"Nothing is either good or bad, but thinking makes it so."
William Shakespeare
Month: December 2010
The Curse of Private Business: Nepotism
My friend, a fellow career CFO and frequent correspondent, MJZ urges me to write on nepotism. Her acute sensitivity to the subject is understandable: over the years, she's had more than a few encounters with this practice and I intend to use some of those shared with me as examples.
The dictionary gives a definition of nepotism as "the practice among those with power or influence of favoring relatives or friends, especially by giving them jobs." Nowadays, a lot of people confuse nepotism with networking. Let me correct them. Circulating a resume of someone you know because you can attest to their professional achievements is not nepotism, but a favor to those seeking good people to hire. If you do the same for someone who is a poor worker and a nitwit, it's not nepotism either, it's just your own stupidity. Merit is the key.
The people who mistake networking for nepotism also miss an important element of the definition – "those with power." In monarchical states and dictatorships (such as Kim dynasty's North Korea) the passage of power from parents to children is a given. And in my post on The Distortion of the Bill of Rights in closely-held businesses, I have pointed out that these companies are not democracies, but absolute monarchies. Yet many of us, who still crave the illusion of meritocracy, still cringe at the unfairness of the "family" business arrangements.
It's not always that nepotism has a poor impact on business. For example, it would be a great relief for the media world if strangely progressive Lachlan Murdoch, son of Rupert, got a chance to overhaul his father's empire. His departure from News Corporation has only deepened the company's regress. However, that's a rare exception: 99.99% of nepotism cases are bad both for commerce and morale.
In her early career, MJZ held a Controller position in a manufacturing and distribution company. She was responsible for all accounting, trade finance, and credit functions. As the matter of fact, she was the one who transitioned them from manual into computerized accounting. She was revered by the business owner. But when his daughter with a marketing degree hit the ceiling in her career at now defunct telecom company, MJZ's job went to her. The company went out of business within a year.
At her more recent job, MJZ had to suffer an onslaught of owners' children (all recent college graduates) being appointed as Presidents of the company's subsidiaries. As the conglomerate's CFO, she was forced to educate them, tolerate their shortcomings and listen to her peers and middle managers complaining about the kids' laziness, time in the office they spent on personal matters, and unlimited PTO. These stupid people made a terribly destructive impact on the business. Yet, MJZ was unable to voice her opinion, because, say it with me, there is no such a thing as Freedom of Speech in a place of one's employment.
Curiously enough, the industry where nepotism is the most prevalent is the one that suffers the most from the lack of fresh talent – the entertainment business. But that's a subject for other posts.
Quote of the Day
"Most people would sooner die than think; in fact, they do so."
Bertrand Russell
CFO Folklore: The Mathematical Wisdom of Economic Triangles
Optimization of resources is one of the most crucial tasks in business and every day life. The larger the variety of resources we have at our disposal, the more complicated the task of their optimization becomes. There are mind-blowing models developed with very sophisticated technology trying to approximate the complexity of, let's say, genetic engineering.
However, there is a fundamental optimization problem associated with any type of job we undertake. Whether you are a business owner, a financial exec, a manufacturing manager, a movie producer, a janitor, or a cook, you have to joggle these three basic properties of production: Time, Cost and Quality.
When we want to optimize these three resources we want to accomplish the job at hand with the highest quality, over the shortest time, and at the lowest cost. Unfortunately, both logical and empirical observations show that one cannot achieve all of these targets at the same time.
In practice, the dynamics within any economic system characterized by the presence of these resources can be described by three right triangles in the illustration above, in which the shorter the line representing one or another property, the closer we are to the desirable level of that resource.
As Pythagorean theorem shows, the hypotenuse (the side opposite to the right angle) is always larger than either of the catheti (the legs). So, what do those triangles show us?
You can accomplish something as quickly as possible and at the lowest cost, but the quality will be far from the desirable level (triangle 1). I can give a task of creating a profitability model for a new line of business to my junior analyst and give him one day to do so. Do I even have to describe what I will get from him, if anything, tomorrow morning?
On the other hand, you can strive for the highest quality achieved at the shortest possible time, but then it will not be cheap (triangle 2). I can drop everything else on my agenda and outline detailed specification for the model myself, and then hire a team of highly paid developers to design it. The result – outstanding functionality available for use within 2-3 days, if you can afford it.
Finally, you can keep the quality standard on the level and cost at a reasonable low, but it is going to take a long time to achieve the desired result (triangle 3). I can give the task to my VP of Financial Planning & Analysis, who is very good at creating this sort of models, but has another 15 ongoing and new projects I already assigned to him. So, I instruct him not to spend more than 1 hour a day on this one to keep the cost relatively low. When will I see the model ready? Who knows?
Simple? They teach Pythagorean Theorem in 8th grade AP Math. Now go and try to explain this to your boss. Good Luck!
Quote of the Day
"… Money might buy service, but not loyalty…"
Laurie R. King
The Frustrated CFO 