Certified General Accountants: Outlook magazine interview

I was honored to be interviewed by Lynn Sully for the CGA’s publication, Outlook.

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We discussed the idea that “you are your customer list,” among other Firm of the Future topics.

You can find the interview here, beginning on page 38.

Book Review: The White Man’s Burden

Anyone who shares the goal, emblazoned on the wall in the lobby of the World Bank—OUR DREAM IS A WORLD FREE OF POVERTY—needs to read this sobering book by former World Bank Senior Research Economist, William Easterly. Named after Rudyard Kipling’s 1899 poem, Easterly provides an assessment of foreign aid’s successes—and more frequently—its disasters.

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Despite spending $2.3 trillion (yes, trillion), nearly three billion people live on less than two dollars day; eight hundred and forty million people in the world don’t have enough to eat; and ten million children die every year from easily preventable diseases; the West still can’t get twelve-cent medicines to children to prevent one-half of all malaria deaths.

Contrast this situation to millions of children receiving Harry Potter novels the day they are released. What’s the difference? The former is based on top-down planning, while the latter is not.

The right plan is to have no plan. The central conclusion of the book is eloquently summarized by Friedrich Hayek, in The Fatal Conceit: The Errors of Socialism:

The curious task of economics is to demonstrate to men
How little they really know
About what they imagine they can design

There’s not one person in the world who knows how to make a pencil, yet any of us can get a pencil relatively easily, without a White House pencil czar, despite the fact that it takes, literally, thousands of people millions of interactions to make one (as Milton Friedman brilliantly explains in this short video).

Easterly draws a very useful distinction between Planners and Searchers:

Planners
Have good intentions
Raise expectations
Decide what to supply
Develop global blueprints
Know the answers
Believe outsiders impose solutions
Receive no feedback
Are not held accountable
Set priorities, deny trade-offs
Aid agencies

Searchers
Look for what works
Take responsibility
Ask, What’s in demand?
Deal with local conditions
Don’t have answers in advance
Believe only insiders have knowledge
Receive instantaneous feedback
Held accountable for results
Understand there are only trade-offs
NGOs and social entrepreneurs

Folks like Jeffrey Sachs, Bono, Bob Geldof and George W. Bush are Planners. Geldof told the New York Times, “Something must be one; anything must be done, whether it works or not.”

The World Bank (where Easterly worked for more than 16 years) and the IMF—the Sisters of Nineteenth Street—are also clearly in the Planners camp.

The Planner’s Paradox

No matter how much you may want it, it doesn’t make sense to have as your goal that your cow will win the Kentucky Derby. It’s much more useful to ask, “What useful things can a cow do?” Aid agencies are cows, not racehorses, according to Easterly.

He tells the story of his nine-year old daughter asking him, “Why do ambulances make so many accidents?” The presence of the IMF and World Bank is a consequence of poverty, not the cause.

Yet the problem is their very presence does cause further pile-ups due to rubbernecking bureaucratic planners, a phenomenon Easterly fails to explain fully, though he does equate aid to the “natural resource curse” (think oil-producing countries) with all of its concomitant negative effects on economic growth.

Another paradox is free markets—they work, but free market reforms do not (think Russia). Same with democracy; it works, but it cannot be imposed, since the majority may vote to abolish it.

It’s amusing that in Eastern Europe, after the fall of the USSR, the Big Six accounting firms were the chief recipients of foreign aid dollars, paid to draft new laws and create free markets, which had little effect on local customs. In fact, in 2003, KPMG’s Bearing Point received a contract from USAID to create a free market in Iraq.

Hiring accountants and consultants to create a free market is like appointing a eunuch to edit Playboy.

A free market is not created from a top-down plan; it doesn’t have goals, which is why we don’t need a White House book czar to ensure children get Harry Potter books. It’s also why we have no Jell-O shops in New York, but plenty of bagel shops.

Easterly does a masterful job of debunking the three legends of poverty with an overwhelming amount of empirical evidence:

Legend Part One: The poorest countries are stuck in a poverty trap from which they cannot emerge without an aid-financed big push.
Legend Part Two: Whenever poor countries have lousy growth, it is because of a poverty trap rather than bad government.
Legend Part Three: Foreign aid gives a big push to countries to achieve a takeoff into self-sustained growth.

Too Many Politicians

Easterly applies the principal-agent problem to that of foreign aid, explaining that it’s really the politicians who are the principals—not the poor—and the aid agencies are their agents. Thus, agencies are not held accountable by the very people they are trying to help.

There are far too many agencies who are each responsible for a plethora of objectives. When the objectives are not met, each agency can blame the others. If everyone is responsible, no one is.

It’s much easier to fart in a crowded elevator, since no one knows who’s to blame, than one where there are only two people.

He asks you to compare the cleanliness of your dining room with your attic. The poor are invisible, located in the rich world’s attic (especially the United Nations). Agencies only have to have visible plans and good intentions to delight the politicians, not produce actual results for the poor.

Easterly claims aid agencies have been bogged down the aid agencies in the equivalent of its Vietnam: AIDS. Despite a number of health triumphs—one area where the agencies have actually produced some good results—they have utterly failed on AIDS.

What’s the Answer?

Easterly concludes that aid will never be able to end poverty, only homegrown free markets can do that with any efficacy.

The solution: First, do no harm. In my mind, this means abolishing the World Bank, the IMF, and most other government-to-government aid agencies, as they have done demonstrably more harm than good.

But Easterly does believe that aid agencies can do some good, if they are held accountable for narrow results. Good luck with that. I don’t think it’s possible, otherwise it would have already happened.

No doubt some NGOs and social entrepreneurs are achieving positive results in some limited areas. He cites Global Giving as aid’s version of online dating, with some positive results accomplished.

The problem with these types of efforts is they detract from the real issue: we shouldn’t study poverty, for even if we knew the root causes, what would we do with that knowledge—create more of it?

We need to study how wealth is created. And it’s not created through aid agencies and NGOs giving away malaria nets and free medicines.

Rather, it’s created through a culture of exalting free minds in free markets, where entrepreneurship flourishes and continuously lifts people out of the perils of poverty. It is our only hope.

One optimistic note that Easterly cites is that the children coming of age today have only known markets, and will make them better due to digital technology. Time will tell, though I’m much less sanguine about this view.

But I remain a paranoid optimist, as long as we realize that the goal is to create wealth, the one and only antidote to creating a world free of poverty.

Book Review: How Will You Measure Your Life?

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Harvard professor Clayton Christensen is one of my favorite business thinkers, right up there with Peter Drucker, Henry Mintzberg, Gary Hamel, and a couple of others.

Unlike most business writers, Christensen understands the importance of theory. He writes:

MANY BUSINESS RESEARCHERS, consultants, and writers create and sell us static views—snapshots—of technologies, companies, and markets. [These] tell us little about how they got there. Nor do they tell us what is likely to happen in the future. My colleagues, my students, and I have eschewed the profession of photography. Instead we are making ‘movies’ of management.

This book applies the same concept of using theories to what’s important in your life. He begins by talking about knowing some of the leaders caught up in recent scandals, like Jeffrey Skilling from Enron, a Harvard graduate. The book sets out to help you answer three questions with respect to “How will you measure your life”:

  1. How can I be sure that I will be successful and happy in my career?
  2. How can I be sure my relationships with my spouse, my children, and my extended family and close friends become an enduring source of happiness?
  3. How can I be sure to live a life of integrity—and stay out of jail?

The last one about staying out of jail may seem unnecessary, but given the number of Harvard MBAs who have ran afoul of the law in recent times, perhaps not.

What’s interesting about this work is that it applies the same logic of using theories, which Christensen uses in his work with business leaders, to your personal life. It’s only theories that allow us to peer in the future, since conclusive data is only available about the past.

I Don’t Have an Opinion, the Theory Has an Opinion. When people ask me something, I now rarely answer directly. A good theory doesn’t change its mind: it doesn’t apply only to some companies or people, and not to others. It is a general statement of what causes what, and why. Good theory can help us categorize, explain, and, most important, predict.

You shouldn’t need Liz Taylor’s record on marriage to know what it takes for a good marriage. Theories help us explain what will happen before you experience it. He suggests you ask:

What are the most important assumptions that have to prove right for these projections to work—and how will we track them?

You’ll learn a lot of interesting things about business strategy, which surprised me at first given the subject of the book. Yet given his approach of using theories, it makes perfect sense.

One of the most intriguing discussions is the “full versus marginal thinking” that will help assure you live a life of integrity. He compares Netflix with Blockbuster.

Netflix didn’t have an existing profitable business model to compare to, it’s baseline was no profit. Blockbuster, on the other hand, based its decisions on marginal costs and revenues, which is dangerous because it

biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. If we knew the future would be exactly the same as the past, that approach would be fine. But if the future’s different and Blockbuster should have been thinking: If we didn’t have an existing business, how could we best build a new one? What would be the best way for us to serve our customers?

He then asks an interesting question:

Why is it that the big, established companies that have so much capital find these initiatives to be so costly? And why do the small entrants with much less capital find them to be straightforward?

The answer is when you’re new to the scene, the full cost is the marginal cost. This is the beauty of creative destruction, and it’s why economists don’t care if a business exists in the long run or not. Something will always come along that’s better.

So what’s this have to do with integrity?

The marginal cost of doing something ‘just this once’ always seems to be negligible, and hence it’s easier to hold to your principles 100 percent of the time than it is to hold to them 98 percent of the time. Decide what you stand for. And then stand for it all the time.

Good advice. Teaching ethics has convinced me of the wisdom of Oscar Wilde: “No man is rich enough to buy back his past.”

He ends on the importance of purpose, for which he recommends three parts:

  1. What do you want the enterprise to have become at the end of the path it is on?
  2. Commitment
  3. One or a few metrics that can measure progress

God, in contrast to us, does not need the tools of statisticians or accountants. [He has] no need to aggregate. His only measure of achievement is the individual.

Christensen, like Mitt Romney and Harry Reid, is a devout Mormon. He also discusses being diagnosed with follicular lymphoma, a cancer similar to that which had killed his father. It went into remission, then he suffered an ischemic stroke right after beginning this book. He’s learning to speak again, one word at a time. I wish him well, and pray he has a speedy recovery.

He’s certainly helped clarify my thinking, and this book, while not your typical self-help book, is quite useful (in fact, all of his books are). Rather than telling you what to do, he helps you construct a theory of cause and effect. It’s much more difficult than reading platitudes, but far more useful. Highly recommended.

Book Review: Negotiating with Backbone

Reed Holden is my mentor, so I’m extremely biased. Still, this is a great book, especially for any firm pricer who has to deal with procurement, which Reed writes is the new normal.

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The final frontier of good pricing is the customer negotiation, and Reed explores this with verve, and an enormous amount of tacit knowledge accumulated from years as a salesman and pricing expert.

He points out “that 80 percent of procurement managers give the other 20 percent a bad name.” I have to say, this has not been my experience with the procurement folks I’ve met, but that’s probably because I only deal in the professional sector, not with general procurement.

What makes this book so useful is Reed documents all of the games procurement plays—from delays, waiting for the end-of-period discounts, to using vendors as “Rabbits” simply to drive down the price of the preferred vendor. There’s many effective tactics offered to deal with each of these scenarios.

And this advice needs to be shouted from the rooftop:

Discounting is a fool’s response. Those who live and die by discounting don’t live very long. Trad[ing] margins for revenues, they undermine the success of their business, which needs profits more than revenue to survive.”

The most important strategy, though, is to know your value, and to be an equal with procurement, not a supplicant. Only equals can negotiate. If you don’t know your value, procurement will drag you to the one topic they know well: price. You must change the conversation to value.

I also love this advice:

Spending the time on the proposal is actually easier than going to the customer with the tough questions.

Here are some of the questions Reed insists you answer before submitting a proposal:

  • What is the process for evaluating vendors and proposals?
  • What are the names and positions of everyone in the process?
  • Who is the ultimate decision maker?
  • What is their timeframe for evaluating vendors and finalizing the deal?
  • How many other vendors are approved to supply the product or service?
  • What are their names?
  • Do any of those other vendors have existing relationships with the decision maker?
  • Which vendor is the preferred vendor?
  • What are your criteria for selection of vendors?
  • Are you interested in vendors that might be able to provide more value to your firm?
  • When and how do we get an opportunity to understand how we can add more value?
  • Are you satisfied with your current vendor?
  • If you have no prior relationship with the customer, why are they asking you to bid?
  • Do budget dollars exist for the requested products and services?
  • How much is the budget?
  • What is the process to get approval to use budget dollars?

If you don’t know the answers [to three or more of these], pack up your bags and look for another opportunity.

The book documents eight different scenarios you can find yourself in. You’ll learn excellent strategies for dealing with price buyers, value buyers, and relationship buyers. The tough buyer is the poker player, who are value or relationship buyers in drag.

Counter intuitively, price buyers may be the easiest to deal with, since at least they are upfront about their expectations of the lowest price. Reed cites research that only 30%-35% of buyers were real price buyers, and that’s in commodity markets. For professional firms, it’s much less, probably single digits.

Reed’s ten tactics for winning the procurement game are exactly right:

  1. Qualify, qualify, qualify
  2. Understand your foundation of value
  3. Develop give-get options [lower price, strip out value]
  4. Map the buying center
  5. Where appropriate, build trust
  6. Use the policy ploy
  7. Delay, delay, delay
  8. Redefine risk
  9. Dealing with reverse auctions
  10. Do your homework

Being a William F. Buckley fan, I appreciated the story of when he was hired to speak at the University of Texas in the mid-1960s, when he was just starting his career as a lecturer. The Daily Texan university newspaper criticized the amount young Buckley was being paid, which was a record amount.

At his talk, Buckley read the most accusatory part of the article aloud, and said to a thundering applause:

I never said I was worth it. I only said I wouldn’t do it for less.

My only quibble with this book—Reed and I have discussed this before—is his use of the poker analogy. He writes:

The way is to consider the negotiation with the economic buyer as a game of poker.

Wagering, like a customer negotiation, is a zero-sum game. That is, every dime that ends up in one pocket is taken out of another.

Remember, you’re in a zero-sum game. The goal of procurement is to grab as much of the pot as possible.

Yet enterprise is not a zero-sum game, otherwise their could be no growth or value created. In the long run, both parties to a transaction benefit, no matter what price is finally agreed upon.

The zero-sum mentality has many deleterious effects, and I believe this analogy needs to be buried. Linguistics matter—a lot.

We must change the conversation to value, something both sides want to maximize. It’s the one area where interests are aligned—the opposite of a zero-sum game.

That quibble aside, this is a fantastic book, and a must-read. Even if you don’t deal with procurement, you will learn strategies from one of the world’s foremost pricing experts.

It’s also an optimistic book, as Reed believes that high value products and services are not dead. With all the talk of the “new normal,” this is a refreshing and empowering message.

DETalk–John Chisholm–Ron Baker Does Oz

In this DETalk, VeraSage Senior Fellow John Chisholm of John Chisholm Consulting regales us with the true story of what really goes on when Ron Baker visits him in Australia.

DETalk: Jay Shepherd on Outstandingness

As many of you know, last week in Las Vegas, the Founders, Fellowsai, and Friends met after the AICPA PracTech Conference. On Friday, we recorded several new DETalks for posting on this site.

The first is by Jay Shepherd of preFix, author of Firing at Will. His talk is entitled Outstandingness and explains that using your pricing strategy as a differentiator is not going to work.

Enjoy!

Book Review: Bourgeois Dignity

Warning: Similar to her first book in this series, The Bourgeois Virtues, Bourgeois Dignity is an extremely difficult—even painful at times—read. It’s dense; long (450 pages); packed with scholarly citations; it rambles, and wanders, sometimes aimlessly, with 41 pages of footnotes that take you even farther afield; it probably should have been cut in half by the editor; not to mention in places it will give you an incredible migraine.

It’s also brilliant. I loved it.

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But I dread trying to summarize the argument because it’s so complex and expansive in scope. For, as usual, McCloskey has looked at the hypothesis from every possible angle. This is the second book in a planned six-book series, which sets out to answer this question:

What caused the spectacular growth in the economy from the late 18th century to the present day, going from an income of approximately $1 to $3 per day to $137 today?

It’s even larger than that if you take into account the quality of goods and services available today versus then. One simple example is antibiotics. Simple infections that once killed incredibly wealthy people can now be cured with $5 and a trip to the drugstore.

Estimates put the growth in the quality of goods and services at a factor of 40 to 190—I believe even that is an understatement.

In 1875, the average family spent 74% of its income on food, clothing and shelter. In 1995 they spent 13%. This is one reason why my colleague Ed Kless says he’d rather be poor anywhere in the world today than in 1800.

This is an incredible accomplishment, and historians, economists, sociologists, poets, along with many others, have offered a plethora of explanations to explain it. McCloskey explores them all, but she reaches a totally different conclusion than most economists. In fact, the subtitle of the book is “Why economics can’t explain the modern world.”

McCloskey believes that economic change depends on what people believe—their talk, their ethics, and their ideas, especially as related to dignity and innovation. It’s what Alexis de Tocqueville called “habits of the mind.”

Yet “ideas about ideas are unscientific” and largely ignored by economists who naturally gravitate towards materialist explanations for growth and dynamism. McCloskey writes:

To be able to detect the dark matter we will need a new, more idea-oriented economics, which would admit for example that language shapes an economy.

Words Matter

One of our favorite lines discovered recently is Werner Erhard’s “All transformation is linguistic. If we want to change our culture, we need to change our conversation.”

McCloskey’s argument is this on steroids. In other words, our conversations about dignity and liberty changed, launching the Industrial Revolution. Here’s how McCloskey expresses this phenomena:

A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the seventeenth and eighteenth centuries in north-western Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low—the “bourgeoisie”—as though it were dignified and free. The result was modern economic growth.

That is, ideas, or “rhetoric,” enriched us. The cause, in other words, was language, that most human of our accomplishments.

McCloskey here is using the word rhetoric in its ancient sense, “the means of [unforced] persuasion,” which includes logic and metaphor, fact and story. She’s written many books on this topic, criticizing economists for not telling better stories, two of which I thoroughly enjoyed: The Rhetoric of Economics, and If You’re So Smart: The Narrative of Economic Expertise.

In the spirit of words being crucial, she’s attempting to rid the world of the dreaded “Capitalism,” preferring “Innovation” instead to explain the wonders of a free market.

Not the Cause

The heart of the book is a deep analysis of why all the traditional explanations of the Industrial Revolution fail to explain the caus. To contrast these viewpoints, consider the book by William J. Bernstein, The Birth of Plenty. This is a fairly representative example of how most commentators explain the origins of the Industrial Revolution, though McCloskey doesn’t cite this work.

Bernstein, like McCloskey, concludes it’s not geography, climate, exposure to microbiological agents (as Jared Diamond has argued in his books), but rather four factors:

  1. Property rights
  2. Scientific rationalism (positing and falsifying theories)
  3. Capital markets
  4. Improvements in transportation and communication

Which of the four was most important? All of them are like ingredients to a cake, all are equally important to produce a just dessert. It’s not physical objects (materialism) that matters, but rather institutions, according to Bernstein.

This sounds very plausible, but not to McCloskey, and she debunks every one of these factors. In chapter after chapter, she definitively falsifies the following list of reasons often cited as the cause of the Industrial Revolution:

  • The Weber Thesis—The Protestant (particularly Calvinism) ethic
  • Michael Porter’s thesis of competitive strategy of nations (this is deftly ripped apart by McCloskey, and R.I.P. as far as I’m concerned)
  • Rise of rationality
  • The exchange of ideas. Ideas having sex, in Matt Ridley’s apt phrase from The Rational Optimist. It helps, but it’s simply not large enough to have caused the Industrial Revolution
  • Education. In fact, too much education can impair growth. An interesting discussion is provided by McCloskey, and Thomas Sowell’s work as well
  • Thrift (savings accumulation)
  • Investment (capital accumulation)
  • Economies of scale
  • Division of labor
  • Greed
  • Expropriation or imperialism
  • Human capital. Not that this is unimportant, but McCloskey would argue (using our lingo) that social capital—specifically, our conversations and beliefs—are more important. I think Rabbi Lapin would call this “spiritual capital”
  • Transportation
  • Foreign trade. This simply reshuffles goods and services, it doesn’t discover or lead to innovation
  • Geography. Jared Diamond’s thesis is thoroughly shot down
  • Natural resources. McCloskey believes there’s no such thing as a natural resource, except the imagination of man
  • Unions
  • Eugenics
  • Institutions. No doubt important, but no way did they cause the spectacular growth, and mostly were formed afterwards
  • Property rights. Again, they are important, but they existed in all sorts of places prior to Great Britain (China, e.g.)
  • Science. This is more a result, not a cause

Thankfully, she also takes down the happiness literature that’s beginning to sprout up in economics, which is just so much hokum.

One discussion that runs through the narrative is the “California School”—why so many scholars (who tend to be disproportionately located in California universities) believe that numerous discoveries were originally from China, giving error to the idea of European exceptionalism.

McCloskey is more and more convinced of the findings of this school of thought, and so will you after reading about it.

Bowing to her colleagues, who love to express economics in mathematics, McCloskey offers this rather innovative “model” (not a theory) to explain the function for national product:

Q = I (D, B, R) • F (K, sL)

In which I is the Innovation function, depending on D, the dignity accorded innovators, and on B, the liBerty of innovators (the letter L is need for labor), and on R, the rent or profit to innovation.

The innovation function multiplies a conventional neoclassical production function, F, depending on ordinary physical capital and land, K, and on raw labor, L, multiplied by an education-and-skill coefficient, s.

It was anticipated by [Adam] Smith, whose Theory of Moral Sentiments (1759) treats the D variable of dignity, and whose Wealth of Nations (1776) treats the B variable of liberty (amongst a great deal also about F(.)).

And as example of how erudite this book is, where else could you read about Frédéric Bastiat’s idea of a “negative railroad.” Bastiat is on of my favorite economic thinkers because he takes arguments, especially those advocating protectionism, to their logical and absurd extreme.

In 1845 he wrote a petition of the candle makers against the unfair competition (think “dumping”) of the light of the sun, arguing that the law should require curtains to be drawn during the day.

He also argued that if exports would good and imports bad (think our completely meaningless “balance of trade” deficit, which describes accounting, not economics), then countries should sink their ships at sea, creating exports with no imports. Brilliant!

He was probably among the best thinkers to explain that job creation is not the purpose of an economy. In another spoof, he argued that the King should cut off everyone’s right arm, since then it would take twice as long to accomplish any task, create all sorts of jobs, and wealth.

Well, the “negative railroad” is just as funny, and only politicians would be dumb enough to fall for it (think “Wright Amendments” for flying out of Texas). Here’s how McCloskey explains it:

A railroad was proposed in the early 1840s from Paris to Madrid. The city of Bordeaux, at a third of the distance, demanded that the railroad break there, on the argument that the break would “create jobs” for porters and hotels and cabs [big cities like Paris, London and Chicago have always had the trains go into them and end].

Bastiat noted that according to such “job-creating” logic every town along the route should see its opportunity and take it. Every few kilometers, at every country village, the railroad on the way to Madrid would end at a Gare du Nord to be resumed as a Gare du Sud, after job-creating expenditure for freight and travelers en route.

All the national income of France and Spain would come to be “generated” by the Paris-to Madrid railroad, at the cost of all other forms of production and consumption. Jobs would be “created.” It would be a negative railroad, a triumph of protectionism and industrial planning achieved through what economists would later call “rent seeking” by the politicians of Bordeaux or Ablon-sur-Seine.

Think Obama’s “investment” in Solyndra to “create” green jobs.

In the final chapter, she summarizes the “Bourgeois Deal”:

Give a woman some rice, and you save her for a day. Give a man some seed and you save him for a year. That’s the plan of investment in capital, tried for decades in foreign aid, without much success.

But give a man and a woman the liberty to innovate, and persuade them to admire enterprise and to cultivate the bourgeois virtues, and you save them both for a long life of wide scope, and for successively wider lives for their children and their grandchildren, too. That’s the Bourgeois Deal, which paid off in the Age of Innovation.

Does the idea of conversation, words, and talk, changing the course of civilization sound too simplistic? Think about this: Why have out-of-wedlock births skyrocketed in the past 50 years?

Even during the worst years of slavery, the black family was largely intact. And, as Charles Murray documents in Coming Apart, out-of-wedlock births are increasing dramatically among the white population.

Why? What changed? Was it our conversation about this issue? Removing the stigma and shame associated with “bastard” children?

If not, what? Even Murray doesn’t completely blame the welfare state, concluding it exacerbated and enabled, not caused.

I find McCloskey’s work compelling, and it certainly has changed my worldview on the causes of the Industrial Revolution. It truly gives weight to the saying “all transformation is linguistic.”

If you’d like to follow this line of thought, you can visit her site here.

The planned six-book series is as follows:

  1. The Bourgeois Virtues
  2. Bourgeois Dignity
  3. Bourgeois Revaluation, how innovation became virtuous 1600-1845, where she will attempt to measure dignity, and even liberty
  4. Bourgeois Rhetoric
  5. Bourgeois Enemies, mostly intellectuals (no surprise there, see Thomas Sowell’s Intellectuals and Society)
  6. Bourgeois Times, present day views on topics such as globalization, environmentalism, etc.

I look forward to each of these works, even though I know I will be in for a McCloskey headache.

Book Review: The King of Madison Avenue

Kenneth Roman joined Ogilvy & Mather in 1963, stayed for 26 years, and was the third successor to David Ogilvy. He wrote this book to assess David Ogilvy’s legacy. It’s a very balanced look at Ogilvy’s entire life, and his major contributions.

David Ogilvy was born June 23, 1911 (same year as Ronald Reagan), the fourth of five children, in Surrey, southwest of London. He described himself as a Scot. He dropped out of Oxford, spent 1.5 years as a chef in Paris, sold expensive stoves in Scotland, and in 1935 started at Mather & Crowther, the agency run by his brother in London.

He arrived in the USA in 1938, where he went to work for Gallup, and in 1942 he worked for British Intelligence as part of the War effort. In 1946, inspired by the lifestyle of the Amish, he bought a farm in Lancaster, PA, which he sold two years later as farming was “tedious.” He opened Ogilvy & Mather in 1948.

He didn’t believe in growth for the sake of growth; he turned down 20 accounts in 1955 alone, including the Edsel, and Charles Revlon (whom he believed to be a real SOB). He decided he had to like the customer personally before accepting them. Although he was a lifelong smoker, he refused to work on cigarette accounts once the health issues became known. He turned down Xerox, which he regretted deeply, since a competitor got rich off the stock.

He didn’t like speculative work, saying, “We don’t make love until we’re married.” Warren Buffet was an early investor, and Ogilvy used to introduce him as the man who made more money from O&M then he did.

He was mentored by three friends that were also building professional service firms: Marvin Bower of McKinsey; Leonard Spacek, Arthur Anderson; and Gus Levy of Goldman Sachs. These friendships inspired Ogilvy to create a strong culture based on beliefs and principles, which he wrote extensively about, some of which is quoted in this book. It’s as relevant today as when he wrote it. Three that I particularly liked were:

He placed Russian matryoshka dolls at the board of director meetings, with a piece of paper in the tiniest doll: “If you hire people who are smaller than you are, we shall become a company of dwarfs. If you hire people who are bigger than you are, we shall become a company of giants.”

“You cannot bore people into buying.”

“The consumer is not a moron. She if your wife. Don’t insult her intelligence.”

He took on the Shell account on a fee basis, rather than commission. JWT begged him not to do it, as it would ruin the industry. By 1970 Ogilvy claimed that one-half of customers were charged fees, not commissions. In his book, Ogilvy on Advertising, he claims credit for bringing the billable hour to agencies. A huge mistake!

He purchased a chateau in France, and retired there in 1973. He died in 1999, age 88.

So what’s Ogilvy’s legacy? The French magazine Expression named 30 men who contributed most to the Industrial Revolution (Edison, Einstein, Keynes, Lenin, Marx): Ogilvy was number seven. He was labeled “the Pope of modern advertising,” which he loved, even though he was a fervent atheist who had a fascination for the Catholic church. He was never knighted (like Martin Sorrell), but was named Commander of the British Empire.

He ranks #4, behind Bill Bernbach, who Roman says had a greater influence on modern advertising, along with more disciples; then Marion Harper and Leo Burnett. Ogilvy’s greatest contributions:

  • Big Ideas
  • The concept of brands and brand image
  • Direct marketing
  • Intelligence of the consumer
  • Payment by fees
  • He detested billboards

All told, this is very well-written book about a fascinating life. Worthwhile read.
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