this is the CEO. People want to know what happened, why it happened and what the company is doing to never let it happen again--and that the person at the top is personally involved.
Good advices -- especially the part of going above and beyond what the law requires. And this is from a generally anti-government think tank.
Posted by Ken Jarboe at 10:47 AM | Comments (0) | TrackBack
October 19, 2007
The problem with valuation - the counterfeit example
The Numbers Guy in the Wall Street Journal has taken off on the valuation of intangibles - Efforts to Quantify Sales of Pirated Goods Lead to Fuzzy Figures:
Counterfeit and pirated goods are a big problem for global business, costing hundreds of billions of dollars, according to manufacturers and trade groups. But their estimates tell more about how difficult it is to assign a value to lost sales than about the actual size of the counterfeiting problem.
The main problem he points out is the lack of good data. Those selling pirated goods don't report their sales and extrapolations from products seized by the Customs Service at the border are iffy.
But there is another issue which he doesn't mention: the pricing problem. Most of these estimates of counterfeiting assume full manufacturers suggested retail price (at least the one's I've seen). But counterfeits usually sell on the street at deep discounts. The purpose of using full retail price rather than street value is to estimate the size of the loss to the manufacturer -- not to understand the size of the economic activity. But to use full retail value, you have to assume that customers would purchase the product at full retail value if the counterfeit was not available. That is simply an unrealistic assumption.
To go back to the problem facing the valuation of intangibles - economist generally believe that something is worth what the market says it is worth. If a copy of the Lion King sells in China for $1, then that is what it is worth (and Disney has a good case for collecting some portion of that dollar in royalties). With many intangibles however, there is no market price - or very thin markets with volatile pricing. One is left with constructing prices. For example, the intangible value of a Rolex might be the difference between what it sells for retail and what a fake Rolex sells for on the street. I guess I would put as much credibility into that number, however, as I do to the estimates of the cost of counterfeiting.
For more on the piracy data, see the Number Guys blog discussion - The Numbers Guy : What's the Real Cost of Counterfeiting? - where he cites the studies and provides links to at least one study on the benefits, in consumer surplus terms, of counterfeiting.
Posted by Ken Jarboe at 08:54 AM | Comments (0) | TrackBack
October 18, 2007
Accounting for intangibles - mark to market
According to this morning's Wall Street Journal, FASB is moving ahead with its requirement for assets to be valued at market prices (market-to-market). For the most part, this affects financial assets. However, the story did raise one concern about intangibles:
But a divided Financial Accounting Standards Board left the door open to deferring the rule as it applied to nonfinancial assets on corporate balance sheets.The discussion by the Board apparently focused in part on concern about how to measure goodwill. Sounds like FASB (and the accounting industry) is still trying to grapple with intangibles.
Posted by Ken Jarboe at 08:44 AM | Comments (0) | TrackBack
US competitiveness in S&T
RAND has put out a new report -- Perspectives on U.S. Competitiveness in Science and Technology. The report is the proceedings from a November 2006 conference sponsored by the Office of the Under Secretary of Defense for Personnel and Readiness. The conference used the National Academies' Rising Above the Gathering Storm report as a starting point -- from which the papers took their cue to move off in a number of different directions.
I won't attempt to summarize the papers here -- the introduction section of the report does a good job of that. There is one point that I would highlight, made most succinctly by Adam Segal but echoed in the other papers. Segal commented about the rise of technological capability in other nations (notably China), "The United States will also have to dedicate more resources to tracking technology developments abroad so as not to be surprise by swift technological breakthroughs. . . . Monitoring these developments, and exploiting them, will require a different type of training than more graduate students (and defense analysts) now receive."
That mindset of exploiting technology from abroad used to be a part of the American innovation system. Unfortunately, that seems to have changes with the growth of the “US as number one” thinking. After all, we were the most highly advanced nation on the planet. What could we possibly learn from anyone else? We taught the world, not learned from it.
With the new emphasis by companies on global innovation and open-source innovation, many companies are picking it up that mindset of "learning from others" again. However, many policymakers are still in the “not invented here” mode when it comes to technology development. That needs to change.
Posted by Ken Jarboe at 08:07 AM | Comments (0) | TrackBack
October 17, 2007
Creating a film industry - outside of Hollywood
Creating a new industry or capturing an old one is the Holy Grail of local economic development. In today's economy, that usually means going after the next hot thing -- "ABC"-tech. But there is a high-profile existing industry that local leaders swoon over: the film industry. Everyone gets excited when the movies come to town to make a picture. My own recent example was spending half a day waiting to see a car blown up at DC's Eastern Market, which was made over to look like a market in Amsterdam.
The real trick, however, isn't luring the one-off movie-shoot. It is creating a sustaining film industry. One of few who have been able to do it recently is New Mexico. As a recent story in Spirit Magazine (High-desert Hollywood) relates:
But the latest Hollywood influx is not about pleasure. It’s about business. And much of it happened because of one man: Governor Bill Richardson.Richardson came into office in 2003, telling New Mexicans that the state needed to attract new businesses and making the film industry a priority growth target for the state. Then he convinced the state government to roll out an incentive package for filmmakers. Today, as many as 32 states offer similar perks, but few are as established or as generous as New Mexico’s. They include a 50 percent reimbursement of wages for on-the-job training of state residents, a tax rebate of 25 percent on all direct costs and labor (or no sales tax on most production costs), and a film investment loan program that offers no-interest loans for up to $15 million.
. . .
The state started small, chasing low-budget indie films before moving into bigger productions that had been shooting abroad and finally courting repeat films and longer series TV productions. At all times, one constant guided the state: “We approached it like a business,” says Eric Witt, director of media arts and industries for the governor. “It had to make money for New Mexico.
"Repeat films and longer series TV productions" That means a sustainable industry with a host of specialized jobs for locals and more economic activity that simply catering to the out-of-town cast and crew:
Until the industry matures, the local jobs lifted from Hollywood won’t last long. Recognizing this stark economic reality, all of the states and countries courting the industry hope to build a self-sustaining film culture, from homegrown filmmakers in high schools to professional digital animators. But New Mexico figured that out first.The state’s original incentive package offered $200,000 in “film boot camp grants” for college and high school campuses. New Mexico also partnered with Comcast and National Geographic in a Governor’s Cup competition for local film projects, including screenplays and documentaries. Meanwhile, both Disney and Sony Pictures Imageworks rolled out academic programs for high school students and undergraduates alike. Sony brought its Imageworks Professional Academic Excellence (IPAX) program to the University of New Mexico. The IPAX curriculum aims to nurture the next generation of digital artists. Thanks to the program, the University of New Mexico joins 10 other schools—including Carnegie Mellon, Stanford University, and the University of Southern California—that graduate IPAX-certified digerati.
The result is the creation of brick and mortar presence of the film industry in the state, with at least two new facilities being built - a 500,000-square-foot, state-of-the-art film studio and 100,000-square-foot digital studio.
Interestingly, Hollywood is facing the same problem. As I noted in an earlier posting, as one-off film shoots have become more mobile, Hollywood is also going after the long run TV production -- where the cast and crews can stay at home in the LA area.
Bottom line: local economic development strategies in the I-Cubed Economy still boils down to smokestack chasing and grow your own. As New Mexico's experience with the film industry shows, in order to attract a sustained presence it is necessary to grow your own, including developing the infrastructure. The same can be said for every other knowledge-based industry.
Posted by Ken Jarboe at 09:15 AM | Comments (0) | TrackBack
October 16, 2007
UK and design
The UK continues to lead in incorporating design into the economy. As a recent Business Week story --
How Britain Jumpstarts Design -- relates:
Designing Demand is the brainchild of Design Council Chairman Sir George Cox, part of a pioneering program which aims to use design strategically to make small businesses a viable engine of national economic growth. The initiative, which is being rolled out nationwide this year, is supported by $40 million in funding from England's nine regional development agencies. (The Design Council itself, which is entirely funded by the British government via the Department for Innovation, Universities & Skills, developed the program, while the regional development agencies finance its delivery in each region. The Design Council takes care of the program's overall coordination, ensuring that it is rolled out evenly and consistently.)
Here's how it works: interested companies apply to their regional development agency for entry into one of three free programs. "Generate" is a six-month program that focuses on one specific project; "Innovate," a yearlong program aimed at high-tech businesses, offers an initial three-day workshop followed by one-on-one mentoring for two hours each month. "Immerse" is a service aimed at larger businesses that offers an initial three-day workshop with a dedicated design associate providing 12 days of advice over the following 18 months. The latter two workshops include a visit from a team of four independent experts in branding, product development, and design management, selected and paid for by the Design Council. They identify areas where design could be used to kick-start innovation and then act as mentors to management, highlighting potential design opportunities and offering advice on how to implement them.
The US Manufacturing Extension Partnership (MEP) is thinking of something similar. But I am concerned that their strategic plan and their new Innovation Services are geared toward innovation-as-new-product-development and design-as-cool-products. I don't think that they have caught up with the design thinking. They should.
Posted by Ken Jarboe at 10:29 AM | Comments (0) | TrackBack
The rise of the D-Schools
In yesterday's posting on China and the intangible economy, I mentioned in passing the new ranking of top design schools. That ranking was recently released by Business Week as a special report entitled "The Talent Hunt":
The Second Annual BusinessWeek survey of the best design schools highlights the growing role they play in supplying creative managers to corporate and nonprofit organizations. Our list includes joint programs among business, engineering, and design schools as well as revamped curricula within traditional design programs. The driving forces of innovation and globalization are pushing companies to revamp their managerial ranks and hire people with new skills. Surprised by the rise of consumer power, companies are seeking people who can connect with customer cultures online and overseas. And in an era of constant change, they want people who are comfortable with complexity and uncertainty. Schools that teach design thinking, with its emphasis on maximizing possibilities rather than managing for efficiency, are in high demand.
. . .
Attracting top-of-class talent is getting more competitive, and some companies are already offering sweeteners. Just as they have long been willing to underwrite MBAs for executives, they are now supporting students in design programs. At Stanford University's design school, where MBAs and engineers increasingly collaborate, consultants and companies line up for the best students.
As I've noted before, this wave of interest in design is not just about cool products. One discussion of design metrics put it this way, "designers see themselves more as strategic visionaries or problem solvers, not spreadsheet analysts or bean counters." A part of the Business Week special report goes into greater detail - The Cross-Discipline Design Imperative:
Conventional thinking divides design schools into two categories. There are schools like Art Center or Rhode Island School of Design, which are often rooted in art and approach design visually and intuitively. Then there are engineering schools like MIT or Stanford: Founded on technology, they have a strong logical bent and bring science and spreadsheets to bear on design problems. Engineering schools probably produce the largest number of professionals with the word "design" in their job title.
But the word "design" has different meanings in these different schools, and as these meanings intersect, design becomes bigger, something that sits well above vocational skills and techniques. Design is a set of principles and ways of thinking that help us to manage and create in the material world. It values creativity as much as analysis. It is a way of seeing and painting a new, bigger picture.
Now business schools and other interdisciplinary graduate programs are entering the fray under the banner of ":design thinking." They have recognized that the creative principles found in design can be used to develop new solutions for business—and they see this as the next cutting edge. They are distilling the essence of the thought process that arose from the craft of the traditional schools of design. The Rotman School in Toronto, the d.school at Stanford, and the Institute of Design in Chicago have been the boldest in claiming this new territory.
The concept of “design thinking” or “design method” is still almost beyond the cutting edge in business and engineering. They are still emerging as design schools and companies work through designing design. Bruce Nussbaum's discussion on Design Vs. Design Thinking captures some of this process (as does the rest of Bruce's excellent blog NussbaumOnDesign).
But the paradigm shift is happening. As we move further into the I-Cubed Economy, design thinking will certainly be one of the core concepts - like scientific management and industrial engineering were in the Industrial Age.
Posted by Ken Jarboe at 09:12 AM | Comments (0) | TrackBack
October 15, 2007
A non-flat world
From Harvard Business School Professor Pankaj Ghemawat comes the idea of semiglobalization (see Businesses Beware: The World Is Not Flat — HBS Working Knowledge):
The data clearly indicate that national borders still matter. I group the differences that they demarcate into 4 areas: those related to cultural (language, customs, religion, ethnicities, etc.), administrative/political (laws, trading blocs, colonial ties, currency, etc.), geographic (physical distance, lack of land border, time zones, climates, etc.), and economic (income levels, cost of natural resources, financial resources, human resources, infrastructure, information, etc.). It is important to take a broad view of such differences, to figure out the ones that matter the most in your industry, and to look at them not just as difficulties to be overcome but also as potential sources of value creation.
In other words, you can't treat the world as a homogenized market.
I like the story of Coke, because through to the late 1990s, under CEO Roberto Goizueta, it bought into and based its global strategy on the globalization apocalypse that was popular then, the globalization of markets (rather than production), because customers everywhere were supposed to increasingly want the same products and services. As a result, Goizueta embarked on a strategy that involved focusing resources on Coke's megabrands, an unprecedented amount of standardization, and the official dissolution of the boundaries between the U.S. organization and the international one.
10 years later, Coke's strategy under CEO Neville Isdell looks very different. Coke is now focused on learning from Japan—where it reportedly offers more than 200 products but makes more money than in any other major international market—for insights into how to pursue the broader objective of injecting more variety into the Coke system. The strategy is no longer always the same one: In big emerging markets such as China and India, Coke has lowered price points, reduced costs by indigenizing inputs and modernizing bottling operations, and upgraded logistics and distribution, especially rurally. And the official boundaries between the U.S. and international organizations have been restored-recognizing the fact that Coke faces very different challenges in the United States than it does in most of the rest of the world since per capita consumption is an order of magnitude higher in the United States.
Coke is therefore a cautionary tale of a company getting carried away with globaloney and paying for it—but is apparently managing to weather the storm. Other companies that went through a similar set of wrenching changes might not have the kind of strategic cushion associated with the world's most valuable brand name. It is generally better for them to ponder the lessons in my book than to seek to experience them all: Offline learning is a lot cheaper than online learning in this context.
Production may be increasingly global (and that is Friedman's real tale in The World is Flat) but markets are local. Years ago, we called this global-localization -- glocalization. Apparently, this mixture of global production and local markets is still one of the hardest lesson to learn in the I-Cubed Economy.
Posted by Ken Jarboe at 03:30 PM | Comments (0) | TrackBack
Innovation survey
The Economist has recently published its survey of innovation - Something new under the sun. I would recommend it as a good summary of the latest thinking on innovation research (including "open innovation") -- starting with the point that innovation isn't any more just about what people in white coats in laboratories do.
I do have to disagree somewhat with its conclusions about the role of government. I think they are too negative on the role of cluster-building, while I agree with them that chasing the next hot cluster is counterproductive.
One thread in the stories did catch my attention: the role of idea execution. Much of the thrust of our current thinking about innovation focuses on the creation of ideas. Weeding through and turning those ideas is to practical products is usually ignored. But, as the articles remind us, Edison used to say that genuis is 1% inspiration and 99% perspiration.
Therein follows a key point on public policy. Much of our policy is focused on the creation process -- more R&D spending, more STEM education, ever stronger patents (as incentives for creation), etc. We need to focus just as much attention of the utilization of ideas and the supporting policies and infrastructure that can drive that utilization to economic wealth.
That doesn't mean, as some might suggest, that the government should just get out of the way. Quite the contrary, there are numerous government action that can facilitate the development process (such as serving as a test bed customer - something the military and space programs have done for countless new technologies).
Most importantly, it means changing our mind set to be open to new ideas from where ever. As one of the articles in the survey (The love-in) concludes:
History also shows that countries that come up with new technologies are often not the ones that commercialise or popularise those inventions. Richard Halkett, of Nesta, a British research body devoted to innovation policy, jokes that the right policy for governments should be “never invented here”. He may be right.
I think the "never invested here" is a bit much. But history also shows that nothing fails like success, because you don't learn anything from it. Focusing on repeating past successes doesn't guarantee future ones. And history show that countries whose political leaders don't understand how the keys to national economic development that process have changed (or don't understand their role in that process) are doomed never even get close to the successes of tomorrow.
Posted by Ken Jarboe at 02:51 PM | Comments (0) | TrackBack
China and intangible economy
China is clearly seen as the manufacturer to the world. But it is also clear that China is moving toward the intangible economy. For example, we know that Chinese companies are moving into high-tech products. China is also ramping up its investments in science and technology (see also the presentation at the Athena Alliance co-hosted Dragon and Elephant conference by Dr. Mu Rongping of the Chinese Academy of Sciences).
But S&T is not the only area where the Chinese are investing. Three Chinese universities are now among the world's top design schools -- two more are in Taiwan. In addition, the World Bank is recommending that China move more aggressively into services (see A workers' manifesto for China - Economist.com). The basis for this advice is macroeconomic and political stability - as the Economist points out:
The implication of all this is that if China is to shift the mix of growth towards consumption, urging households to spend more of their income will not be enough; the government will also need to increase the share of national income going to households. Mr Kuijs [of the World Bank] argues that this will require a shift in the composition of growth from capital-intensive manufacturing towards labour-intensive services. He recommends a package of reforms which include: financial liberalisation to lift the cost of capital; scrapping distortions in the tax system which favour manufacturing over services; increasing the prices of industrial inputs such as energy; removing restrictions on the development of labour-intensive services by, for example, tackling monopolies; and a stronger exchange rate to stimulate production in domestic service industries. Increased government spending on health care, education and a social safety net would also encourage households to save less and spend more.
More labour-intensive growth would boost household income and consumption as a share of GDP and so help to reduce the trade surplus. But, perhaps more importantly, by allowing workers to enjoy more of the rewards of rapid growth it could also help to prevent future social unrest, and it would reduce pollution as the economy became less dependent on energy-guzzling industries.
In other words, these changes are necessary to turn China into a normal developed economy.
The implication of this is shift will be as profound as the previous rise of China as a manufacturing giant. Will it create a new competitor to the US in innovation? Or will the shift to more consumption mean larger markets for US goods and services?
I don't pretend to know the answer to that question. Probably both. But I do know that as the Chinese economy shifts, the nature of our economic relationship will also shift -- and the nature of our economy will shift as well as we move deeper into the I-Cubed Economy.
I also know that our competitive advantage in the I-Cubed Economy is nothing we should take for granted. Our economy vision and policies need to recognize that fact -- sooner rather than latter, because latter will be too late.
(For more of the possible shift in the Chinese economy, see Mr. Kuijs' papers:
China’s Pattern Of Growth: Moving To Sustainability And Reducing Inequality,
Rebalancing China’s Economy—Modeling A Policy Package, and
How Will China’s Saving-Investment Balance Evolve?)
Posted by Ken Jarboe at 09:21 AM | Comments (0) | TrackBack
October 12, 2007
Intangible feelings based on tangible facts
Behind every "intangible", such as a company's reputation, there usually are strong reasons -- which are evident with probing and the correct measurement. Case in point - from a slightly different example -- has been the persistent feeling in the American citizenry that the economy is not personally as good as many of the current statistics makes it out to be. That "intangible" feeling has been dismissed by some as simply something whipped up by the media and politicians.
Well, a new set of statistics shed a different light on the issue - according to a new study by the IRS, as reported in the New York Times:
New data shows that after adjusting for inflation, 95 percent of Americans reported smaller incomes to the tax man in 2005 than in 2000.
. . .
Analysis of the new income tax data, known as Table 5, also shows that while incomes rose markedly in 2005 from 2004, with all taxpayers’ average income up nearly 4 percent in real terms, average pretax income declined slightly for 75 percent of Americans.
Maybe that feeling that the average American has been getting about the economy is correct -- based on their own on-the-ground-tracking of the monthly paycheck and bills.
So, we you get that "intangible feeling," look into what forms of data you can find about it. Your feeling about the situation may be more based in fact that some of the preliminary "facts."
Posted by Ken Jarboe at 10:23 AM | Comments (0) | TrackBack
August trade in intangibles
The US trade deficit once again improved in August, according to yesterday's BEA trade data. Intangible trade balance also improved, reversing last month’s decline. Our surplus in intangibles grew in August ever so slightly by $40 million compared to a $230 million decline in July. The August surplus was $10.2 billion. Both royalty payments (imports) and receipts (exports) grew by a small amount, as did both imports and exports of business services. The result was the surplus remaining essentially changed, with that $40 million increase.
The deficit in Advanced Technology Products improved slightly over last month’s dramatic decline. The August deficit was $4.7 billion compared to $4.9 billion in July. While an improvement, the August deficit was still above the running average for 2007 of $4 billion and well above last year’s level. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.
Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.
Posted by Ken Jarboe at 09:30 AM | Comments (0) | TrackBack
October 09, 2007
The importance of being there
Advanced telecommunications - especially the Internet - was supposed to result in the death of distance. Place would no longer matter, since individuals could communicate with one another across time and space. Email is the epitome of this communications. Fast, yet free from time constraints (you can answer your emails on your schedule).
I won't go into all the reasons why this analysis is short sighted -- why place still matters (my 2001 paper Knowledge Management as an Economic Development Strategy goes into some of the arguments). But the following story points out a major problem with email - E-Mail Is Easy to Write (and to Misread) - New York Times:
New findings have uncovered a design flaw at the interface where the brain encounters a computer screen: there are no online channels for the multiple signals the brain uses to calibrate emotions.
Face-to-face interaction, by contrast, is information-rich. We interpret what people say to us not only from their tone and facial expressions, but also from their body language and pacing, as well as their synchronization with what we do and say.
Most crucially, the brain’s social circuitry mimics in our neurons what’s happening in the other person’s brain, keeping us on the same wavelength emotionally. This neural dance creates an instant rapport that arises from an enormous number of parallel information processors, all working instantaneously and out of our awareness.
In contrast to a phone call or talking in person, e-mail can be emotionally impoverished when it comes to nonverbal messages that add nuance and valence to our words. The typed words are denuded of the rich emotional context we convey in person or over the phone.
E-mail, of course, has a multitude of virtues: it’s quick and convenient, democratizes access and lets us stay in touch with loads of people we could never see or call. It enables us to accomplish huge amounts of work together.
Still, if we rely solely on e-mail at work, the absence of a channel for the brain’s emotional circuitry carries risks.
At the core of the I-Cubed Economy is tacit knowledge and tacit communications. Tacit information is best conveyed in real time. Maybe telecommunications will eventually advance to the point where such information-rich face-to-face is possible over long distances. But even then, the serendipity of bouncing an idea off your colleagues in a chance meeting will still be important. I think for the foreseeable future, the importance of being there will remain.
Posted by Ken Jarboe at 10:41 AM | Comments (0) | TrackBack
The dark side of valuation
The Holy Grail of intangible measurement is valuation (see earlier posting). If we could just get an accurate valuation of these relatively illiquid assets, the financial markets could better handle these resources. Or so the argument goes.
Of course, there are numerous analytical tools out there already (see our paper Measuring Intangibles). But, human nature being what it is, there is always the danger of shading the analysis toward the preferred outcome - especially when there are millions and billions of dollars at stake. It is this concern that keeps auditors awake at night. The problem is especially acute in illiquid assets. As today's Heard on the Street column in the Wall Street Journal reports:
New academic research suggests that some hedge-fund managers may cherry-pick flattering prices when valuing securities that don't actively trade in an effort to improve the performance of their funds.
. . .
The academic research found a significant difference in the number of funds reporting a slight gain compared with a slight loss in any given month. That difference was most pronounced for funds that trade illiquid securities; it didn't show up in funds that primarily trade stocks or futures contracts, which have active markets and easily obtained prices. This suggests that some funds could be fudging results.
"Hedge-fund managers purposefully avoid reporting losses by marking up the value of their portfolios," according to the authors of the study, Nicolas P.B. Bollen, an associate finance professor at Vanderbilt University, and Veronika K. Pool, an assistant finance professor at Indiana University. If that is the case, the authors wrote, investors may "underestimate the potential for losses in the future and may overestimate the ability of hedge-fund managers."
This story points out just one of the pitfalls of valuation - there are many more stories, I'm sure.
That is not to say that valuation isn't a worthy goal. But maybe we are going about it backwards. Maybe the problem isn't better valuation techniques, but a more liquid market. Granted, there will always be intangible that are not freely traded (such as firm specific intangibles). For those which are tradable, the best valuation technique is the market price. So task one may be expanding and creating markets for intangibles – using existing (admittedly flawed) valuation techniques. Let the buyers and sellers work out the pricing.
In that regard, I would direct your attention to two recent articles by Patrick H Sullivan and Rob McLean: “The confusing task of measuring intangible value” and “Intangibles on the Balance Sheet? Not worth it. But get ready for Management Commentary.” There argument is that description and transparency in disclosure may be more important that valuation. Better disclosure will allow anyone to apply their own analysis and techniques to both liquid intangibles (those freely traded) and illiquid one (those traded only as part of the entire enterprise).
That is a conclusion which I heartily agree. Our 2005 paper Reporting Intangibles called for mandatory disclosure of intangibles.
So, by all means, let us pursue better valuation techniques. But let us also go after better disclosure – activity that is likely to give us more bang for the buck.
Posted by Ken Jarboe at 10:05 AM | Comments (0) | TrackBack
October 08, 2007
Patent notes
Two pieces in this morning's Washington Post. The first is an editorial Patent Fight in support of the pending patent reform legislation:
Though strong patent protection is a good thing, lately the problem has been too much of it. The technological revolution of the past quarter-century has swamped the U.S. Patent and Trademark Office with hundreds of thousands of patent applications, each claiming to be original and each more arcane than the last. The result has been a proliferation of "low-quality" patents and expensive lawsuits over who invented what. Some inventors use dubious patents to extract large payments from high-tech companies, which usually find it cheaper to buy off purported inventors than to battle them in court. This is not a pro-innovation patent system; it's an anti-competitive one.
The second piece is in the Federal Diary section - Backlog, Quotas Overwhelm Patent Examiners:
Here's how bad it is at the U.S. Patent and Trademark Office.
If the agency could shut its doors to catch up on its work, its 5,500 patent examiners would take at least two years to clear the backlog of pending applications. When the agency reopened, there would be more than 1 million new applications piled up on the doorstep.
The story is about a new GAO report - U.S. PATENT AND TRADEMARK OFFICE: Hiring Efforts Are Not Sufficient to Reduce the Patent Application Backlog. The report looks specifically at the issue of retention of patent examiners:
Despite its efforts to hire an increasing number of patent examiners annually and implement a number of retention incentives and flexibilities over the last 5 years, USPTO has had limited success in retaining new patent examiners.That retention issue is directly tied to what examiners feel is an unrealistic workload. And examiners are apparently voting with their feet.
Workload and patent reform are integrally linked. Workload is due not just to more and more complex patents. It is also due to applications clogging the system. The Federal Diary story explains:
In an interview, Jon W. Dudas, the agency's director, said reducing the backlog of applications for patents involves more than hiring and keeping examiners. "A good part of this solution is saying that, 'Applicants, if you give us better information, we can do a better job,' " he said.
A quarter of applications arrive with no supporting materials and another quarter carry more than 25 references to supporting data, he said. Although an extreme example, Dudas said the agency once received an application that came in 28 boxes, with 2,600 pages per box.
"We need the best material. Not the kitchen sink. And not nothing," Dudas said.
Recently the PTO has published new rules on continuations and on additional documentation:
Under the new rules, applicants may file two new continuing applications and one request for continued examination as a matter of right. Also, under the new rules, each application may contain up to 25 claims, with no more than five of them independent claims, without any additional effort on the part of the applicant. Beyond these thresholds, however, the new rules require applicants to show why an additional continuation is necessary or to provide supplementary information relevant to the claimed invention to present additional claims.
But some are up in arms about the change. For example, biotech companies worry that this will harm them (The Scientist : New patent rules hurt biotech?):
Currently, applicants can file an unlimited number of continuation requests accompanied by new arguments and evidence to support their claims. That strategy is frequently employed by universities and biotech companies when the full scope of their discoveries cannot be immediately established or when researchers seek to extend patent coverage from one or two new molecules to an entire class of compounds.
Under the new rules, applicants must demonstrate why an additional continuation is necessary and provide supplementary information to support additional claims.
[As a side note, I find this concern by biotech and pharma to be very interesting, since they are the loudest critics about the time it takes to get a patent. Bio/pharma have a very strong and legitimate complaint about the time lag -- especially given the FDA approvals needed as well. But the above statement begs the obvious question: has bio/pharma's patenting process helped create the very problem it is complaining about?]
There are other administrative actions that can be taken as well. In earlier postings, I mentioned a new pilot program at PTO to sort through pre-grant information ("prior art") through a peer-review system. That will help (but will need legislative approval if it is to expand beyond a voluntary program).
But ultimately, it comes down to what the Post editorial was talking about -- weeding out the dubious patents. Administrative changes are not enough (even those which everyone agrees on). Nor is continued Supreme Court refinement doing to be sufficient. Patent reform legislation is still needed.
And the sooner, the better.
Posted by Ken Jarboe at 09:11 AM | Comments (0) | TrackBack
October 05, 2007
Getting the numbers right
As expected, this morning's unemployment numbers for September also included a revision of the August numbers. Rather than declining by 4000 jobs in August, employment actually grew by 89,000.
The September increase of 110,000 was in line with expectations - as the Wall Street Journal reports - " Employment Rebounded in September As August Decline Was Revised to Gain":
September payrolls topped Wall Street expectations of a 100,000 rise. A report Wednesday from Automatic Data Processing and Macroeconomic Advisers that attempts to track the government figure, as well as recent jobless claims data, had pointed to modest gains in employment.
While everyone is making noises about what the new numbers mean for the direction of the direction of the economy (see Jobs Report Eases Recession Fears - New York Times), the real story for me was how a glitch in the numbers can cause Wall Street to go crazy. The August numbers -- which most economists didn't believe after they took a good look at them -- caused a 250 point drop in the Dow. The Nikkei 225 and the FTSE 100 also dropped. Billions of market capitalization disappeared.
The August numbers were apparently wrong for a number of reasons. One of the big ones was because of how they measure employment. The surveys (and I've been in the sample twice in my life) as you how many hours you worked in a week in mid-month. Unfortunately in August, many school teachers don't start work until the end of the month. So they were all counted as unemployed. And it was the state and local government employment that took the hit in August.
In fairness, however, the August numbers that spooked the markets also included downward revisions of employment in June and July.
However, it is still a good lesson in the herd mentality of the markets.
I raise this point for one reason. There is a growing about of attention on the issue of valuation of intangibles. That attention is very welcome. But we need to keep in mind that valuation of any asset - physical, financial or intangible -- is as much an art as a science. After all, we saw 2% of the value of corporate America disappear one afternoon because of the way teachers are hired.
Posted by Ken Jarboe at 01:37 PM | Comments (0) | TrackBack
October 04, 2007
Financial competitiveness - part 12
Remember all the talk about how America was losing its competitive edge in financial services? For "America", read "New York City", of course. Well, the concern may be lessening. At a conference on the future of New York hosted by the Economist on Tuesday, Mayor Bloomberg was apparently very upbeat. According to the New York Times City Blog - "Economic Threat From London? Not to Worry, Mayor Insists", "Mayor Michael R. Bloomberg — fresh from a visit to England, during which he stayed at his London apartment — presented an extremely cheerful report card on the state of New York’s economy." Later panelists apparently talked about how NYC could stay competitive (unlike the Mets) -- but there did not seem to be any wailing and gnashing of teeth.
Is there really a threat of London gaining ground on NYC as a financial center? Probably yes. Is it a major blow to the US financial services industry? Probably no. Improvements to US financial regulation and other economic policies are needed -- not just for the competitiveness of NYC as a financial hub but for the economic system of the US as a whole. As we develop our I-Cubed Economy, our policies will need to catch up with where our financial system has already gone.
But, as for all the hype of the-sky-is