AWARD FOR BEST ALIEN

Shirky's broken filter

2011-09-01T18:52:00.007+01:00

Information overload doesn't exist. Or at least it doesn't in Clay Shirky's world. Shirky's famous solution to the firehose of digital information was to fit a better filter. By building networks of people we trust to deliver the news, tailored to our own unique interests, we make the abundance of data irrelevant.

It's a utopian vision of data gathering. But how many of us truly trust their own networks? Of course, they may be full of smart people with great connections of their own, people to whom we outsource the delivery of breaking news hours before the major news networks manage the same feat. But information must be broad as well as fast and smart. Does your network teach you things you never knew, or does it teach you things you could never know?

The great joy of the web is in serendipitous discovery; finding those nuggets of knowledge we never knew existed. Great projects to expand the sum of human knowledge are now, thanks to the web, well within our grasp, from efforts to digitise the previously unpublished words of Isaac Newton to attempts to document the Salem witch trials of the 17th century. Will your networks deliver information of this breadth? Unlikely. How successful can we ever be in finding experts on subjects in which we have no expertise? The filter is only effective if we can work out how to build it.

Filtering a firehose turns out to be just as challenging as drinking from one. What if the digital age's spikiest irony is that as information becomes less scarce, its very abundance becomes the biggest barrier to access? Consider Google. Its dominance of search has produced an unintended and damaging consequence in the organisation of the world's information. The highest ranked articles achieve their position as a result of the number of web links to that content. The objective is relevance, but the system often promotes the mundane and popular over the rare and treasured. As Nieman Journalism Lab's Maria Popover writes:

"An esoteric piece of content, however valuable and interesting, will remain confined to the niche community of scholars and hobbyists who have linked to it, ranking it low enough in Google's search results to prevent all but those actively seeking it out from accessing it and engaging with it. Instead, the trivial thrives and the remarkable remains rare."

Through Google's lens, all of the information we require is available, but how accessible is it? How many of us does it reach? It's one thing to organise the world's information, to claim it as "universally accessible", but it's quite another to propagate a system of accessibility that rewards popularity over value. In Google's glass, the trivial floats right to the top, an oily viscous of marginal data.

Shirky may have been right about the filter, but that filter is in need of a good clean. Google's attempt to socialise the processing of content is a good start. Google+ divides relevance into circles, making it easier for the right content to be promoted to the right people. Another way is to take the filter straight to the search engine. Bing's ambitions to become a "decision engine" are underpinned by its links with Facebook, which allow it to deliver search results that are punctuated with the recommendations of friends.

This so-called "socialisation of search" returns us to our original question: how much faith can we really have in our own networks? It's an apposite question for those of us obsessed with the numbers. If SEO is largely a popularity contest, what does that make our quest for social capital? While the ultimate goal is more friends, more clicks and more visibility, social search will always struggle for relevance. How do you decide what's important with 5,000 friends clamouring for attention?

But social search does have its own built-in editor. Perhaps over time, the links between our search queries and our friends' recommendations may come to influence the very make-up of our networks. After all, bad advice is an effective filter, too.

Pic credit: catspyjamasnz

Is Twitter undemocratic?

2011-05-06T17:26:00.009+01:00

There was an interesting Twitter poll posted by Nixon McInnes yesterday, based on the number of Tweets featuring yes2av or no2av hashtags. It was interesting largely because the graphic underscored one of the main reasons why the medium is still a poor conduit for market research.

In case you missed it, the No to AV camp triumphed. But using Twitter to try to predict that result would have proved disastrous. According to Nixon McInnes’s data, there were over 28,000 tweets containing the yes2av hashtag but only 11,000 containg no2av. In other words, almost three times as many yes campaigners than no campaigners.

Social media sentiment tools claim to offer a whole range of useful services, from stock market predictions to product-launch analysis. But the viability of these services exists both on the assumption that sentiment analysis can be predicted accurately on a large scale and that the sample is an accurate representation of the whole population. Research by Daniel Gayo-Avello, Panagiotis T. Metaxas and Eni Mustafaraj at the Department of Computer Science, Wellesley College, Massachusetts, suggests neither, showing that in the last US congressional elections “Twitter did no better than chance in predicting results”.

Twitter’s UK population has long been associated with liberal tendencies. Telegraph writer and polemicist Milo Yiannopoulos worries that the site’s “hegemony of the Left” raises questions about “the contribution of social media to the national debate.”

“…doesn't the echo chamber on Twitter risk distorting discussion in the public square, giving a faulty impression of what most people actually think? And, with a media increasingly taking its cues from Twitter and Facebook, platforms colonised by spoilt, urban liberals, won't the so-called silent majority of Middle England become even more disenfranchised, and, consequently, suffer still further from under-representation and ridicule?”

Yiannopoulos oversimplifies the argument. To claim that Twitter’s “spoilt, urban liberals” are able to bend Middle England’s silent majority to their will ignores the openness of the medium. Twitter is a conversation open to everybody. It democratises social media like no other platform. But the numbers are indeed demographically skewed. As a result, Twitter’s left-leaning politics is out of kilter with the society it purports to represent. Until the Daily Mail readers join the debate, Twitter will remain an unreliable barometer of public mood.

Pic credit: inckognito

Social media versus intuition

2011-03-25T15:16:00.014Z

Ask any newspaper editor about reader appetites for long-running stories. Many intuitively feel that public interest begins to wane far sooner than coverage tails off. It’s a tough call. When does war stop being interesting?

The movement of print to online offers journalists a far better idea of reader engagement. Although an online front page is hardly the most democratic of content aggregators: important stories, as decided by editors, go at the top and are replaced hours, and in some cases minutes, later.

With certain stories, social media can provide a more accurate depiction of public mood. The magazine Fast Company employs data supplied by Crimson Hexagon, which uses a statistical human-assisted approach to monitoring tweets, to measure how conversations change once a new event happens. “On March 23, conversations about Elizabeth Taylor dominated some 500,000 tweets. Japan? Just 119,397. And Libya? Around 97,499.”

Tweets in general have an incredibly short shelf life. According to a report by Sysomos, only six per cent of tweets are retweeted, and nearly all of those retweets occur in the first hour. Just 1.63 per cent of tweets are retweeted in the second hour, and only 0.94 per cent in the third. Of course, the combined immediacy and brevity of Twitter make it an ideal medium for transient information. But it’s interesting to note that stories of all sizes are prone to reader fatigue.

Editors are paid for their judgment. In the US, during the first 10 weeks of 2007, stories about the Iraq war accounted for 23 per cent of TV network news. In the first 10 weeks of 2008, that share had fallen to 3 per cent. On cable networks coverage fell from 24 per cent to one per cent, according to a study by the Project for Excellence in Journalism.

A daily tracking of 65 newspapers by the Associated Press confirms the trend. In September 2007, the AP found 457 Iraq-related stories on front pages. Over the following months, that number fell as low as 49. The cost of foreign correspondents, allied with falling ad revenues, is a key determinant, but editors intuitively understand the shelf-life of their biggest stories. Social media measurement provides the ability to back up those assertions.

pic credit: mknobil

The future of search is human

2011-03-10T15:58:00.009Z

Advertising drives consideration, conversations drive sales. It’s the mantra of social commerce, and the central tenet of Facebook’s plan to monetise its enormous user base. While the social networking site’s current valuation is a juicy bet on the future value of its consumer data, the firm is likely to see a more immediate return from e-commerce: providing a platform for online retail brands to segment and target customers more effectively.

What Facebook wants to replicate, says head of international business development Christian Hernandez, is the mall effect, where groups of mostly young shoppers congregate, share information and offer mutual advice. Facebook allows brands to create virtual malls on its platform by allowing users to “like” particular products, automatically alerting friends via status updates. And offers can be delivered in real time, adds Hernandez. “Because you liked that red dress on Asos but didn’t buy it, Asos can send you a message through Facebook to say it’s now 30 per cent off.”

E-commerce has traditionally been a relatively lonely pursuit. More than one person can in theory hunch around a laptop, but with social media’s help, large groups of buyers can combine to drive deals (Groupon) share content (Twitter) and influence buying decisions (Facebook) much more easily.

Social proof is an important influencer of purchasing decisions, hitherto missing from the online retail experience. Facebook’s partnerships with brands such as Levis represent a new opportunity for low-cost, highly effective marketing. The future of search is human.

Pic credit: Franco Bouly

Why promotion breeds incompetence

2010-11-02T14:29:00.008Z

Random promotion is more effective than promotion on merit, according to new research. The report, by Alessandro Pluchino, Andrea Rapisarda and Cesare Garofalo of the University of Catania, Sicily, concluded that picking managers at random actually increased the efficiency of organisations. According to the Guardian, the research mimics the findings of a 2001 study by Steven E Phelan and Zhiang Lin, published in the journal Computational and Mathematical Organization Theory.

Phelan and Lin concluded that random promotion performed better than every other method, including merit; up or out, where employees are either promoted quickly or fired; and seniority, which rewards longevity over performance.

But would a random promotion system work beyond the confines of a controlled study? It’s not hard to imagine how such a system might start to unravel team spirit and undermine motivation. Either a company imposes a random system in secret, running the risk of employees perceiving the promotions as misguided, or the firm publicises its intention to switch to a randomised process, risking lower performance levels across the board as normally efficient employees lose their chief incentive to perform beyond the minimum level expected.

But why promote at all? According to the Peter Principle, hierarchies are naturally inefficient because a continuous system of promotion inevitably leads to employees reaching a level that exceeds their own competence. Or as the Canadian psychologist Laurence J. Peter put it: “Every new member in a hierarchical organization climbs the hierarchy until he reaches his level of maximum incompetence”.

In practice, given enough time, every large company has the potential to become inefficient and prone to failure. As the channels that stretch to the very top of the organisation become filled with people who are promoted above their maximum capability, and in turn these incompetent managers are given the freedom to fill the rungs beneath them, the large hierarchical organisation grows ever closer to implosion. The Peter Principle is therefore the strongest and most rational argument in favour of private equity .

Pic credit: ThomasThomas

Voters don’t know what they want until governments take it away

2010-10-13T17:37:00.008+01:00

With the Comprehensive Spending Review only a week away, communications is now the cabinet’s most important fiscal tool. A clear strategy is emerging. From David Cameron’s standpoint, it doesn’t really matter where the knife falls as long as the right message accompanies the pain. The amount of time spent explaining the proposed cuts is dwarfed by efforts to inform us of the potential consequences of inaction. There’s a reason for this: the coalition understands the theory of loss aversion.

Defending his decision to abolish child benefits for households in which one parent earns over £44,000, Cameron said the measure raises £1bn, “and that is £1bn that we don't have to take off the poorest families, or off the health budget, or the schools budget.”

In other words, if we don’t take this money from the rich, we’ll take it from the poor, or even worse, the children. Drink this medicine, or the puppy gets it.

Cameron uses these conditional threats liberally and deliberately. “You have to address the massive welfare bills,” he said in June. “You have to address public sector pay bills… Otherwise you will have to make reductions across the board...”

And:

“One of the most shocking things is the extent of the interest we are paying on our debt. If we don’t do anything about it, it is going to be £50, £60, £70 billion... We will be spending more on debt interest than we do on educating our children and defending our country.”

This isn’t just scaremongering. Social psychologists recognise this language structure as an attempt to manipulate our natural aversion to loss. According to Noah Goldstein, Steve Martin and Robert Cialdini, the human “tendency to be more sensitive to possible losses than to possible gains is one of the best supported findings in social science”.

In their book, Yes! 50 secrets from the science of persuasion, Goldstein et al cite the age-old business school case study, Coca-Cola’s attempt to change its formula from old Coke to New Coke, as evidence of our universal sensitivity to potential loss over gain.

In 1985, Coca-Cola decided to sweeten its formula in an attempt to make it taste more like Pepsi, which many consumers said they preferred. Coke blind-tested its new, sweeter drink on 200,000 people, 55 per cent of whom said they preferred it. When the blindfolds were lifted, and consumers told they were drinking New Coke, their preference for the new formula increased a further six per cent.

Backed by extensive market research, the company thought it was onto a winner. But new Coke bombed. Consumers hated the new variety so intently that they campaigned for the old Coke to be reinstated. The episode proved a public relations disaster. It was also difficult to explain. Why did consumers reject a taste they had overwhelmingly preferred during testing?

Some marketers attribute the anomaly to a brand loyalty so intense that consumers essentially ignored their own taste buds in an effort to preserve the status quo. But according to Goldstein et al, what really happened was that Coke’s marketing team underestimated its customers’ natural aversion to loss.

“During the taste tests, it was the New Coke which was unavailable to people to buy, and so, when they knew which sample was which, they showed an especially strong preference for what they couldn’t otherwise have. But later, when the company replaced the traditional recipe with the new one, now it was the old Coke that people couldn’t have and it became the favourite.”

It was the fear of losing old Coke that prompted the extreme reaction. How does this information help Cameron’s communications team? Because the notion of loss is so compelling, an announcement that shows people what they have to lose will always be far more effective than simply showing them what they have to gain. Most marketers realise that “50 per cent off” will always be less successful than “Last chance to get 50 per cent off”.

For a government preparing to announce a series of unpopular public sector cuts, the theory of loss aversion presents a challenge. Every cut it makes will likely produce an emotional reaction disproportionate to the perceived value of the original benefit.

Consider the child benefits row. The public reaction to the removal of child benefits for high earners (many of whom said they didn’t even use the benefits for living expenses, preferring to set up savings accounts so that their children can enjoy the benefits in the future) shows the difficulty of implementing a heavy cuts programme. Whether or not we personally benefit from a particular service the coalition plans to cut, we are pre-programmed to resent the removal of that benefit.

But the government can also use its knowledge of loss aversion to plan its communications strategy. By exploiting our fear of bigger, potential losses in the future, it can neutralise our natural aversion to losing certain services right now. Watch Cameron’s team announce the cuts, and follow it with a reminder of what we stand to lose if we don’t take the medicine.

Pic credit: The Prime Minister's Office

How to dismantle a superpower

2010-10-08T16:32:00.007+01:00

How is the age of austerity treating you? There’s plenty more pain to come, as George Osborne frequently reminds us, but it’s in his interest to do so. To give the coalition its greatest chance of survival, cuts must be oversold in order to appear under-delivered. Doom mongering carries no lasting effect as long as the actual pain is less than expected.

Like a Tory Hans Gruber, Osborne will keep cutting until he finds something you do care about. But the aim is that when the time comes to close the local library on Wednesdays, you’ll be too preoccupied with the survival of your hospital’s cancer ward to care.

In the US, the headline cuts have already begun. A piece in the New York Times detailed a range of fiscal lacerations deep enough to make you wonder whether Obama has any kind of overarching strategy at all. Clayton County, a suburb of Atlanta, shut down its entire public bus system, stranding 8,400 daily commuters. In Colorado Springs, the authorities switched off “a third of its 24,512 streetlights to save money on electricity, while trimming its police force and auctioning off its police helicopters.”

Glenn Greenwald from salon.com notes that across rural America, paved roads are being torn up and replaced with gravel or other rough surfaces “as counties struggle with tight budgets and dwindling state and federal revenue", while the state of Utah is “seriously considering eliminating the 12th grade”.

For Greenwald, the end is nigh:

“Does anyone doubt that once a society ceases to be able to afford schools, public transit, paved roads, libraries and street lights—or once it chooses not to be able to afford those things in pursuit of imperial priorities and the maintenance of a vast Surveillance and National Security State—that a very serious problem has arisen, that things have gone seriously awry, that imperial collapse, by definition, is an imminent inevitability?”

A recent Ipsos Mori poll found that 55 per cent of respondents had never heard of Cameron’s Big Society. They’ll find out soon enough.

Pic credit: Architekt2

Necessity is the mother of disruption

2010-09-02T16:21:00.027+01:00

A hat tip to IDEO’s Tom Hulme for pointing me in the direction of Kickstarter, a social-funding platform based in the US. Kickstarter aims to help hard-up creative entrepreneurs find money for artistic or “ambitious” endeavours. Ideas for potential projects are posted on the Kickstarter website, allowing interested parties to make donations. No equity is taken, but the most successful projects tend to come up with innovative ways to reward their benefactors.

One of Kickstarter’s more obvious charms is its all-or-nothing policy, borrowed it seems, straight from the BBC’s Dragon’s Den. Projects must be fully funded before the allotted time expires or no money changes hands. This has two notable benefits. One, it allows creatives to gauge public interest in a project before committing to it, which provides more-or-less free market research with zero risk. Two, it lends a sense of urgency to entrepreneurial creation. Want to bring an idea to life? The clock is ticking.

Kickstarter is full of creative ideas, focussing largely on prospective films, books and music, plus the odd entrepreneurial gem, such as the social enterprise Conflict Kitchen, a take-away restaurant that only serves food from countries with which the United States government is in conflict.

Conflict Kitchen’s current incarnation is the Iranian take-out restaurant, Kubideh Kitchen, serving kubideh: a spiced meat barbari bread sandwich with onion, mint, and basil. The sandwich is served in a custom-designed wrapper that features interviews with Iranians on subjects ranging from Persian poetry to politics, thereby serving up a multi-sensory attack on the cultural conscience.

The theme switches every four months (a frequency that appears to lag only slightly behind US foreign policy) allowing Conflict Kitchen to provoke discussion around a different culture. Next up is Afghanistan. Bolani Pazi, as it will be known, plans to offer a well-known Afghan street food, called bolani. After that, Conflict Kitchen will switch its attention to North Korea. If you want to invest, do so here.

While Kickstart’s projects provide a great example of innovation thriving in the oxygen of social support, it’s hard to ignore the invention of the funding model itself. Last month I spoke to the creators of Funding Circle, a UK social lending platform, about the paucity of available funding for established SMEs. Funding Circle aims to help small businesses reduce their reliance on punitive high street banks by putting them in touch with members of the public. Group lending ensures the risk of default is spread, securing an above average return for investors and improved rates for borrowers.

Small business finance is critical for long-term economic growth, yet the lack of supply remains a problem infinitely more discussed than resolved. Labour flat-refused to tackle it, while the coalition continues to prioritise the issue right to the bottom of the list. If the banks won’t play ball, perhaps it’s time to disintermediate them out of the picture completely. Social lending could prove necessity is also the mother of disruption.

Humans are boring, say machines

2010-08-12T17:49:00.014+01:00

Behavioural psychologist Gavin Potter is an expert on idiosyncrasy. He helps computers understand what it means to be human. Potter works as a consultant to online dating companies, using massive data sets to help match prospective partners. Every time a user clicks on a potential date’s profile, all the relevant information leading to that click (hair, eye colour etc) is logged, helping the software to make predictions about the types of people we might be attracted to in the future.

While Potter is an expert on what makes us unique, his success in teaching computers to predict our behaviour comes from spotting the things that make us alike. For example, female daters click on profiles of men who are on average three years older than them. If you think that’s clichéd, consider that over 90 per cent of men seek women who are half their age plus seven. "People think they are unique," says Potter. "They say, ‘you can't possibly profile me’. The depressing thing is that you can actually do it pretty accurately."

The key to accurate, automated profiling lies in the size of the dataset. The bigger the dataset, the easier it is to iron out statistical anomalies. With evermore data, those clichés get easier and easier to find. It’s ironic that in our attempt to examine humanity through artificially intelligent means, all we ultimately reveal is our own robotic predictability.

Large-scale datasets are becoming increasingly available to the public. Take a look at behavioural economist Dan Ariely’s blog for an interesting take on password selection. Data from 100,000 Israeli user accounts, which were published following a cyber attack, show a depressing lack of what the author defines as necessary “randomness”.

The accounts, which were hacked from user registrations for Pizza Hut and an Israeli property website, revealed individuals’ usernames, email addresses and passwords. The most commonly chosen password was 123456 (584 users), with 1234 as the runner up (569) and 12345 in third (388). All in all, 1786 passwords (nearly 6 per cent) were comprised of consecutive increasing numerals.

“This means that one person in 18 didn’t muster the cognitive capacity to generate a password more intricate than 1234 and the like.”

Even worse,

“788 people (roughly 2.5 per cent, or one in forty people) chose a password identical to their username. [And] 417 people (1.32%) chose a password comprised of identical digits (e.g. 1111).”

The password analysis was completed by hand, but advances in computer processing power, and the addition of psychological insight to statistical analysis, have greatly improved our ability to automate the discovery of behavioural patterns from large datasets. It's unfortunate that the most enlightening discovery to date is our penchant for banality.

Pic credit: Tleilaxus

Zuckerberg's privacy trade-off

2010-07-06T14:55:00.008+01:00

Facebook spends a disproportionate amount of time and money persuading us to leave our data in its capable hands. At least, its efforts appear disproportionate to the average user. In fact, Facebook CEO Mark Zuckerberg, who lists "openness" as one of his interests on his own Facebook profile, is desperate to sell us his vision of the future, if only to prop up Facebook's ambitious $10bn valuation. That future precludes privacy.

To Zuckerberg and his shareholders, disclosure is the new discretion. To justify the business model, all of our likes and dislikes must be indexed and segmented at the behest of Facebook's eventual paymasters. Privacy must die if Facebook is to live.

The average user may not fully comprehend the company's goals, but that won't stop them feeling cheated once the targeting begins in earnest. As the Guardian points out:

"...the internet has proved resistant to overt commercialisation in the past. When Rupert Murdoch's News Corp bought MySpace for $580m in July 2005, the company used it to plug its own products and the site's hip audience of teenage music fans soon began to search for other online hangouts."

But moral outrage is generational, argues Web entrepreneur David Murray-Hundley. "We're very good in technology at saying, 'this generation doesn't get it, let's concentrate on the one behind'."

"It scares the crap out of most people," adds Murray-Hundley. "But look at the generation behind. They give up their data. An 18-20 year-old will give you the whole world."

That we are outraged while Facebook grows ever more powerful is no longer a paradox. It is simply a demographic shift. The appeal of Zuckerberg's trade-off, access for data, is a gamble on social media's popularity and eventual ubiquity. Don't bet against it.

A bad Budget for creativity

2010-06-22T15:46:00.004+01:00

The biggest business loser in today's Budget is undoubtedly the video games industry, which lost the tax relief earmarked by Labour’s pre-election budget. It's a massive blow for a sector that annually contributes £1bn to UK GDP. Despite a vague promise of support from Ed Vaizey, the Chancellor this afternoon announced the removal of a tax break he regards as "poorly targeted".

Big mistake. The industry has been lobbying hard for tax relief in the face of tough competition from countries such as France and Canada, which enjoy government subsidies that allow developers to pay more for the best talent.

In the past, the UK has more than punched above its weight in the sector, rivaling games giants Japan and the US. But with more attractive packages available in English-speaking Canada and Australia, or closer to home in France, developers fear a "brain drain" of talented programmers. In a Budget purporting to inject life back into the private sector, Osborne has greatly underestimated the value of one of Britain's most valuable creative industries.

The Jabulani: predictably unpredictable

2010-06-17T17:27:00.013+01:00

More on the Adidas Jabulani ball from Jon Naylor over at Half Volley. Adidas has produced the official World Cup ball ever since FIFA first sold the rights back in 1970. But as Naylor reminds us, this is not the first time the German sports company's technology has been criticised. In 2006, the "Teamgeist" was described by England goalkeeper Paul Robinson as "a water-polo ball", while 2002's "Fevernova" was compared by Italy's keeper Gianluigi Buffon to a "ridiculous kiddy's bouncing ball".

But if you study the statistics, says Naylor, it begins to look as if Adidas's perennial critics are merely getting their excuses in early. Since the Tricolore ball, which featured in the 1998 World Cup, "there have been progressively fewer goals scored in World Cup finals tournaments", not more.

2006 (Teamgeist): 147 goals, 2.30 per game

2002 (Fevernova): 161 goals, 2.56 per game

1998 (Tricolore): 171 goals, 2.7 per game

If the balls were "as difficult to handle as has been suggested, then surely goal avalanches would have been more regular in later tournaments," suggests Naylor, as opposed to increasingly rare?

Not necessarily. There are other factors at play, not least the attitude and skill level of the average World Cup striker. With an unpredictable ball at his feet, and the whole world watching his every move, many attacking players are opting to pass rather than shoot, or as we witnessed during England's opening match against the US, concentrating more on hitting the target than on scoring. True enough, we've seen the odd goalkeeping howler, but many more shots have ballooned over the crossbar.

So far, this World Cup has yielded the lowest number of goals in history. But there's another angle to consider. An unpredictable ball produces fewer goals, but what it also creates is more competitive matches. It may not be traditionally designed, but the Jabulani is at the very least a useful leveller, bringing parity even where attacking resources are unevenly distributed. Which is one of the reasons why games such as Brazil-North Korea are ending 2-1 rather than 5-0, and why Switzerland were at least in with a chance of toppling favourites Spain.

We might not get as many goals, but an unpredictable ball means a less predictable tournament. It's a reasonable trade-off.

BP and the crowdsource defence

2010-06-15T11:39:00.009+01:00

With some suggesting BP could ultimately collapse under the weight of the multiple lawsuits headed its way, survival will depend a great deal on how the oil company is seen to handle the crisis. While the accident exposed flaws in the company's risk management, BP's response will test its PR team to the full.

The case for the prosecution is clear enough. Any future litigation will likely focus on the oil company's appalling safety record. But how much BP will owe in damages is unwritten. If the company can show contrition through the seriousness of its response, the courts will at least be inclined to focus more on facts than on the level of public hysteria.

BP chief executive Tony Haywood has already made the best PR decision available to him. Crowdsourcing a potential solution to the problem, a strategy that has already elicited over 30,000 ideas, is a public relations masterstroke on multiple levels. First, it shows that the oil company is ready to explore almost any route in its attempt to clean up the mess. It projects a willing, can-do attitude: an image the stricken company will need to hang on to.

Second, it demonstrates a degree of openness. At best, an inclination to collaborate can be used to combat the perception of secrecy—the potentially damaging impression that the public isn't being told the full story. Finally, it suggests, albeit subtly, that the company is in some way disconnected from the root cause of the problem. While BP can still score image points in outwardly claiming full responsibility, the fact that it has sought assistance from outside the company is a strategy of disassociation: it suggests that the leak was an occurrence so freakish that the only solution is as yet unknown.

The risk to BP's—and Haywood's—reputation is that ignorance is always a shaky foundation on which to mount a defence. If BP didn't fully assess the risks, it should never have commenced drilling in the first place. That said, the best outcome Haywood can hope for is leniency. Public perception remains crucial.

The puncture in Cameron’s inflated society

2010-05-07T12:32:00.014+01:00

Even if David Cameron manages to bargain his way to the top of a coalition government, the Tories have floundered in their attempts to convince the British public that an unwieldy state should be replaced by community power. In a referendum for Cameron’s Big Society, the Tory leader has failed pretty convincingly. As Tim Montgomerie concludes on ConservativeHome:

"Unforgivably, the big society message favoured by the Tory head of strategy, Steve Hilton, was never poll-tested, and failed to cut through with most voters–and even frightened some."

Labour has dismissed the Big Society as an election gimmick, but there are signs in the private sector that the decentralisation of command is gaining currency. ROWE, which stands for Results Only Work Environment, is an attempt to rebalance the working environment, replacing so-called presenteeism with extreme flexibility. In lieu of command and control, employees get to dictate when and how much they work, the only stipulation being that they meet their individual targets. In a ROWE, it doesn’t matter what hours you work as long as the job gets done.

ROWE is a trade-off that rewards productivity with work-life autonomy. According to ROWE’s architects, former Best Buy employees Cali Ressler and Jody Thompson, eighty per cent of lost productivity can be attributed to presenteeism, an all too common attitude in which employees believe simply turning up to work is enough to warrant their monthly pay slips. ROWE decentralises workplace decision-making, so that employees set their own schedules. The goal is to empower through increased responsibility. Says Ressler:

"People at all levels stop doing any activity that is a waste of their time, the customer's time, or the company's money. This promotes a more engaged workforce motivated to not only produce something, but to produce something meaningful."

There are of course clear disadvantages to such a distinct redistribution of rights, not least of which is the fact that most organisations require more than a skeleton staff present during normal working hours to deal with that inconvenient thing known as the customer. It’s also argued that focusing too heavily on results dilutes team spirit, turning workers into selfish, unilateral robots—empowered, but inconsiderate to the needs of the company as a whole.

It’s a fine balance. Gain motivated, productive employees; risk creating disparate self-interest. Now consider the way local government decisions are made. Would Cameron’s Big Society have followed a similar path?

Cameron's ideological handicap

2010-04-27T11:59:00.010+01:00

This is the best description I've come across of the ideological hurdle David Cameron must leap to win the election. DC is hamstrung by a blanket mistrust of free market capitalism and his party's historical bond with that system, writes Larry Elliott in the Guardian. You might think that the biggest loser after a recession of this size would be the government that presided over it. But the polls show that voters are still a little nervous of a return to small state politics.

"Cameron is in the diametrically opposite position to Margaret Thatcher in 1979: she was helped by the crisis of Keynesian social democracy in 1976; he is hampered by the crisis of laissez-faire. The events of the past three years have made it much harder to argue for a small state, market-knows-best approach to economic management, and the Conservatives have not yet found a plausible alternative.

"They have tried substituting the Big Society for the Big State, but it doesn't really address the fundamental weakness for the right: the ideological advantage is with those supporting more state intervention to tame the market."

Why art should be compulsory for CEOs

2010-04-22T12:57:00.014+01:00

In Tim Brown's book, Change by Design, the author calls for design thinking to "move upstream", closer to the boardroom, where strategic decisions are made. But there are a couple of good reasons why this is harder to execute than it sounds. Roger Martin, who with the help of Brown first coined the phrase "design thinking", says that most CEOs are completely devoid of artistic capability while many designers seem overly keen to keep it that way. "CEOs aren't nurturing their artistic sensibilities," says Martin. "Art is a little foreign to them."

"In Canada, virtually everyone who can drop art drops it. Maths and English are required subjects to the bitter end at high school. Hardly anyone takes anything that would cause any development of their artistic sensibilities at university. Some take history of art, but the numbers are minuscule in total."

If you combine that with the fact that many designers want to keep design "pure" and away from the grasp of CEOs, says Martin, you have a recipe for disintegrated organisations, in which design is wholly detached from the process of innovation. Leaders should "care about lines and form", adds Martin. It's the only way to ensure design thinking pervades the entire organisation.

"Why are iPhones so pretty? It's because when the guy who green lights them is shown an iPhone that looks pretty good and one that looks awesome, he says I'll take the awesome one".

Social media for business: five tips for neutralising negativity

2010-04-20T15:44:00.026+01:00

1. You will be judged on the tone of your response. Be humorous, but not flippant. Be polite, not argumentative. Consider every contact individually. Does this person require assistance, or are they simply letting off steam?

2. Don’t hide behind a logo, be human. Make one employee your single point of contact for social media. This should be a senior marketer with a good grasp of frontline customer services, not an intern with plenty of Facebook skills but little idea of how your business really works.

3. Deal in facts. If your company is being attacked for something that isn’t true, politely offer a link to a source that backs up your side of the story. Treat every comment in the same way you might in a retail environment: other customers will be listening.

4. Show that you care. Emphasise that the reason your company has a social media channel is to listen to customers’ problems and act on that information. Promise to investigate the problem and keep that promise. Social media happens in real time, so be quick.

5. You may need to move the discussion away from a social media platform to email, or even telephone. This has two benefits: first, it removes the oxygen of publicity. Second, it permits you to be much clearer and more precise than you can ever be in 140 characters.

Innovation lessons from Richard Noble

2010-02-01T18:26:00.016Z

Richard Noble is defined by his multiple land speed records, and also by the attempts that didn’t go quite as well as expected. His first effort, for instance, back in 1977 in a car he built himself, finished upside down in a field after a death-defying, mid-air triple-roll. Noble, somewhat dispassionately, describes the order of events as: crash, pub, scrap yard. He says back then he hadn’t a clue about engineering, let alone any motor racing experience. He was obsessed by speed, and invigorated by the desire to break records, and that seemed enough.

It’s impressive, this insouciant ambition, which drives Noble to achieve things that to others seem inconceivable. Innovation has never seemed so natural. His latest record attempt is called BloodhoundSSC. The car, which Noble hopes will destroy his own land speed record, becoming the world’s first 1,000mph vehicle, is currently being built in Bristol. He’s set firmly on that record, but goal number two is more altruistic: to inspire a new generation of engineers.

Young scientists may well be enthused by Bloodhound’s potential. Provided the team can keep it on the road, the car will be able to travel the length of four football pitches every second. Although it would be too dangerous to try, should the driver be of the mind to swivel in his seat and fire a gun back towards the car’s origin, the car’s sheer velocity would render the bullet impotent. It would exit the chamber and fall straight to the ground.

Noble retired from the cockpit soon after breaking the record with Thrust2 in 1983. These days he looks after the business side of things. You might think such an experienced campaigner would rule his project teams with an iron fist. Actually, the reverse is true. “Every employee should have enough authority to fail the company,” he tells me. Why? Because to inject a workforce, any workforce, with passion, commitment and ingenuity, you need to forget about the concept of natural leadership.

Noble's project teams are almost completely flat. Noble is the sole director, looking after planning, finance and company culture. On everything else, his teams answer to no one. "I only want to know when things go wrong," he says. With no manager to go through, people are forced to collaborate. Teamwork prospers. In a flat organisation, says Noble, "you see people develop like you've never seen them develop before".

Here’s an interesting lesson: if you want innovation to thrive, take your hand off the tiller.

Why the world needs fewer handbags

2009-12-10T14:58:00.013Z

One of the marketing department’s cleverest tricks is product life extension. With a “new improved formula” here, and a version 2.0 there, the marketer can reignite interest in a fading brand with minimal investment. For the purveyors of FMCGs, such as toothpaste and shampoo, marketing sheen is administered in lieu of real research and development, no matter what those white-coated boffins in the ads lead us to believe. And this is considered good business. Money for old rope is every finance director’s dream.

But while extending the life of a brand of detergent isn’t necessarily all that harmful (we’ve all got to wash our clothes occasionally) pull that same trick with electronics and the downside is more pronounced. How many iPods have you bought in your lifetime? How many DVD players? How many TVs? These faux product upgrades provide something for nothing, but it’s what we do with all the somethings that causes alarm. Continuous flogging of the product life cycle is a serious environmental threat, packing landfills to the brim with materials that nobody really knows how to dispose of safely.

Acclaimed minimalist designer Dieter Rams spoke out recently against our throwaway culture. He told the Times:

“There’s such a lot of things. Such a lot of unusable things. Most things are unnecessary and overdone. Look around: we cannot send to the third world all the garbage we don’t need any more. We have to go back to more simplicity, longevity.”

Longevity is anathema to marketers, of course. But perhaps if consumers were trained to see that Rams’s philosophy of “Weniger, aber besser” (less, but better) is both practical and desirable, marketers would begin decorating their brands with more sustainable messages.

Sustainable doesn’t have to mean green. According to IDEO UK managing director Sue Siddall, obsession with product life cycle is dissipating, partly because endless replenishment isn’t always commercially desirable.

“Look at the handbag business: high-end, luxury handbags. These brands taught their consumers to be promiscuous around brands, they taught them to buy the “it” bag every season, four bags a year. They now have a bunch of consumers that are brand disloyal. They don’t care which brand, it just has to be the one Sienna Miller is wearing. They have driven a behaviour that has shot them in the foot.”

Why we should leave design thinking to designers

2009-11-25T17:08:00.020Z

Design thinking is the business buzz-phrase of the year. This I judge not on its novelty (it originated in the 90s*), but on the sheer weight of design thinking books now littering my desk. This is not to belittle its worth. Design thinking’s growing prominence is a welcome shot in the arm for both innovation and customer value.

In essence, design thinking is a process that allows businesses to match their boring analytical sides with creativity and intuition. It sprinkles old, dysfunctional products with designer dust, creating “user experiences” that fundamentally define brands. It's about using creativity to change behaviour.

I spent most of last week talking to a variety of design luminaries, most of whom displayed a messianic reverence for Apple designer Jonathan Ive. Those iPods are pretty, right? But Apple’s nod to design thinking goes way beyond white earphones. As Stewart Emery and Robert Brunner write in their book, Design Matters,

“Close your eyes and imagine you are holding an iPod. Now take away iTunes, take away the ability to buy the song you like for 79p without having to pay £100 for a dozen more that you don’t want, lose the ability to create playlists, cut out the packaging, take out the ads, delete the Apple logo and close all the stores. The remaining question is: do you still have an iPod?”

To a designer, that iPod in the palm of your hand has its own form of communication. Design language is the term designers use to describe how a product makes the customer feel. It is what happens when a product’s form and function fuse to elicit an emotional response.

According to Brunner and Emery, design language “is the consciously orchestrated work of a designer”, the way your product speaks to its target market.

BMW is one company fluent in design language. That’s largely thanks to the efforts of the Dutch designer Adrian Van Hooydonk, who assumed responsibility for all the company’s car designs in 2004.

Back in 2004, BMW was expanding its range, producing more cars for more markets. But was there a central message BMW could hang on to? A consistent product vision for all BMW cars? Van Hooydonk decided he wanted all BMW cars to appeal to the type of consumer that wanted to own “a drivers’ car”.

His strategy perfectly illustrates the inherent balance of design language, where form is just as vital as function. The design team had to produce beautiful cars, but looks had to be supported by performance, otherwise the customer experience would be compromised. “A car shouldn’t look like it can corner well if it can’t.”

How a BMW car speaks to its owner, in the way the leather interior smells, in the soft thunk of the door as it closes, in the way the wheel feels as it turns, its solidity at high speed, its reliability, these are all elements of its design language. They elicit an emotional response in the driver, but more important, they are inextricably linked to BMW’s marketing strategy, to build “a driver’s car”.

Design thinking, which puts the user at the heart of a product’s development, is partly about the transmission of design language. What message is your product sending to the customer? What does that message say about your brand? What does it say about your strategy?

Design thinking is also credited with the creation of innovation and discovery. Design tools such as networking, brainstorming and fast prototyping are all essential components of the creative process. But discovery also comes from an ability to pose new questions while others revel in predictability. If you walked a designer around the shop floor of a customer services call centre, his or her first question would not be to do with operational efficiency, it would be about why the product creates so many customer questions in the first place.

Companies such as BMW and Apple didn’t break the mold. It’s eminently possible to build businesses that balance creativity with predictability and efficiency, but most chief executives just aren’t very good at asking tough questions. As design consultant Lydia Thornley puts it:

“There is an element of otherness that design thinking can sometimes bring in... It’s that level of questioning, slightly outside of the comfort zone, that can unearth an issue that nobody had thought about, and suggest ideas that might not otherwise emerge.”

* According to Roger Martin, the phrase is actually a little bit newer than that. Martin told me Design Thinking first emerged as a concept during a series of conversations he had with Tim Brown in 2002.

How to fund the bailouts, part two

2009-10-27T17:29:00.008Z

Thanks to Tory MP Brooks Newmark, we can now view the spiralling public debt in a new and more frightening way: that is, rising at a rate of £700,000 every minute. Quite an image, regardless of your political bent. It doesn’t end there.

As the angriest of angry bloggers, Wat Tyler, so eloquently puts it: if you add the cost of future state pension payments, throw in the liabilities of our two largest semi-nationalised banks, consider the burden of decommissioning our old nuclear power stations, and remind ourselves of our PFI obligations, that hole in the public finances does actually start to look a bit scary:

“If we wanted to be cautious—admittedly not something our present rulers have been much good at—we'd say our real national debt is now in the range £7-8 trillion. Or around £300 grand for every single household. Gulp.”

Gulp indeed. But for the time being, the size of the debt is irrelevant. We can only begin making cuts once the economy is back on its feet. If nothing else was learned from the horrors of 1929, the importance of managing the recovery slightly better than the decline is paramount. A third-quarter contraction of 0.4 per cent suggests we are not ready to commence tinkering.

Whatever Cameron says, we must stop thinking of the public budget in the same terms as an everyday household budget. Households balance the books by spending less when the pay cheques become lighter. Governments do precisely the opposite. £700,000 a minute is a scary image, but every time we sensationalise the DEBT CRISIS, there is a risk of undermining valuable spending projects that only months earlier seemed perfectly reasonable. All that hyperbole increases the pressure on the Chancellor to say no to everything.

One sector up for review is the UK's space industry. For those of you surprised to learn that the UK even had a space industry, it is worth recognising that British success in this field over the last few years has been largely incidental—at least as far as the government is concerned. We spend about £200m of public money a year on space, a pitiful sum considering the sector’s huge contribution to our economy—70,000 jobs and more than £6bn in revenues. But space is precisely the kind of industry that needs continued financial support to go on producing a net benefit.

The Space Innovation Growth Team (IGT) is currently preparing a plan for the next 20 years of UK involvement in the sector. The report, due in December, will outline how to turn a potentially greater government subsidy into a competitive advantage. There is of course a very real chance that the report will be ignored completely. And here, in a nutshell, is the potential DEBT CRISIS fall-out: industries that contribute vital skills and revenues starved of the necessary investment capital by unnecessary meddling.

Europe’s space industry is only as competitive as ESA, one of the space industry’s largest client, allows it to be. It is no coincidence that French lobbying of ESA is much more effective than UK efforts. France’s government spends almost £2bn on space—ten times the UK’s contribution. That £2bn is very difficult to ignore. When those lucrative private sector contracts are handed out, it is the countries that have sufficiently greased ESA’s palm that triumph. It may not be particularly democratic, but these are the rules. Making poorly timed, schizophrenic spending cuts may remove us from the game entirely.

Fred Destin’s ignorance theory

2009-10-06T10:31:00.010+01:00

A few days ago, I had an interesting chat with Fred Destin, Atlas Venture's ebullient technology partner. Atlas bought a stake in the property website Zoopla at the beginning of 2008, which wasn’t exactly a fun time to be involved in the property game. It was also a pretty difficult period to source capital in any sector—all in all an investment climate fit to make even the coolest of VCs twitch. Destin, who has a seat on Zoopla’s board, adds that at that stage, his firm’s investment was in “two people and some PowerPoint slides”, hardly an invulnerable guarantee of success.

It is often said of European VCs that they lack the gumption of the Sand Hill road mob—the kind of formalised chutzpah that turns garage upstarts into grade A businesses. European investors, it is said, need data, data and more data, followed by proof of concept, before they are willing to stump up any capital. And to some extent that remains true. But Destin added an interesting spin.

The problem with European investors, he told me, was that even when faced with unmistakeable proof of concept, they tend to undercapitalise, thus hampering their investment’s ability to scale to its full potential. Put it this way: not many US VCs get accused of undercapitalising a potential winner.

He also did a great job of making early-stage investments sound very much like sticking it all on red and preying to the gambling gods for clemency. Destin says he actually prefers working with unknowns. He says:

“Our job is to manage risk proactively. We don’t think about it as a casino at all. We scrutinise and think about it very hard. But it’s our job to take these shapeless risks. I am early-stage, my natural DNA is around early-stage. It’s tough to make investment decisions without much data, [but] that’s what makes it exciting. Your average market practitioner does not know how to deal with that level of risk. You take data away and they panic."

Conversely, Destin says he revels in a vacuum of information:

“I profess ignorance and use that as a tool. I can assess market attractiveness. I can assess the management team. We then make absolutely no assumption as to what’s going to work because if you do, you lock yourself into a strategy that you haven’t [yet] proven. You tend to be internally led rather than market led. This is where the risk may seem inconsiderate because you’re willfully declaring ignorance about the market you’re addressing.”

But ignorance allows you to

“…force yourself to be smart. You use what you know in terms of company building, supporting entrepreneurs, discovering the market. We will design the product around what the market needs with an intuition, but then we’ll go and test it. We don’t want to be smarter than the market we are entering.”

And here’s Destin’s view on Europe’s investment weakness. There are, he says, three stages involved in readying a start-up for potential greatness:

“At Atlas we call it ‘prove-build-scale’. You spend very little at the prove stage. You have 6-15 people, spend as little as you can proving the hypothesis. The build stage is [about] scaling up the management team, adding talent, putting in place the technology you need to accelerate. Only when you’re ready can you understand how to scale properly, go into a big investment round and hit the accelerator.

“I think that Europe usually fails on the third category: we tend to undercapitalise the businesses that are doing well. And this is where we get a competitive disadvantage to the US. They have a tendency to overcapitalise early, but when they scale they scale well because they are able to raise repeat large rounds of money to really capture an opportunity.”

Gordon Brown's brain: explained

2009-09-23T17:59:00.010+01:00

Gordon Brown has long been accused of lacking in emotional intelligence, defined as the ability to read and comprehend people’s emotions and act on that analysis to effect positive change. This is a polite way of saying that he’s a bastard to work with. According to a Bloomberg report earlier this year, a new aide was warned to watch out for "flying Nokias" when he joined Brown’s team. The Prime Minister was also alleged to be fond of trashing printers.

Brown’s belligerence can be traced back to a personality disorder, according to Dr Thomas Stuttaford, a medical columnist who writes for the Times. Apparently, Brown shows symptoms of having a “cluster A” personality disorder, which means

“…he is likely to be demanding, self-absorbed, have difficulties in relationships with others, suffer discomfort in social situations with unfamiliar people… and may be so focused that he finds it difficult to concentrate on subjects other than that which has caught his immediate attention."

Dr Stuttaford’s armchair diagnosis is somewhat weakened by the fact that he is a former Conservative MP. But Brown’s inability to connect with, and therefore to lead, his inner and outer circles is unlikely to resonate well with voters, many of whom may recognise that Cameron, however slippery, at least engenders unity and respect in his associates.

Brown’s a clever guy, so why can’t he do something to change his image before it’s too late? Researchers at UCLA believe they have the answer. A report by neuroscientists Naomi Eisenberger and Matthew Lieberman delves into the link between emotional intelligence and management, and discovers a neat paradox: clever people often make the worst leaders.

What’s the link between social intelligence and leadership? According to Eisenberger, all physiological and neurological reactions “are directly and profoundly shaped by social interaction.” This means that employees respond well to praise (which, incidentally stimulates the same area of the brain that lights up after a financial windfall), but their response to a perceived threat is often far more severe and longer-lasting than the response to a reward. When Brown’s aides have to duck a flying mobile phone, or indeed when any employee is reprimanded, given an unworthy task, or given a pay cut, they experience that threat as a neural impulse, “as powerful and painful as a blow to the head.”

That’s because when people feel excluded, says Eisenberger, there is “activity in the dorsal portion of the anterior cingulate cortex”, which is the area of the brain that also deals with physical pain. Brown’s aide might as well take that flying Nokia in the face. As far as his brain is concerned, the damage done to his future level of engagement is likely to be the same.

According to business+strategy, an employee’s response to such treatment

“… is both mentally taxing and deadly to the productivity of a person—or of an organization. Because this response uses up oxygen and glucose from the blood, they are diverted from other parts of the brain, including the working memory function, which processes new information and ideas. This impairs analytic thinking, creative insight, and problem solving; in other words, just when people most need their sophisticated mental capabilities, the brain’s internal resources are taken away from them.

“Most people who work in companies learn to rationalize or temper their reactions; they “suck it up,” as the common parlance puts it. But they also limit their commitment and engagement. They become purely transactional employees, reluctant to give more of themselves to the company, because the social context stands in their way.”

One of the key aspects of high emotional intelligence is self-awareness. When a leader is self-aware, “it gives others a feeling of safety even in uncertain environments. It makes it easier for employees to focus on their work, which leads to improved performance. A self-aware leader modulates his or her behaviour to alleviate organizational stress and creates an environment in which motivation and creativity flourish.” Does that sound like an accurate description of Brown’s cabinet?

So the Prime Minister, once described by Baroness Morris of Yardley as the “last Cabinet colleague you'd have thought of suggesting a drink with", may be causing his associates untold pain, and his conduct is inspiring poor performance. He’s an intelligent man, why can’t he moderate his behaviour?

Lieberman’s research helps explain why many intelligent people struggle to lead. High intelligence, he suggests, often corresponds with low self-awareness. That’s because the neural networks required for information holding, planning, and problem solving are in the lateral, or outer, part of the brain, while the networks that support self-awareness, social skills, and empathy are nearer the middle. These regions are “inversely correlated”. Or in other words, use of one region can inhibit use of the other.

Says Lieberman:

“If you spend a lot of time in cognitive tasks, your ability to have empathy for people is reduced, simply because that part of your circuitry doesn’t get much use.”

Or as Sir Bob Geldof once put it:

"Would it be easy to spend a night in a bar with him? No, he'd get bored.”

How much does a fact cost?

2009-09-01T18:04:00.019+01:00

Opinion is cheap, so the maxim goes, but facts are expensive. The question is, how expensive? Gerry Marzaroti, editor of the New York Times Magazine, is unequivocal: “Investigative reporting is very, very expensive,” he says. A Hurricane Katrina story his magazine recently published on its front cover cost $400,000 to produce.

Or at least it would have done had his own reporters done the investigating. As it stands, the story was put together by a freelancer named Sheri Fink, who financed the first four months of the investigation herself. As her story gathered pace, she was part-financed by the Kaiser Foundation, a US health research lobby, and ProPublica, a non-profit news organisation that funds investigative journalism.

Fink’s tale is undoubtedly of (US) national interest. She investigates suspected cases of euthanasia at a New Orleans hospital marooned by the floods of Hurricane Katrina back in 2005. The article is too lengthy to describe in detail here, but Fink’s efforts are well worth spotlighting. She introduces new evidence, analyses “previously unavailable records” and interviews “dozens of people who were involved in the events at Memorial and the investigation that followed.” It took her two and a half years.

Those facts that are buried underneath reputations, those nuggets of information hidden by the rich and powerful, are always the hardest, and therefore the costliest, to exhume. Harvard’s Nieman Journalism Lab blog holds a running tab on the cost of investigative reporting. Among the most expensive editorial investigations it can find is The New York Times’ Baghdad office, which costs $3 million a year to run.

There are UK parallels. How much did the Daily Telegraph sink into exposing the MPs’ expenses affair, bearing in mind the initial cost of the leaked documents, and the 25 journalists the newspaper assigned to the task? According to Telegraph assistant editor Benedict Brogan, you can add to that the price of “lawyers [and] all sorts of experts”.

Let’s just focus on the cost of uncovering the facts. Assuming an average journalist salary of £40,000 (although some will have been on considerably more) and a conservative estimate of three months’ work, the direct cost of the expenses investigation would have been at least £250,000. Add to that the cost of acquiring the information, which could have set the Telegraph back anything up to £300,000 and the pressure on a publisher to recoup their editorial outlay begins to tell.

Canny news editors are well aware of the value of just one Duck Island, of course. In May, Telegraph sales were boosted by an average of 18,718 copies per day. The problem comes when the economics start to cloud judgment. Competition from low-cost Web publications has left traditional reporters with evermore spaces to fill. Fewer reporters reporting news is a situation that inevitably deprives editors of the kind of stories that tend to shift more papers. With newspaper sales on the decline and advertising revenues down, publishers are increasingly less inclined to hire more reporters. And so the decline of the newspaper industry descends into a depressing, self-fulfilling prophecy.

Or at least the old model does. Back in June, 4iP and Screen West Midlands announced funding for an interesting start-up called Help Me Investigate. Founder Paul Bradshaw describes his creation as an online “platform for crowdsourcing investigative journalism. It allows anyone to submit a question they want to investigate,” and volunteers to club together in order to find the answer. Because it relies on the goodwill of participants rather than the whim of megalomaniac publishers, the breadth and variety of investigations is assured. Examples of current questions include: “Is it less safe to have a baby at night?” and “Where is Diana really buried?”

Bradshaw has already achieved notable success for the citizens of Birmingham, where the company is based. A question concerning the most likely place to get a parking ticket prompted a Freedom of Information request, which revealed that the most ticketed street was Alum Rock Road in Washwood Heath, where drivers received an average of nine tickets per day—almost twice as many as the next most ticketed area. Data released by Birmingham City Council also showed that in July, wardens were handing out an average of 200 tickets a day more than at the same time last year.

According to Bradshaw:

“Investigative journalism is about more than just ‘telling a story’; it is about enlightening, empowering and making a positive difference. And the Web offers enormous potential here, but users must be involved in the process and have ownership of the agenda.

"The Web allows you to ‘atomise’ processes, [to] break them down into their constituent parts. The site breaks apart investigative journalism, allowing users to contribute in specific and different ways. This is not citizen journalism. It is micro-volunteering.”

Despite Bradshaw’s protestations, some will inevitably see Help Me Investigate as another Web threat to traditional reporting. If the crowd proves to be more adept at investigative reporting than the journalist, it challenges the essence of the journalist's medium, the newspaper. But such questions misunderstand the nature of collaboration. Does it really matter if extra credit is attributed for a discovery deemed to be in the public interest? Is an official, unpaid army of sources and helpers so very different to the current unofficial, unpaid model?

Writers with bylines almost as big as their egos may despise sharing the limelight. But perhaps those journalists and editors that come to regard Help Me Investigate as a source rather than as a threat, may well find that the cost of their investigations has suddenly and miraculously been reduced.

Breaking the habit of public debt

2009-05-21T15:21:00.008+01:00

The row over public debt rumbles on. Private equity boss Jon Moulton weighed in yesterday with a blistering attack on Alistair Darling’s record as chancellor. Piling excessive debt on top of a crisis caused by debt is apparently “entirely analogous to giving heroin to a heroin addict. It makes them happy for a short period and guarantees that it will be worse in the future," he said. Moulton is worried about a return to the crazy economics of the 1970s, when the public sector dominated our GDP. Right now, says Moulton, “only the south east has a public sector worth less than half the economy.”

And spiraling debt equals loss of control, he warned. The interest payable on a debt equal to the size of the UK’s GDP would mean “that money going out of the economy will actually exceed the growth of the economy.” Worse, “if foreigners decide they want a higher interest rate [on gilts], [domestic] interest rates will go up without any intervention from the Bank of England being possible.”

Those pesky foreigners may well have their way if Standard & Poor's carries out its threat to downgrade our precious credit rating. Without that Triple-A badge of honour, foreign investors would very likely start behaving exactly as Moulton predicts, requesting more bang for their buck, further depleting UK coffers. But don’t panic, says the BBCs Robert Peston, we’re still selling gilts.

“The Debt Management Office has this morning completed the biggest ever auction of gilts in history. And it sold the lot very comfortably indeed, with far more bids than it needed…”

Peston continues: “Putting British sovereign debt on negative outlook is not as bad as being assessed for possible downgrade, which almost always leads to a downgrade….”

That’s because a negative outlook from S&P is only ever followed by a proper downgrade in a third of cases. More often than not, the victim recovers. S&P will make its assessment as soon as the result of the next election has been decided, and a new (or similar) public debt reduction strategy is in place. If the UK shows signs of reducing its debt burden, S&P might let us keep our AAA rating after all. If not, those gilts are going to start getting expensive.

David Cameron has already made it clear that debt reduction is a priority; Brown continues to believe in a Keynesian solution. But will the PM risk playing chicken with S&P? It's all grist for Cameron’s mill—if he’s smart enough to grab the opportunity.

Home win

2009-04-21T17:55:00.004+01:00

Tesco’s financial results look like a win for the PR team as well as the finance director. On the face of it, the world’s third largest retailer looks an unstoppable behemoth. It has over 2,000 stores in the UK and in the words of the London Evening Standard, its profits have now “smashed through the £3bn barrier”. The supermarket, which also operates one of this country’s few successful banks, claims it is on track to double in size over the next ten years. That’s right: DOUBLE the number of stores, worldwide, before the end of the next decade. If Sir Terry Leahy managed to achieve this target in the UK, we’d have 64 Tesco stores in every city in the country.

A staggering thought. The Evening Standard certainly seems to think so. It put “Tesco to DOUBLE in size” on all its news billboards this afternoon. But consider the numbers—profits first. Did Tesco really smash through the £3bn barrier? Well, not according to the BBC’s Robert Peston. If you use the statutory measure of pre-tax profits, a measurement Peston prefers because “it's less amenable to manipulation”, Tesco’s pre-tax profits “grew by 5.5 per cent to £2.95bn, or 4.3 per cent after adjusting for a rogue 53rd week in the 2009 figures”.

Here are some more facts, which work well together in almost any order: journalists love round numbers. Three is a lovely round number. 2.95 is not. Good press officers tend to send out facts that appeal to journalists and that show the company in a good light. Shareholders like positive headlines.

Will Tesco really double in size? Quite possibly. Is this really as impressive as it sounds? That depends on your viewpoint. It would be impressive, if slightly incredible, if Sir Terry managed to double Tesco’s size in a few years. Four, or five years maybe. But ten? Worldwide? In order for the chain to reach its target, Tesco will need to expand its total shopfloor space by seven per cent a year.

Growth at that level, even maintained for a sustained period, is not quite as sexy as focussing on the DOUBLE part. Tricky, perhaps—especially in a recession. But not sexy. Not headline material. And in the aftermath of a recession there will be plenty of retail bargains to go around. Failed shops, petrol stations and superstores on the cheap, all over Europe. Possibly even a fall in land prices. Seven per cent per year is tough, but achievable. So how do you make sure the papers pick up the sexy part? Think of a number: 10, or maybe 12—that’s how many years we’ll need to achieve manageable growth of 7 per cent. And that’s how we’ll DOUBLE the size of the business.

Why does this matter? Well, talking about Tesco’s size is one way to distract attention away from the less than impressive performance of US subsidiary Fresh & Easy (which lost £142m). It’s also a great way to stop journalists writing headlines about the competition, which appears to be catching up. Tesco’s like-for-like sales grew 3 per cent in the year up to February 28. But at Morrisons alone, sales were up 7.9 per cent over a similar period.

A well-earned home win for the PR team.

Why I’m posting the link to this article on Twitter

2009-03-20T17:07:00.004Z

I first came across Twitter in 2007. I was writing an article about British entrepreneurs who were ditching the UK for the sunshine and smart money of Silicon Valley. Some, like Aaref Hilaly, had already made it; while others, like Kulveer Taggar, were well on their way. But all were convinced that the Valley’s natural network of technology enthusiasts was the only place in the world to start a company.

Kulveer Taggar’s relocation proved a smart move. A couple of months after our interview he sold his eBay software tool Auctomatic for several million dollars. But it’s the lead-up to that interview that sticks in my mind. I found Kulveer on Twitter. Sure, a contact had first given me his name, but after a cursory Google search I clicked through to Kulveer’s Twitter page. At first it made little sense to me. It looked like some kind of instant messaging service, but all the messages were from Kulveer. And they were visible to anybody. There he was getting on a plane. There he was getting off again. In a meeting. Playing poker. Hoping Man Utd win. Broadcasting the excruciating minutiae of his life.

At least it seemed excruciating to me. Not trivial. Excruciating. How could anyone bear that level of personal disclosure, I remember thinking. What was there to gain? Who was listening? I couldn’t understand Twitter because the art of self-promotion was alien to me. I’m not saying that Twitter’s early adopters had only self-promotion in mind. They “tweeted” each other to strengthen the Valley network — to legitimise it. But as Twitter grew, so did its power to promote the individual. Its power to market “brand-me”. Twitter became a professional tool to sell its users to a wider network.

It was an idea destined to be born in the States, a country where self-promotion is merely stage one of the Dream. Stick a mic and a camera in front of the average American and you’ll more than likely get a broadcastable soundbite. Here, we’re still schooled in understatement. I laugh when I see Brits posting messages from boring meetings, “tweeting” from funerals, broadcasting to the world about how they like their morning coffee. I laugh because it seems so un-British. We have egos, of course we do. But because the UK default setting is to be scathing of success, we tend to reveal as little as we can about how we want to achieve it.

Twitter turns that on its head. Brand-me is suddenly, enticingly, acceptable. It brings us ever so slightly closer to the US. Why is that important? Because unless you talk to others about what you do, they’ll never be able to help you. I’ve followed Tim O’Reilly’s call to “build stuff that matters” with interest. The way O’Reilly sees it, there is more than enough talent in the world to get us out of the increasing mess we find ourselves in. He regards his own company as an organisation that “changes the world by sharing the knowledge of innovators”. But if people didn’t share — if they didn’t promote their own failures and successes to a wider audience — that task would suddenly become a lot harder.

To put it another way: if we weren’t comfortable telling strangers what kind of coffee we like in the mornings, maybe we’d be just as stilted in conversation about the things that really matter.

Advice on dating scientists

2009-03-04T18:00:00.011Z

Matching research projects with funding is tough work. In this country, the money tends to promote scientific discovery only when commerciality is ensured. If there's a sniff of risk, VCs either price the deal accordingly, or bolt. Pioneers 09, an event run by the Engineering and Physical Sciences Research Council (EPSRC) at London's Olympia, is essentially a matchmaking effort: grey-bearded scientists rubbing shoulders with slim-suited financiers.

It all felt pretty relevant. Gordon Brown's vision is for university spin-outs to somehow drag us out of recession. The ideas are certainly there. Our research is top-notch. But where's all the money to back that research? The money markets must be un-gummed before the £2.5bn we spend annually on university R&D can hope to get us out of this mess.

Professor David Delpy, chief executive of the EPSRC, had some sharp advice for the recession-obsessed cynics. He spoke after Richard Noble, the ebullient project director of Bloodhound SSC, who is bidding to manufacture a car capable of breaking the world land-speed record. Noble had seemed positive enough—his project involves the participation of 541 schools, an arrangement that simultaneously crowdsources talent and inspires schoolchildren into science and engineering: a worthy effort. But Delpy seemed irritated by Noble's suggestion that UK manufacturing needed a boost.

"Manufacturing may only be responsible for 13 per cent of the economy, but that makes us the 6th largest manufacturing economy in the world. We ought to be far more positive."

Delpy was mainly referring to the buoyant pharmaceutical industry. The automotive sector is Noble's game. Maybe they were both right.

How to fund the bail outs, part one

2009-02-19T18:34:00.005Z

It’s expensive, all this bailing out. Which is why Obama is so keen on grabbing some of that cash back from tax evaders and avoiders (yes, there is a difference, however slight). As the new President amusingly put it:

“There's a building in the Cayman Islands that houses supposedly 12,000 US-based corporations. That's either the biggest building in the world or the biggest tax scam in the world.”

Gordon Brown wants a piece of the action too. HM Revenue & Customs estimates that the size of the tax gap (the difference between what UK companies should be paying and what they are paying) could be anything up to £13bn—a sizeable wedge with so much toxic debt on the state’s banking balance sheet.

Gordo’s crackdown on tax havens is an international effort. It has to be. Attempting to rake back some of the cash that your largest businesses are hiding offshore isn’t going to work if other nations’ aren’t playing the same game. No government, Brown’s included, can risk being seen to damage the competitiveness of its blue chip firms unless there is complete collusion.

And that goes for the targeting of individual savers too. Those citizens hoping to avoid tax in their own country often stash their money in a nearby tax haven. So Dutch savers might open a Swiss bank account, for example. If you target Switzerland, as Brown intends to, those Dutch savers simply move their money to Lichtenstein. You need multinational coordination to have any hope of affecting a proper clampdown.

Obama has already scored a minor victory. The Swiss bank UBS has been forced to reveal the names of around 19,000 wealthy US account holders whom the IRS suspects of tax evasion. According to the Huffington Post:

“Prosecutors suspect that UBS helped its American clients hide $20 billion from the government, or about $300 million a year in taxes, from late 2002 to 2007. UBS has admitted that some of its employees ‘participated in a scheme to defraud the United States.’”

So who’s on the list?

Toxic bonus

2009-02-11T17:45:00.003Z

There was a joke doing the rounds in the City last year, which played on bankers’ annual bonus worries. The credit crunch had struck and expectations were low. In lieu of a fat wedge, it was said, City employees could this year expect the deeds to a repossessed Hicksville ranch. In retrospect, of course, not such a bad offer. But maybe if traders were, as the Americans say, forced to eat their own dog food, we wouldn’t have got ourselves into this mess in the first place. Here’s an interesting twist from credit crunch blog, The Baseline Scenario:

“Why not say that all bank [bonuses] above a baseline amount - say, $150,000 in annual salary – [have] to be paid in toxic assets off the bank’s balance sheet?

Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there - at the value that they insist they are worth.

Of course, the average employee does not get to set the balance sheet value of the assets… but think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations.

Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.”

Great idea. I’d set the basic salary bar a little higher, though. We want to see directors and unit heads carrying the can, not flunkies. How does that Pedigree Chum taste, Sir Fred?

Inside job

2009-02-09T17:50:00.007Z

The government’s review of banking bonuses may be cynically timed, but it is not, as some have suggested, a cover-up. David Cameron is right to question the sense of ploughing £20bn into an industry that’s mis-firing on all cylinders, only to give five per cent straight back to the morons that got us into this mess in the first place. But Brown’s intention is not to screen the public from the truth.

The review, which will be led by former Morgan Stanley chairman Sir David Walker, was announced three weeks before RBS, now 68 per cent controlled by the government, is due to release its results. They won’t be pretty. But bonuses will be paid (according to the contractual small print) no matter how badly RBS does. Brown and Darling will use the Walker Review to deflect some of the inevitable flak.

Cynically timed, then, but not a cover-up, as Vince Cable and Robert Peston have suggested. The review will have a specific goal: to find a new way of structuring City bonuses so that they encourage the long-term health of the banking sector. Risk will still be encouraged, but it will be responsible risk, whatever that is. With the review target so clear, it’s difficult to see how it could be construed in any other way than as a very real attempt to shore up the weakest links of the City machine, without damaging its potency in the process.

Sir David is indeed an insider—and it’s his apparently cosy appointment that has enraged the conspiracists—but outsiders have thus far proved themselves incapable of penetrating the complex idiosyncrasies of high finance: both the financial journalists and the banking non-executives failed to ask the right questions at the right time.

Besides, those doubting Sir David’s capability need only refer to his last public review of 2007, which set out to bring transparency to the mysterious and much-despised private equity industry. In some ways, the two reviews are similar: open up the hood, appease the public, but don’t neuter the defendants in the process. Some of the private equity industry’s most secretive boards have already begun to release details relating to performance and strategy. But last month’s report by Ernst & Young, the first real data to emerge from a newly transparent industry, has revealed perhaps even more than even Sir David bargained for.

According to the Guardian’s spin on the report:

“More than half the profits generated by UK private equity firms in recent years have been made by piling debt on to the books of the companies they invest in… Just one fifth of the returns achieved come from strategic and operational improvements.”

Confirmation, if you ever needed it, that private equity is about short-term profits, not organisational efficiency.

What gems will Walker’s investigation into banking bonuses uncover?

No protection

2009-02-05T09:45:00.002Z

The arguments for protectionism get louder the deeper the economy sinks. At Lindsey Oil Refinery, employees have been protesting the decision to ship in 400 Italian and Portuguese workers at a time when UK unemployment is beginning to accelerate. In the US, President Obama’s stimulus package carries a crucial section of small print: all projects financed by the $800bn bailout have to source US iron and steel, rather than imported materials. And in Spain, where over one million men under 30 are now unemployed, Industry Minister Miguel Sebastian has launched a "Made in Spain" initiative, aimed at persuading citizens to spend their hard-earned euros on Spanish produce.

On a very basic level, you can see where the protectionists are coming from. Even Jamie Oliver is at it. As governments all over the world acquiesce to huge bailouts, aren’t the people entitled to choose where all this public money is going? According to the BBC, Ohio Democrat Tim Ryan has calculated that using wholly domestic input (iron and steel from US sources) for future infrastructure projects will create an extra 77,000 jobs across the country. His position isn’t exactly isolated. When help is needed, it’s human nature to treat the neighbours first. Charity doesn’t travel well when there are problems closer to home.

But that’s where the logic ends. In a global economy, companies must look after their exports as well as domestic demand. That’s why US firms General Electric, Boeing, and Caterpillar (each of whom are about as “American” as apple pie) have all spoken out against Obama’s bailout. According to the BBC, more than half of Caterpillar's sales are exports. “We’ve got to keep our markets open if we expect other countries to keep their markets open,” says Caterpillar CEO James Owens.

He’s absolutely right. The last thing the world needs right now is a tit-for-tat trade war. While it’s been inaccurately reported that the wave of protectionism that followed the Wall Street crash of 1929 was the chief cause of the Great Depression, it certainly lengthened the pain. Obama must choose between his election pledge of standing up for US workers and developing a foreign trade policy that stimulates growth on both sides of the Atlantic.

Knol: it kinda sucks

2009-02-03T17:22:00.004Z

The battle to become the Web’s number one encyclopaedia took an interesting turn last week when the 240-year-old Encyclopaedia Britannica decided to go all Web 2.0. New contributions will still have to be verified by one of the encyclopaedia’s 4,500 experts, but this is actually pretty similar to Jimmy Wales’s new vision for Wikipedia. So concerned is Wales that troublesome graffiti artists are ruining his beloved project’s credibility, he has decided that amendments will in future be vetted by Wikipedians higher up the food chain.

Journalists have since taken every opportunity to quote a few classics from Wikipedia’s ever-expanding canon of witless contributions. “Is Wikipedia cracking up?” asks the Independent. During Sunday’s Super Bowl, Bruce Springsteen, who performed live for the half-time show, apparently had his entry subbed to read:

"Bruce Springsteen. This guy kinda sucks."

Tellingly, media interest in Google’s rival encyclopaedia, which the advertising and search company calls Knol, has been rather thin on the ground. Google says Knol is a site that provides “authoritative articles about specific topics, written by people who know about those subjects”. After six months, the number of Knol contributions on a variety of subjects has grown to over 100,000. Google recently announced a commercial deal with dummies.com to try and boost the quality of the next 100,000. I can see why.

Taking one search term at random, try inputting “Silicon Valley” to see what Knol comes up with. As you might expect, there are plenty of entries that reference Silicon Valley—this is, after all, a beta for a tech gizmo. But the only entry I could find on the Knol database that attempts to actually describe Silicon Valley (What is it? Where did it come from?) is written by somebody called Grace Keng. It is 250 words long. Wikipedia’s entry on the same subject is almost 2,000 words.

Unfortunately, Keng’s entry adds very little to the story of the world’s pre-eminent tech cluster. There is a photo credit (with the picture deleted). There is also a short history of the region's early days in tech, which brings new meaning to the word “succinct”:

“The 1930 (sic), two engineering graduate students of Stanford University set out to do their work in a garage in Palo Alto.”

The identity of these mysterious students, or at least some idea of the kind of work they enjoyed, are trifling details that Knol users can presumably google for themselves. There is then a solitary reference—a link that goes straight through to Wikipedia.

Keng does at least find the time to offer us a special insight into Silicon Valley’s phenomenal success as a technology hub:

“One of the major reasons for Silicon Valley's success is the ability to attract people from all over the world to live and work in the valley. The cultural mix and the diversity of ethnic traditions have enriched all of us.”

Which sounds suspiciously like estate agent-speak. Oh wait: Keng is an estate agent. She even posts her details in the unlikely event that having read her enlightening précis, you might suddenly decide you’re in the market for some prime Silicon Valley real estate. Sign me up for some of that ethnic enrichment.

Wikipedians and other righteous defenders of Web Justice are concerned that if Google manages to acquire a dominant position in both content and search, we might as well all pack up and go home. Knol’s feeble arsenal of content suggests otherwise.

Buzzword 2.0

2009-01-29T17:57:00.004Z

At London Business School’s “Management 2.0” conference last night, I detected more than a hint of phrase-fatigue. The scrap to call the latest technological trend, label it, and thereby bask eternally in the glow of its subsequent success, has grown ever more competitive by the progression of the trends themselves. The concept of Web 2.0, for example, couldn’t have been spread more effectively by any other means than Web 2.0 technology. The speed of communication is now so frighteningly quick that giving these buzzwords oxygen immediately legitimises them.

These cute catchphrases are a business school’s meal ticket. They provide the professors with a catch-all hood for their disjointed research (and once it is adopted, the title of their next book) and offer the schools an opportunity to differentiate in a crowded market. “Management 2.0” doesn’t belong to London Business School (we can thank Harvard, among others, for that), but last night’s impressive turn-out spoke volumes, if not for the love of the latest buzzword, then at least for LBS’s progress in achieving its mission to become “the world’s pre-eminent business school”. Well, that’s what it said on the plaque in reception, anyway.

Up on stage, Julian Birkinshaw introduced companies that LBS considers to be pre-eminent in their application of management 2.0. The first was by far the most interesting. TopCoder is a platform for competitive software development. Its “employees” compete online to code software solutions, which are then licensed to third parties. Essentially the company is a huge, virtual community of 140,000 developers in 200 different countries, all with different programming skills. TopCoder merely provides a platform to organise the commercialisation of those skills.

The beauty of the model lies in its appreciation of the Generation Y developer community. However flexible their working habits, young coders still require a dependable structure. They also want the opportunity to work on larger projects without having to pitch their work to blue chip clients. They are rewarded financially, out of royalties, and through the respect of their peers—often a greater motivation than the mighty dollar. The loose controlling structure that sits above this platform requires new thinking—a different style of leadership, which understands that knowledge can come from anywhere in an organisation: management 2.0.

The shareholder value argument

2009-01-23T17:42:00.004Z

There isn’t as much business support for carbon reduction as you might think. Of course, plenty of larger companies talk a good game: a recognised CSR policy is useful for attracting Generation Y employees, if nothing else. But the Director magazine postbag provides a useful barometer of business frustration: we receive scores of letters for every cleantech entrepreneur we feature — most accusing us of environmental bias. “Greenwash”, scream the cynics. Climate change is a smokescreen for tax rises.

I was more than a little surprised to hear Sir Rocco Forte lapse into a greenwash rant during an interview at the tail end of last year. On reflection, I found his indifference to the commonly held, PC view of things, slightly refreshing: it’s not often that you catch the established business elite so happy to go against the grain. But on the whole it felt like a naive, poorly-researched position for such an accomplished businessman.

At least Sir Rocco avoided the “shareholder value” argument. The thinking goes like this: a director’s legal duty to maximise shareholder value is in direct conflict with an expensive CSR strategy. Any attempt to go green costs money (the costs of administration often outweigh any energy savings) automatically reducing shareholder value. How does a company geared towards maximising profits for its investors suddenly gain a conscience without losing sight of its legal obligation?

Theo Vermaelen, professor of finance at INSEAD, answers this conundrum easily enough:

“Shareholder value is calculated by taking revenues and then subtracting labour costs, executive compensation, interest and taxes. This residual cash flow incorporates the interests of all stakeholders, not simply the shareholder.”

Vermaelen also says that any company attempting to raise equity without announcing a later intention to implement social policies is “unethical”. Implicit in this is the assumption that the only thing investors care about is a financial return. Maybe they do. Vermaelen also clarifies that “maximising shareholder value is not the same thing as maximising short-term profits”. But his support of image over action feels disturbingly corporate:

“Obviously if CSR policies are simply PR or marketing exercises then obviously they are not inconsistent with value maximisation or unethical. But it is up to the company to prove that this marketing strategy works.”

Or how about we forget the gloss? How about we make a change for the sake of change? Last month I met Gavin Starks, founder of AMEE, a carbon calculation company. His goal, with apologies to those of you who get headaches about this sort of thing, is to measure the carbon footprint of the earth (as in, everything: every person, company, activity — the lot). His response to the problem of CSR conflicting with shareholder value is simple:

“I think you have to look at what value means and what time frame. Are we looking to provide the greatest return in the next 12 months, or the next 10 or 20 years? Forum for the Future mapped out various scenarios for the future of humanity. Most of those scenarios were war based, [as a result of] future scarcity. That becomes part of shareholder value.”

I’ll post a link to the AMEE story as soon as we publish it.

Picture distortion

2009-01-21T17:55:00.003Z

Tough talk from the Telegraph this morning. Tough — and alarmist. In fact, business editor Ambrose Evans-Pritchard’s comment piece bordered on irresponsible. There is a “real risk”, he said, of the UK defaulting on its national debt for the first time “since the Middle Ages”. His breathless prose covered the “reckless” City, the “fiscal incontinence” of Gordon Brown and the “pitiful regulation” of the UK housing market. Here’s a bigger chunk:

“If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to let its national debt jump in a crisis — or a war — perhaps even to 100pc of GDP. It is another to take on foreign debts on such a scale with no reserves.”

You can understand Jim Rogers and George Soros’s need to talk the pound down, both doubtless have a vested interest in its demise, but AEP is, as far as we know, a disinterested party. The UK's foreign currency reserves stand at $61 billion. The combined foreign currency liabilities of those troubled banks are $4.4 trillion. “This is a mismatch indeed,” according to Paul Amery at Index Universe. But there is hyperbole at work here. Our debt rating is still measured in triple A’s, for now at least. And the bond markets are still buoyant, albeit for the admittedly sobering reason that aside from piling into expensive gold, or sticking huge bundles of cash under your bed, there really are few safe alternatives.

AEP talks about the unsustainable level of national debt, but the bank bail-outs heavily distort the picture. Remove those liabilities and we’re almost back in prudent territory. Our national debt is roughly a quarter of Japan’s; less than half that of Italy. Those banks haven’t gone bust, they’ve been part-nationalised. Nobody knows how much of their debt will turn out to be toxic, least of all the Telegraph’s business editor.

It’s easy to politicise in a crisis. Even easier when the numbers are so mind-bogglingly huge. But however much attention you give to Brown’s bank bailout (and it deserves as much spotlight as we can possibly give it) bear in mind that on this alone, the government had no other choice — at least no other palatable choice. With the markets as touchy as they are, simply talking up the possibility of a default gives the idea credibility — a very bad thing when you’re trying to maintain interest in UK government stocks. That’s not the responsibility of the media. But it’s a good idea to leave hyperbole to the Opposition.

Who knows what’s eating AEP. Maybe he got more hits than Peston today.

Darwin's lemmings

2009-01-19T16:29:00.004Z

Behavioural scientists attribute the global financial meltdown to our herding instincts. Much like our primate ancestors, humans tend to form groups to tackle adversity — the phrase “safety in numbers” is drawn directly from our tendency to trust larger numbers of people, even if our instincts tell us to go against the grain. It's a cute paradox. We yearn for a competitive advantage, strive all our lives for knowledge, yet doubt our own opinions if they disagree with those of our peers. And so, despite incandescent logic burning in the back of the investor’s mind, schemes such as Bernard Madoff’s continue to wreak havoc. Double-digit returns, while countless other funds struggled with huge losses, certainly looked suspicious, but our hardwired inclination to follow the herd proved the greater draw.

And if all goes awry, there is plenty of solace in group-failure, says Paul Seabright.

"When the maths gets too tough we seek reassurance from the powerful groups to which we belong. If it is okay to them that is fine by us; the group will protect us if things go wrong. We have to trust someone: modern life would collapse if we did everything alone. So we trust those who seem most like us, which means we trust the folks they trust, and so on in another long chain that stretches our strategic reasoning capacities to the limit.

The big surprise of the last three months to economists has been that professional investors behave with as much of a group instinct as retail investors. But it would not have surprised Darwin: professional investors are just another primate population. If you want to change their behaviour you have to change the way it feeds back not just into their pay packets, but into the status competition and coalition formation in their chosen peer-group."

Speaking of Darwin, the coming celebration of his bicentenary will no doubt spur the age-old efforts to link his theories to the modern economic world. What would Darwin have made of modern capitalism — the global march of the biggest and baddest corporate monsters? Such a question misinterprets Darwin’s intention. His theory was indeed based on “survival of the fittest”, but to be “fit” did not necessarily imply size or power, it concerned dominance of the species “most responsive to change”. As Simon Calukin notes in the Guardian,

"The simplistic "might is right" case has been blown apart by the force of events. However it originated, the credit crunch is the meteorite that is causing the mass extinction of what now can be seen as financial dinosaurs. Suddenly the once mighty are so no longer — in the new credit-starved world, investment banks are extinct, by the end of the year most hedge funds will have gone out of business, and even Russian oligarchs are finding food hard to come by."

If Darwin is to be considered truly prescient, business success in the next decade will be determined by flexibility, not size.

Bank job

2009-01-15T16:53:00.002Z

Funnily enough, now wouldn’t be such a bad time to start a bank. Public confidence in the banking system may be at an all-time low, but that doesn’t make the business model defunct. In fact, super-low interest rates, combined with a healthy supply of businesses desperate for credit, makes 2009 the ideal year to get started. According to SmartMoney.com, the three-year failure rate for brand new banks is less that one in every 1,000 – an encouraging ratio when pitted against the perilous failure rate of pubs and restaurants, both ventures that attract entrepreneurs in drooling flocks.

To get started, you’ll need a bunch of like-minded entrepreneurs, each with at least £50,000 to pump in. The rest of the cash can be raised by issuing shares to local investors and businesses. While much of your start-up investment will be burned by marketing costs, consider the pitch: a local bank, lending to local businesses, free of toxic debt, providing a much needed community service. All you have to do is earn more on your lending than you pay out on your borrowing. Oh, and avoid collateralized debt obligations.

Do something

2009-01-13T12:05:00.003Z

Watching Gordon Brown’s hilarious “do-nothing” attack on Cameron can lead the observer to only one conclusion: it’s a wind-up. Brown knows only too well that the parties’ economic strategies are closer than the public is led to believe (on numerous economic rescue packages their strategies are the same, only differing on where all the extra money will come from), so accusing Cameron of laissez faire when the chips are down must really smart. Especially when Labour is in a position to cherry pick all the best Tory ideas and repackage them as its own.

So what do the Tories think of the idea that not even Alistair Darling will admit to supporting, so-called “quantitative easing”? Let’s leave this one to Osborne.

“The very fact that the Treasury is speculating about printing money shows that Gordon Brown has led Britain to the brink of bankruptcy. Printing money is the last resort of desperate governments when all other policies have failed. It can’t be ruled out as a last resort in the fight against deflation, but in the end printing money risks losing control of inflation and all the economic problems that high inflation brings.”

Oh George. In your rush to conjure up images of an ink-stained Brown, desperately printing cash in a last ditch attempt to stop the UK going to the dogs, Zimbabwe style, you’ve forgotten three key facts:

1) Quantitative easing is a relatively popular Tory policy. It is supported by the Institute of Economic Affairs, a Conservative think tank, and indeed any sensible monetarist you might care to name. Monetarism, lest we not forget, is supposed to be Tory economic policy.
2) Darling has been very careful to “rule out” quantitative easing, mindful of the market’s current tendency to overreact.
3) As Times journalist David Smith so rightly says, “‘Printing money’, to be clear, is not the same as printing money”.

He continues:

“This is not a cash economy. The value of notes and coins in circulation is £51.6 billion, less than 3% of £1.9 trillion of “broad” money in Britain, M4, consisting of bank deposits and the corresponding lending. Printing money means getting broad money growing faster through so-called quantitative easing.

“How? One way is for the Bank to buy government bonds or commercial securities from banks or their customers. This creates a credit in the central bank’s reserve account, which can then be the basis for increased bank lending. It also drives down interest rates throughout the economy.”

2008 wasn’t a great year for Osborne’s sense of judgement. It’s been an inauspicious start to 2009.

Analyse this

2009-01-08T15:20:00.003Z

Jeff Madrick, reporting from the annual meeting of American Economists, laments the lack of remorse shown by some of the country’s more mainstream economists over their role in the financial crisis.

“There was no session on the schedule about how the vast majority of economists should deal with their failure to anticipate or even seriously warn about the possibility that the second worst economic crisis of the last hundred years was imminent,” he writes.

There wasn’t much in the way of introspection, no self-analysis either of these professors’ personal roles, or of economics itself. At the very least, writes Madrick, serious investigation should have followed the realisation that Wall Street had risen to such dizzying heights that it accounted for one third of the nation’s total corporate profits. Maybe we lacked serious investigation. But the warning signs were there. Economists were indeed looking puzzled. Chris Dierkes mentions a few here. In the UK we are blessed with the prescience of Vince Cable.

It’s easy to be blinded by wealth. The City enjoys, or at least has enjoyed, extreme favouritism from policy makers—a special treatment disproportionate to its actual value. But in truth, we were never short of warnings. We were short of bankers responsible enough to heed those warnings.

Back to Madrick - this should be your credit crunch takeaway fact:

US Investment banks took on $25 to $40 of debt for every dollar of capital.

Is it any wonder the money markets are so gummed up?

The price of innovation

2009-01-07T18:24:00.002Z

Gordon Brown never misses an opportunity to champion innovation, but the details are often murky. I can understand his paranoia: reveal too much detail and your plan will be rubbished by media and opposition alike before it’s even had the chance to develop legs. But some kind of idea of how we’re going to turn all those ex-Woolworths employees into wind farm entrepreneurs really would be useful. If it’s “digital infrastructure” you’re interested in, then Silicon.com does a good job of suggesting a few things to spend that £18bn on. Actually make that £17bn. Apparently Gordon’s splurged a billion already. Championing innovation is pricey.

Last month, I visited computer games developer Media Molecule and was struck by the depth of creativity there. The UK’s games industry is blessed by a wealth of talent, but we’re hampered by our rival developer nations’ generous tax breaks, which make it hard for the Brits to compete. Media Molecule remains competitive by keeping the numbers down. But here’s the thing: employees are actively encouraged to use the premises to work on their own projects, out of hours. If they manage to come up with anything worthwhile, the intellectual property is theirs to keep. That might sound like a bizarre oversight, after all, a company’s greatest asset is usually its people. The more they create, the more money you make.

But hanging onto your most effective creatives is, in the long run, a more profitable track. And these employees will be more encouraged to stay if you offer them a sense of freedom—the opportunity to chase their dreams out of office hours. This is, after all, the same freedom that enabled Tim Berners Lee to create the World Wide Web. Infrastructure is important, but so is fostering the will to create.

Spend versus save

2009-01-07T18:03:00.002Z

Spend or save? Gordon’s splurge package versus Dave’s deep pockets. Fiscal versus frugal? While the politicians battle it out, it appears the public has decided on its own strategy. And the consumer says: let’s have both. That is, spend your hard-earned on computer games now; stay in and play them to save. 2008 was the year of the video game, with sales hitting an all-time high of almost 83 million units across all platforms. That’s 1.3 console games each. No wonder the pubs are empty.

Total sales of software and hardware topped £4bn, which is more than we spent on music and video—evidence that computer games are not only seen as the recessionary purchase of choice, but also that they are finally beginning to shed their geeky image. Much of the hard work has been undertaken by Nintendo, whose strategy of bringing gaming to the kind of punters who previously considered it to be a somewhat nerdy pastime, has reaped rewards. Nintendo Wii hardware and software holds the top three slots in the all-platform chart on Amazon, while Nintendo Wii games made up almost a quarter of all UK software sales in 2008. The company’s handheld console, the DS, has followed the same risky track, and to good effect: you’re more likely to see a DS handheld out and about than any other portable.

But the biggest surprise is Sony’s performance. Sales of software for the PlayStation 3 rose by 145 per cent, a phenomenal rise on last year, especially considering that the majority of the console’s titles are unsuited to the casual gamer. By this I mean impenetrable apocalyptic first-person shooting games. Maybe the nerds do still reign.