Crack cocaine economics and six ways to get off it

by admin on September 2, 2008

in General,Innovation


This amusing talk by economist Steven Levitt, filmed at TED Talks shows what it is like being at different points in the crack cocaine gang hierarchy. He makes the comparison between the org structure of a modern enterprise and that of the gang, noting many similarities. The final slide (see illustration) has particular potency. As Steven observes, it doesn’t seem to matter how badly companies perform, the most senior executives always seem to enjoy top payouts. There is for instance a certain irony in this recent Guardian headline: Accountancy: Downturn means £1m uplift for Deloitte chairman.
In view of the recent fall in UK house values, other posts I was reading got me thinking about the British addiction to property investment and the debt that goes with it. Daytime TV channels are stuffed full of programming telling us how to turn homes into investments, lulling us into thinking that however tough the reality, property investment is a ‘good thing’ but with little mention of the potentially catastrophic effects of negative equity. Simon Wardley, best known for making the horribly complex sound extraordinarily simple says:

It is not unusual for a complex dynamic system that is deformed out of shape to return to a more stable equilibrium, once those deforming pressures are removed. In our case, the deforming pressures were caused by the current spending spree of future revenues (i.e. debt).

Add to that the fear of impending recession as predicted by the OECD, a currency that is suddenly making the USD look respectable when compared to the Euro, a government that seems hell bent on making stupid statements that undermine confidence and you have the misery making ingredients of a perfect storm.

What can professionals do to offer concrete help to tide business through. Several things that spring directly from thinking about innovation. I first should preface by saying that all the best advice about managing in a recession is given when everything seems rosy. That’s the real time to plan. Not now when it is a lot harder. Anyhoo – here goes:

  • Kill the client’s IT budget and endeavour to move from capex to opex. That means thinking hard about using saas services.
  • In the same vein, get clients to consider alternative uses for spare floor space capacity at minimal additional expenditure. It’s one way to help with any interest payments.
  • Try and get as many clients as possible online with a service you can share. That gives you the potential for early warnings if things are starting to look difficult and clients the comfort of knowing that someone who understand cash flow is watching their backs.
  • Help your client move as much of their sales marketing efforts online as possible, helping them to open up new channels of business. If you don’t know how – find an expert to help out.
  • Conduct a simple energy audit. Fuel costs are a huge drain on resources but a potential big cost saving winner.
  • Conduct a telecommunications audit. This is now the single largest operational cost for most service businesses on a per capita basis.It can be cut dramatically. If you’re not sure, ask Pat Phelan about MAXRoam. If you’re really smart and can help a whole portfolio of clients, he’ll likely cut you a great deal. The best bit though is that Pat is a strictly no BS operator; he prefers to deal in unvarnished reality.

Apart from helping distressed clients, you’ll do wonders for your business relationships and set clients thinking about why they spend in the way they do. The best clients I ever had were those I rescued from near bankruptcy. Why? Because I was prepared to stand alongside them and give whatever support I could. Over to you.

Endnote: Some people got a bit uppity about the last slide in the TED Talks comments. That shouldn’t be an issue for UK folks – at least not in our family.

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Pat Phelan September 2, 2008 at 2:16 pm

Great post Dennis and not just because I'm in it :-)
You bought up some very valid points, in a week where a friend bought a 50k motorcar for 20k this post drills home that we are in a recession but tightening of the belts and a little bit of clever accounting can easily see us out of it.

Last week here we sat down for a day and reviewed every single expenditure in the previous month.
result €2500 savings next month

keep up the bloody great work.

PaulSweeney September 2, 2008 at 2:41 pm

yeah. totally. Three things to add:
(1) Pat Phelan, please post both your review process and the items that you hit for cost reduction :)

(2) Innovation often performs well under conditions of restraint. Imposing some themes works well here (i.e. Reduce Features, Pre-emptive, Ready to Go etc.) I am sure that just putting the phrase "how could we do better web-demo's would be a huge benefit for everyone;

(3) Bald Plug: <a href="” target=”_blank”> will bring in your outstanding cash twice as fast just through simple SaaS based messaging service. See the biggest online retailers get this… Most companies have debtors and debtor days, yet most companies leave this money "out there" when there is no need to do so. As an afterthought, it also actually forces you to look at "who is a good customer", and what does that mean.

aferenta January 18, 2010 at 8:10 pm

Well most organizations have the same structure , even if they are illegal crime organizations or an other enterprise on the market , and business is good , a least as long as there is demand , there will be suppliers , and the only way i see of ending such organizations is affecting the demand with <a rel="follow" href="; rel="nofollow">Treatment for crack cocaine addiction centers and any other addiction

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