Risky Business

Risk management has become a bit of a hobby-horse for me. It’s part of corporate governance for UK Plc’s and US corporates. I was exposed to it first when I was on the board of Tempus Plc and then again at SABMiller Plc. It’s fair to say that like a lot of corporate governance, company directors regard Risk Management as at best a necessary chore and at worst a pointless exercise. Business is at its heart a risk/benefit decision process and well-run businesses would claim that their normal management processes take care of risk assessment. Every time Risk Management came on the agenda at SABMiller, my old boss, Graham Mackay, would, with some irritation, point out that the origins of Risk Management lay with governance for banks and their particular needs rather than manufacturing businesses like ours. He had a point and to be fair SABMiller is an extremely well run business.

However, always the contrarian, I really enjoyed Risk Management (I was on the RM committee at Tempus and had to oversee its implementation for the marketing function at SABMiller). The arguments made sense to me:-

When businesses suffer serious calamity people with hindsight always say the risk could have been forseen. They are right more often than not. In fact, more often than not someone in the organization or a disaffected former employee claims they wrote a memo about it.

An exercise where you take a hard look at what could go wrong and then discuss ways of either avoiding, mitigating or insuring against it, is a fundamentally very strategic exercise. Of course you see risks but you can also see opportunities. At the very least you get fresh insight.

There are various ways to approach RM (good old Wiki lays them out) but it is essentially fairly straightforward. An experienced and accountable group of people look at all the potential risks for all aspects of the business and draw up a list. They then catagorize the list into how likely they are to happen (high, medium, low probability) and how serious the effect would be if they did (high, medium, low impact). This then gives a matrix and of course you start with the highest probability/highest impact and work your way through them. Can they be avoided by improved management processes and/or better monitoring? Can they be insured against? Is further work or more fundamental change required? Logical stuff.

The point is, the risk is brought out into the open – what is the worst that can happen, how likely is it, what can we do about it? It’s impossible to do this without getting some great insights about the business and identifying some sensible actions to manage the risk.

The reason I am so obsessed by this subject is that for me it lies at the heart of what triggered the Recession i.e. the failure of the banking system (ironic that isn’t it?). It is also the solution, for me, as to what we should do to prevent a future reoccurrence of the systemic failings in the financial institutions, and a preferable one to lots more regulation and red tape.

Surely if Risk Management had been effective – that is to say applied with conviction and purpose – at Lehman Brothers (and the rest of the banks) they would have realized that they were massively exposed if house prices turned down? Does anyone now believe that Risk Management (forget the ethical questions just focus on the good business sense argument) was alive and well under Lord Browne at BP?

We don’t need loads more legislation. We have Risk Management – we just need to ensure that it is taken entirely seriously. And whom do we rely on to do that? Non-Executive Directors, that’s who. There has been a lot of whinging and whining among that elite group NED’s on the boards of the big corporates. They complain that they carry so much accountability and responsibility for very little by way of reward as a result of all this pesky governance. How can they be held accountable, they have to rely on what the executive board tell them about a business they get involved with only 6 or 8 times a year? Bullshit.

A well chosen, vetted and experienced Non-Exec should know enough to be able to ask the tough questions and should be relied upon to see that protocols like Risk Management are taken seriously. Are you telling me an experienced banker could not have asked a few probing questions about toxic debt and the impact of a downturn in house prices (especially given how deep Lehman and others were into it)? Are you telling me an experienced oil man could not have spotted the shortcuts that BP were taking and the risk they were exposing themselves, their shareholders (which includes a lot of pensioners) and all of us to? I’m bloody sure I can in marketing which is my chosen area.

We do not need to change much. Keep the governance and regulation we have, just make sure it is applied vigorously and hold the NED’s to account if it is not. The one change I’d make is to have a potential Non-Exec vetted and approved by an independent authority. And I don’t buy the argument that any of this will put the good Non-Execs off joining a board. It is very prestigious, very interesting and already well paid. They get circa $50 -100,000 to attend 6-8 board meetings a year (and read the papers and take an active interest in the business). This fee could be increased – surely it’s worth it – but in my view that is not the issue or the barrier to having good non-execs. Breaking up the cosy club of senior businessmen and well connected retirees and opening it up to better qualified people is the issue. No names, no pack drill but I have met some truly ineffectual and disengaged Non-Execs in my time.

Business is risky and the impact of corporate calamities affects all of us. It can be made much less risky and no less profitable with a bit of common sense.

Post Script

For those interested in the application of risk management thinking specifically to marketing you might like to read ‘Brand Risk’ by David Abrahams. You’ll see some contribution from yours truly but despite this, it is an interesting book from a smart author.

At least I think it is but then Risk Management is a hobby-horse of mine.

Thursday’s Joke

Two great white sharks, a dad and a son, spot a sinking ship with drowning people in the water. The Dad shark says to the son:

“Listen, we’ll just swim round them once with only a bit of our fins showing. Then we’ll swim around again with all our fins showing, then we’ll go eat”

The son shark does as he’s told and they scoff the lot. He asks his dad:

“What was all that business with the swimming around showing our fins before we went for the kill”

His Dad replied:

“I find people are like prawns, they taste a lot better when they’re not full of shit”

Agency of the Future

Came across this the other day – very interesting contribution to the agency of the future debate. It also has some useful links.

Direct your comments to Bud not me – if you scroll down you will find mine, which in summary is that we live in a both/and world. There will be a need for a ‘conventional advertising agency’ for many years to come, but there will be growing demand from both conventional clients (P&G et al) and non-conventional clients (i.e. everyone else but especially the new economy businesses) for a whole host of new configurations of services in which digital (= creative use of technology) will play a bigger and bigger part. As Bud points out, increasingly clients will bring some aspects of ‘marketing services’ in-house facilitated, as they are, by galloping technology.

A couple of simple observations. Clients have always paid only for what they cannot do cost effectively themselves. If clients cannot get what they want from their current agency roster they will go looking for it and someone will offer it or develop it. As I keep pointing out – age has its advantages – Ad agencies used to offer everything from making ads, pack design, research, new product development, PR, media buying etc etc. However, only the first of these did they do very well so new agencies developed as clients went looking.

I offer one piece of evidence of this both/and view, and it is a back-handed compliment to Martin Sorrell. If it was obvious that one agency model was going to be the clear winner rather than it being both/and with lots of different and emerging agency models, then WPP would look much more focused. As it is he buys everything that moves and even aims to have 3 competing brands in every major sector (I don’t think this is just about managing client conflict). He is betting on every horse in the race and any new ones that come along, a bit like his mate Rupert Murdoch. Who’d bet against this “strategy” – no-one but a private independent which is where I think the real action is.

“Change the World” by Not Trying To

I was in Unilever’s Offices in Durban last week. They really are fabulous, big views of the ocean and more meeting rooms of every description than I have ever seen. They have lots of open space with small informal meeting areas, conference rooms and brainstorm rooms aplenty and working kitchens, laundry rooms and bathrooms dotted around. Together with all the pictures of real consumers and areas designed to look like a township you could see they have gone to great lengths to make sure the whole business feels connected to their market and what they make and sell.

Around the Brainstorm rooms they had decorated the walls with inspiring quotes from famous entrepreneurs. One in particular caught my eye:-

“The people who change the world are the people crazy enough to believe they can change the world” Steve Jobs

I like the idea of specifically designed ideation rooms where people feel they have permission to dream big – we made this a feature of Added Value offices and called them Idea Generators. I also like inspiring quotes. But this one from Steve Jobs struck me as all wrong.

I can’t think of many instances in life, and especially in business, where people changed the world because they wanted to, or set out to, change the world. They normally intend only to change their world or solve some particular problem they confronted and, in a very few instances, they succeeded unexpectedly in making a big impact on THE world. Steve Jobs had no intention of changing the world when he started Apple. He had dropped out of university and needed to justify having done so by making some money. In fact if you look at the case studies of many of the game changing internet innovations and the people behind them– Skype, Paypal, Google, the internet itself – they actually set out to do something much more modest and mundane. They get full credit for not only achieving what they set out to do but also spotting and exploiting the discovery that they had stumbled on a much bigger opportunity. But let’s be quite clear – they were absolutely not crazy enough to think they could change the world or arrogant enough to want to.

Nelson Mandela changed the world, and he certainly dreamed big, but he set out purely to overthrow a regime that disadvantaged his people. There is a quote of his I particularly like that goes something like this:-

“Dreams without action are a waste of time. Action without dreams is merely passing time. But with dreams and action you can change the world”

A great reminder that when the ideation sessions end a smaller group of people actually need to make the ideas happen, and a great reminder that we need the stretch of some big ambitions to give our actions lasting purpose. But he said this after he was President and the old regime had been dismantled. He did not set out to change THE world, just his inequitable world.
Unilever has for more than a century (Unilever was created in 1930 but Lord Leverhulme kicked the whole thing off in the 1880’s with Sunlight soap) focused on making the best value cleaning and food products it can. Lord Lever had as much impact on the world as Steve Jobs but he did seek to change the world. He just concentrated on doing what he knew best, to the best of his abilities. Like Steve Jobs he was smart, ambitious and tenacious and sure, he dreamed big, but his dreams were purposeful. They inspired him to overcome any obstacle in his path. Like Steve Jobs they occasionally got him into trouble (his desire to control every aspect of his supply chain from plantations, shipping lines to factories and stores overstretched the company and is what effectively forced the merger with Dutch company Margarine Unie).

No, I don’t like the quote from Steve Jobs and actually think it is very unlike him. Watch this video of his address to Stanford graduates for much more inspiring words from the truly impressive Mr. Jobs

He offers some very inspiring advice and reflections to all of us, not just graduates.
My favourite all time quote which I think is much more relevant to Steve Jobs, Lord Leverhulme, Mandela and all the other great leaders, visionaries and entrepreneurs comes from George Bernard Shaw:-

“The reasonable man adapts himself to the world. The unreasonable man adapts the world to himself. Therefore all progress depends on the unreasonable man”

Don’t accept things the way they are just because that is the way they are. Challenge everything, be unreasonable, ask why not, what if. GBS deliberately said ‘man’ and not person. Men are often more unreasonable which is both a good thing and a bad thing.

Why was I in Unilever Durban? They have just launched a mobile marketing scheme with which I am involved that may well change the world of FMCG marketing in emerging markets, but neither they nor I are crazy enough to think we can change THE World.

McGuffins and Nerdwanglers

I’ve been tweeting recently about some purchases I have been making, joking about the fact that I have no idea what Canon SLR 550d 18MP really means, or RAM, memory and processor speed for that matter. Not entirely true, I have a vague idea that more megapixels in a digital camera gives better picture quality, but someone who really knows what they are talking about explained that it is not quite as simple as that. There are many other aspects of the camera, and how you use it, that will negate the benefits of just having more little ‘pixies’ as I call them.

Megapixels is just an indicator of performance, a heuristic or shorthand that helps us judge what we are getting for our money in terms of performance. We need them because most of us cannot grasp all the aspects of performance needed to make a fully considered choice. So we rely on these heuristics and we also just copy what we see other people do who in turn have relied on them. It does not just apply to high tech products like cameras or computers. Most of what we buy now has a huge amount of technological know-how behind it or at least expert craftsmanship. From my earliest days in brand management I learned how complex a detergent is, and from my more recent time in the beer industry I know just how complex is the process (not so much the ingredients although they of course matter) of making beer. Miller Lite (not the most strikingly different of beers) involves no fewer than 3000 choices in the brewing process, each one of which, if made differently, would result in a different tasting beer. Have you ever seen a perfumers organ (no sniggers) – the thousands of little vials of perfume ingredients, some of them worth a fortune, that they use to compose a new fragrance? The marketing focuses on simple vocabulary like “fresh, musky or sensual” to describe what is in effect a work of pure art.

As Gladwell pointed out in Blink we thin slice to form our judgments. We use a few simple things to sum up a person, situation or brand choice. Marketers exploit this by latching on to a few simple concepts – often but not always based on the science – to ‘help’ us. They will hype some aspect of the product to persuade us to buy and sometimes they employ what I used to call “Nerdwanglers” and I discovered years later the Americans call “McGuffins”. Let me explain.
Nerdwangler – showing my age – refers to the late Kenneth Williams, a very camp UK comic who had a character who spoke in a strong west country accent and used phrases with made up words such as “She took me down the orchard and I showed her my nerdwangler”. Nobody knew what a “nerdwangler” was but it sounded naughty and got lots of laughs. It was suggestive. When I ran Persil, we relaunched the brand with a new low temperature bleach that had the chemical acronym of TAED (can’t remember the full name but it starts with tetra). There was an impressive amount of technology and chemistry know-how behind this ingredient. It was only one of several changes we made but in total they did give noticeable cleaning improvements at the lower temperatures people were having to wash in because of more and more artificial fibers (you can literally boil wash cotton). When we tested the new packaging we got a great result for “New Improved Persil – now with TAED for a better Cool Wash”. We knew we would, it was an improvement on “miracle ingredient X” which had worked in the past until it got over used. TAED was a ‘nerdwangler’ – no-one knew what it meant but it sounded good, like more megapixels and twin turbos.
The button on the sleeve of a Dunhill blazer actually unbuttons, the second hand on a Rolex actually sweeps, the door of a Mercedes shuts with a soft, firm sound rather than a clunk. They are all heuristics.

They justify our purchase decisions to ourselves, and to our mates – “Look Fred, your watch goes tick tick tick but my Rolex goes swoosh”.

Any harm in any of this? Well let’s look at some common McGuffins, Nerdwanglers and heuristics.

Audi RS6 does 0-60 in 4.6 seconds, faster than a Porsche Carrera

Single malt whisky is more expensive than a blend (price is the single most common heuristic in purchase decisions)

Rolex is made from one piece of metal with a fully mechanical movement

Dettol kills 99% of all known germs

Camel One has only 1mg of tar and nicotine

You lose weight faster on the Atkinson diet

Canon 550d has 6 more megapixels than the Nikon DX3

Yes but…….

The Audi only does this in a straight line, the Porsche thrashes it on a track or winding road.

A single malt whisky is just an ingredient used to blend a whisky, one with a very distinctive but singular taste – fine for sipping but not for having a few drinks. Any scotch expert will tell you there is vastly more complexity and balanced taste in a decent blend. Scotch drinkers drink blends.

Any Rolex will lose or gain 5 seconds a day (if you are lucky) – the cheapest quartz is more accurate.

It is not good to kill all germs, we rely on them to build our immunity. What about the ones we don’t know and what if the 1% is a superbug that will kill you?

Tests show that smokers who switch to low tar/nicotine cigarettes end up smoking more in a day so the total effect is no different and certainly no better for you.

The Atkinson diet worked by satiating you with protein and fat so you felt full quicker and therefore ate less. Smoking will do the same thing and is probably no worse for you. You lose weight if the calories you expend exceed the calories you take in. If you diet you actually programme your body to gain more weight in the future (it’s a genetic thing, we are designed to gain weight to see us through the winter months).

The Nikon has a better lens and is full frame – it will take much better pictures. It is however a brute to carry around and only the professional will be able to make full use of its superior performance.

Everything I have just said can be discovered on the internet in just a few minutes from a variety of sources that are more trusted than the manufacturer – Wiki, blogs, chat rooms, social networks etc.

The days of the McGuffin and the Nerdwanglers are numbered. We are not becoming more rational in our purchase decisions we are just able to be more rational.

Those of you who are following the debate I am having with Paul Feldwick will know that I do not accept the distinction between rational and emotional choices. If I buy something because a) it makes me feel good b) it says something about me or c) I see lots of other people doing it, then I am behaving entirely rationally as a super social ape wishing to enjoy life, get on with others and avoid risk.

So yes, I have a Porsche, a Rolex (2 actually), a Canon 550d (I did my research, it does take great pictures with all those pixies, a decent Tamron lens and a light body), I smoke Marlboro Light, drink a single malt but only if someone gives it to me. I disinfect my toilet (well someone does). But I eat and drink what I like and try to work it off in the gym. And of course I smoke so I am never as hungry as my more clean living friends but that might not be sensible for my lungs and heart. Apes don’t smoke, maybe I should copy them? But then they don’t see the funny side of showing someone your nerdwangler. (I have no idea of the origins of ‘McGuffins’).

Thursday’s Joke

A Chinese guy goes to his boss and says he has to go home early.

“Me feelin’ weally sick, bad cold in nose”
His boss lets him go but gives him some advice.

“Listen you can’t just give in to a cold. Try some vigorous exercise – in fact when I get a cold I find that if I make passionate love to my wife it goes away”

Next day the Chinese worker is back, evidently feeling a lot better.

“Thanks for advice, boss. It weally work. Also, you have nice house

Plus ca change, plus c’est tout une charge de merde de taureau

Fluent in French – just another of my hidden talents.

I cannot believe Sherrington’s stupidity in thinking he can win a debate with Paul Feldwick. Even if he was arguing water was wet and Paul was arguing it wasn’t, he’d lose. Mr. Feldwick is ten times smarter than Uncle Fester (my special name for Shezza). As it is he is trying to argue that the internet has changed everything – bollocks. Name me one thing?

The internet makes marketing more interative – listen, marketing was interactive in the Coliseum in Rome. Thumbs down if you want to see the Christian fed to the Lions, thumbs up if you to want to see them freed so they can form Bible Groups and put little fish on their chariots.

The internet gives people more access to information so they can make better purchase decisions – I go down the pub and ask my drinking buddies which is the best car to buy for under 10 grand. Someone always knows.

Everyone can publish their views – yes, they can, in a gazillion dull blogs (duller even than this one). We always knew that everyone has a book in them, just not necessarily a good one. Now that anyone can publish for free the cyber space is clogged up with the most useless drivel***.

The internet has changed the nature of social interaction – wow, now a load of spotty teenagers can share their mindless ramblings and puerile pursuits with a load more spotty teenagers on Facebook. Big deal.

Oh but it’s so easy to book on-line – are you kidding me! By the time you have filled out the form 10 times because you keep missing some piece of information (which is only asked for so they can pester you with a load of useless offers later on) you might as well pick up the phone and call someone. Better still get your secretary to do it. And for secretary read search engine – much better than google.

The internet has caused an explosion of content – if by content you mean some video of a cat playing the trombone or some little kid hitting his brother and laughing ‘til he wets himself, well then all I can say is that you are easily contented. (I will acknowledge the vast improvement in quality and quantity of pornography and the ability to fill in few dull hours at work watching it).

Look how the internet has changed politics – Bush and Brown were kicked out and Obama and Cameron got in. Am I missing something?

The internet has changed the balance of power between big brands and consumers – not so’s you’d notice. And anyway do you seriously think any of these big corporations pay any attention to what you think? They listen to their shareholders and watch their competitors. If you want to influence what they actually do with their brands, give up 2 hours on a Tuesday night to sit in some bloody focus group in Staines being interviewed by a drippy moderator with a degree in Humanities. You have a much better chance of some witless brand manager concluding from the debrief that there was a much stronger preference for the apricot flavoured toothe paste just because you and the other mouthy guy gave it the thumbs up and the rest of the group couldn’t be bothered saying anything.

Access to news, sports and weather reports – buy a newspaper.

No, it’s all a load of tosh spread by the Silicon Valley geeks who want to sell you the latest Lilly Pad Phone so you can browse 24/7. Browse what? If you want to browse go to a big department store, you’ll even get a free splash of aftershave.
And if f you want to blog so that you can share your views with a large unkown captive audience, take a felt tip pen with you the next time you use a public toilet (also a useful place to meet new friends and interact socially as George Michael will tell you). I call it the Bogosphere.

*** My eBooks available on this site are of course an exception to this general rule.

Up yours, Stame.