So now textbooks for school can be rented in many cases.  One question I haven’t heard answered is if the book  you rent is already highlighted, is that considered good or bad?  It would be handy to know what kinds of grades the previous renter got.

Anyway, I heard about this idea of renting textbooks on National Public Radio Friday morning  and thought it would be an interesting subject for a rethinking blog entry, but it seemed a little ho-hum.

I presumed that someone looked at the furniture rental model (which makes no sense for most people because they charge so much, it’s ultimately cheaper to buy it if you rent it for more than 12-18 months in many cases).  Books are a little different, but basically if you assume two or three renters, have an efficient book collection model, it’s not too hard to find a price point that works for the publisher and the student.

Then I read this article in the paper by Tamar Lewin and realized there are some really big implications that extend far beyond the book world into lots of other industries. And I will give you the key points that caught my attention:

1) Some publishers are doing the renting themselves, like Cengage Learning, while others, like McGraw-Hill are working with a rental company, Chegg

2) In the case of Cengage, in their model the author gets a royalty for every rental, which doesn’t happen in the McGraw-Hill model because they sell their books to Chegg and Chegg doesn’t have any royalty agreements with authors

3) Then the wild-card is how many years professors are willing to commit to the use of a given textbook.  If they won’t agree to at least three years of using the same book, the model doesn’t work, so now there’s a risk that a financial incentive for the schools will influence their decisions about what books are best for their students.  That is a little scary

Why do I think that’s so much more interesting than just another rental business?  When you have a re-usable asset like this (again somewhat like furniture, software as well in a different sense), and people are thinking about renting it for the first time and experimenting with different models that include royalties and long time contract commitments, it’s very likely that some interesting models as well as best (and worst) practices will emerge.  Additionally, because most of these students are young, this segment of the population will enter the workforce with a different notion of buying vs. renting assets.

As we see more use of software-as-a-service and renting software becoming a hotter and hotter topic under the expanding umbrella term “Cloud computing” – I have to believe efforts like this will end up having some effect on the software business both for the customer in terms of what they want and expect, as well as the providers and the manufacturers.  Stay tuned on this one.

At least the highlighting isn’t an issue with software. . .

-Ric

This one is a bit of a stretch, and I have a reverse example of this approach from the business world that I will talk about at the end of this.

I will start with an uncontroversial example, and then progress to one that’s a little harder.  Somewhere between trivia and common knowledge is the tactic that’s used by firefighters to put out forest fires.  Do you know what they do?  They start fires.  Really.  Fires need fuel to keep burning, so if the firefighters burn the portion of the forest that’s in the path of the larger forest fire, by the time it gets to that area, it’s already burned, and there’s no more fuel for the fire and it goes out.  Stop the larger burning by starting (and containing) smaller fires.  The trick in this one is to go through the logic of the outcome you want (stop the fire), and then to ask what techniques accomplish that, and while pouring water is a way to put it out, removing the fuel source is in many instances a better way.  So ask what it will take to achieve an outcome, and if the current path isn’t working, ask if there’s another way.

On to V-J Day.

64 years ago today World War II ended.  This article in the paper today by Dan Barry talks about a man, Albert Perdeck, who was a soldier in that war and he was in the aircraft Bunker Hill that was attacked in 1945.

One of the primary points of the article is that people don’t talk about V-J day anymore, and a lot of people don’t even know what it stands for (Victory-over-Japan).  I think there’s a lot of validity to Dan Barry’s observation that a lot of time has passed and celebrating victory over Japan has a very different ring to it than simply saying the end of WWII.  Japanese/American relations are now very good and I expect people don’t want to stir up some of those awful memories, from Pearl Harbor to the atomic bombs.

For people who are unfamiliar with the timeline leading up to August 14th, hundreds of thousands of people had already died in the war.  The United States led by President Harry S. Truman notified Japan that we had created a bomb that would blow up an entire city and that if they didn’t surrender, we would use it.  They didn’t believe Truman and on August 6th we  destroyed the city of Hiroshima, and when they didn’t surrender after that, Nagasaki was destroyed.  Horrific doesn’t begin to describe those two bombings, but the reason it struck me as an example was that everyone wanted the war to stop, so many people had died already but that wasn’t ending the war, so Truman tried another more radical approach that amounted to killing people more people (sadly a LOT more people who weren’t soldiers) to stop the killing.

As I said, not wanting to stir up bad memories on this one, but with both the forest fire example and the WWII example, the tactic of doing more of something to stop a larger problem of that same something is a non-obvious approach to problem solving.

So my business example here is actually a case where a situation like this backfired for Vlasic pickles. People bought pickles at a pretty predictable rate.  Then Vlasic and Wal-Mart teamed up to sell gigantic jars of pickles.  I think Vlasic expected this to just be a great source of revenue from a great retailer and it would have a happy ending.  Not for Vlasic.  A little bit like the forest fire example, when these people bought the giant jar, it was basically two or three years of pickles for their household.  And they are fine staying in a jar for a long time.  So what happened was people stopped buying pickles at the grocery store and Vlasic had for all practical purposes put themselves out of business.  Just as the firefighters burn the fuel in the larger fire’s path, Vlasic sold them so many pickles, they wouldn’t have an appetite for buying more for a long time.

I realize these are some unorthodox examples, but the point is that when you are trying to solve a problem, think about cause and effect and what other options you have, and know that some can be really great, while others will backfire if you don’t think them through.

-Ric

I have written several times about the fact that measuring our progress in the current recession (and beyond) requires several measures, not just one.  Too often I pick up the paper and someone is talking all about one measure that is the key.  One day it’s unemployment, another day it’s bank debt risk, and the next day it’s something else.  While my opinion on that hasn’t changed, Eric Zencey’s article G.D.P. R.I.P. in the paper yesterday really surprised me, because a measure that we are all familiar with, that we all understand, doesn’t really mean what it has come to imply.

Gross Domestic Product has come to be synonymous with how well a country is doing, and I think that has gone largely unquestioned for a long time.  So when Zencey explains with compelling example after compelling example that it means something different, I agreed with him that we need a new label for this measure.  The basic argument is that G.D.P. literally only tracks the value of the transactions that take place.  As he puts, it when hurricane Katrina hit, it resulted in an $82B increase in the G.D.P., but by no means were we better off.  Someone can dry their laundry in the sun, and they are (in a very simple sense) better off, but there is no transaction captured in the G.D.P., and I can write a check for $50,000 today, which would seem good for the G.D.P., but that would send me into debt, and I would absolutely not be better off.

Thankfully, Zencey is realistic enough to know that we aren’t going to throw away the statistic known as the G.D.P., but I think he’s right in waking us all up to the fact that it is a simple transactional measure, not a measure of well being.  If we want to measure how well we are doing, as well as the value of things that aren’t on balance sheets (like the bayous he talks about that used to protect New Orleans that were also a gulf shrimp breeding ground – very valuable, were destroyed so they could be developed which look great in the G.D.P. but arguably destroyed more value than they created) we need to look for something more.

How do we do that?   That’s a great question.  The micro example of drying your clothes in the sun is a hard one, but the example of the bayous and hurricane Katrina is pretty clear, G.D.P. is basically just a part of a larger balance sheet, it’s the simple transactional bit, and there are a couple of other pieces (the bayous were adding value without transactions, so there should have been a replacement cost associated with things like that), and in the case of hurricane Katrina, it seems you almost need a waste measure, that is how much value is thrown away or destroyed (which is probably something the insurance companies can sort out).  Good food for thought.

-Ric

Randall Stross just wrote this article for the New York Times, which essentially looks at the past 40 years of growth in spending in information technology.

Stross points out that retired software executive Thomas Siebel, whose greatest fortune was won at the eponymously named software company he founded, points out key segments of that 40 year timeline, namely 1980 to 2000 and then from 2000 forward as the key times.

In a great graph, that unfortunately misspells Tom’s name, twice, I think both Siebel and Stross have missed the key point.

Looking at spending patterns as a compound annual growth rate (the so-called CAGR) as Siebel does, or slicing at specific blocks of time misses a critical piece of this data, the fact that innovations in technology and the ability of businesses to realize the potential of those innovations are reflected in the numbers.

In chapter 2 of Rethink, I walk through a series of big ideas in business, times when a truly different unit of analysis has been created, from Adam Smith’s “task” in the 1700s, to the “process” mostly made popular by Michael Hammer and James Champy in the early 1990s (with others in between, and one more at the end – the “what”).

Why this matters is that Hammer and Champy’s process transformed the way businesses looked at interdepartmental work, and that was what broke the dam on the popularity of ERP software, and that is the cause of the lump in this graph that begins in the mid-1990s.  Then the internet took off, and crashed, but it left us with a flat world economy.

So there we were in a flat world economy, and then six years ago a technology architecture was introduced called Service Oriented Architecture (SOA) where technology could be built and managed like a series of lego building blocks.  But the promise of SOA remains unfulfilled because businesses kept looking at their businesses with these old units of analysis, such as process.  Even with that limitation, another lump emerged with a strong economy.

SOA has matured with the internet and the latest label is “cloud” computing, and there are internal clouds and external clouds and terms like “SaaS” for software-as-a-service, and “S+S” for software-plus-services (suggesting some software needs to remain on your desktop and some of it should be in the cloud, or at least, “a” cloud).

So what does this have to do with Tom Siebel and the graph in this article by Randall Stross?  Just as the process lens unleashed the ERP software wave in the mid-1990s, the “what” lens in the pages of Rethink has the ability to unlock the potential of cloud computing and we should expect to see another big lump on this graph as we move into the years to the right.

And I will bet you a dollar that I am right.

-Ric

I mean really.

In chapter one of Rethink, I explain how Bob Nardelli destroyed The Home Depot in his cost cutting efforts by flat out missing what was most valuable to his customers (one of the ways he lowered costs was lowering wages, so all of the best people left, and the knowledgeable people were what the customers valued, it wasn’t that they had better plywood).  Cutting costs was was was needed, but “how” he went about it was a mistake. One of the reasons that story got so much attention was because after the company did so poorly, and the stock dropped so far in value, Nardelli still got an exit package of about $250 million.

So when Nardelli was hired as the next CEO of Chrysler, I was not only shocked that someone with $250 million in the bank wanted to go back to work, but that someone from a totally different industry would hire someone who had failed so spectacularly and so publicly in his previous role.

So when I read this article by Louise Story in the New York Times today, it was a little stunning just how much of a deja vu it is.  As Story wrote:

“To reduce expenses, Mr. Nardelli cut excess factory capacity and billions of dollars in fixed costs. He improved the interiors of several models, which bolstered some of its approval ratings.

But there still wasn’t a strong demand for Chrysler’s product line, which was packed with large vehicles like minivans and S.U.V.’s at a time when skyrocketing gas prices were making consumers interested in more fuel efficient cars.”

Wow.  Once again Nardelli slashed costs without asking what his customers really wanted.  Chrysler was making cars people didn’t want, so why would people buy a cheaper version of something they don’t want in the first place?

I honestly blame Steve Feinberg of Cerberus, the private equity firm that hired Nardelli.  Nardelli did EXACTLY the same thing for Chrysler that he did for The Home Depot, so in that sense I don’t blame Bob this time around, he has proven to be a one trick pony.

Maybe the next job Nardelli needs is to cut government spending in areas where people have little choice but to pay for the services, like the post office which is $7 billion in the hole this year.  At least there it doesn’t matter what the customer values.  I am not acting like a headhunter for Nardelli, but if someone is thinking about hiring him again, it’s a pretty consistent track record.

Sheesh.

-Ric

Inexcusable.

That’s the first word that came to mind when I read this article by Ian Urbina in the paper this morning.  I hadn’t ever heard of Peggy Cooper Cafritz or her world class art collection or her 15,000 square foot house very near where I went to college in Washington DC, but the fact that it burned to the ground on July 29th, destroying the hundreds of irreplaceable works of art, not knowing many of the facts, I did wonder how the fire got started and why there weren’t better fire control systems in the house.

But the bigger issue around this fire, which was the focus of Urbina’s article, was that there wasn’t enough water pressure in the fire hydrants to put the fire out.  The strongest water pressure they had was 323 gallons per minute, which is less than 20% of the amount needed for a fire of this size (1,643), and of course when they went to the second floor, there was even less water pressure.  This is, for all practical purposes in the middle of Washington, the Potomac river is so close you could practically smell it from the porch of the house.

While this frustrates me at a micro level that so many great works of art were lost and a beautiful home was destroyed, this was totally avoidable.  More importantly, it’s somewhat amazing that insurance companies aren’t all over this issue.  Don’t get me wrong, the insurance industry behaves badly in many areas, especially health care.  But as I wrote about FM Global on an April 27th blog entry, smart insurance companies should be working harder to know their risk, and at the very least notify their customers about their specific risk profile, and charge them accordingly.

Where am I going with this?  As my good friend Lawrence, a volunteer firefighter in Westchester County, New York will tell you firsthand, fire departments need to regularly check the water pressure in fire hydrants, a lower skill, lower risk task often delegated to the volunteers.  Whether it’s fire departments or some other independent group, someone should have a database of water pressure at specific fire hydrants so that the risk can be assessed on a per block basis.

And at the risk of stating the obvious, the outcome that everyone would like is to have enough water pressure in hydrants, so firefighters can do their best to minimize fire damage.  “How” they go about it is what’s in question here.

This wouldn’t happen overnight, but from where I sit, it’s a relatively straightforward organizational task.  So when people go out to a site like zillow.com, for example, to find a home, zillow could add a fire risk overlay on a per block basis, partly as a warning to home buyers, partly to inform insurers, and also to help local governments prioritize where they need to improve water pressure most urgently.  Adding quality controls to the process would take some effort, but tougher problems have been solved.

And it would probably be a pretty good little side business for zillow, especially now when home sales are slow.

-Ric