The Great Correction: How the Euro Crisis parallels our worst business models
Short-term thinking will send us all off the cliff in the long run …
Not too long ago I sat in a meeting with a company CEO, who was outlining the (let’s call it) strategy for the upcoming year. The model was this: greatly increase service fees, accepting that there would be significant attrition in the number of clients willing to bear them; then persuade the remaining clients to pay to fund products which would then be made available for free to those who didn’t pay for them. A tough sell, you might think.
During this time, costs would be controlled by reducing the number of services offered in the areas where the company was already successful and well differentiated. Resources would also be scaled back here. This would both reduce revenue streams in the near term and possibly force an exit in the long term.
To recap: destroy or damage existing revenue streams and put all the company’s eggs in the basket least likely to bring in new money. Now, not only would that model fail but it had failed before, spectacularly. The answer to that failure, rather than to re-evaluate the model, had been to divert money from something that was working to pump into further attempts — and to keep pumping to the point at which the funding sources dried up.
As an analyst, it was my job to point out the flaws in this strategy and warn about the giant cliff looming, but the advice went unheeded on that particular occasion. Here’s why. The CEO was rewarded (richly) in the short term, not the long term. If he implemented the board’s flawed strategy he, personally, would make a lot of money now, not in a few years time. Therefore it didn’t pay him to reflect on what could happen to the business and its staff in the long term.
Now I read this article by Paul Krugman about the Euro crisis and I have to chuckle. Except it’s not funny. The notion peculiar to lenders that interest should be highest for borrowers who can least afford to pay it — on the basis that the “risk” is greater — is a masterclass in short-term thinking. Or stupidity, as I like to call it. The punitive rate more or less obliges the borderline borrower to default. They are ruined but hey, they paid so much interest on the repayments they did make that the investment is recouped, so who cares, right?
Except that if your business model is to destroy your source of revenue, eventually you will have no one to sell to and they will have no money to buy with. Let’s call that — oh, I don’t know — how about recession or global financial crisis or depression. As with finance, so with business. Killing the goose that lays the golden eggs hasn’t been a viable model since Aesop. And yet people are still getting paid fortunes to implement it. People are calling our current times “The Great Correction” : but unless the blinkered short-termism that characterises this particular incarnation of capitalism is corrected, that name will remain as vacuous as it sounds.