Thursday, December 10, 2009

Debt and Economies.

From time to time, we get data, and news, on debt, and how it is affecting country economies, corporations and individuals. Sometimes, with so much going on in terms of the impact of debt on corporations and individuals, the value of looking at debt's impact on country economies may not be obvious. Or perhaps, the impact of news from Dubai made you go "Wha?".

While economists may not always (!) be successful in demonstrating the interconnections between country economies, corporations and individuals, through neatly tied in, accurate and precise models, we still have a sense of how these interconnections affect us.

Say, a country's debt troubles affect the medium to long term rates it offers on government debt. If an industrial sector company, say in the infrastructure sector, has limited financing options, this impacts the internal hurdle rate that the CFO would set for the company's internal projects. This, in turn, would impact a division's ability to innovate and price products to its customers, which, in turn, could impact the sector's ability to service its individual consumers. One of the many possible outcomes- you, as a utilities consumer, end up paying exorbitant electricity charges for power served off an outdated grid that wouldn't let you leverage advances in renewable energy within your home.

You may argue that economies are complex systems, and practically every outcome could be termed an "unintended outcome", but that does not mean we throw the baby out with the bathwater. It pays to "watch" the macroeconomic world around us.

Lets look at the impact of debt with country economies on returns on long term government bonds. Here's an article that should make you think:

This is a quick review of recent perspectives on debt's impact on country economies to provide background on :
1. Deflation:
2. Managing Debt:

1. Sovereign debt and risk:
2. Potential lessons from market reaction:

Speculation about an EU country default:

Are there any other economies you believe that need a closer look? Economies in Asia or LATAM, perhaps? Why? What could be the potential impact?

What do you think?

Tuesday, August 25, 2009

Photography Series: All That Glitters Is Not Gold.

From composing words, to composing images.

The theme here is the contrast between a meditative stone buddha and a glittering gold column behind it.

Taken with a Sony DSC T1 digital camera. Taken in the afternoon sun, while lying on searingly hot stone to get the right light for this photo.

Location: Temple of The Emerald Buddha

Wednesday, August 19, 2009

Data, Privacy and Social Media: Impact on Analytics and Tools

Executive Summary: How does data, along with the constraints on it, impact web analytics tools and the industry? How do you start structuring your thoughts about data's role in this industry?
Note: This came about after some rumination on the way the web and social media are being used by businesses, and this post has been updated with some of those thoughts to help continuity.

My last couple posts have been threatening to run down this alley for a while, but I realized that Data, Privacy and Social Media need to be addressed together in a separate post. I shared these thoughts with Alan Chapell, Chapell & Associates, after a chance meeting with him at an event before the Affiliate Marketing Summit.

Do Privacy Issues Impact Data Access for Analysis?
Yes, especially when you are not the primary service provider.

When you think about Data, Privacy and Social Media in the same breath, issues like those that Facebook has recently faced come to mind:
1> The criticism:
2> The response:

It is important to note that this recent case is part of a continuum of controversies over access to and sharing of online customer information during the past decade.

Data privacy is just one of the factors impacting the web analytics industry. Hence, to assess the impact of data related privacy issues on web analytics for social media, you need to drill down for insights in the following manner:

Drill Down Level 1: Analytics, Market Structure and Client Trends
1> State of the Art in Analytics.
2> Client Requirements.
3> Market Structure.

Drill Down level 2: Client Needs and Impact of Data
Insights from areas 1, 2 and 3 above will help you create a picture of:
1> Industry Objectives: Met and Unmet
These are objectives that the web analytics industry can currently help its clients meet. E.g. What metrics can be measured, and how do they translate into impact for the client?

2> Data Access and Usage: Reality, Needs, Gaps
This is role data currently plays, and can play, in the industry. E.g. What data, out of the available data sources, is currently utilized, how is it utilized, and how can it be utilized?

Drill Down Level 3: Data Privacy Constraints
Once we have this level of analysis, we can gain an insight into the impact of current privacy constraints on the industry. Importantly, we also can overlay various combinations of data privacy constraints to get an insight into the role data privacy can play in the industry.

Drill Down Level 1: Below are some questions that help us get insights:
1. State of the Analytics Art: What is the level of skill and tool maturity of social media companies in terms of tracking social networks, and allowing ad targeting around them? Some additional evaluative questions can be found at my previous post below:

2. Comparing Traditional and Social Media Analytics:
An alternative to consumer targeting via social network analysis is targeting via demographic and psychographic analysis. Here companies like Nielsen have developed a set of consumer personality profiles. Are social media sites developing such profiles?

3. Third Party Analytics:
How do third party analytics compare with the State of the Analytics Art? Specifically, (in terms of providing social network access to third party providers for analytics) are social media companies taking an API and metrics sharing or a raw data sharing approach? This impacts the competitive environment in the analytics industry.

4. Client Needs:
What are clients doing in the web and social media space? What are the client objectives in this space? Are they looking at demand generation or demand fulfilment? What would they like to/ need to measure?

5. Market Structure (and Opportunity!): Who are the major players? Is the market fragmented? Are there alliances in this market? How strong are service provider- client relationships? Do analysis, metrics, or data clearinghouses exist?

The opportunity!: Is there a market for "clearinghouses" for analytics that would provide media buyers access to social media consumer data across platforms? In reality, a "clearinghouse" is not easy to achieve- E.g. In the brick-and-mortar retail world, Walmart does not share its scanner data.

The Background
How did I arrive at this post? My last couple of posts have been pointing toward looking at Data, Analytics and Social Networks through the privacy lens:
1. Data, Privacy and Customized Brand Metrics:
How do you deal with a profusion of metrics which often have an unclear context? We need metrics with clear semantics. Some of these metrics may be custom created for a specific brand, consumer profile, activity and social media context.
Future Shock
While generic, industry standard metrics are important, there is a huge *future* potential for metrics customized to the brand. These will hinge on the data collection capabilities of social media platforms, and their ability to share it in a cheap, safe, anonymized manner with third parties for further analysis. Additional factors that come into play- quality of data, privacy concerns and analytics capabilities.

2. Data, Privacy and Web Analytics Tools:
3. Can you utilize the social network based targeting tools in conjunction with non social network based predictive analysis tools to minimize errors or optimize marketing spend?
Don't Forget Data: The Root of All Analytics
While it is easy to get lost in the tools and their trade-offs, don't forget the data. Your data- what attributes are available, access, usability and quality- may dictate the choice of tools.

What do you think?


Web Analytics: Social Network Analysis Tools for Ad Targeting.

Executive Summary: Are you looking at social network based ad serving analytics tools? How do they stack up on the measures below?:
1. Are they mature enough to provide "error" analysis (say Type I/ Type II) on the targeting?
2. Can you compare the "error" from social network based analytics tools against the error using non social network based analytics tools?
3. Can you utilize the social network based targeting tools in conjunction with non social network based predictive analysis tools to minimize errors or optimize marketing spend?

Why is there no focus on cost above? Apply cost factor weights to the results from the questions above and you have your ROI!

How To Develop Criteria For Evaluating Social Network Analysis Tools
From the Blueprint-for-winning-Social-Network-Analytics-Orders Dept., the How-Do-I-Start-a-Competitive-Analysis-of-the-Marketplace desk.

What About Social Network/ Graph Analysis for Marketing?
I have tinkered with various "traditional" analytical tools, like applying predictive modeling for web analytics, to looking at web server log files to analyze "eyeball" trends during the early days of the Internet boom, so, a recent post below reignited my interest in social network analysis for serving targeted ads:

The post referred to a Knowledge@Wharton article on Network Based Marketing:

This article had some interesting insights:
Insight 1: Social Networks Help Us Find Like Minded Buyers
Another possibility is that because people often tend to talk to people like themselves, their buying tastes would be similar regardless of whether they ever discuss the product. "Social theory tells us that people who communicate with each other are more likely to be similar to each other, a concept called homophily," the researchers point out. "...Linked consumers probably are like-minded, and like-minded consumers tend to buy the same products."

Insight 2: Social Networks Help Target Buyers More Effectively
"In addition, analyzing the network allows the firm to acquire new customers who otherwise would have fallen through the cracks, because they would not have been identified based on traditional attributes."

The Power of Non Social Network Analysis Tools
I can attest to the fact that with non network based- a.k.a. traditional analytics- tools provide you incredible ways of reaching out to your target audience. If you have the data- various demographic, psychographic or geographic attributes- some of these tools can help you:
1. Target your audience effectively,
2. Give you a sense of the targeting errors (Type I/ Type II) with the model,
3. Help you rank order your targeting efforts by efficacy, and hence optimize your marketing dollar.

Comparing Social Network Based Marketing Tools vs. Existing, Non Social Network Tools
The first thought at comes to mind is whether social networking based ad targeting tools have matured to provide these features. Specifically:
1. Are they mature enough to provide "error" analysis (say Type I/ Type II) on the targeting?
2. Can you compare their "error" against the error using non social network based analytics tools?
3. Can you utilize the social network based targeting tools in conjunction with non social network based predictive analysis tools to minimize errors or optimize marketing spend?

Don't Forget Data: The Root of All Analytics
While it is easy to get lost in the tools and their trade-offs, don't forget the data. Your data- what attributes are available, access, usability and quality- may dictate the choice of tools.

In the Future Shock section of my previous post below:
The ability to develop customized brand metrics "will hinge on the data collection capabilities of social media platforms, and their ability to share it in a cheap, safe, anonymized manner with third parties for further analysis. Additional factors that come into play- quality of data, privacy concerns and analytics capabilities."

Data privacy currently remains an important factor- more in a later post.

Aren't You Forgetting Computing Power?
I am discounting computing power as a factor. I will not tell you why. :-)

Conclusions For Social Network Based Ad Targeting
Non social network based marketing tools are pretty powerful. The questions above give you some insight into decisions related with integrating your existing analytics capabilities with social network based analytics. For the service providers, this is your blueprint for winning orders.

What do you think?


Monday, August 10, 2009

Sustaining a Brand Conversation: Behavior Tracking and Measurements Notes for Brand Marketers

Executive Summary: How do you deal with a profusion of social media metrics which often have an unclear context? We need metrics with clear semantics. Some of these metrics may be custom created for a specific brand, consumer profile, activity and social media context. We could create two categories of metrics- generic, infrastructure metrics of the type that are commonly thrown about and need contextual understanding, and functional metrics that have clear semantics attached.

The Story So Far
We covered a need for strategic thought behind social media marketing investments below:

The next step is to generate a picture or customer touchpoints/ interactions with the brand across various channels. Besides qualitative insights, you would like concrete measures that support these insights.

There are challenges in tying in consumer behavior in a "regular" distribution channel with that across social media channels. Leveraging your existing, real world consumer profiles in the social media world is a separate theme. Our focus in this post is to find ways to measure and track consumer behavior in the social media channels.

Challenges with Interactive Metrics Today
There are two challenges with social media metrics today:
1> A profusion of metrics.
2> A need to understand the context in which these metrics are being generated.

David Berkowitz has a great post here on the various metrics available to marketers today, and a proposed Cost Per Social Action (CPSA) metric: are third party companies like Visible Measures doing interesting work as well.

As for context, a wise man once said, context is everything. Does a metric mean the same coming from a face to face interaction as opposed to one over twitter, or even one from a different social media platform?

A Potential Solution
Some new metrics are needed. However, they need to be functional in nature. By functional- I mean that the metrics need to carry a consistent meaning for brand marketers. CPM clicks could be meaningless in some contexts. You might argue that this is true of all metrics. True. Hence the need for metrics with specific meaning and context attached to them.

I am not saying this is the end of the existing metrics. We could have two classes of metrics- the infrastructure metrics and the functional metrics. All metrics have semantics, hence I am calling these new metrics "functional" metrics, instead of calling them semantic metrics.

Future Shock
There lies the key. While generic, industry standard metrics are important, there is a huge *future* potential for metrics customized to the brand. These will hinge on the data collection capabilities of social media platforms, and their ability to share it in a cheap, safe, anonymized manner with third parties for further analysis. Additional factors that come into play- quality of data, privacy concerns and analytics capabilities.

What Can We Do Now?
While it is great to theorize about the future, there is opportunity today to develop measures that make sense for a specific brand, consumer profile, activity and social media context.
You are welcome to contact me for a conversation on these.

Update 1 (Thanks to David's followup): Functional Metrics Example
Craig has a great illustration of my distinction between infrastructure and functional metrics here:
Cost Per Lead (CPL) could be called an "infrastructure" metric, as opposed to Cost Per Opportunity (CPO) which could be called a "functional" metric. CPO is tied to the lead and pipeline generation funnel, and not to the various tools and mechanics that cause CPL number variation. CPL feeds into CPO generation.

Update 2: Caveats and Another Functional Metrics Example
The challenges the metrics are expected to address:
1. In metrics, we often miss the forest for the trees. As I have mentioned before- Marketing is following Social Media.
2. Given the context of the million dollar Superbowl ads, we need to build the kind of "bridges" in social media that already exist in traditional media and which allow traditional media to justify its spend to some extent. That's a separate problem.

So taking the sales theme further (you can see I am trying to leverage my B2B sales/ account management experience) here's what I would call an infrastructure metric derived out of a sales force effectiveness ratio: social media effectiveness ratio = social media "wins"/ customer "contacts".

Now, you might call sales force effectiveness metric a functional metric that has been translated into an infrastructure metric. True, wins and contacts are tied to the platform. We then build a cross platform metric that takes this data and spits out the "functional metric" results.

The Four Philips brand equity measures- Uniqueness, Relevance, Attractiveness and Credibility- are a tougher portability nut to crack. However, a quick metric that is "translatable" that would be familiar to brand and category managers- ACV.

What do you think?

Additional Background
A backgrounder to help you develop your own perspective on the ideas here:


Sunday, August 9, 2009

VC Decision-making: Investing in an Existing Portfolio of Companies.

Executive Summary: Investing in existing portfolio companies involves a lot of groundwork to be done by the Venture Capital General Partners. Below is an experience recounted by a VC investor, followed by some of my thoughts on the tale well told.

The VC Doubling Down Experience
Fred Wilson has a great post on "doubling down" vis-a-vis portfolio companies:

The Analytical Backgrounders
If you have read a previous generic post linked below, you will definitely enjoy an experienced VC investor sharing his experience above in making the decisions:
1. Creating Value through Operational Improvements:
2. Microeconomics, Synergies and Operational Portfolio:

Identifying a subset of "core"/ "sustainable" (your mileage may vary) investments from a portfolio during tough times is not an easy process even for great investors. The key aspects of Fred's post are:
1>raise funds during tough times, and,
2> choose to pump in more money into the newly identified "core" investments, instead of making new investments.
3> "restructure" existing investments in some way- e.g. strategy, team, cost.

To better understand the VC decision making process, here are some questions you may ask:

1> Fundraising For An Existing Portfolio
- Would you have your "core" investments list, and their follow up round funding needs in hand, when you raised funds?
- Would your fundraising account for possible iterations to this list? E.g. Would your fundraising process include discussions on potential exits and the potential returns to LPs from these exits?

2> Portfolio Picking as Cherry Picking
- Portfolio Company Consultations: Would you choose which investments needed more money from you on a case by case basis? Would this process be any different from board level discussions on company performance, except for more stringent criteria being thrown into the mix?
- Follow on funding Factors: Would the lack of (or unfavorable term sheet conditions in) follow up rounds of funding due to economic conditions force you into considering more investments in the same companies than you normally would?
- Finance Portfolio Constraints: Would you exit firms that had strong potential, but would skew the risk-reward profile of your portfolio?
- Exit Negotiations: What factors would cause you to take a "non core" company off the "for sale" list? i.e. What could cause you to exit the exit negotiations? How many "non core" companies would you have in play for exits at any point of time? Would you keep the window of being part of a follow on syndicated lending team on some "non core" companies?

Another way to quantify this is as follows:
- Company Funding Needs: How may of the newly identified core/ sustainable investment could do without funds from the same VC firm?
- Finance Portfolio Constraints: How many of the investments outside the "core" list had funding needs that the VC firm could not accommodate in the risk-return profile of the reconfigured portfolio, despite strong potential of meeting expected returns?

The Investor Basics
1. (Re)Evaluating financial options can be difficult in tough times over investments you have made which count on an expected future value, but that's par for the course for any investor.
2. The next step is to identify core investments that continue to be strong on performance indicators,and which, in your judgement, will provide strong returns. This too is par for the course for any good investor.

For those who have doubled down in tough times, a simple question to ask would be how many companies you exited went on to provide "spectacular" returns after their exit?

Its NOT So Easy
This only goes on to illustrate that a VC's decision making to exit portfolio ventures is, for starters, pretty difficult on the VC as well.

What do you think?


Thursday, August 6, 2009

The Startup Thought Process Series: Commuter Rants

Series Initation Note: This kicks off a series on my conversations with folks starting digital media companies with the objective of assisting the enterpreneurs.

The Startup: I met an owner close to rolling out a site for commuter rants. Simply put, the site is a forum for commuters to rant about their commute.

Our relatively brief conversation focused on helping him with the vision/ raison d’ĂȘtre for the site. Snippets of the conversation are listed below. These are really interconnected factors, however you need to be able to think through them linearly once, before you iterate through the options and interdependencies. As with a few startups, these answers may change with time, however, it helps to have concrete thoughts about these questions at the start of the journey.

I. Market Potential
The entrepreneur's first area of uncertainty was: how frequently would a commuter rant at his site? We broke that down into market sizing and frequency of usage.

i. Who is the target user of this site? What is the market size?
What kind of commuter? Someone who takes the NJ Transit or Metro North to and fro work? Or does it include someone stuck on the D.C. beltway on a Friday evening? The idea here is to understand an existing unmet need and customer behavior tied to this unmet need.

For sizing, there are several ways to generate the numbers- by geography, by demographics, etc.

ii. What would the growth and usage trends be like?
Would they be like that of Twitter (where 30% of the users tweet once never to return) or like that of Facebook?

II. Business Model and Market Strategy
We are really thinking about distribution channels, partners, customer relationships, core capabilities and revenue models here, all of which can be expressed pithily as:
Would you prefer a B2C model or would you modify the site for a B2B model?

Note: We explicitly kept aside market defensibility to assist in brainstorming.

A> B2C Model
i. How would you grow the B2C site?
Would you eventually develop features tied to hyperlocal search to enable customer stick? E.g. Regulars in a train compartment can connect with each other?

ii. How would you monetize the site?
Through Ads, and possibly, viral content (to help folks cool down, for starters)?

B> B2B Model
i. How would you grow the B2B site?
After an initial push to bring on site users, would you consider tying up with media companies who may leverage feed from this site? E.g. TV Weather and traffic update has a ticker running at the bottom which shows "selected"/ "near real time" commuter "rants"?

ii. How would you monetize the B2B site?
How many media companies would buy into this? What would such features be worth to the media companies?

III. Product Strategy
Would you roll this out as an independent site/ platform? Or,
Would you leverage existing platforms like the iPhone and/ or Facebook?

The questions for you:
1> How would you have looked at this differently?
2> Would you invest?
3> What changes, if any, would change your investment decision?

What do you think?


Tuesday, July 28, 2009

Innovation and Effective Healthcare for The Masses: An Oxymoron?

I tread carefully when it comes to discussions on optimizing healthcare solutions for the masses because Stephen Hawking's image crops up in my mind with this question: What if we designed a wonderful system that made it really difficult for Stephen Hawking to seek assistance at any point in his life? Replace Stephen Hawking with any person important to you, or who you believe is important to society, and you know what I mean.

Teams designing an effective healthcare system for the masses have challenges on sustaining innovation that are slightly different from those faced by mass market consumer products companies.

For a mass market beverage company, the challenge in supporting innovation may exemplified by the case of the Quaker Oats Company product portfolio acquisition. However, for regulators designing an effective healthcare system, the real challenge in societal optimization of healthcare lies in supporting innovation "pathways" through:
1> supporting basic research, and,
2> providing markets, processes and infrastructure for very expensive drugs to hit the market, and,
3> providing patients means to seek solutions outside the "mass" healthcare system.

For patients that have to pay out of pocket, then the government must make this process seamless, painless, and provide structures that help individuals extract some "economic rent" from (no apparent or direct attached economic benefit to) society. Depending on the context, you could call easy access to private, non profit foundations, to help fund your recovery, a form of economic rent.

In fact, the government may leverage experience with organ transplants for designing these "innovation pathways":

The three points listed above are examples of the way certain "types" of innovation may stop getting support once creating and sustaining a mass market healthcare system becomes a prime focus of the society. I realize I am effectively proposing an indirect subsidy for innovation. I am in favor of this sort of indirect subsidy, because my hypothesis is that this may have a multiplier effect on drug research. My perspective is that this indirect subsidy would be similar to the investment in national highways in the last century.

What do you think?


Friday, July 24, 2009

Find Clarity on the Healthcare Debate. Now. Here's How.

Based on the French Openesque rallies in Congress over Healthcare so far, most folks, including Peter Singer in an NYT article*, agree on some key points:
1> Private health insurance must remain available.
2> Consumers must pay less for healthcare.

So, why are we still debating? The "how" is keeping us busy! You, as the consumer and the raison d'etre of this battle, can seek the following from your representatives:

1> A baseline of the current healthcare costs, overt and covert, by consumer segments.

2> Projected costs for current and proposed healthcare plans.

3> Healthcare market structure definition and guidelines for market agent behavior, tied to measurable outcomes, that all entities- private and government- must adhere to.

In plain old straight talk, the answers to these questions help *you* decide.

Both Democrats and Republicans have leveraged the government as a market agent in the financial services industry. This learning could be transferred to the Healthcare industry. It may shed light on triggers for the government to become a service provider market player and also triggers for the government to exit the service provider value chain to return to just regulating the market.

In terms of cost, talk to any healthcare practitioner and he/ she will tell you its all about incentives. What would you change if an internist is not paid by an insurance company for taking steps that help prevent a more expensive medical condition later because it is not part of her job description? What would you change if you thought someone was recommending tests for sleep apnea when its a case of tonsilitis? This requires clarity on not just market structures, but also incentive processes.

To summarize: These questions with help each party in the debate develop a contextual, competitive positioning strategy to achieve recognizable differentiation in the market through both methods and outcomes.

If you are wondering how we can continue supporting broad innovation in healthcare, see here:
* Peter Singer's New York Times article on healthcare:

What do you think?


Saturday, July 18, 2009

How do you define "Real Economic Recovery"?

Two economists, Shiller and Roubini, mentioned recently that lost confidence (animal spirits impacted by fear) was a key factor in worsening economy *:

The leads to a question. A Big, Hairy, Audacious Question.

How do you define Real Economic Recovery?
1> GDP growth? Economic recovery could be defined as a specific technical recovery from a recession as indicated by GDP numbers.

2> Employment Growth? Would you define economic recovery as a scenario where 96% of the country returns to productive work and innovation flourishes? Would this thought be in line with Schiller's and Roubini's contention that "animal spirits" play a part in worsening the economy?

I threw "innovation flourishes" in there, despite some question over whether government intervention in innovation helps. E.g. MITI in Japan.

3> GDP size? Would you define economic recovery in terms of GDP size? i.e. the world may not be what it used to be, but the world returns to some semblance of "normal" economic activity? Simply put, if financial institution balance sheets need to contract for a return to "normalcy", couldn't GDP numbers contract as we return to "normal" economic activity? Would this not really be a resetting of the GDP scale?

What does this mean to your daily life? Are there other, more effective recovery measures we could develop?

What do you think?

The Big, Hairy, Audacious Context
GDP as a "measure" vs. GDP as an indicator of true economic activity.
To illustrate an extreme case in point, there are remote parts of the world, say a self sustaining tribe in a remote village in India (an interesting example with a dichotomy between the stock market oriented urban economy vs. the rural economy), where people work hard every day to ensure that they can feed themselves. Individuals in this tribe own no land- its a jungle- and they move from clearing to clearing. From their perspective, they live full, healthy, economically productive lives.

However, due to the fact that this tribe exists in a very remote region, it not part of a GDP measurement.

On the other hand, GDP might stop contracting, and even improve for successive quarters, while job losses continue, and few new ideas that truly improve lives are launched.

Government Investment in "Infrastructure" for Economic Recovery
Is government investment in infrastructure a critical tool for economic recovery? If so, would energy and healthcare qualify as "infrastructure"? This based on a loose definition of infrastructure as a series of standard frameworks that simplify people's lives and make them more productive in leveraging their strengths?

E.g. Given the inverted population pyramid, could healthcare qualify to be called infrastructure, just like national highways?

Note: * Thanks to Amit for posting this on the Macroeconomics forum- it got me thinking about this topic again.

The Art of The Stimulus and Economics

From the I Told You So Dept., the "Economics is dead. Long live Economics" desk.

Brief Summary: How do we develop tools for governments to take decisions on the economic crisis? Create Socio-Economic Anthropological models that not only leverage standard parsimonious economic models and capital market inefficiencies, but also incorporate people's behaviour, potentially through market research tools. International finance and relative "behavior" of economies needs to be considered as well- stay tuned.

The Economist has an interesting article (yet again- thanks to Lori Sullivan for sharing) on how economics needs to change to adapt to the real world:

It wraps up with a wonderful line-" the end economists are social scientists, trying to understand the real world". You can read the backgrounders listed at the end of the post, so I will refrain from an I-told-you-so-last-week.

Can Economic Models Actively Help Generate Solutions and Make Decisions?
The honest answer- I don't know. However, analytical approaches need to "improve". Referring to Public Enemies in a previous post was only a half joke.

Economic models need to incorporate additional variables as proxies of elements of the economy. This is more than economics learning from finance and vice versa.
This is more than economics
acknowledging capital market inefficiencies via economic models incorporating the inefficiencies in some way.
People's behavior is also an element of the economy.

Socio-Economic Anthropological Modeling? Or,
How to Get a Context to an Economic Environment?
1> The elements that make up the economy today are different than those in the 1930s. The U.S. economy today has a large services component.

2> The people that make up the economy today broadly differ in age groups, education levels and skill sets. The sectors you may want to stimulate to revive "animal spirits" need to match this demographic structure of the population.

3> People today may also behave differently than those in the 1930s. At the risk of throwing in a *seemlingly* vague commentary, here is an article that attempts to characterize an entire
generation of young Japanese:

4> Would we go so far as to say that the "animal spirit" of the 1930s was different that the "animal spirit" today? To throw in a little more science into the art, could we utilize market research (say clustering) techniques to characterize behavior of populations?

5> Can we then build Socio-Economic Anthropological models that bring in the "animal spirit" aspect of the economy to more accurately reflect the economy? Then, can we potentially predict the impact of actions meant to improve the economy?

What do you think?

The Background
From the I Told You So Dept., the "because I-have-been-telling-it-so-for-a-couple-of-years, and the-jury-is-not-out-yet" desk
So what am I talking about? Previous posts give you some background:

1> Economic Crisis and the Art of The Stimulus- To Boldly Go Where No Man Has Gone Before?

2> Financial Transactions, Trust and Keynesian "Animal Spirits"

3> Financial Markets, Economic Crises And Global Co-ordination

4> There is an international finance component that needs to be analyzed as well. A case in point- the global impact of the Lehmann collapse. Stay tuned.

Economic Crisis and the Art of The Stimulus- To Boldly Go Where No Man Has Gone Before?

From the "The Art of The Stimulus- The Final Frontier" Dept., the "Economics- Why hast thou forsaken me?" desk.

Christina Romer wrote an interesting guest article in the Economist on the Lessons on 1937:

The article states that the response to the fiscal stimulus in the early 1930s was pretty rapid, and cautions against switching to a contractionary fiscal and monetary policy too soon.

My take? I found it interesting that Ms. Romer picked healthcare reform as an example of how the government could bring about long term fiscal stability, given the various trade offs the government can make. Overall, the chart, and the numbers certainly tell a story.

Does Ms. Romer's argument convince? Yet?
Despite the seemingly obvious story we can glean from the chart, I would like to I would like to dig a little more into life and times in the 1930s. This is not my excuse to watch Public Enemies (deft touch there, isn't it?).

What would be the clincher?
I would like to leverage the economic data artefacts of the time strictly as socio-economic archeaological evidence that develop a socio-economic anthropological view (phew!) of the time.

Socio-Economic Anthropological Snapshot? What? Why?
1> If we seek solutions, then we need to delve into why some solutions worked in the past. A cool chart demonstrating exponential growth as a result of a stimulus is really a starting point.

2> How is this different from research already published? Isn't there enough research out there that succintly (parsimoniously) captures conditions in the 1930s via standard economic models?
A great example of how I differ can be found here:

3> Socio-economic anthropological snapshot? Phew! Yes, if the objective is to stimulate the economic engine, how else do you do it without understanding the motivations behind the number?

4> How specifically does a "better understanding" help us act? This understanding may tell us whether the current socio-economic climate contains "discontinuties" that would impact the models [**] we are counting on to help us solve the current crisis. This understanding of the discontinuities may help us improve the solution.

5> If it further helps drive home the point, here's an apocalytic scenario I have previously posted about:

What do YOU think? As always, I welcome your insights.

[**} Am I being "circular" here? Or am I truly rejecting economic modeling as an approach?
- My contention is that current models may not help us define solutions.
- At the risk of sounding like a behavioral economist, we need to dig a little deeper into the context and gain insights.
- However, as an agent in a behavioral market, how can I count on I getting real insights on potential differences between the crisis in the 1930s and the crisis we face now?
- Even if I do, should I not be able to find proxy variables to develop a "new model" that leads to an actionable approach?

1> The ideas were first published on a macroeconomics forum on July 12, 2009 while gaping at Tim Geithner on Fareed Zakaria GPS. Many thanks to Prof. Rosensweig for the wonderful forum.
2> The ideas in the post above are a further elaborate my thoughts below, earlier this year:
3> The next post stretches my ideas on economic models a little further:


Thursday, July 9, 2009

Sustaining a Brand Conversation: To Strategize, or not to Strategize, about Social Media? A Note to Brand Marketers

Why should you care about the Social Media industry beyond what you are doing in it? Why should you care about how it evolves?

You care about sustaining a Customer Centric Conversation with your customer. That's why.

You are already a step ahead of the competition if you are asking these questions.

Some might question why we need to think about market structures, channels, consumer behavior, and returns on investment in the Social Media industry. Fair enough. There is enough activity in the hyper-competitive Social Media market right now for folks to dive in and get a lot of the work done quickly in funky, interesting ways, while helping the market evolve as a byproduct. We could even discount research that discounts first mover advantage.

Recently, Facebook surged past MySpace in Monthly Unique Visitors. If that news made you wonder how you are impacted, or how your company's busy work in Social Media is impacted, you are asking the right questions.

If You want to sustain a conversation with your customer, without being distracted by the ebb and flow of the social media buzz around you, you know you want to tie in your social media tactics with strategic market insights.

Instead of steps that assist your journey toward an effective social media presence, your search leads you to information on how to get things done. Lets change that. Right here. Right now.

Here are four thought enablers that help you cut through the clutter to formulate a social media strategy.

The Interplay between Marketing and Social Media:

1. Marketing is currently following Social Media: What we define as conversational marketing right now, is just marketing catching up with social media. Social media can be abstracted as a process of developing new channels of communication. How you leverage these channels is driven by your brand. Marketing in these channels will mature when brands begin to consistently leverage the innovation in channels for improved resonance.

2. Marketing Future 2.0 goes beyond Web 2.0: Marketing has a few steps to take before it truly takes off, and leaves social media behind to become a platform. I will hold on my vision for marketing here.

3. The Social Media Industry is a Market: Social media will become a platform and will have a few dominant players like platform markets do. However, the innovation game is not over yet. While some players have taken an early lead and have shown the legs to innovate, social media tools have not reached a communication channel innovation plateau yet.

4. Value: Value, value, value! How do we justify social media spend to a corporate? How do we tie it into the brands, say, in terms of a Brand Equity Pyramid? This is the outcome of some ruminating on my previous blog here:

Needless to say, the note assumes that you already are pursuing social media opportunities for your brand. If you do not have your feet wet yet, you are welcome to read some of my previous posts below for some ideas- I would heartily welcome a conversation on those points of view.

This loops us back to the next post that started this train of thought, proving that Execution -> Metrics -> Strategy are not linear, but form a circular reference, and spiral into greater maturity as the industry matures. Therein lies the risk and the reward.

While I am at it, here's a blatant plug: please feel free to contact me for more! You know how to find me.

Psst... Watch out for my Twitter game- BigBirdBots!


Thursday, July 2, 2009

Consumer insights and Social Media trends... Updated: Preview Note to Brand Marketers

From the "Lies, damn lies and... statistics?" Dept. of Quibble-Over-Who-Said-What, The Mark Twain vs. Benjamin Disraeli desk.

At a wonderfully hosted interactive media event last evening, I sprung 2 stats at a social media strategist, while emphasizing the need to critically look at trends and consumer behavior. The bright strategist I was chatting with was aware of each of them, however, when we put them together and... here, I will let you decide:
1> Average number of Twitter followers: 126.
2> Over 30% of Twitter users tweet once, never to return.

On that note, let me splash some more statistics around this page for further insightful conversation with you:

What do you think?

Update: I usually restrict my unrestrained editorializing to face to face conversation. However, thanks to a twitter (Thanks D.B.) note, I will let loose a little. :-D

From the Dept. of Stick-Yer-Neck-Out-And-Live-To-Tell, the Die-Hard-With-A-Clue desk.

Why should you really care about the Social Media industry beyond what you are doing in it? Why should you care about how it is evolving?

The statistics below kicked off an interesting conversation with a social media strategist. The math jumps at you. The average number of twitter followers could be skewed by the 30% who never return, and the Twitter BigBirds TM (Sidebar: CNN and Ashton Kutcher are Twitter BigBirds; No disrespect to Tweet TM). Our conversation converged on the fact that business acumen remains key to success here.

The theme of this conversation dovetailed with the theme of another with Susan Lewis who is at work finding sponsors for her Twitter game. The fundamental question here is: How do we help a corporate entity justify its spend in social media, beyond harking to the old Internet boom eyeball metrics?

Finally, is it just about measurement? What are we looking to achieve with the measurements? Stepping back from the metrics, how should brand marketers be thinking about their social media presence?

More on this in part Duh:

Sunday, June 28, 2009

Consumer Insights from News: Market Sizing

Three events this year have generated a lot of interest from consumers:
1. President Obama's Inauguration
2. Iran Elections
3. Michael Jackson's demise

There are interesting insights to be gleaned from analyzing patterns in data across channels that deliver news -or music, in the case of recent tweets over the Michael Jackson tribute song- to the consumer.

Kick off for Rigorous Analysis?
Keeping thoughts of rigorous analysis aside- how about plotting each of these event on 3 axes? These three events can be compared to other, more "regular" events like the NBA finals. The key point to note is that some of the delivery channels are pretty nascent and they may not have a large universe of comparison points.

The Objective?
The deep dive may help size the market for various solutions, like developing quick reaction advertising patterns that respond to breaking news, to more effective tools for the media and advertising industry. Of course, from experience, I would like to emphasize the sizing can only supplement your own acumen about the market opportunity.

What do you think?

Note: Updated with the 3 axes plot approach to kick of analysis.

Wednesday, June 24, 2009

Brands, Economics, Blink, Twitter & Facebook: Part II

Almost titled Part II: Economics, Brands, Blink by Malcolm Gladwell, and Social Networking- Twitter & Facebook. Brevity is the soul of the blog... oops.

Part I of this Post:
Thanks to Twitter, I was reminded of an article on “Predictably Irrational” behavior:

Some more background can be found in my Part I post here:

Marketing and Behavioral Economics.
The day care center experiment on the effects of social and market norms colliding provides interesting results. More importantly, it can serve as an interesting starting point for marketers to think about how to participate in conversations with their customers on social media sites.

Looking at the social media marketing vehicle as a "participant" on the social marketplace, it may help illuminate patterns that help the marketing vehicle navigate uncharted 'mindfields' with their experiential partners (read customers).

While this perspective should not be news to skilled brand managers, the key here would be developing patterns and tools that help brand managers make more effective decisions.

These theories could be used to:
1. Create markets with specific incentives (watch out for unintended consequences),
2. Make decisions that drive the market entity's/ brand vehicle's behavior within a marketplace, and,
3. Leverage various market players' behavior in a marketplace to your market entity's/ brand vehicle's advantage.

Points 2 & 3 can be interpreted as old school, carpet bombing, bulk-broadcast-media-buying strategy & social network or conversational marketing respectively.

Social Media and Behavioral Economics.
A potential application- could it help a brand decide which social media site to develop its presence on, especially if the brand could utilize all 3 approaches to negotiate? There are social marketers that would recommend using the third approach listed above as it is more "authentic". This seems to have become the prevailing thought in the B2C arena.

Where does Microsoft's strategic investment in Facebook, more a B2B deal that has B2C impact, fit across the 3 approaches listed above?

What do you think?

Update: To be even more explicit in my messaging:

1> Everything Must Go!?
As a marketer looking at the channels to reach out to your customer, you may need to understand how to leverage the new channels that have sprung up where your customer is not a "couch potato". As you learn more about the new channels and more about your customer, you will find new ways to apply your experience, knowledge and acumen in the new channels. You do not necessarily have to toss everything out of the window. :-)

2> Marketing Future 2.0
Marketing Future 2.0 arrives in baby steps- while there is an advantage to be being ahead of the learning curve, your best friend is still your ability to distill it into impact on consumer buying.

Now, what do you think?

Economics, Brands, Blink, Twitter & Facebook: Part I

Almost titled Part I: Economics, Brands, Blink by Malcolm Gladwell, and Social Networking- Twitter & Facebook.... As if that wasn't enough, did I mention Physics? I will, however, refrain from mentioning Star Trek... oops.

Some thoughts on Bob Pittman's perspective of the money making potential of the internet in this post, to give you some background:

Behavioral Economics: Isn't that an oxymoron?
Have you read Blink by Malcolm Gladwell? There is an economics' field that seems to agree with Gladwell that human beings are not all rational masters of their emotions.

Behavioral Economics around us.
Thanks to Twitter (Paula Drum RT), I came across an article talking about behavioral economics:

Most of us have helped implement a behavioral economics based solution to the pension enrollment challenge: If you want people to enroll in the pension plan, then automatically enroll them — and let them opt out if they want to.

The article also covers an example of how government intervened to incentivize teens against getting pregnant. Predictably, this will get you thinking about how this theme ties in with prevailing thoughts on financial market regulation. The article cautions that the government could itself become an "imperfect decision maker" as a market participant.

The physicists amongst us must be wondering whether economics and psychology got together to give birth to either the observer effect or the uncertainty principle.

Behavioral Economics and Game Theory.
The article got me thinking about the interplay between behavioral economics and game theory. How would an approach to less-than-fully-rational-decision-making impact game theory cases like prisoners dilemma where rational decision making leads to "seemingly sub optimal" outcomes?

I found a paper that talks about behavioral game theory:

The tweet also reminded me of another article on "Predictably Irrational" behavior:

Now, what has all of this got to do with Marketing, Tweeting and Authentic Branding?

What do you think?

Part II of this post can be found here:

Sunday, June 7, 2009

NYC Internet Week: Business Impact of Innovation

As part of a NYC Internet Week gathering, I got involved in a discussion on business impact of innovation in technology with two representatives from, Dana and Tom.

We discussed the poster child for technological innovation- the XEROX PARC center at Palo Alto. It was filled with the brightest minds who came up with amazing innovations in computing that are taken for granted today. Dana mentioned that the facility is a shadow if it's former self and is reflective of Xerox's current state of affairs.

The center had the first PC like workstation ready in the early 70s (the mouse was at hand in the 60s) and the Graphical User Interface available in the late 70s, but these brilliant ideas lay around within the walls of the facility. However, they captured the imagination of Steve Jobs, who successfully pushed them out to the market and created a successful company out to them.

The question is, was Steve Jobs alone responsible for the business impact of such innovation? Was Bill Gates the primary force? Would you also consider advancement in manufacturing technology, as well as the Palo Alto cluster of innovation bringing skilled individuals together as important factors in the business impact of innovation?

Another thought to consider- isn't Xerox also continuing to innovate in some way? Are there levels of innovation? Based on my brush with managing innovation at a beverage company, can a gated process truly manage innovation?

The impending release of newer versions of the iPhone, and the apparent dependence of Apple stock value on Steve Jobs' presence in the company, are interesting cases that make you probe the nature and sustainability of innovation.

What do you think?

Sunday, May 31, 2009

Innovation, Sentiment, Economics, and the Market

The thought “one company’s cost savings are another company’s lost revenue” below offers interesting economic insight:
{ On Private Equity: Scott Schoen, THL }

As I have pointed out in this blog based on Shiller’s and Stiglitz’s articles, “sentiment”/ “perception” and other such “soft” or “behavioral” aspects play an important part in the economic engine of a region: {Financial Transactions, Trust and Keynesian "Animal Spirits"} & {Financial Markets, Economic Crises And Global Co-ordination}

Economic contraction would lead to a destruction of value through the destruction of existing market players, structures and relationships, before the economic engine restarts. This may lead to a slower recovery. This can be a good rationale for a central bank investing in an economy to keep it afloat in such a way.

However, once we accept that “sentiment” is a factor in the economic engine; could the effort to maintain existing market players, structures and relationships also impact the incentives for the economic engine to generate lasting recovery?

What do you think?

Microeconomics, Synergies and Operational Portfolio

A case discussion link below would give you background perspective on this post { Private Equity Case: Dialogic Carve Out from Intel}:

I checked with a technology industry focused private equity investor on whether his investment committee considers synergies across its operational portfolio in its investment decision making. After all, technology is a pretty broad term- do they see an advantage in narrowing their focus?

His rejection of the idea was couched in an excellent example. The investment team would not buy competitors. This was a pretty straight forward discounting of the potential of merger efficiencies, and we can list numerous reasons for it- from strategic ones like the hypercompetitive nature of the technology industry, to investment ones like the heightened risk of a larger company’s underperformance weighing down upon the rest of the portfolio.

However, this should remind you, as it reminded me, of microeconomics. Does rejecting competitors also mean you would reject complements? Strictly as an investment strategy, wouldn’t investing in complements also increase the correlation across investments?

Investment examples in the technology industry would be:
1. Investing in Facebook and Fun Wall, or investing in Twitter and Twitterdeck.
2. Investing in the Transmeta Crusoe process and a windows power management utility for that processor

Would this mean that the investing team needs to have processes in place to monitor revenue correlations across portfolio companies?

The Venture Capital Context
Lets look at this in the venture capital context, discussed in my post here: {Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?}

Investing in startups, especially the very early stage ones, needs to account for some strategy shift. However, sometimes even late stage startups may need to adjust their strategy to account for monetization opportunities in tough economic times.

How would the venture capital firm react if this strategy shift made this investment a complement of anther portfolio investment?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

US Consumer Confidence, Economists' Optimism, and the Economy.

Chatting with a brand manager at a Consumer Goods/ Beverages company recently, I got the sense that the consumer was focused on value and was still buying. So I took another look at the news to put the conversation in perspective:

A. Did someone say "green shoots"?

1> US consumer confidence reports has interesting, and intriguing numbers, this week:

2> Economists are turning optimistic about the economy as well:

3> Even Roubini has mentioned that we are in the trough phase of the U shaped recession. While he still stands by the possibility of a "perfect storm" in 2010, I am inclined to call this positive news.

B. Are we there yet?
For contrast to the signs of Spring we see above:

1> Dr. Altman recently demonstrated, backed by research, that corporate defaults had hit 8 percent in January.

2> He also pointed out that many creditors are in no position to take companies through a bankruptcy.

3> Additionally, on the consumer front, credit card defaults are still a concern.

Now that we have a contrast between most economists and Doctors Doom and Gloom, what does the impressive rise in consumer confidence mean? 70% of the economy is consumption- so a rise in consumer confidence may, at best, be good news in the short term. So, based on this recent news, we seem to have the right economic tools at work to "salvage" the situation and those tools seem to be having an effect.

However, I still think of this as a zero sum game when it comes to investing (bailout) in pulling the economy from the brink. Here are some thoughts:
1> In 2001, the US government took some steps to "salvage" the situation, that eventually led us to 2008. What are economists suggesting needs to be done to prevent us from ending up in an downward spiral of increasingly severe recessions? Could Roubini's W shaped "perfect storm" really be plain old speculation about "when", not "if", the next storm lands at out doorstep?
2> How will the world pay for this? Could an effect show up in international finance, where some countries pay more for this rebound that others?

While I hope economists continue to huddle to figure out options and tools that will solve some of the problems, these questions give you the context to make decisions that steer you and the enterprise through the storm.

What will you do?

P.S. This note is based on a post on a macroeconomics forum on the morning of 05/31/09.

I later found some interesting articles that provide more structured and well thoughtout arguments. The leader here is Nouriel Roubini:

Also, Fareed Zakaria's GPS episode, dated 05/31/09, will give you more food for thought, besides the added bonus of seeing Kissinger talk about US options in NE Asia.

Thursday, April 30, 2009

A Classical & Fusion Concert at Carnegie Hall

I attended an Indian Classical & Fusion concert at Carnegie Hall earlier this year. A review of a concert in the series can be found here:

My reaction to the concert: I was blown away.

I will admit to being a little starved of good classical performances of any sort for while, let alone live Indian classical. For someone with an untrained ear, I was really counting on flashes of brilliance from the performers to (re)capture my interest. A bit like a how an impossible volley at a crazy angle reminds you how much fun watching a Wimbledon final can be. Based on the names performing, I knew there would be at least a few flashes of brilliance.

The concert was all brilliance AND class. It was like being touched by God. It displayed Masters on top of their game, completely immersed, and reveling, in their trade. It was humbling, as all great displays of skill are, but I felt more like a wide eyed kid in a candy store.

The power of music! The patterns within a musical piece! The patterns within the music of the individual performers! The story that the interplay of instruments in a piece tell you and the story that a sequence of pieces tell you! Wow!

Like a little piece of art you like a little more than others, it even found a little bit of me to connect with. All this coming from an ear as untrained as mine.

I blame it all on the performers.

My jaw still drops (scrapes the floor, really) every time I think about the evening.

Sunday, April 5, 2009

Is Private Equity The American Industry that protects American Enterprise?

Here’s a potential title for future historians to consider for the Private Equity industry in this decade:

Flush with liquidity, which you could call a “Greenspan Blessing”, the Private Equity industry, a truly American Industry, invested over a trillion dollars into American enterprises that were/ are strategic players in their industries, protecting them from a future downturn that would make many vulnerable to hostile takeovers from international buyers.

My thoughts went down this path thanks to a question posed by David Rubenstein from the Carlyle Group.

While lobbyists in D.C. would be salivating at this spin- the idea behind the headline is to answer David's question on the Private Equity industry's place in the economy.

I have an answer that's more an essay, however, I am sharing below some questions that I structured to effectively, and comprehensively answer David's question. Hope this helps you in understanding the Private Equity industry better.

Back to our headline- does it really make sense?
1> Would America’s rebound from the downturn have to lag that of other economies (discounting the opportunities for Brazilian, Chinese and Indian companies) for this to even be a potential story?
2> Can we prove the industry’s deal making and execution can have this unintended, headline making, consequence?
3> Could this unintended consequence have happened as an explicit strategy to protect, store and manage American value? Would this strategy have worked if it were run by the American government?
4> Given America’s history and promise as the land of reinvention and rejuvenation, does this unintended consequence or strategy make sense? Specifically, why save and protect when failure makes you better and stronger?
5> Or couldit truly be an example of reinvention and rejuvenation?
6> Can the Private Equity industry even be called a truly American industry? Could we truly say "Only in America!"?

How would this trend of over a trillion dollars in Private Equity investment have worked out during the 1981-82 recessions? Are the market structures today substantially different than they were in 1981 for the comparison to be odious?

While I have an opinion and can weave a story…

What do you think?

Private Equity Firms and Large Company Acquisitions

Richard Friedman’s key factors for Private Equity funds targeting large companies- financing, downturn lag effects and compensation limits on management, listed here

- lead to a host of follow up questions.

Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).

If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!

Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?

Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.

Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.

Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.

Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?

The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

Saturday, April 4, 2009

Panel: Creating Value through Operational Improvements

The panel discussion kick-off reminded me of a simple brand equity value chain, noted below in a slightly modified manner: look at the market for size and value, and work your way inward into the organization into the capital structure, evaluating improvements at each step.

To tackle the question of creating value in the current economic context, the panelists considered various tactics like evaluating the purchasing power of the customer, to benchmarking various activities of the organization. This can lead to evaluating options like changes to distribution strategy, or even product rationalization.

A Managing Director at Fenway Partners, who has been through the 2001-02 downturn, pointed out that you may save capital, but you are then faced with the challenge of deploying it.

He ventured three capital deployment options- buy debt at a discount, invest in organic growth by looking at operational investments, and invest in equity acquisitions. Investcorp’s analysis on operational improvements making an impact on exit multiples/ firm value fits into this decision making process.

Some questions I considered coming out of the panel:
Growth: Depending on the nature of the industry, and the cash at hand, what would encourage companies to pursue market share growth as a strategy? How are companies allocating resources to strategies that have a longer incubation time for results?
Risk Taking: How are companies deciding on change management risks in the current economic context?
Know Thy Customer: Given that customer segmentation is expected to lead to actionable marketing activities, how would it change in the changed economic context? While investing in understanding the customer may take a hit, how are companies evaluating situations where cutbacks here will hurt more than add value?

One Chart, One Slide to Show It All
Taking these questions and thoughts further, you really come to a simple X-Y bubble chart that lists points in the company’s value chain starting from financing to customer touch points on one scale, and profitability of investments on another, with bubble size being a function of risk.

Corporate Finance: A Decision Making Template
The decision making template behind this evaluation process could be:
1. What is the customer impact? One parameter to consider could be- would this improve customer “stick”? This helps evaluate customer acquistion programs, given that margins are under pressure and most companies are looking to increase volumes.
2. Do we have cash for change?
3. What is the profitability *profile* of each investment? E.g. Do certain improvements investments have "long tail" returns?
4. What is the exit strategy for this change project?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

On Private Equity: Scott Schoen, THL

Scott Schoen started off by describing a simple structure for the fundamentals of PE.

The THL Perspective of Doing the Deal
Sourcing (involves valuations and generating deal flow for inside due diligence)
-> Financing (due diligence is key)
-> Operations (improvements are key)
-> Strategic Exits (options include secondary PE markets)

Inside due diligence consists of identifying the
level of control required of the target,
leverage for the deal,
operational value add opportunities.

Financing constructs considered include PIPE structures where the private equity firm can acquire control with about 30-% to 35% of equity without paying for control. Financing sources can be broken down into existing investors, the government, and Mergers & Acquisitions. Each of these requires various strategies to be in play.

Manifestations of the Current Economic Context
Scott Schoen’s key points about the manifestations of the current economic context:

Sizing the problem: The economic contraction is a function of leverage. It impacts US Financial Sector assets totaling $60 trillion on the US balance sheet, and also impacts the leverage ratio (40:1) of financial institutions. As an example, he pointed out that the total CLO transactions in Q4 2008 were $0.

Return to basics: The contraction will lead to companies looking for cost savings; however, one company’s cost savings are another company’s lost revenue. In terms of the private equity industry, this translates to a return to the basics- better covenants and refinancing of senior loans.

Restructuring: There are two ways to deal with distress scenarios. Either negotiate amendments when faced with defaults, or go into a court process as lenders are fragmented, with banks as senior lenders.

Rates and The PE Deal: New rates at LIBOR +2.5% to 8.5% are causing value to seep through the PE deal.

The Equity Overhang: The private equity industry equity overhang of $400 billion will likely go into mid market private equity transactions

LP Asset Allocation: Limited Partners have capital allocation challenges to deal with- these can be deduced from the equity overhang. A $10 billion fund that is allocating 5% in private equity needs $1 billion in investments as money comes back at a certain pace.

It would be interesting to evaluate the strategies that GPs, LPs and lenders are considering to find returns across the process. Given the willingness to consider PIPE transactions, would PE firms begin behaving like hedge funds to manage the huge equity overhang?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

Saturday, March 14, 2009

Richard Friedman’s perspective on the Private Equity industry

Richard Friedman’s address (Head of Merchant Banking at Goldman Sachs) turned out to be a whirlwind tour of what he’s seen of the private equity industry over the years, growing from a billion dollars in size in 1991 with 4 key firms to 545 billion dollars in size in 2008 with over 200 major funds. As usual, the barrage of information spawned many questions.

Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.

Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.

The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.

Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”

Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?

Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.

This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?

How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?

How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?

How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?

Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

Trends in Credit Markets by Edward Altman

Dr. Altman presented an interesting perspective on economic conditions in 2009- backed with the kind of data and research that gets you thinking critically at the economic data you see around you.

Some quick notes on topics touched upon:
1> The High Yield Bond OAS (yield to maturity spreads over treasuries), which were at 260 bps in June 2007, had jumped to 2046 bps in December 2008.
2> Spread index creation, based on weighted averages of spreads, and dropping of companies that go bankrupt, reduces the spreads.
3> Default rates could be a leading indicator of the health of corporate bond market, however, CDS does not define a distress exchange as a default event.
4> The size of the distress debt market, compared to that of the high yield debt market is an interesting economic trend.
5> Hedge funds will find it difficult to make money as the default rate rises.
6> Moody’s downgrade of 50% of CLOs in the $100 billion market is based on a 40% recovery rate on defaults.
7> In 2009, more than 12 companies went bankrupt with over 1 billion in liabilities.
8> Distressed exchange market in 2008 more in value than the the bond market since 1984 (IBM issuance of the convertible bond to finance an acquistion).

Points to note about the credit markets trends:
1> Low equity and debt volatility till summer 07. The VIX fell to 10.
2> Low default rates and high recoveries.
3> Distress debt control investing- loan to own.
4> Rescue financing- essentially a privatization of bankruptcy.
5> Volatility a measure of downside distribution of asset values.
6> Now, volatility high and liquidity low.

What patterns do you see?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.