Eddie Senatore

Survive to Thrive – A journey to business success

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A Complete Contract – Why Disputes Happen

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Why Disputes Happen

Economists define a complete contract as one that eliminates opportunities for shirking by stipulating each party’s responsibilities and rights for each and every contingency that could conceivably arise during a transaction (Economics of Strategy, Dranove D, Besanko D, Shanley M and Schaefer M, 7th edition, p105).

A complete contract therefore sets out courses of action during a transaction, providing rewards when objectives are met and penalties when they are not. The idea of a complete contract comes from the notion that the activities, actions and outcomes under a complete contract would mimic all the steps that a firm would undertake if it conducted that activity inhouse. With a complete contract you would be indifferent if you did the activity yourself (make) or you outsource the activity (buy).

The agreement must be enforceable such that an outside party, such as a judge or an arbitrator, must be able to observe which of the contingencies occurred and whether each party undertook their responsibilities. Finally, any specified damage must be capable of being met by the shirking party, otherwise what’s the point, right.

Suffice to say in a commercial context a complete contract does not exist. All relevant contingencies must be covered off, all actions agreed, rewards and penalties clear. During the contract negotiation process, parties must agree on what makes for satisfactory performance and parties must be able to measure this.

So then most contracts must be incomplete – check out the Lululemon controversy.

There are a number of reasons why contracts are incomplete.

Problems with complexity – how is it possible to consider every contingency in every transaction, a concept otherwise known as bounded rationality.

There are also problems with specifying or measuring performance just like in the Lululemon case. Was the see through yoga pant due to lack of specificity of the sheer or a design issue? How many times have you seen the word ‘reasonable’ or ‘best endeavours’ in an agreement. See this Lululemon summary.

Then there is the old chestnut of asymmetry of information, where parties to an agreement do not share or do not have equal access to all contract relevant data or information. A caveat emptor for example or quality control for example; did the supplier of the Lululemon yoga pant follow specifications, was the sheer even specified?

A well-developed body of contract law such as in Australia or the USA makes it possible for transactions to occur smoothly when contracts are incomplete. Some agreements specify standard provisions, for example real estate transactions. Even within these transactions there are broadly defined terms which make matters contentious. Just what is reasonable notice? So we have to create guiding principles outside agreements to help what’s in the agreement.

Matters escalate to litigation which is a costly way of “completing” contracts, not to mention time delays, uncertainty and more often than not relationships, which cannot be mended.

Relationships are developed by way of interactions in the market place. For example, when goods are produced or services delivered they are provided on the basis of some key performance measures – timing for example, sequencing, technical competencies, colour, condition, quality etc. Contracts tend to manage these relationships. Some contracts may even enable assignment of certain activities others may not.

Confidential or private information adds another layer of complexity. Patents go some way to help with protecting processes or intellectual property, but they also suffer from similar issues such as bounded rationality or what detail the patent actually intends to cover or protect. Employees for example may be trained or educated and this cannot be taken back, so they are managed through non-compete agreements. Again for reasons noted these agreements are also incomplete.

Economists describe these interactions as transaction costs.

Take transactions between parties which involve relationship specific assets, that is assets required specifically to complete a transaction. These assets could be technically trained staff in a specific area to manage client demands or geographically positioning a business, or assets acquired or developed either specifically for a client, for example specific plant to fulfil a special client order or you create an asset to serve a specific client, say the casting of a particular mould. In this setting you can see how business disputes arise pre, during and post contract development.

complete contract

A number of possible outcomes exist. One outcome could be that both parties attempt to negotiate safe guards into contracts. The upshot is parties enter into time consuming and costly contract negotiations and re-negotiations.

Parties could take up post contractual bargaining positions. For example either party may enter into plan B’s – a buyer may hedge against a contract hold up (deliberate or not) or a supplier may bargain with a standby provider. Both options create market inefficiencies.
Distrust may arise in so far as more and more safeguards are written into a contract or information is withheld impeding information sharing and raising the issue of asymmetry of information, creating further costs.

Finally, parties may reduce exposure or risk by under investing in facilities and relationship specific assets. For example, a supplier may not invest in maintenance of its plant, again reducing efficiencies which efficiency was the reason for using the supplier in the first instance.

The issue with market inefficiencies is that it reduces productivity which will in and of itself escalate conflicts.

There you have it, some reasons why dispute resolution steps need to be followed, when disputes come about.

Small Business Disputes

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Small Business Disputes

small business disputes

Options, options, options

Resolving small business disputes is tricky, with little by way of options. The usual plays are thrown out as alternatives; sell the business, appoint an external administrator (the type will depend on the circumstances) or some form of court intervention.
Here’s why you should consider the mediation process first.

1. Confidentiality

Business mediation is a confidential process, unlike litigation where you bare all to the public. It is arguable confidentiality is in a company’s best interest (and as a corollary a director’s duty). Public knowledge may tarnish a company’s reputation and value. Keeping conflicts private makes sense.

2. Providing options

Ideation is a bedrock tool for innovation. So to mediation. Mediation enables option generation. In mediation it is the business owners who determine which course of action is appropriate; the parties will construct and resolve their affairs. No one else.

3. Cost and time

We don’t have enough of either. Mediation is an alternative to costly litigation for example. Mediation will save money because it can bypass court fees and associated costs. Mediation can move quickly as the parties choose when to move forward rather than move to someone else’s schedule.

4. Flexibility

Following on from controlling time is flexibility. The parties can call on mediation at times when it works for the parties. Video conferencing mediation is also an option.

5. Control

By far one of the key benefits. The parties control the outcome, not the court. Usually the court is about winning or setting principles. Mediation enables parties to find some common ground and develop an agreement that could even provide mutual benefits.

Of course not all matters will resolve themselves. One thing is certain, commercial mediation services and facilitation (before conflicts escalate) should be key interventions to be considered.

Find a Facilitator Before a Dispute or Conflict Gets Out of Control

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find a facilitator

Find a Facilitator. Facilitation is a process that makes life easier. Using a third party to neutralise and help parties achieve collective outcomes.

You can use the process of facilitation at any stage. For example facilitation can be used in pre-conflict situations. This is not to say conflicts haven’t already erupted or there are no existing underlying tensions. Find a facilitator before any conflict escalates and becomes entrenched so that parties can work together in a collaborative way to achieve common objectives.

Facilitation can also be used during conflict as a tool or mechanism to manage conflicts. Of course the facilitation process can continue after matters have resolved to ensure new habits take hold.

As a business facilitator, I would oversee the progress of meetings and attempt to alleviate as much tension as possible, get personal agenda’s off the table and focus on group work. I recently worked with a group where initial discussions with two sets of lawyers and one accountant had recommended to wind up a company and have assets sold to settle their dispute. Working through a facilitated process we were able to have the parties agree to certain steps to resolve issues.

One essential element of facilitation is the involvement of all parties internal to the entity. With this in mind a facilitated outcome could be as simple as one session at board level or a more complex set of scheduled meetings over an extended period of time. It is important to note a facilitator does not become part of the decision making entity or process. The agenda must be owned by the parties.

Similarly, rules of conduct must be set and agreed to by the parties. The meeting facilitator can be engaged to run meetings, or simply keep a record of the meetings or act as a watchdog to make sure the group does not stray from the agreed agenda and rules of conduct. The facilitator creates an environment where internal stakeholders continue to manage and make decisions about their affairs.

There is a lot of work which goes into facilitation up front; meetings, including where to meet, how often, agendas to be agreed, surveys and establishing rules of conduct, who will look after what (from meeting notices, survey preparation, mail-outs, typing of minutes, etc), how participation is to be determined, who will represent different stakeholder groups, decision-making protocols, deadlines and resources for work to be done.

Then there is the conduct of the meetings themselves. Facilitation methods should be structured with the participants in mind and an environment created where everyone feels included and encouraged to participate. In this regard, rules of conduct must be observed.

Group record keeping is another important function of the facilitator. This can take various forms, with agreed outcomes or minutes being the base line record keeping tool. The best facilitated meetings demonstrate group interaction as the meeting progresses.

Another important task (and skill) is managing and maintaining the group. Managing tensions and ‘feelings’, following the rules and ensuring the agenda is playing out. Understanding body language; are people paying attention, is a break needed, are there distractions from within or outside the group (messaging and emails for example) and are they hearing what is being said.

Summarising, reopening and agreeing at appropriate times is also a necessity.

Find a Facilitator for conflict management situations before they escalate. I’ve seen a lot of groups survive tensions and grow into self-managed groups after an extended period of time using a corporate facilitator.

For the trusted adviser it translates to client retention and growth.

Retail is Not Dead

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closing down

Retail isn’t dead. It’s a challenge to get right, but not dead.

Professor Cristensen’s research tells us new technologies constantly reshape the marketplace. Consumer needs, wants and desires also shift as does competition. There’s nothing new in this. This is old school threats and opportunities; Porter’s forces still play out.

Professor Darrell Rigby’s research tells us every 50 years or so, retail goes through a major disruption. History tells us this also. Big cities and railway networks introduce people to city based shopping malls. Massed produced motor vehicles pushed the populus to the suburbs thereby creating urban centers. Shopping malls then move into the suburbs. Big category killers (Toys R Us) and massive discount stores (Walmart) emerge next.

Online shopping now. The internet has caused a shift in consumer behaviour. Sales associated with bricks and mortar stores have at best flatlined, with sales moderately increasing for stores who work hard on their customers. Online players on the other hand, have been reporting increases in sales by 11% or more in a relatively short space of time.

Consumers are demonstrating a propensity to spend more in the experience economy, travel and food in particular. Arguably an oversupply of physical retail stores, including an oversupply of shopping malls exists. There are also newly created segments such as the pre-loved sophisticated clothing segment for example. Let’s not forget poor retail management has also contributed to a decline in retail.

consumer-behaviour

Strategic positioning is one area of management responsibility. Not recognising a changing marketplace and sticking with existing strategies is an upstream problem. Recognising this with downstream metrics is too late – ‘oh sales are down’ – fixing it with a ‘50% discount sale’ is too little too late. Underwriting losses is a short term fix.

Big picture strategic questions – What business are we in? Who are our competitors? How do we create value? For example – are we a brand or an integrated fashion company or are we simply a generalist retailer?

These questions force a re-examination of a business, possibly presenting opportunities for a change in how the business interacts with new marketplace dynamics. Established methods, such as ‘that’s the way we do things’, or ‘I was always taught to do it this way’ is a definite warning sign for a business competing in a changing marketplace. There is simply no agility in the ‘that’s the way we do things around here’ ethos.

I recall an executive program on strategy I attended at New York University. We had the task to examine the business operations of each participant on the course. One group held the exclusive distribution rights for Red Bull in New York City. There were concerns the current licence agreement with Red Bull would not be renewed. Red Bull were doing this in other cities. They were looking for strategies to manage this risk. As it turns out, their business was not distributing Red Bull to retailers in New York City. They were in the business of knowing the ins and outs of every road, back street and ally and what times work, what times don’t, which locations are more vigilant than others and what size trucks fit where and who will cut you some slack to double park for a fiver.

This is now a totally different business opportunity.

Relationships also change, particularly with customers, not to forget employees and suppliers. Research conducted by Professor Joseph Pyne highlights two dynamics – online retailers provide an opportunity for consumers to save time, the notion Professor Pyne labels – ‘time well saved’ whereas physical retailers compete on the basis of ‘time well spent’. Simply having a bricks and mortar store with an online presence doesn’t cut it.

We see these notions at play with Apple’s move into bricks and mortar retail stores and I asked the question, ‘why would Amazon buy Whole Foods’?

Mark, Mary and Annette is a true story about a retailer I worked with who changed and is surviving. Read about their Story.

Working with those in business to stay in business

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This document below discusses many solutions to your business problems , including start up funding, working capital and cashflow. The information is also available as downloadable PDF about the tools of business.

Why businesses fail and how you can keep it from happening to yours.

Business Failure.
This is a phrase that strikes fear into business owners and entrepreneurs, and for good reason. Simply put, a lot of businesses do fail.

Why? This could be your product, your market, or uncontrollable and unforeseen economic events - or this could be you.

Ouch. That is not an easy thing to hear.

As an entrepreneur and business owner, you do not want to fail, and if this does happen, you want it to be despite your best efforts. You do not want it to be because of something you did or did not do.

Yet a lot of the time, that is exactly why failure happens. The person running the business does not understand one or more basic fundamental business principles, so they are not able to take the necessary steps for success.

Don’t let that happen to you.

How to avoid being the reason your business fails

In the over 30 years’ experience of helping business owners, I have yet to come across a truly unique way of going bust. In the interviews conducted with business owners and entrepreneurs who have personally experienced business failure, I see the same problems over and over.

Understand the reasons why businesses fail, and take the steps to make sure that yours does not. Get control of the fundamentals.

Let’s back up a bit and go over some numbers.

What the statistics tell us.

Statistics tell us that experience, planning, and capital management skills are major factors for why businesses succeed or fail. See page 6 to see research results on business failures.

Although statistics like these are helpful as a starting point for understanding what could go wrong, they do not tell you the whole story. They certainly do not give you a way to identify and overcome the problems that may crop up in your own business.

That is why I’ve written this business fundamentals primer. Entrepreneurs and small business operators need to be able to find and fix leaks in the pipes before they become gushing rivers of lost money.

I have many years of experience working with struggling businesses, helping them to get back on track, and I have found there are seven big elements that determine success or failure.

Whether you are starting a business and want to get it right straight out of the gate, or you have become worried that maybe everything is not as it should be with your existing business, tackle these elements one by one to make sure you are on the right track.

    Statistics maintained by the Australian Securities and Investments Commission in Australia reveal the reasons why businesses fail.

    • Lack of experience
    • Poor location
    • Poor financial control
    • Ineffective strategic management
    • Cash flow planning​

    Within the last couple of years, the US Small Business Administration cited these as the major reasons businesses fail.

  • Lack of experience
  • Insufficient capital
  • Poor location
  • Poor inventory management
  • Over investment in fixed assets
  • Poor credit arrangement management
  • Personal use of business funds
  • Unexpected

    • ​

Here is a record of the top 5 reasons for business failure from the Dun & Bradstreet Business Failure Record, 1981.

  • Inadequate line experience
  • Inadequate managerial
  • experience
  • Unbalance experience
  • Incompetence
  • Unknown​

Gustav Berle in The Do-It- Yourself Business Book adds the following two reasons.

  • ​Competition
  • ​Low Sales​

What I've gathered from years of working with struggling businesses.

Get these elements right, and you are well on your way to a thriving enterprise. Get them wrong, and well… you end up talking to someone like me to try to avoid disaster.

Following are the top seven elements.

Startup Funding

Startup funding is all about the money you will need to start a new business. Here are some of the issues you face when you make these decisions.

How much will you need? Expenditures fall into these three areas.

  • One-time expenditure
  • Operations
  • Growth and expansion

Step One: Estimate your costs

This workup should give you a good idea how much cash you will need.

  • Formulating your business idea, product or service
  • Validating your business idea, product or service
  • Licenses and authorizations
  • Legal costs
  • Accounting costs
  • Insurance
  • Rent
  • Materials / inventory
  • Business coaching
  • Marketing
  • IT systems
  • Staffing costs - salaries and other payroll expenses like workers’ compensation
You have probably heard the old startup adage “Halve your revenue predictions and double your cost estimates.” The point is, you should always expect something to come out of left field and surprise you, because at some point, it will.

Most businesses scream out under capitalization or lack of startup funding – money is tied up in their working capital. When the cash is tied up, it leads to further problems. You delay production and your scheduling falls behind. That means you now need more money to cover overhead costs you had not budgeted for, which in turn reduces your profit. When your money is tied up like this, you tend to start relying on bank financing and avoid paying your creditors or taxes.

Next thing you know, you are a business failure statistic.

Step Two: What will be the source of the capital?

What will be your mix of startup funding – equity or debt?

With both forms, you can raise money from traditional or other sources such as:

  • Banks
  • Friends and family
  • Angel investors
  • Government grant funding
  • Crowd funding – internet sites that facilitate funding for projects by collecting small contributions from the general public
  • Large venture capital investors
Equity

This means taking a stake in your business. You will only get a return on your stake if you make enough money to pay all the bills and have some left over; that is when you make a profit.

The more equity you give away, the more control of your business you lose. If the business is wound down, you will likely lose the lot, unless of course you sell your business for more than what you invested in it.

Debt

With debt you borrow money on a promise to repay the loan. The repayment comes with conditions. You will be required to pay interest and probably provide some form of security, whether it is in the form of the business, your personal home, or in many cases, both.

The more debt you take on, the more debt you have to repay, and if you get in over your head, the higher the probability that you may risk bankruptcy.

Whilst you make the loan repayments you are in control of your business. Miss the loan repayments and you will lose control of your business.

Working Capital

Working capital is the money used in the day-to-day trading operations. It is a measure of the current assets of a business less its current liabilities.

Working Capital = Current Assets - Current Liabilities

Current assets include cash, debtors and inventory. Current liabilities include any items which are due to be paid within the next 12 months.

Simply put, you need to have enough cash to keep the business liquid; that is, enough to pay the bills as they fall due.

Here is the tradeoff.

"Hold high levels of cash and stock, and you will remain liquid, but with lower profits. Hold lower levels of investment, and profits may be higher, but with greater risk of liquidity."

Get this wrong and it will destroy you. Working capital is a complex mix of time and money, and you should have defined policies for it.

Policies around working capital

  • What level should you have
  • How to manage inventory, receivables and payables
  • What level of investment
  • How much of each – inventory, receivables and payables
  • Who to have accounts with, what are the terms of trade

Ways to fund working capital

  • Cash reserves – subject to what return business owners want
  • Overdraft – usually repayable on demand, with an interest cost
  • Fixed term loan – usually long term, with a higher interest cost
  • Trade creditors – subject to terms offered by suppliers

Again, there is a trade off between risk and reward.

"You could fund your whole operations with long term funding, and whilst you will be liquid. It will cost you more, so profitability is lower. Using short term funding to cover the whole of your operations trades profit at the risk of liquidity."

________________________________________

"Try to match short term funding with short term needs and longer term financing for your stable working capital and longer term asset needs."

The Cash Conversion Cycle

Making money is one thing and converting it into cash is another.

The cash conversion cycle is the number of day’s cash sits out of the business (inventory and sales of account) less the days you can have with the cash in your business (how long it takes you to pay your bills).

How quickly can you convert the capital you invested from a spend, to putting it through whatever you are doing, to a recovery back into your bank account?

A very simple practice to get cash back into the bank is to make sure your customers pay on time. If you have given your customers 14 days to pay the amount you are owed, then you should make sure the amount is actually paid within 14 days.

Letting this blow out to 21 days or more just means you are giving your customer a loan without charging interest.

Here are some issues that will affect how quickly you can convert your investment in working capital into cash.

What sort of trade terms are you getting and how long does it take you pay?
​The more time you can get from those to whom you owe money, the better. Paying accounts is a little tricky. How long you get to pay your accounts will depend on your supplier and the deal you negotiate with them. Risk your reputation if you don’t manage this well.

How long is it taking you to convert raw materials into items you can sell?​

Take into account waste, inefficiencies, and losses. How long does it take to make the goods? How long does stock sit on shelves? Improving these times will shorten your cash conversion cycle.

How much time are you giving people to pay, and how long are people actually taking to pay you?

Let’s say your average debtor days equal 55. The more time you give customer to pay, the longer it takes to convert to cash. You can play with the number of days customers have to pay – you could offer 45, 30 or 21 days. The better you manage this process with follow-up and enforcement, the shorter this period becomes.

Cash or Profit

Understanding the difference between profit and cash is critical. Cash is the money sitting in your bank account. Profit is the difference between revenue (sales) and expenses.

Profit = Revenue - Expenses

Revenue may include such items as a gain on the sale of an asset. Some revenues are not cash, such as gains in value of a stock.

Expenses may include depreciation or amortization (these items are not cash either).

Payments that do not go into your profit calculation include your principal loan repayments, tax payments, and asset purchases.

Just because you have cash in the bank, does not mean you can spend it all. Some cash must be kept in reserve to cover deferred expenses.

The most obvious deferred expense is tax. Businesses have collapsed because they spent the money that should have been kept in reserve to pay their taxes and other large periodic expenses.

Just because you make a profit, does not necessarily mean your business is in good shape. If you do not collect what is due to you from your customers, or if you spend on investments or non- core items such as luxury motor vehicles, that profit figure is meaningless.

 If you take the cash out of the cycle by spending it on items other than the ones for which it’s been set aside, it needs to be replaced. That replacement may be in the form of borrowed money, which then increases your interest expenses and erodes your profit, or additional startup funding, which means you lose more control of your business to others.

Strategy

Research, plan and document, but maintain some flexibility. In other words, make a plan, and expect it to change with circumstances.

Validating your business may be the only planning you need to do. We all make assumptions about our business. Validating is a process of testing those critical assumptions about your business, such that if the critical assumptions fail, your business would fail too.

Assume that things will go wrong; some of those things will involve factors that are outside your control such as economic and technological factors, or change in trends. There are some elements you can control, such as the people you employ and the client base you target.

Have a robust system of review and analysis, and try to keep a good, authentic support system around you (we will address this further down).

Here are the elements your strategy needs to address.

  • How you use your startup capital (see the first two sections on page 9 and 11)
  • How you position yourself in the market
  • What you sell
  • How you sell
  • Your competition – who else is in the game and how to play against them

You need strategy to manage these elements. It is easier than you think, and it does not have to be perfect, but you do need a plan.

Management

Just because you love or are good at doing something, does not mean you will be good at running a business, nor love it. There are a few different skill sets that need to be in place on a successful management team.

  • Product development and production
  • Human resources
  • Capital management

What we often see with struggling businesses is a manager or team that has strong technical skills but poor capital management experience. Without that critical element, it doesn’t matter how good your product or service may be. A business, which by definition exists to make a profit, needs good money management if it is to be viable.

Good money management means:

  • Balancing your start up capital – how much startup funding do you need, what is the source, and what is the mix between equity and debt?
  • Getting your working capital right.
  • Understanding what is cash and what is profit – how much of your profit gets invested back into the business and how much goes to stakeholders.
  • strategic planning for all of the above.

Business life cycle

How much capital you need, where you position yourself strategically and how well you need to understand business will depend on at what stage you business is positioned in its life cycle.

  • Pre-startup – product/service validation
  • Startup – the business is unstructured, simple bookkeeping, simple product/service lines
  • Survival – the business is gaining some traction, channels firm up with increase in sales
  • Growth – market gets broader, but still simple product/service lines, start to develop systems and more management skills needed
  • Expansion – products/services broaden, systems become more sophisticated
  • Maturity – you are the top of your game

You will face different business issues at different points in the life cycle of your business.

For example, a pre-startup will be grappling with its product and testing its validity.

Compare that with a business in its growth or expansion cycle, which is about funding growth of the business or introducing new product lines or markets.

Simply making it from one cycle to the next does not increase your chances of survival. In fact, the old cliche “The bigger they are, the harder they fall” is true. A more mature operation has a lot of resources invested, and so has a lot at risk.

If you do not have proper management, you will simply fall harder.

Advice, support and sharing.

Sharing, seeking advice, and getting support makes good business.

Just searching and reading this primer shows you are looking for advice and support, which puts you ahead of everyone who is trying to go it alone.

Surround yourself with others who are facing the same problems and issues, and not just those in your own industry. Diversity is a bonus, because it lets you see a common problem from a fresh perspective, and that allows for solutions that you may never have considered had you stayed within the boundaries of your own niche.

What to do with this information

Now, you do not have to be Einstein in dealing with these critical business elements. You do need to be aware of them, address the key fundamentals, and have a plan in place to deal with them, so you do not lose control. Reading this primer is a good first step, but there is a lot more to explore.

Here is what to expect next.

  • A series of emails that will explore the seven factors more deeply. These will include checklists and short tutorials, so you can take action instead of just reading about it.
  • Regular updates.
  • Detailed information around key business fundamentals.
  • Stories from others in business, so you can see how other people have found solutions to their problems.
  • Information about my latest training sessions and other learning tools, such as webinars.

I welcome the opportunity to talk to you one on one. Help me find out more about what it’s like to be in your business. And as always, if there anything at all that is causing you confusion, please let me know. I welcome your questions and feedback.

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Listen to more content about each phase of the business life cycle

Startup Phase | Survival Phase | Growth Phase | Expansion Phase | Maturity Phase

Mediation and insolvency

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According to former US Judge Peck one primary objective of mediation is to restore communication between parties to mitigate against further deterioration in relationships, allowing parties to explore solutions and options without their legal position has being compromised which facilitates the discovery of mutual interests, as another objective.  Building trust is hard work, especially in insolvency.  Mediation creates the possibility of settlements so long as there is a willingness.

There have been a couple of large-scale insolvency cases in which mediation has been used successfully.  This includes the Lehman Brothers bankruptcy and MF Global Holdings Limited where the courts encouraged mediation between US, Wales and English counter parts resulting in a global settlement being achieved.

Nortel Networks Incorporated is a case were mediation failed.  Of the $7.5 billion in assets banked, over $1.3 billion in professional fees have been paid, while creditors ranging from hedge fund managers to retirees wait.

Judge Peck suggests that the mediation process should include some key success factors. Firstly, there is a window of opportunity within which to mediate; with US Judges and attorney’s getting better at identifying this window.  An important skill I would imagine. Secondly, decision makers need to be in the room.  Decision makers not only need to understand the solutions and settlement proposals, but more importantly be part of the consensus building process. Lastly, and importantly, there must be a willingness or sincere desire to settle the dispute.  When the process is undertaken voluntarily and initiated by the parties, success is more likely; compulsion led mediation less so.

Judge Peck also recommends any resulting agreement should include a clause enabling parties to refer an agreement to the relevant court, so that the agreement has teeth.  Unusual.

I’m not suggesting for a minute litigation is irrelevant, far from it.  Litigation has its place, whether it is to set legal precedent or facilitate a quick outcome in cases where there is a developed set of procedures such as summary judgement or when courts are well placed to handle the dispute on hand.  However, there are some distinct advantages to mediation including:

·     Lower costs – costs are agreed and fixed

·     Quicker than litigation

·     Less adversarial – solution focused, claims not being forced to fit common law

·     Easy to follow and understand – less jargon

·     Less process – pre-trial, directions, request for particulars, discovery, security for costs etc

·     Private and confidential – material cannot be used subsequent to mediation

·     Can be terminated at any time

Lehman Brothers requested the Bankruptcy Court to approve a set of alternative dispute resolution procedures using the Bankruptcy Code to approve the process.  There were objections raised, with arguments against being alternative dispute resolutions should only apply to adversarial proceedings; that contracts did not provide for mediation; that mediation is inconsistent with the centralised decision-making process that bankruptcy entails and other jurisdictional arguments. Objections were also raised around impact of substantive rights, scope of procedures, mediation logistics and other special needs.

Not to be.

Alternative dispute resolution was approved by the Bankruptcy Court enabling Lehman Brothers to commence mediation prior to filing for litigation.  As the dispute resolution process is entirely confidential, parties do not have to settle nor waive rights.  It proved successful with 77 of 202 alternative dispute resolution matters involving 224 counterparties being mediated with all but 4 settling.

In Hong Kong a scheme was used to manage the Lehman Brothers bankruptcy mediation process.  There was the pre-mediation phase which involved information gathering, pre-mediation briefings and preparatory meetings.

The Hong Kong Monetary Authority established an office, with trained staff who would educate potential users on the mediation process.  This would include simplified information, forms and guidance notes.  When information gathering is complete pre-mediation briefing sessions are conducted. Mediators discuss the suitability of mediating specific cases to both sides – in the case of Lehman Brothers both investors and bankers were briefed.

These sessions enable informed decisions to be made as to whether or not mediation could be used to resolve claims.  If so, preparatory meetings commence.  A mediator other than the mediator who undertakes the mediation itself helps prepare the parties for mediation.  This would include assisting with exploring solutions and settlement options. Parties are then required to complete a consent to mediation, claim and claim response forms.

Solutions or offers can be put at any time, even before mediation has commenced.

Then mediation takes place, either the parties resolve their dispute or narrow down the issues.  Mediation must be concluded with 21 days and mediation meetings should not last more than 4 hours.

The downside?  As mediated outcomes are confidential there is no sharing of lessons learnt or issues ventilated, nor the resolutions achieved.

Polaroid

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History is filled with stories of disruption. The Polaroid Corporation is one.

The Polaroid Corporation began its ascendency in Massachusetts around 1937. Polaroid was once described as a “juggernaut of invention”, the Apple of its time so to speak. Under the leadership of Edwin Land the Polaroid Corporation flourished.

Edwin Land was the inventor of polaroid filters, the process that lines up crystals of iodoquinine sulphate and embeds them in transparent plastic.  The polarising film was used in a range of industries from 3-D movies, photographic filters, sunglasses, night-vision cameras. Polaroid even experimented with new ways of creating colour images which came good around 1963.

All upside

The late 1930s was an era of rapid development for chemistry. In 1938, German chemist Dr. Edith Weyde and Andre Rott invented a “diffusion transfer reversal” process. This was a method of transferring a negative image from photo-sensitive material (the negative) to non-photosensitive material (the positive image). This invention paved Polaroid’s way to the invention of the instant camera. It also led to the development of the first photocopiers.

It took Polaroid 20 years to arrive at the instant image camera.

The first Polaroid Land Camera delivery was a block of 57 units going on sale in 1958 and sold out within hours (think iPhone). Polaroid’s technology was embraced by a wide range of customers, including some of the greats of modern photography like Ansel Adams, Walker Evans and Andre Kertesz.

The Polaroid camera became a mainstay of scientific laboratories, who have been using it for quick documentation and measurement. Polaroid cameras made slides that were used in conference presentations when glass slides could not be produced quickly enough.

Some downside

Electronics comes to market and started to dog Polaroid. In 1977, Polaroid announced the invention of the instant self-developing movie camera named “Polavision.” The rapid decline of the company began in 1977 with the introduction of the Polavision camera. At that time video-tape based cameras were close to monopolising the market.

Management failed to see the implications of this new video-tape disruptive technology. People no longer needed a physical product when it came to imagery. Many preferred to store images electronically and view them on electronic media, rather than have them in photo albums and boxes of negative and films.

The instant camera was also in rapid decline with the rise of the digital camera. Photographers were declaring “Film is dead”!

Polavision is widely seen as the swan song for Polaroid.

Too late

By the time Polaroid got into the digital camera business, it failed to capture a large market share. Its scanner lines, Polaroid SpiritScann using 35 mm film in 1999 and outputting to print in 2000 also saw heavy competition and was discontinued when it first declared bankruptcy in 2001 and again in 2009.

Between 2005 and 2009, the Polaroid went through six CEOs. By 2006, they stopped producing Land cameras altogether. By 2008, they stopped manufacturing film for Land cameras, which left a lot of owners without.

Fujifilm took over the manufacture of instant film that would fit the older 60s and 70s Land cameras. Fujifilm also discontinued the manufacture of instant film for Land cameras in 2016 due to declining sales.

An English company called “The Impossible Project” continues to manufacture and market colour and black and white film for the Polaroid 600 and SX-70 cameras and Land large format cameras up to 8 x 10. They also make printers for duplicating Polaroid film images. There are communities on the internet that annually celebrate the fate of Polaroid. The company itself limps on under reorganisation, now making small digital cameras and other equipment.

Polaroid’s failure is widely attributed to the failure of management to recognise the way the market was moving and to move with it, taking the difficult choice of letting go of a product that brought so much success, but now had reached the end of its life.

It always pays to revisit industry value chains to identify how the moving parts are moving, identifying any changes and how these changes impact on your own business value chain.

 

 

 

 

Opportunity or distraction

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I’m back from my Strategic Breakthrough learning experience at New York University’s Stern School of Business. 18 of us worked on strategic planning and corporate culture theory and practice. One of the power plays was to lay bare our businesses to 17 CEOs and a professor of strategy, digging, probing, poking and pulling apart our business models. Daunting. Educating. Fun.

One of the participants headed up a private bank in South East Asia. The bank provided traditional banking services, commercial and retail loans, securities and insurance. The CEO wanted to invest in a fintech start-up. When pressed why, his response was that if we do not innovate we will be disrupted by some start-up somewhere.

This was fairly typical of a lot of the businesses in the room. CEOs of oil companies concerned with green energy, publishers concerned with digital, defibrillator manufacturer thinking about advancements in health technologies and so on.

Innovate, disrupt or be disrupted is nothing new. Let me explain.

Once upon a time there was this guy called Graham Alexander Bell who had an idea about voice transmission over wires.

Graham Alexander Bell, poor choice of photo I agree.

Bell was an educator, taught elocution and with his father innovated and fostered new ways of communicating with the hearing impaired; sign language and lip reading to name two. Bell invents the telephone and lodges a patent with the US Patent’s Office on 7 March 1876.

The patent

Bell has a benefactor, an investor – Gardiner G. Hubbard. Hubbard supports Bell through his early attempts (failures) to bring the idea of the telephone to some level of usefulness from at least 1874.

G G Hubbard, lawyer and investor

So far we have an idea, an investor and failure. Sounds familiar right.

Bell’s family moves from Scotland to Canada. Subsequently, Bell moves to Boston to teach. Unwell for travelling between Boston and Canada and working on the telephone, Bell quits his job, remains in Boston and focuses on his idea. Now a real start up.

To get his idea on track Bell on-boards, Thomas Watson in 1875 and by 1876 they created a device enabling voice to be carried over wire caused by changes in currents.

As is usual with start-ups, Bell has no money. So Bell pitches his idea and device to Western Union’s boss William Orton.

The savvy Weston Union’s boss, Orton

At the time, Western Union was a big deal. Western Union owned the telegraph wires enabling telegrams to be sent over the short, mid and long distances throughout the USA. Later Western Union would enable international connections.

Orton thanks Bell for his pitch and declines the offer to purchase Bell’s patent. Unconfirmed reports suggest Bell offered his patent to Orton for $100,000. One of the issues at play was that Orton and Hubbard didn’t get along. Hubbard is an attorney and on occasion had cause to challenge Western Union. Orton is self made, having suffered business failure himself, he works his way up by consolidating the assets of various telegraph companies existing at the time merging a number of them, ultimately creating Western Union. During this time Orton studies to become an attorney himself.

Subsequent to Bell’s pitch, Orton buys some patents, in particular, the provisional patent (the intent to lodge a patent – a caveat) by Elisha Gray. Gray’s intention to lodge a patent or caveat was lodged on 14 February 1876 (recall Bell lodges a patent on 7 March 1876). I can’t seem to verify this but google tells me that Bell fights about 600 patents challenges over his time. But this fight – who was first, Bell or Gray was pretty important. Anyway Bell holds the patent, Gray does not. Bell wins.

Not only does Western Union buy Gray’s ideas in 1876, it also employs Edison. This is a real problem for Bell, Western Union has the telegraph poles that hold the wires needed to transmit the voice, a provisional patent and Edison.

Bell bats on. Hubbard approaches another potential investor, Chauncey Depew, and attempts to secure $10,000 as an initial investment. Unfortunately, Depew knew Orton well and seeks an opinion and you can guess how that went. So in little over a year after Bell pitches to Western Union, he and his cohorts set up, Bell Telephone Company and start to exploit the market and in about 1878 the creation of a telephone exchange enabled people to connect to each other within a 15-mile radius – short point or neighbourhood distances.

Clearly, mid point and long point services were next and for a time Western Union was focused on serving these two markets with essentially commercial telegram transmitted information – such as stocks etc.

Western Union tries to take its telephone to market. Bell challenges Western Union on the basis it was exploiting his patent and for 2 years fight it out when on 10 November 1879 Western Union settles with Bell.

Western Union yields up about 80 of its patents, hardware and 56,000 telephones in 55 cities together with providing a non-compete until 1896. In return Bell pays a 20% royalty Bell telephones to Western Union for use of the wires.

So then, the telephone, opportunity or distraction?

If you search biggest business strategic blunders you will find the classics Blockbuster, Kodak or the new Coke stories. You will also find Western Union’s decision not to take up Bell’s offer to buy his telephone patent for a miserable $100,000 in 1876 as one of the biggest strategic blunders of all time.

But was it? On all accounts Western Union was a progressive and innovative business. What David Melki tells us is that Western Union was kept busy by the demand of its short term commercial messaging, for example, stock trades and at this stage technology was able to transmit up to 4 messages per line, compared to a unreliable and scratchy audio over short distances. Western Union could argue that it was focused on its core business. If you think about how stock market data is transmitted today, the telephone is not at play but a new type of wire is.

The ability to leverage its assets through a licence to Bell was a smart play and perhaps all Western Union needed to do.

Western Union’s strength was in its infrastructure, wires and its ability to reliably message commercial messages such as stock trades and market information over short, medium and long distances. Even today after Western Union closed its telegram business in 27 January 2006 it continues to provide money transfers including on line and mobile.

“Effective 2006-01-27, Western Union will discontinue all Telegram and Commercial Messaging services. We regret any inconvenience this may cause you, and we thank you for your loyal patronage. If you have any questions or concerns, please contact a customer service representative.”

The answer to whether the telephone was a missed opportunity or a distraction for Western Union will depend on your answer to question: What business was Western Union really in?

Back to the bank. For bank’s region many of the population do not have a bank account; preferring to do basic financial transactions through mobile technology. No margin and little volume in security trading and insurance, with high reputational risk make it a low return investment for the bank. Perhaps sponsoring incubators specializing in fintech start ups is be a better way to keep on top of the trends and future disruptions rather than hedging a bet on one fintech start up.

So the question you need to ask is – What business am I really in?