Which Location Has the Best Outsourcing Deal?

Posted on February 13, 2013 by Chris Niccolls

Not too long ago, the outsourcing of corporate office jobs was synonymous with India. Big news stories showed example after example of work successfully outsourced to India, yielding enormous savings.  Years ago, when IBM was the biggest and most recognizable name in computers, managers often chose IBM without even looking at the competition. “Nobody ever got fired for recommending IBM,” was once a common saying in corporate America. Once we were all aware that outsourcing existed, India became the dominant “brand”, and it dominated our thinking. Is India still the default choice for outsourcing? What about the rest of the world, including outsourcing to the US?

Over the past few years, outsourcing has become more sophisticated. Outsourcing firms have learned that economies rise and fall, and that different currencies can have very different exchange rates over time. Contracts now include many more clauses and conditions than they used to, so it’s a bit more difficult to compare a flat rate per hour. Still, there are definitely trends. Since India is still the world’s brand for outsourcing,
let’s start there and look just a bit deeper than just the hourly rate:

 

  • India: India still offers positions at a fraction of the hourly US rates. Due to the
    downturn in the world economy, outsourcers have held back raising rates, even
    though inflation in India is two to three times greater than the US. Whether or not they will catch up for these “missing years,” we can expect Indian inflation to outpace the US for the foreseeable future. India also has a higher rate of promotions (on top of cost of living increases), and a very high attrition, leading to a
    higher cost of recruiting, training and employee incentives. While it is not
    unique to India, anytime you deal with another country you need to keep in mind
    that currency rates may change dramatically. If you sign a contract today under a favorable rate of exchange, by the time of your contract renew the exchange
    rate could be dramatically different. This is applies to any offshore location.
    Finally, India does not have a well-established “night shift” culture, and it
    takes dramatic incentives to get people to work at night for any prolonged
    period. Since “normal” work hours in the US are late night in India, your best
    bet is to outsource over-night work, or on work that can be returned a day or
    two later.
  • Other Countries: There are many countries with very specific value propositions:
    specific areas of expertise, better synchronized work hours, different language
    skills, and so on. Let’s use the Philippines as an example. While India’s
    culture is based on British culture, the Philippines follows American culture.
    Britain’s long history with India reduces many cultural barriers, especially
    since India follows British law (the Philippines follows American law). For an
    American, they will find it a bit easier to use the Philippines for tasks
    involving language and will require much less training for legal outsourcing.
    Their inflation rate is on par with the US, and attrition is also lower. There
    are similar (but not a severe) night shift issues, and you have the same
    currency exchange rate issues. However, comparable work in the Philippines
    costs about 20% more, and not all the established forms of outsourcing are
    available in the Philippines.
  • U.S. Outsourcing locations: These are smaller cities and towns with lower wages and operating costs than the big metropolitan cities where many outsourcing
    projects originate. Pricing here is a very mixed bag. It depends on the local
    conditions. If we look at Fargo North Dakota, which has a long tradition in
    outsourcing. In 2010, local unemployment was 5.0% and dropped to 4.2% by August
    of 2011. A busy local economy increases pressure for higher wages and raises
    your hourly rates. With greater cultural similarity, much less soft skill
    training is needed. Inflation is at US levels, there are no currency exchange
    risks and hours of work fit well with the rest of the US. Since Fargo’s greater
    metropolitan population is about 150,000 compared to Mumbai’s 20,000,000, it
    often takes longer to recruit there. And the costs are much higher than India,
    usually 50% more. You can still save money and improve services, but the
    financial impact is much less.
  • US Major Cities: Why outsource to the same location (with the same basic costs) that you work in? You may need a skill that is only available in your local market,
    or the work process may require direct physical interaction. You may even host
    the outsourcer within your facility. However, even in the same location
    outsourcers may provide nuanced cost advantages: a document outsourcer lease a
    fleet of copiers at a better rate; outsourcing e-discovery proves staff that is
    more fully billable than internal resources; outsourcing of programming
    minimizes the number of programming skill you would need to hire and keep
    occupied. A good outsourcer may have slightly lower attrition and costs, but
    otherwise they hire and buy from the same market as you do. This is the highest
    cost market, but there are times when it can still the best deal.

 

There are many other details that will affect the real value
of your outsourcing price. India continues to be one of the lowest per hour
options. Even though costs and risks for India are often left out of the
initial pricing, there are still opportunities to reduce costs and improve
work. There are a lot of other countries that offer equally compelling options,
but you need to know these markets to understand their real value. Outsourcing
to smaller domestic locations is a very viable option, and there are still very
many “undiscovered” locations that offer excellent value. Even local
outsourcing in the big cities still has a place, and offers value, but should
be used more selectively. Invest a little time to understand how to interpret
the cost and value structures of each location, and it will pay a big
dividend!

Posted in Backup Plans, Best Practices, Uncategorized | Tagged , , , | 4 Comments

Will The Republican Party Change By 2016?

Posted on January 31, 2013 by Chris Niccolls

RepublicansThe 2012 election could have been about immigration reform, or putting a budget in place, or world peace. But, as we know, it wasn’t. Instead, the agenda was largely for each candidate to attack the accomplishments and highlight the failures of each opponent. The Republicans and the Democrats both fighting for the most powerful elected position in the world, and each only able to tell us that voting for their opponent would lead to disaster. The American electorate clearly heard this message, and voter participation in 2012  dropped by 5,000,000 since the 2008 election. The 2012 election marks the 4th Republican loss in the last six elections. What can the Republican’s do to put out an agenda that will turn around their losing streak?

What do Republicans believe in? The Republican party is America’s conservative party. Conservatives, by definition, are resistant to change. Conservative parties, around the world, are organizations that: look back on former glories, believes the past was better and safer than the present, knows that changes in demographics and moral values have made the world unfamiliar and uncomfortable, and fight to build a more predictable world… for us and for our children.

Democrats, on the other hand, represent the liberal view-point. Liberals are less tied to the past, and often seek to improve the world by overturning outdated values from the past. By definition, liberals are more open to change, and are willing to accept that there could be a multiplicity of legitimate solutions for a problem.

By contrast, conservatives demand more concessions than they will give, making them reluctant to make deals that are “change makers.” If you go to TED Talks, a collection of short presentations by some of the most intelligent people on earth, you can watch a presentation by Jonathan Haidt about the moral roots of conservative and liberal thinking. Haidt’s studies show that there are five universal values (not doing harm, being fair, group loyalty, respect for authority, and purity) that determine our moral programming. Hadit’s data also shows that conservatives require agreement across  all five values, while liberals are inclined to make a deal with agreement on as few as three values. Liberals are more likely to make a deal. Conservatives are not only less likely to make a deal, but also more likely to look despairingly on  fellow conservatives who compromise their values for the sake of making a deal.

The problem facing Republicans is that their current view of world formed,and then soon froze into place, during the “Golden Age of Conservatives”, the Presidency of Ronald Reagan. But in the decades since the 80s America has drastically changed: demographics have changed, women have become the dominant voting bloc, the cold war ended a generation ago, and even the weather has changed. Republicans are torn between staying “on topic” with an increasingly irrelevant agenda and developing a new agenda that is relevant to most Americans, but not to all Republicans. If the Republican party is to remain a national party, they need to change their position and their message!

As a political scientist, I understand that a change in message means a change in identity. There is a risk that the most conservative elements of their party may reject change. But as a project manager, I know that a group that cannot prioritize their needs, cannot hope to achieve their agenda. Corporate project managers face the same issues when managing major change projects. Senior corporate managers are usually older and more conservative, and they are the ones who… more than anyone else… are responsible for protecting the firm from risk. Learning how corporations and project managers deal with change, just might tell us how to save the Republican party!

In the past, senior managers in major corporations made emotional decisions that would never be allowed in today’s transparent, stockholder driven culture. In the mid-80s, J.C. Penney’s CEO decided to move the corporate headquarters from New York City to Plano Texas. The entire executive team, hundreds of executives, resigned. With a population of 100,000, Plano’s labor market could not easily replace these executives, and Penney’s stock lost 50% of its value. Why would the CEO pursue this risk strategy? The depressed Plano real estate market was depressed and cheap, and there were tax incentives, but that was available everywhere (including NYC). The key factor on Plano’s favor appears to be that the CEO was born just over the border in Oklahoma.

Despite the negative results and the lack of analysis to support his decision, the CEO kept his job. In the 80s, CEO preferences … rather than research… was good enough for key decisions. Today, major corporate (and government) decisions require data and analysis. Let’s look at some key issues for the Republican Party, why these are the key issues and how they need to change:

GUN VIOLENCE: Republicans often say the 2nd Amendment provides unconditional support for guns, which is not true.  The 2nd amendment… “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms”… ties gun ownership to the security of the state, not just the individual. This was further clarified in the Militia Acts of 1792, stating the responsibility of adult males to carry a gun and be called up by the state in time of national emergency. The Militia act of 1862 allowed African-Americans to serve in Militias, and the Militia act of 1903 replaced all militias with the National Guard. Yet, the most vocal supporters of gun rights do not appear to realize that these events occurred.

Of course, in Revolutionary America, there were other reasons than traditional national defense for keeping Americans armed. Americans lived in a wilderness filled with dangerous animals; firearms provided defense and fresh meat for our families. The  westward expansion started scores of Indian wars as American’s took over more and more land, until the wars ended at Wounded Knee in 1890. Adult white males needed public duels to settle personal disputes, until the last states outlawed dueling in the late 1800s. And, of course, men had a moral obligation to protect family and neighbors in a slave uprising.

While the reasons for the 2nd Amendment have all but disappeared, Republican’s believe that we cannot update the definition of gun rights. Yet, American did this in 1934, when high-capacity, fast-firing military weapons entered the American culture. Today we speak about assault weapons and high-capacity clips, in the 30’s it was machine guns (such as the infamous “Tommy Gun” from the Chicago mob wars), high-capacity drum magazines, and silencers. The National Firearms Control Act of 1934 required the registration and taxing of any sales of restricted weapons and paraphernalia. The Firearms act imposed a $200 fee for any of these purchases. If the Firearms Act had indexed the fee to inflation, it would be $3,500 today. However, since the 70s a combination of legislative changes and “tweaks” to gun design have allowed the unrestricted sale of weapons that are more powerful and accurate than the Tommy Gun.

For most Americans, supporting the right to buy a 21st century assault weapon because an 18th century land-owning white male living in the countryside needed a gun, is quite a stretch of logic. Until recently, only 1% or 2% of the population would support this argument, and if you threw in controls on hunting rifles, you might get up to 5%. The more that we allow the free sale of thee weapons, the more frequently we see incidents of public massacre, which is exactly what the specifications of these weapons claim to deliver. When weapons were less deadly, and the need for guns more obvious, there was little will to ban them. Guns owners may still have the political unity to fight off gun restrictions, in 2013. But as new massacres continue to fill the news, the Republican part needs to decide if it wants to be the party of unrestricted gun rights. It can, and some of the membership may even believe it should. Just as corporations must decide which new markets and technologies to adopt, the Republican party needs to decide if investing in this policy leaves it with political capital for any other changes.

SCIENCE: In the early and mid-20th century, a master of oration could talk a bill through Congress. Today, everyone wants facts. We want to see the numbers. We want the credentials of the number crunchers. And we want to know… the science. The 21st century is a very precise world. When someone is arrested, we expect videos and DNA evidence. When a storm is on the way, we what to know when it will arrive, and how long it will last. Technology provides the precision that American farmers need to maximize crop production, and that each of us depends on every day.  It correctly predicted that Hurricane Sandy would be the most destructive storm in East Coast history. However, when that same science predicts that record-breaking storms will continue, Republicans attacked the science and the scientists making these predictions.

For the last 30 years, Republicans have supported policy positions that lack empirical evidence. Agricultural, industrial and economic policy in the early 20th century had to be based on opinion, because the science did not exist. We now understand how weather works, the scientific universally accepts the new weather model, and we can use that model to make accurate long-term weather predictions. Senior corporate managers can no longer simply follow their personal preferences. Likewise, Republicans must decide between fact-based  policies that may appeal to a larger audience, and policies that are followed because of tradition or custom. As America become ever more diverse, fewer policies can be based on just shared history and culture.

Still, every policy cannot be supported by numbers. In banking, the pursuit of short-term profitability conflicts with following the best interests of clients. Yet, firms that pursued “profit-first” and ignored customer interests are paying a high price. Banks that supported the “moral” view of customer service may be the big winners, as banks that. Accepting science does not mean rejecting personal values, but when the science shows us how the universe works, we need to accept this and develop new policies, rather than attacking the science. If the Republican party cannot do this, then, just like a corporate executive who cannot explain why he is supporting an unprofitable division, the Republicans are going to lose the support of their “shareholders.”

FAMILY VALUES: This is the area where the Republican self-proclaimed role as the party of morality, can be given free rein. The problem is that the party’s positions are not only different from mainstream America, they are different from the Republican membership. Gay rights issues have become the lightning rod for cultural change in America. In the last century, most Republicans thought that being gay was bad. Accepting that your child was gay was bad. And gay marriage was unacceptable. But it’s been a decade since Richard Cheney, the very Republican 46th Vice-President of the United States, told the world that his daughter was gay. He publicly stated that he saw no issue with this daughter being gay, he accepted his daughter Mary and her partner were full members of his family, said that he Mary’s child was like any of his other grandchild, and loved Mary just like any other child. Oh… and gay marriage was unacceptable. Richard Cheney IS the typical older Republican, who speaks public Republican policy while following the real-world values that their families actually lived. The difficult to understand, and support, chasm between personal and public values has become the Republicans dilemma.

Talking one way and living another is not unique to Republicans. The Democrats struggle with their own dichotomy between values that they support, such as unionization… especially the various teachers unions… and the values of mainstream America, which is decidedly anti-union. Corporations are struggling with issues of cultural diversity in the workplace, Women as CEOs and as the majority of the new workforce, and global integration of operations. The big lesson is not how we will solve any single issue, it is that we need to continually deal with change. They process of accepting change, and integrating it into corporate and governmental culture is an ongoing process, not a single issue or project. Change management is needed to continuously incorporate new culture, technology,  ideas and practices. To be conservative means holding on to the past, but the present is becoming the past faster than ever before. Republicans are used to establishing policies that are meant to stand for generations, but most of today’s policies are out of date in just a few years.  Change management is the greatest challenge for the Republican party.

Will the Republican party survive the 21st century? If they want to they can, but they cannot survive the 21st century as the Republican part of the 20th century. Corporations have faced similar challenges in transitioning to the 21st century. That transition has included building Project Management Offices, Change Management groups and Process Improvement organizations.   Projects and changes are no longer “occasional events,” they are vital ongoing activities of every organization. The leading corporations around the world have sizable and effective organizations to incorporate change, and the speed of change… in virtually every endeavor… is increasing. The Republican party needs to do more than just change their policy positions; they need to change their process for change. The models are out there, in the most respected and profitable corporation in the world. If they want to change the Republicans can, but what kind of party do they want to be? Time, and the 2016 election will tell!

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The Republican Party: Three Problems In 2013

Posted on December 27, 2012 by Chris Niccolls

The Republican party has a big problem, a really big problem. The 2012 Presidential elections dealt the Republicans a crushing blow. The loss in the popular vote was greater than expected, but the loss in the electoral college was devastating. With the economy is still under performing everyone’s expectations, most Republicans assumed that Obama was a weak candidate who could easily be beaten by… anyone who wasn’t Obama.  However, that’s not the way it turned out. Now, the Republican Party is scrambling to find answers, to find out what went wrong, and what has to change in the future. Of course, one of their biggest issues is that their party’s most active element wants to turn back the clock and return to an earlier age. Well, it’s not just the Republicans. The 21st century is a very confusing time for many Americans as we undergo a period of fundamental change. If we can crack the code for change for the Republicans, maybe we can learn something about change for the rest of us?

If you could place the Republican problem on a map, it would be the tiny spec labeled “compromise” that sits just outside the vast territory called “change.” Enormous change is happening, but the Republican party is not having any of it! But you really can’t blame them. They are the official conservative party, and being conservative means being the party that looked back on the past as something better, and resists anything new. As we saw in the Presidential debate, the Republican candidate (Mitt Romney) questioned the size of the US Navy, which he said has not been this small since 1917. Which was technically true if you counted the number of ships. The Democratic candidate (Barack Obama) responded that you cannot compare 1917 ships to 2012 ships… and also commented that Romney could just as well have mentioned the lack of horses and bayonets in today’s military.

These debates will never be accused of providing too much information, but consider this. The destroyer is one of the smallest sea worthy gun ships in the navy, and the battleship used to be the largest. In WWII, a battleship was typically 15-30 times larger than a destroyer. A 1917 “big” battleship is about 10,000 tons. A “little” destroyer built in 2012 is 14,000 tons. We can’t compare the size of  battleships, because not a sinle navy in the world still uses battleships. The last battleship in the world was retired 20 years ago. On average, each class of ship today is 10 times the size of their 1917 counterpart. And today’s ships have more: accurate guns,. more powerful shells, radar, sonar, GPS, missiles (increasing “gunnery range” from 5  miles to several thousand miles), satellite support, computers, diesel or nuclear power (1917 was steam powered),  and electricity (in 1917 many ships lacked electric lights). Was Romney’s comment on naval power a slip? Probably not. Most likely it reflected how strongly the Republicans are focused an emotional view of the world, rather than a  fact-based view.

You’ve probably seen something similar at work. Groups that just can’t acknowledge that something about the business model, or the culture of the firm, has changed. They feel that proposed changes are a terrible mistake, and any resistance on their part is right-minded resistance. They feel they are the last line of resistance. Besides, if they can hold out, you and your projects just might go away. It almost sounds like a definition of the Tea Party. Because these parallels are so strong, if we can find the key to revitalizing the Republican party, we might also learn how to solve some of our own corporate problems.  Besides, if the pace of change is indeed increasing, we need to know how to deal more effectively with change.

LEADER: Every major change starts with a leader who leads the change. When the Republicans nominate a Presidential candidate, they choose the face of the party for the next four years. Romney had government experience, but not at the national level.  He had powerful connections and is a wealthy businessman, which is very much in line with the Republican image of success. However, few presidential candidates have made their money in the world of finance, but at a time when America is still recovering from a global financial collapse, Romney had special vulnerabilities. He most conservative Republicans believe that their message was right, but the messenger was wrong. Undoubtedly, we will learn more about what happened in backroom discussions within the Republican party, but it does appear that Romney wanted to present a more centrist view, especially in immigration reform. A different leader might have gained more votes, but they would need a different message to gain more than the core Republican vote.

When a corporation is faced with a major change, internal politics are very, very real. The choice of the leader of change is very important. In IT, where change happens more rapidly than in other departments, the turnover in CIOs is very rapid. You can interpret the data different ways, but a CIO generally gets “voted out” every two to four years. For the leaders below the CIO, their perceived “time in power” can be even shorter. IT staff is always very interested in who is leading  new initiative and which groups will benefit. It is often assumed that when a UNIX professional leads, UNIX groups will prosper. Likewise, if the new leader comes from a PC background, it is assumed that PC desktop and server groups will prosper once changes take place. Choose and announce your leaders carefully. Don’t assume that your workers are passive, and will automatically follow any new direction that management agrees to.

MESSAGE: Once the primaries are over, the winner is expected to reach out to their party and perhaps beyond their party to form their platform. The platform used to be very important, with most of the news coverage focused on an analysis of the “message” in the platform. In the 2012 election, the platform virtually disappeared for both the Republicans and the Democrats. Instead, the debate was about the other guy’s flaws and failures. Very little airtime was spent by Republicans talking about the Republican platform. Even the details of the proposed Republican budget were not for public discussion, and would only be fully released after the election was won. As the Republican party became ever more conservative, there seemed to be no happy medium between the desires of the ultra-conservatives and a more liberal message that would appeal to undecided voters.  The decision to have no message in many issues areas appears to be the worst possible decision, if votes are the measure of success. There are difficult decisions that still need to be made, but few in the party who wanted to be associated with the downside of these messages. During the election, it was repeatedly stated that program cuts could be delivered with virtually no negative consequences to the elderly or the needy. However, in the budget discussions after the elections, these easy steps for balancing the budget seem to have disappeared. The lesson learned is that you can’t escape bad news; eventually, you have to reveal the big plan.

With any big change there will be good and bad news. You can’t hide from it. When change comes to your organization, change is easier if everyone can rely on what they are told. When everyone second guesses the truth of your message, or wonders why there isn’t more information, resistance to change rises. If your organization plans to dramatically reduce the cost or the size of a department, positions may need to be cut or job may be moved to a new location. Corporate culture differs dramatically, but providing as much information as honestly as possible is the best policy. If the entire plan is not yet fully known, that’s fine. But as the plan progresses, let the employees of your firm know what events are coming up rather than letting them find out about significant events on blogs and in the newspapers.

DEMOGRAPHICS: The rise of the Hispanic vote was a major discussion during the elections. Did the Republicans lose the Hispanic vote because they ignored immigration reform, because of their lack of presence at the Republican convention, or for their strong rhetoric about returning to an “English First” culture? There are definitely cultural clashes between the idealized 50’s culture they want and the increasingly ethnically and racially diverse culture of America in the 21st century. Regardless of which culture is dominant, women will continue to be 51% of the population. In addition to numerous gaffs about the role of women in America, the Republican party failed to deliver a message that was compelling for independent women voters. The demographics of the Republican party are: older,  wealthier, more male and more Caucasian than the Democratic party or independent voters. The Republicans have typically supported: higher military spending, lower taxes on the wealthy, no civilian gun restrictions, greater restrictions on immigrants, etc. It will be difficult for the Republicans to give up (or change) these policies, without giving up the members who are so tightly attached to each policy.

While the average corporation is not dealing with these specific issues, major corporations are dealing with a similar problem. The most senior managers of any firm tend to be older and more conservative than the managers that report to them. A tier or two down, and managers may question why change cannot happen in leaps rather than small steps. The teams that manage each change project  have until recently reflected the demographics of senior management, who a few years ago were middle managers. Today, you need to see that project teams are more reflective of the company. There need to be more women in senior positions on teams, if only to better represent the greater number of women in corporate management positions. Many companies have gone global, or use outsourcing in countries like India and the Philippines.  Are members  of the branch office represented when headquarters makes plans? If your firm has moved heavily to outsourcing in the last few years, then your “workers” in these outsourced firms probably have no one to represent them when change plans are developed. However, if you ignore the significant cultural differences in this workforce, there may be unintended consequences for your projects.

Change takes time to happen. Almost all the very difficult changes that are facing the Republicans have been under discussion since the last Century.  Eventually, though, the issues of the future become the issues of today. This is a time of big change, for the Republicans and for every corporation. Today, we have just looked at the foundational changes in America, but in our next blog, we will look at some policy changes and possible solutions. But for today, that’s my Niccolls worth!

Posted in Best Practices, Decision Making, Learning and Development, Project Management Office, Uncategorized, Unique Ideas | Tagged , , , , , , | 1 Comment

Holiday Spooktacular: Are Evil Forces Holding Back Your Projects?

Posted on October 29, 2012 by Chris Niccolls

Do evil spirits control your workplace? Have your projects been cursed? Is your PMO hunted by failed and stalled projects? If that’s the case, then today’s Halloween special edition will show you how to cleanse your environment of dark influences, purify your project portfolio and sleep the sleep of the just and true project manager. If you’re ready to face the forces of darkness… let’s dive in!

It is strange, but true, that more people base their lives (and their decisions) on superstition than on facts. If you watch baseball, you will soon notice that many pitchers go through strange gyrations before they throw the ball. Superstition! You need to repeat certain steps if you want to win. Sports, maybe. But superstition in corporations? It may seem ridiculous that a bank, research firm or legal department is ruled by superstition, but in fact, we often act without proof that our actions will do any good. Consider that in America, only <a href=”http://www.gallup.com/poll/114544/darwin-birthday-believe-evolution.aspx”>40% of people</a> believe in evolution, but 50% or more <a href=”http://www.christianpost.com/news/how-many-americans-believe-in-ghosts-spells-and-superstition-29857/”>believe in some form of superstition</a>.

When we are in uncertain times, bet on superstition winning over facts. Face it, we all like to follow a routine, and we don’t like change. In many ways, that’s what superstition is, a routine that you’ve fallen into. It probably doesn’t do anything, but you’re afraid that if you ever stop… something bad will happen. If you’re a follower of Lean Six Sigma, this probably sounds pretty familiar. However, instead of calling these non-value added processes superstition, you could call them waste! When we watch a horror movie, we see the clichés that have become our new superstitions. We all know them, the really dumb things that actors do in movies, especially when the monster is just behind them. But we do expect the movie to follow a certain plot, and so we have these clichés.

Well, we’re not in the movies, and Halloween comes but once a year. We may live in a superstitious world, and we may have bad days at the office with just one too many cliché, but we can break this pattern! If we all stay together, and no one gets lost. No that’s not right. OK, follow me if you want your projects to live! No I’ve heard that one before. How about… try these tips and see if they help?

DON’T LOOK IN THE BASEMENT: Every teen slasher movie has someone who goes into the basement, and never returns again. In the audience we’re all thinking, “Why would you go down there? It’s dark, and the killer is ALWAYS in the basement. Dude… that’s the last place you want to be!” Well, there are a lot of projects in everyone’s basement. These are the projects that could be of some use, might even make you curious if you should start on them, but they don’t have significant benefits. If you have projects in the basement, leave them there. Maybe these projects were put in the basement because there was too little agreement and too much dissention to make them work, without killing a lot of your political capital. Poor innocent political capital. Leave them in the basement until you’ve cleaned up your other projects. Dig up projects when you need to, but learn to leave the basement locked until you have a good reason to go down there.

BEWARE THE FULL MOON: The moon rises every 28 days, as it always has. But not everything in our firms follows an eternal and unbreakable pattern. In fact, most things change, although it may take a very long time for change to happen. One way to increase the speed of change is to inject new technology into your project portfolio. Perhaps you can even leapfrog technology. Instead of replacing desktop computers with laptops, you might move directly to Tablet computers or smart phones. Breaking your old pattern can have magical results!

PROTECTION FROM THE EVIL EYE: From four leaf clovers to horseshoes, we have endless charms and relics to protect ourselves from the unexpected. In project management, operational managers have something similar. It’s called a contingency staff. Contingency staff is additional staff that can be brought in during peak work times, when weather or disaster keeps staff from the office, during flu season or any other time that additional staff is needed to keep the work moving. However, when you have had a contingency staff for a very long time, your “good-luck luck charm” gets comingled with regular staff. Over time contingency and core staff are lumped together, and you no longer know the cost of getting work done. Contingency staff, which may be temps or offshore staff, can be lost in reporting and left off of your service’s expenses. Now that’s Scary! When you put your project together, remember to identify all contingency staff and determine how it fits into the baseline for your operation’s cost.

THAT SCOTTISH PLAY: Wording is everything. There is a superstition among actors that when you work in the play “MacBeth” you cannot say its name, or you will have bad luck. Every firm has culture, and every culture has hot button terms. At JP Morgan, they want outsourcing but not offshoring. Be careful not to confuse the two when you launch a project. President Bush (senior) learned that you can only reword to a certain extent. Taxes, a very unlucky term for conservatives, were particularly out of favor when he became president. In fact he campaigned on a motto of, “Read My Lips… no new taxes!” However, when he then added “revenue enhancements,” well, he had some bad luck in the next election. Your culture may vary, but if you carefully craft your arguments for change with an understanding of the magic words for acceptance and rejection, I will predict much success in your future.

THINGS MAN WAS NOT MEANT TO KNOW: Every project manager and PMO director understands the power of the skeptic, and how these managers and decision makers can throw up barriers that hold back important projects. They don’t want you to make any changes or rock the boat. But even the most reluctant member of the project team has some connection to the goals of your project. You need to discover that connection. If it’s helping the firm achieve its goals or advancing that mangers own goals, there is almost always some connection that can be developed to move a project forward. In old monster movies, if you wanted to villagers to help you, you needed to marry one of the locals or go through a painful initiation. It may not be quite that painful to get your project team behind you, but you may need to sacrifice… something. Negotiation, compromise and persuasion are skills that needed on every project. If you can facilitate the right deal at the right time, you just may be able to get the villagers to leave their pitchfork and torches at home!

The day after Halloween, the spooks and spirits return to their resting places for yet another year. Come the morning we will go back to work and prepare to do battle again to close out our project portfolios. A night of debunking superstition and mystical cliché may not change us completely, but it may make our projects just a little less frightening. So it’s back to work and here’s hoping that all your gravestones… ahhh… milestones are on time. At least, that’s my Niccolls’ worth for tonight!

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PMO Genius: Rule The Bizarro World!

Posted on September 19, 2012 by Chris Niccolls

When you manage projects, a big part of your effectiveness is derived from common knowledge and a database, not necessarily a formal database, of what works and what doesn’t. In the last decade, everyone in a corporation “knows” certain basic facts that underlie the logic of why we do projects. We “know” that: things made in China are cheaper, that it cost less to make things in far away and inexpensive locations, that you don’t pay taxes on things that you buy on the internet, that certain businesses are gone forever from America. Because we know these things, we can act without re-examining these beliefs or explaining them to everyone. This database of common knowledge both informs us of what we should do, and defines the scope of the benefits we should deliver if we are successful. But what happens if one day you wake up in a strange world where everything you knew is now wrong, and the world runs backwards. Well, this Bizarro world may already be here!

For years, we have worked under the assumption that globalization and outsourcing work and work well. Yet, in the 80s most decison makers believed that there were significant, if not insurmountable barriers to globalization. Manufacturing and purchasing was much more local. It made sense to buy from local vendors rather than using centralized, lower cost supply chains.  It took a long time, but we all learned that our new eternal truths were: central, global, and often involved distant locations. However, we have seen ever-widening cracks in our beliefs about how business fundamentally works. For example:

Taxing the Internet: Years ago, we knew that bricks and mortar were dead, when internet merchants were exempted from sales tax. How can a local business compete against this huge advantage? Well, that advantage is now trickling away.  California is now charging sales tax, making it eight states that have leveled the playing field for traditional stores, with 6 more states about to impose a sales tax on the Internet.

FedEx Restructures: Which explains why FedEx is restructuring its business model. Back in 2000 FedEx did its IPO based on the growing need by Internet merchants for delivery services. Now, FedEx believes that it’s time to cut their Express services, raise the price for all premium shipping, and move resources into lower cost shipping options.

Fuel costs Drive Location: The cost of fuel has been rising ever since the beginning of the Iraq war more than a decade ago. The farther away you manufacture, the more fuel it takes to bring that product to your market. A sudden spike in the cost of fuel, and a storm that delays the arrival of a container ship, and the profit from a billion dollars in cargo disappears. The uncertainly of fuel costs and weather in a world of global warming, and all of those offshore factories are not nearly as attractive as they used to be.

Outsourcing to America: The cost of local labor has dropped in the last few years, and domestic productivity is rising. The justification for offshore manufacturing of high price tag goods isn’t what it used to be. Look at cars. Most of the Japanese and Korean cars that Americans buy are built in Kansas. That’s where China is setting up factories. When it comes to cars, there is still a bias towards the Japanese cars being better built and a better buy. But did you know that the top-rated Toyota Camry is it’s not only made in the US, but it uses more US labor and parts than any other car in the world! Japanese designed, and American built has produced the best product in its category.

If you manage projects, you need to know what “normal” looks like. Today basic project assumptions, such as “farther away means lower cost,” are no longer automatically true. Big changes are on the way. The changing value of distance isn’t just something that internet businesses need to think about. Take a look at your own firm’s supply chain. How dependent are your projects on getting products through express shipment?  Take a recent IT project, and assume two more days to ship every order needed to complete the project. How many projects are based on outsourcing or offshoring fueling a financial benefit?

Take a close look at your basic project assumptions… are your assumption up to date? Is it time to review your least successful outsourcing projects and look at how making local decisions for production and/or management might turn it around. Yes, it’s a Bizarro world, but this is your big chance to fix the wrong assumptions of the last few years. Hey, Bizarro is looking better every day!

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Barclays Scandal Shows Need for Better Executive Management Reporting

Posted on July 5, 2012 by Chris Niccolls

Bob Diamond, the former head of Barclays Bank, stepped down from heading the bank because of the LIBOR scandal. Essentially, LIBOR is a calculation that set the borrowing rate in the UK for different markets; for each of these markets between 6 and 20 contributor banks submit their numbers, which are then grouped and re-calculated by a third party (Thomson Reuters, acting for the British Bankers’ Association). UK banks use these numbers to set or influence various short term lending rates. While LIBOR is very important to banking, no single bank set any rate; each bank just contributes to the number. The numbers that banks contribute reflects the “perceived” rate from each bank, leaving lots of room for interpretation.  This story is still in its early stages, so we may find that many other banks were less than honest in the numbers that they contributed.

As we churn through the various scandals of the last few years, there seems to be a consistent theme from top executives: “It’s a big company, and I didn’t personally know that this was happening.” Moving over to media, we have Rupert Murdoch and the hacking scandal. Here, one of Murdoch papers (the Sun, run by his son) continues to show  evidence of government bribery, influence peddling and attempts to intimidate or control government officials. The younger Murdoch said that he didn’t know about the hacking scandal.  To take a look over at Siemens, still recovering from the global bribery scandal that started to surface almost 10 years ago. Jamie Dimon at JPMC initially characterized the firm’s $2 billion loss as a “tempest in a teapot.” Dimon also said, in a number of different ways, that JPMC is very big and the CEO can’t know everything. And he’s right.

Just for a  moment, let’s set aside the cynicism that we all have when we hear that well-paid executives missed the critical details of a financial crisis, bribery case, insider trading, security fraud or influence peddling scheme. Let’s assume that these are not cases of fraud or incompetence. Let’s assume that, at least as these issues get started, that we’re being told the truth. These are big companies and there is so much going on that it may not be possible to know everything. In part, that’s why big companies produce so many management reports. However, when I look at these management reports, they are not always that informative. What are they doing wrong?

  • Presentation: Some reports have the right data, but it’s not presented in a way that is easy to understand. Perhaps a table would be more informative if it was presented as a pie chart?
  • Size: Reports are too big aren’t going to be fully read. I’ve seen “management reports” that are hundreds of pages long. IF it’s that cumbersome, it’s not going to be read every week or every month. Do your report designers understand what makes a report readable?
  • Duplication: Many times executives receives a lot of reports, and one report duplicates the information or the conclusions from another report. Where there is a lot of duplication, there is a lot less reading and comprehension,  and important points are missed.
  • Subject: It may be a good report, but it’s not covering an important subject. Maybe it was important subject years ago, but it is no longer something that interests an executive or will lead to an executive action.
  • Metrics: I’ve seen beautifully designed reports, that are well-designed and just the right size, that even hit the right subject… but that use the wrong metrics to track the issue.

Getting executive management reports right, isn’t easy. It’s hard to fight the trend of reporting what everyone else does,  instead of reporting on the things you need to know and will act upon. It’s easy to pack “executive” reports so full of information that no one ever reads it. And it is just too easy to create a report that misses the key metrics you need. When these mistake are made, executives genuinely do not know what’s going on in their firm. That’s why you, project managers and PMO directors, need to be sure that the reports your organization is creating are the right reports. Take a look at your project portfolio, when was the last time there was a major overhaul of reporting? Has anyone started an “executive reporting” project in the past few years? Your firm… every firm… spends a lot on reporting. Isn’t it time that everyone made sure that the people that run your firm are getting reports that they actually read?

Great executive reports are rare, and they are because they are difficult. However, the exceptional executive report is the best guarantee that  executives know what’s going on, regardless of how complex their operations are. This is a really big issue. The number of times we see executives in front of the Congress, the courts or the media trying to explain what went wrong in their firm is a good indicator of just how rare real transparency is in corporate America. When a firm has transparent operations, it’s a lot harder for scandals to start, and you can put the brakes on a problem when that problem is much, much smaller. At least, that’s my Niccolls worth for today!

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Jamie Dimon Needs A Good Project Manager!

Posted on June 22, 2012 by Chris Niccolls

A few blogs ago we talked about how undisclosed risk in any operation or project can completely change the game. What used to be the right choice may now the wrong one, when you don’t know the whole story. The $2 billion loss at JPMC… or is it $3 billion loss… or should we count the $20 billion in lost equity value… is all about undisclosed risk. Simply, a program was set up by JPMC’s Chief Investment Office to run a hedge fund to  insurance against risk-related  losses on JPMC’s equity portfolios, valued at as much as $400 million. You can argue if that’s a good or bad strategy, but it is logical to want to reduce that risk. However, rather than reducing risk, it was increased, and money was lost. Something was changed.

The source of the problem, the “Gemba” in Kaizen/Lean quality management world, was that this “insurance” program changed, apparently without authorization or notification. Senior revenue producers, especially in the finance world, may think it’s peculiar to speak in terms of project management or quality control when looking at the actions of senior managers.  Yet, without this discipline, problems happen. Carefully examine the discussions between JPMC and the government, and you see that this “insurance” program looks more like a profit center. That’s a big change with a lot of implications for the business model. An acceptable risk to protect assets is not the same as an acceptable risk to make a profit. The Chief Investment Office either made or was on the way to make this transition without a transition program to support the changed role.

According to Bloomberg BusinessWeek, “JPMorgan altered the risk model in mid-January without telling investors…” Back in May the New York Times stated, “JPMorgan’s office, with a portfolio of nearly $400 billion, had become a profit center that made large bets and recorded $5 billion in profit over the three years through 2011.” The change in roles may have accelerated after January 2012, but the Chief Investment Office was at least dabbling (if a $5,000,000,000 profit can be considered dabbling) with a more risk oriented role for years. It’s not clear if all the money or just some came from this hedge fund, but the role of the OFFICE seemed to move steadily towards riskier and more profitable models. Even if the intention was still to protect assets, we shouldn’t be surprised that the thinking of this office was in transition and would eventually apply that thinking to all assets under its control. When billions of dollars of revenue started to appear in this office, didn’t anyone question how this financial alchemy was possible?

What we’re seeing is a combination of events. First, when money starts to flow in a financial firm, people tend to get out of the way. I don’t think that requires many explanations, and it’s why there is so much discussion about controls… and whether these controls should be imposed by the financial firms or the government. Even Jamie Dimon agrees that there must be more control, “Mr. Dimon said that there should be specific limits on the types of trades that failed. In this case, however, he said, not enough limits were erected.” However, there is another factor, one that is pretty difficult to understand. Let’s call it the “invisible Gorilla.” YouTube created a buzz a while back with a video about people passing around a ball. The video instructs you to watch the people in the video and count the number of times the ball is passed. Half way through the video (which runs less than a minute) a guy in a gorilla suit walks across the stage. You are now asked, “How many times was the ball passed (16 times)? You are then asked if you saw the Gorilla. About 40% (mostly the people who got the ball passing number right) say, “What Gorilla?”

The human brain is VERY bad at multi-tasking, regardless of what the average teenager thinks. This video highlighted the problem with texting and driving at the same time. People are bad multi-takers because we don’t really multi-task. Instead we selectively ignore information. Individuals who can hyper-focus well, type “A” personalities like Wall Street senior managers, can perform complex tasks breathtakingly well and still ignore a “Gorilla” staring then right in the eyes. Add to that the prejudice we have that individuals who make millions of dollars a year have brains that can handle situations that confuse the rest of us. While some people are better at some tasks, asking a single brain to multi-task (which causes mistakes), hyper-focus (which causes blind spots), and take responsibility for income generation with confidential investments (which limits controls, inputs and awareness of events by others) we create a risky mix of human frailties. That’s why project management and quality control needs to be more involved in top level banking activities. These methodologies take these shortcomings into account and offset them with areas of human strengths.

I don’t know if Wall Street is ready to hear this, think about how long it’s taken us to realize how bad we are at driving and doing anything else. Still, I think that we need to rely more on structured processes that create the visibility that senior managers need. At least, that’s my Niccolls worth for today!

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PowerSearch: A New Way To Pay For Ediscovery

Posted on June 5, 2012 by Chris Niccolls

I don’t know about you, but I’m still sifting through all the information I collected during Legal Tech in February. Changes in ediscovery, Google’s release of their new Vault product, and Amazon’s ongoing reduction in the cost of storage and retrieval are all coming together redefine how we deal with documents. When I look at all the new innovations, I am struck by a new paradigm: we need to stop looking at ediscovery as a separate process, and start looking at it as an event in the larger process of managing a document’s total life cycle.

While I was at Legal Tech earlier this year, I briefly spoke to Girts Jansons, the founder of PowerSearch Software. Later, I had a chance to have a longer discussion with Girts to understand the innovation that PowerSearch is driving with their new pricing structure. Pricing? Normally, when you think about innovation in ediscovery, it’s about the technology not the way you get charged.  However, this is where PowerSearch has come up with a truly innovative idea, that would change the way we do ediscovery. What’s the big innovation? PowerSearch charges for what you find, not for what you upload. Think of the old “needle in a haystack” analogy we so frequently use for a typical document review. The entire collection of documents is our haystack. Depending on where we are in the review process, the “needle” is either the discoverable documents we need to deliver to the court, or it is the privileged documents we are trying to exclude.  Whichever it is, the bigger the haystack the greater the cost of our review. WIth PowerSearch the size of the haystack doesn’t matter as much.Instead what matters is how many needles we find.

I’m going to put aside the question of whether PowerSerch is faster than other products or if other products have more features. In my experience, every lawyer has their own preference for a specific tool, usually based on their familiarity with that tool rather than a recent evaluation of capabilities. Furthermore, while every review must incorporate the use of computers and software, the majority lean more towards linear review and less towards TAR (Technology Assisted Reviews).  I will only assume that PowerSearch is a reasonable tool. You can try it yourself and decide if it is better or worse than the tools you use today.  Let’s even assume that you continue to use the tools you use today.

PowerSearch allows you to upload and process some or all the documents in a document review into their Cloud based systems. Uploading and processing is free. Therefore, you can complete your document review and then have PowerSearch review it for free. If you find any additional documents, you only pay a fee for the documents you extract (the more documents the lower the price per document). Once the documents have been processed, you can do other searches as often as you like. This allows you to search a collection of millions of documents in just a few seconds. As we all know, when a document review enters its later stages, the client can provide missing information or provide new information that requires a re-review of all documents. This could destroy the budget of the review, especially a linear review that requires staff to re-read the entire collection of documents. In PowerSearch (or any TAR system) you could update the criteria and look at the new documents in just a few minutes.

Even if you do not want to rely on PowerSearch for the results you present to court, in the late stages of a document review you could run searches to scope the impact of the new client requests. This would tell you if there are few or many documents, and would allow you to quickly respond as to the cost and time for this addition to the review. Of course, if you used PowerSearch as your primary tool, just by asking how many new responsive documents that are would deliver the documents. When you run a linear review, if you make a mistake, you need to redo the entire review, creating the new search criteria and having lawyers re-read the documents. Running a TAR based review just requires an update to your search and… there’s the new documents!

Obviously, starting from the beginning using any TAR based tools will greatly reduce the cost of processing a document review. However, PowerSearch’s new pricing model allows you to add many of the features of TAR, with very little cost. If your linear review caught everything you were looking for, then it will cost you nothing and take little of your time. On the other hand, if you perform your review as you normally would and use PowerSearch for additional quality assurance, any new documents that it reveals could be invaluable. Linear reviews are notoriously inaccurate, but many lawyers still feel that they need to keep their reviews largely linear, until the courts order them to do otherwise. PowerSearch’s pricing model allows you to make cost-effective use of it as a scoping and researching tool, while still using your normal processes for identifying documents. This makes it a great transitional tool, for when your firm is ready to move to a full TAR process. At least, that’s my Niccolls worth for today!

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Money Laundering… The Vatican Connection

Posted on May 29, 2012 by Chris Niccolls

A lot of people were very confused when the Pope’s butler was arrested, and told it had to do the growing scandal at the Vatican Bank. Some said, “How does a butler have anything to do with Banking?”; others said, “The Vatican Bank? This must be some kind of secret conspiracy!” As much as I hate giving any credit to conspiracy theorists, this one is a bit more Dan Brown that Agatha Christie. So, let’s skip any, “The Butler did it!” jokes and see what’s really going on.

Both the Vatican and the global banking system grew up together. HBO’s show, “The Borgias”, sensationalizes the seamy side of the medieval Papacy, but  the endless intrigues are based on historical facts. The Borgias consolidated political power at the Vatican, while the Medici family  created our modern banking system. Banks at that time were a far cry from what we think of today, with the secretive movement of money being key to its functions. The Medici bank rose and collapsed over and over again, but it built the political power base that put the Medici’s on the Papal throne just a decade after the Borgia’s reign ended.

The world of Baking has evolved and moved on with the times, but the basic operations of the Vatican have remained fairly static. That’s not to say that the Vatican hasn’t tried to modernize its operations, it just hasn’t been very successful. What we call the Vatican Bank is officially named the, “Istituto per le Opere di Religione,” or the Institute for Works of Religion (IOR). This office functions as a bank, with a “real” banking CEO. It works with International regulatory groups, and represents the Vatican City in its use of the Euro. But it is NOT a central bank, as the Bank of England is for the UK. The IOR is technically a charitable foundation, and is managed with other Vatican charities. But charities lack the controls that a bank requires. When we skip ahead to the 70s, the IOR is definitely acting as if it was a bank, transferring large amounts of money into and out of other banks. The IOR even appoints banking advisers, of a sort. One of these advisers was Michele Sidona.

Michele Sidona, known as the Mafia’s banker, is appointed by the Vatican to advise the IOR. And advise them he does. Using Mafia money form the growing heroin trade, Sidona begins to buy up banks in the US and Italy, who then use the IOR as part of their clearing house for laundering money. Eventually, one of Sidona’s banks (Franklin National, based in Long Island, New York), collapses. Later, still other banks under Sidona’s control fail. After murdering an Italian regulator, who was about to share money laundering data with US government law enforcement agencies, Sidona was sent to jail where he in turn was found dead (from cyanide in his coffee). Skip forward again, to the 80s. Banco Ambrosiano, with deep ties to both the Vatican’s real estate groups and the IOR, suddenly collapses. Banco Amrrosiano, run by CEO Roberto Cavi, picked up where Sidona left off and most of its assets are owned by… the US Mafia. Cavi flees prosecution, and a few days later is found dead, hanging under London’s Blackfriars bridge, with his pockets filled with money and bricks. Both Sidona and Cavi belonged to a secret society called Propaganda Due, which had numerous powerful Mafia members. The degree of money laundering was so great that it was in some ways an open secret, and was only slightly disguised when retold in the movie, “Godfather III.”

This time around, we’re just learning about the issues. In 2010 Italian authorities seized an account from the IOR worth $29 million, triggering a larger investigation. Since 2010 JPMC has been asking the IOR about account 1365, a mysterious and huge ($1.5 billion) account with  activity strongly resembling money laundering. As a result, JPMC announced the closure of this account on March 30, 2012 citing a “lack of transparency. Even before the closure of the account there were many rumors of serious problems (the “Vatileaks” scandal), and the head of the IOR was recently fired by the Vatican. I’m sure that there is much, much more to come.

The IOR was never intended to be a bank, although it has slowly moved into that role. As a charity, the IOR falls into a gray area outside of banking regulation. As a bank, it needs much stronger internal controls. However, Likewise, the Vatican’s has a very long history of absolute opposition to government regulation, that makes a poor fit with today’s trend towards deep government regulation and inspection of financial institutions. Secrecy in financial institutions does not always led to illegal activities, but individuals with large amounts of “shadow economy” money look for these places to launder money. The impact of these shadow transactions goes beyond the profits of money laundering and the criminal activities that it supports. Financial institutions that regularly engage in money laundering need to disable a wide range of oversight mechanisms. This invariably leads to larger problems, including bank collapse.

A butler in the Vatican probably doesn’t know much about international banking, and has few reasons to send documents about dubious banking transactions to the press. However, numerous individuals in the Vatican do know what this information means, and have their own reasons (both altruistic and self-serving) to expose this data.

Just like the butler, both project managers and PMO directors that work in financial firms come into contact with many pieces of information as we develop and execute projects. Early signs of insufficient transparency or eroding transparency are there, if you look for them. When money handling departments don’t build projects for the PMO portfolio, don’t participate in key projects or just don’t like to provide data, it’s an important clue that shouldn’t be ignored. Firms that are corrupted by money laundering don’t get that way overnight, nor is it caused by a single event. When secrecy takes precedence over controls, managers may be are starting down a very dark path. The PMO cannot stop these issues, but it can be the canary in the coal mine and provide early warnings of larger issues. At least, that’s my Niccolls worth for today!

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Stop Burning Money: Learning From JPMC’s Financial Mistakes

Posted on May 14, 2012 by Chris Niccolls

If you’re a long time reader of this blog, you know that for some time we’ve been discussing project management in the largest possible sense. For many, project management is all about managing the schedule and budget of a project. My view is that the project budget and schedule are merely outputs of a much more involved process. The basic tools of project management are very similar to the tools of many other offices: procurement, audit, business improvement, etc. But, in a well-managed firm the threads of all of these different departments come together in the PMO Project Portfolio. Firms, especially financial firms, are now so large and interconnected that individuals and departments can control billions of dollars of assets and leave almost no “footprint” on the firm (i.e. process documentation, business objectives, scope of responsibilities, stakeholder buy-in, etc.). Last week, we heard that JPMC (the world’s largest bank) ran a “loss prevention department” that lost $2 billion. How did that happen? How do you prevent it in the future?

The short version of the story goes like this. JPMC manages many billions in their security portfolios. To limit the risk in these groups, JPMC created a hedging group to limit the possibility of losses on that portfolio. How does a hedging strategy work? It can get very complicated, but essentially it is about putting together a basket of assets that moves in the opposite direction of the assets you are trying to protect. These assets are almost always leveraged (borrowed money used to “amplify” profits). That means that if your primary asses go down, the hedge fund goes up…. Which provides the profits to protect your primary assets.  In a recent blog we went over the details of hedging and how it has led several of the last market collapses. That’s not to say that any one hedge fund is necessarily bad, but all hedges have an Achilles heel. They work perfectly, except for the day when they go through the floor. Each Achilles heel is different and depends on the math behind the fund: it could be a sudden rise or dip in the economy, or a sudden drop in the Asian real estate markets, or loss of confidence in a type of financial instrument. All of these changes have happened, and as a result we had market and economic collapses in the 80s and 90s.

When these strange activities really get going, the next step is that the biggest of these funds keeps increasing its “bet” until it is astronomical in size. If that’s a bad bet, then the firm and even the entire economy can take a fatal hit. We have heard that the damage was $2 billion (this may rise), but the bet was much larger… $100 billion. The bet was only slightly wrong, and lost 2% (i.e. $2 billion). It could easily have been 5 or 10 billion, or more. However, this time, something very different happened. The CEO of JPMC, Jamie Diamond, did something we haven’t seen in a long time. Before he was required to, he publicly reported this problem… BEFORE HE WAS LEGALLY REQUIRE TO REPORT IT! This is one of the reasons that Mr. Dimon has been called America’s best CEO of banking. It took real guts to do this, rather than trying to “fix” the problem with even riskier trades to cover the problem… which has been a recurring problem with other banks. However, if Jamie Dimon is the best CEO of a bank, and JPMC I the best bank in the world, then we have to assume that the JPMC problem is neither unique nor the worst example of what we can expect in the future.

According to Dimon, “There were many errors, sloppiness and bad judgment. These were egregious mistakes, they were self-inflicted.” On “Meet The Press” (5/13/12), Dimon added that JPMC had many billions invested in security portfolios and needed to build a group to hedge the risk for their portfolios; unfortunately, the strategy for that group was, “badly vetted, badly monitored.”

Dallas Federal Reserve Bank President Richard Fisher, said the biggest banks do not have adequate risk management. “What concerns me is risk management, size, scope… At what point do you get to the point that you don’t know what’s going on underneath you? That’s the point where you’ve got too big.” For once, we see commonality between the banks and the regulators. Even when every department produces management reports, these big firms do not have transparency in their operations.

The PMO’s project portfolio is more than a list of projects. It is a crystal ball into the thinking of individual departments. If the PMO is truly global, there should be a section in the folder for each department. When there is a gap in the portfolio, a department with no projects, that’s a sign that this department either is not very connected to the rest of the firm, does not see itself as having any need for improvement, or does not wish to expose it’s operation to the firm.

  • Not connected: There are a lot of reasons for a department to not take the time to work with the PMO. Big deals, high pressure meetings, highly paid staff with better things to do. But these are the same reasons why the department may not be well connected with regulatory and control department. Today, there is a lot of talk about whether bank regulation works, if JPMC had this problem. However, much regulation occurs after the fact. Because of reporting requirements, Dimon found out about this loss. But if there was more exposure of the working of the hedge process, other stakeholders might have raised questions or escalated the issues.  For example, did the fund change its philosophy and did this change lead to the loss? If so, what about changes to their trading systems, training, etc. There are rumors that this loss prevention department was changing its shift to profit making. Did that happen without a project?
  • No problems: When a department does not believe that it has any problems to fix, it invariably has a lot of problem. Perhaps more importantly, it has been able to fool itself into not seeing its flaws. Or believing that only it’s managers are capable of identifying or fixing their problems. This is a high risk thought process. But it’s not uncommon. If we look at a lower-risk industry, we can learn something important. Take supermarkets. Every supermarket is a bit different. The demographics of the neighborhood change, and the physical space varies between supermarkets. Every supermarket manager needs to make compromises to maximize profitability. Managers compete fiercely against each other for the honor of top store manager. While the financial reward will not be as great as a top fund manager, it matters a lot for a supermarket manager. Yet, the head office frequently rotates managers because of “store blindness.” After being in one location for a while, managers have lived with their weaknesses for so long, that they become blind to them. This condition is progressive, creating an ever expanding blind spot where effective management cannot occur. It is no different in banking.
  • Resists exposure: We all know that some manager are more helpful and others are less helpful in developing projects. But managers that are completely absent should set off a red flag. Especially if they are responsible for high-value  assets. High-value and high-risk  operations should be the most connected operations within the firm. They need to have regular contact with stakeholders in other departments, including regulators. The project portfolio should provide insight into the intentions of the that department. Active resistance to exposure can be a culmination of the other influences (everything is OK, I have no reasons to be connected, I don’t need help from other department, etc.).  However, it could also be that the operations of this department are too proprietary, too confidential to be exposed to the entire PMO. If this is the case, I would argue for a sub-department… the Confidential Projects PMO.  This would be a smaller group that only works on projects with high levels of confidentiality.  Big financial firms must flow information from business units to many other groups (IT, compliance, legal, HR, etc.), so there are few legitimate reasons for not injecting PMO disciplines into the top levels of business thinking.

Irony truly rules the world. JPMC created a group to prevent losses in portfolio trading, which pursued a high level risk strategy that has cost the firm $2 billion… so far. Yet this highly leveraged strategy could have cost JPMC much more. You can be sure that JPMC is combing through the firm to find out if other departments have gotten out of control. Expect high-level resignations and executives who suddenly have an urge to spend more time with their families. Will other firms take this as a cue to ensure that departments with the highest risks and most valuable assets are fully connected to the rest of the firm, including the PMO? Will financial firms take advantage of the position of the PMO, and the analytic skills of their project managers, to analyze the project portfolio to find signs of risk behavior and operational blindness? Probably… they will. But not until we have a much bigger and more visible blow-up. And when that blows-up happens, expect a blow by blow examination on this blog site… and that’s my Niccolls worth for today!

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