Risk Rap

Rapping About a World at Risk

Intellectual Capital Deflation

balloonBearingPoints Chapter 11 filing represents a watershed type event.

The filing by the global consulting firm BearingPoint puts it on life support or at the very least in an intensive care unit. BearingPoint the bulge bracket consulting firm that was spun off from KPMG due to regulatory mandates concerning the separation of accounting and advisory businesses is in serious trouble. It has been struggling under a mountain of debt and the bankruptcy filing will give the firm protection from creditors while it seeks to reorganize its business.

BearingPoint’s filing is an interesting metaphor about the deflation of intellectual capital.  Ideas, creativity, knowledge, productivity and innovation are some of the words that that we closely associate with intellectual capital.  Once we may have even thought this form of capital to be immune from the vicissitudes of the banality of markets.  I surmise that the recent business cycle exposes that idea as based more in our narcissistic prejudices then the cold objective realities of efficient markets.  As we witnessed radical capitalism’s continued drive of extreme rationalization through monetization we discovered the price of anything but seriously lost sight of the value of everything.

During the 1990’s I remember always being impressed and astonished by the reports of the rising productivity of the American workforce.  Year in year out the rising productivity was the proud boast and confirmation of American managerial brilliance.  But today that claim looks spurious at best.  Rethinking this proclamation may reveal this was accomplished not by brilliant management innovation but by outsourcing operational functions to subsistence based economies; and some artful balance sheet wizardry that aligned business performance ratios to maximize shareholder returns; particularly senior managers whose stock options were critical design considerations as to how those ratios were engineered.  Indeed if productivity is a proxy for innovation, the productivity of  American capitalism was outpacing the most aggressive predictions of Moore’s Law.  True technology contributed to massive gains in productivity but in many ways was an economic rent seeking agent that enabled a flawed economy to sustain itself through over leveraged economic and misdirected intellectual capital.

Today we are confronted with the evaporation of massive social wealth that the IMF estimates to be almost $4.1 trillion in the financial service sector.  I suspect a good portion of this value was carried on the balance sheet as good will.  And anyone that has been living close the plant earth the past couple of years can attest to how the good will of corporations has been severely discounted.  Perhaps this wealth never really existed and as the saying goes “you can’t lose what you never had”.  We can take comfort in that and perhaps we can look on the bemused folly of central governments eagerly trying to stimulate economic growth to levels of our recent unsustainable past.  I must admit that my sympathies and conviction stand with the Keynesian but I am beginning to wonder if they are chasing the long tails of ghostly economic shadows cast by AIG’s worthless CDS franchise.  Once considered a revolutionary innovation cooked up by the finest minds of the capital markets financial engineers are now perplexing conundrums wrapped in a riddle and remain valuation Level Three FAS 157 mysteries.

To be sure intellectual capital deflation is a huge subject.  I must also admit that this blogger lacks the time, skill and brain power to elucidate and articulate the numerous nuances and depth this assertion deserves and requires.  I guess we could sum it up in a sound bite like the “dumbing down of America” but I believe that merely addresses the race to the bottom marketers skillfully cultivated to gobble up a greater portion of that ever fickle and fluid market share pie.  In a way the deflation we speak of turns this dumbing down on its head and now claims the purveyors of fine ideas and clever tactics devised by the corporate marketing geniuses who were able to enrich themselves by conceiving the brilliant plans to convince us to buy so they can sell as much useless junk to as many people as possible.

The monetization of intellectual capital by incorporated consultants are increasingly becoming inefficient.  New technologies that are enablers of strategic thinking has large consultancies disappearing into the computing cloud.  Large bull pens of gray matter are inefficient as innovation in small firms are more efficient purveyors of thinking large to solve small problems or thinking small to solve larger problems. The large corporate dinosaurs that protected bloated bureaucracies enmeshed in group think stasis increasing showed an inability to be agents of innovation.  They boldly proclaimed best practices to justify and position themselves in the executive office but now that the large corporations have been decapitalized their value creation mantras dissipated as markets capitalization fell.

In appears that the bulge bracket firms viability were dependent on knowledge transfer initiatives to underdeveloped economies to support outsourcing; and rent seeking business models dependent on regulatory mandates of Sarbanes Oxley, GBLA, COBIT, EURO conversions, Basel II, Y2K, PATRIOT ACT, HIPAA, FISMA etc etc. Their business models profited from significant business drivers of the past two decades the reallocation of capital to emerging markets and the guarantee of market protection due to governmental regulatory mandates.  In both instances value creation from the deployment of intellectual capital proved to be unsustainable.

Consider the financial services industry and hedge funds.  Hedge funds claim to offer uncorrelated investment products but most of the hedge funds performance fell in lock step with the market index averages.  Investors pay premiums to participate in absolute return strategies offered by hedge funds.  Fund managers make the claim of absolute returns based on their superior insights that their intellectual capital confers on their investment strategies.  Last year that claim was demolished to devastating effect.

Newspaper publishers are also experiencing a decline in the portfolio value of their intellectual capital.  But many believe that it is more of  a question of their antiquated business model and once they figure out how to Googlize their business model to sufficiently monetize its intellectual capital shareholders will once again be rewarded with an appreciation in its investment and the true value of their intellectual capital will be realized.

The markets are dramatically changing. Today the question is not so much about ideas and strategy its a question of execution. Just as in the recent past it was about raising capital and acquiring assets now its about making informed capital allocation decisions and liquidity. Its true you need the target to shoot at but you also need munitions, a good scope with adjusted cross hairs and a gun. The value proposition of consultants is quickly becoming marginalized.

Its a poor business model. It scales poorly, its racked with inefficiencies, its built on protected markets and knowledge segregation. Now that those barriers are falling and more and more MBAs are out of work the value of this form of intellectual capital continues to fall.

Consultants all to often are beholden to their process biases. They find it difficult to get out of the box and routinely ask their engagements to climb into the box with them. That said it is an absolute necessity that business redefines its business model to address current market realities. It needs to do so with dispassionate dispatch and it needs to create a unique value proposition that differentiates the brand and adds identifiable alpha in an expanded value delivery chain.

Its a big challenge that many professional services firms need to confront. Our firm went through that transition 6 years ago. We went from a strategic sound practices consulting firm to a product creation and marketing firm dedicated to the commercial application of sound practices. For Sum2 creating value was a very different value proposition then delivering value. The need to build equity in our business was our principal concern. Building and marketing tangible product value is how you create a sustainable business model.

Corporations are becoming disenthralled of their self perceived cleverness. Many believe that major investments in applied intelligence create a culture of insularity that hedges all risks and builds enterprise value. In the past it allowed executives to hide behind a wall of opaqueness. They bought the best and brightest minds from our esteemed business schools convinced that this treasure of intellectual capital would protect them. They believed the digital blips of risk models to be sparkling Rosetta Stones containing the secrets that unlock the mysteries of effective risk management, value creation and business sustainability. The codified results of these algorithmic exercises are revered as holy Dead Sea Scrolls that offers the protection of an supernatural mojo. This is the thinking of a bankrupt brain trust.

You Tube Video: Nena, 99 Luft Ballons

Risk: Group Think, sustainable business model, value creation

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April 24, 2009 Posted by | banking, bankruptsy, Basel II, business continuity, economics, FASB, investments, media, risk management, Sum2 | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

Knowledge is Good

The state college and university system is confronted with mounting challenges as state and federal funding sources continue to trim budget allocations to these vital institutions. State funded college education is a critical social service and support institution that provides higher education opportunities to our lower and middle class citizens. The availability of affordable and accessible public education is critical to maintain an efficiently functioning democratic society. Education offers economically disadvantaged people the hope of social advancement, cultural assimilation and a chance to realize the greater aspirations of America’s promise.

As state funding for higher education decreases, consumers will have to pay more. Colleges will need to scale back offerings and will be required to become more of a market driven enterprise. They will also need to rely more on the largess of alumni and corporate support to remain economically viable.

Cutting state colleges loose to navigate the ebbs and flows of the market economy threatens institutional independence and moves state education services one step closer to privatization. On the positive side this will encourage and inform institutional development and program initiatives that address the needs of the diverse communities’ state colleges serve. This will tend to temper the “ivory tower” criticism of academic institutions; but they must not lose sight of state college’s principal mission to enlighten citizens, serve cultural needs, enhance economic advancement potential and advance the political liberties of citizens.

State colleges are not vocational schools. Nor are they pools of labor and intellectual capital created to support these requirements of capitalist enterprises. As state colleges become more dependent on private sources of funding, it risks that its institutional culture will assume characteristics and political biases to support and advance the interests of its funding sources. This is another dangerous example of how privatization is assuming control of functions previously considered the domain of the state. The privatization of certain military functions, administration of elections and leasing highway toll road administration to private interests signals the growing pervasiveness state capitalism and commercial control over social and governmental institutions.

A free society requires educational institutions to be free from the control of special interests. Partnerships between corporations and public education institutions are critical to the success and growth of both parties. Academic freedom and the protection of the marketplace of ideas must never be compromised for the want of funding and must be guarded at all costs.

“Eternal vigilance is the price of liberty” Wendell Phillips, the abolitionist wrote. Extra vigilance is required to assure that state education continues to be well funded and that the source of funds does not inhibit academic freedom and the ultimate liberty and freedom of expression of our citizens.

The challenge to maintain a standard of excellence, secure funding, maintain costs and create brand differentiation of the state college curriculum and service offering are keys to its survival. Like all market driven enterprises, state colleges need to create and market a unique value proposition. State colleges must balance course curriculum, services and institutional experience to equally serve its social constituents and commercial interests of its funding sources.

The experience of “No Child Left Behind” is a good example of a well intentioned policy that has harmed the primary education experience. NCLB’s places an emphasis on student’s ability to pass standardized tests. Test results are used as a metric to score the schools effectiveness and as a yardstick to reward good performance with additional funding. This program compromises the schools core education mission of instilling a love of learning to better prepare students to be productive members of society. NCLB more closely resembles a grant application process for capital funding that places the protection of the institution ahead of its mission to teach students.

Democracy requires citizens to possess an ability to question, reason and understand how dissimilar issues, events and disciplines intersect and connect in an increasingly complex world. State funded colleges are communities where these types of skills can be developed, nurtured and shared equally and dispersed widely to all members of the society.

That is what the original Lyceum was all about.

We close with a fight song from one of our great public universities, Hail to the Victors!

Risk: public education, civil liberties, informed electorate, participatory democracy, institutional bias, reputation risk, market risk

June 25, 2008 Posted by | education, government, pop, private equity, taxation | , , , , , , , , , , | 1 Comment