Can You Disintermediate?
Check out the “In the News” story at right. The Philadelphia Inquirer chose a headline with a local slant. “The Drudge Report” said it better:
Woman Lost Millions With Madoff, Now Cleans Houses ...
My private dossier on Bernie Madoff—who admitted to running a $50 billion Ponzi scheme for years—is bulging with 44 stories (so far). Madoff was an intermediary: He got between investors and savers and their money.
Our lives and businesses are totally entangled with intermediaries. And some of them are very, very bad.
This is about disintermediation:
The elimination of intermediaries in the supply chain, also referred to as "cutting out the middlemen."
Two weeks ago, I was at a client meeting in Chicago, and my client (who booked the trip) received word from United that my flight to Philadelphia had been canceled and that I had been rebooked. I was given a phone number to call for details.
When I called, United tried its damnedest to put me in voice-mail jail. In a rage, I started pounding the operator button—0! 0! 0! 0!—and got a live guy with an Indian accent.
"To be honest, I’ve hated BPO [Business Process Outsourcing] for years," wrote Andrew Mickey on SeekingAlpha.com. "BPO is when 'non-core' activities like customer service or accounting for a business are outsourced. The masters of BPO are Indian companies, which provide basic business services at significantly lower costs."
I don’t know whether this guy was in India or Chicago. But whenever I hear an Indian accent on the phone, I assume the call is coming from 9,000 miles away and a job has been stolen from an American telephone sales rep when 11.1 million of us are out of work (so far).
The Saps That Signed On With Satyam
Three weeks ago, B. Ramalinga Raju, founder and chairman of Satyam—one of India's three largest software development and IT outsourcing companies with 53,000 employees—confessed to committing major fraud.
In his letter of resignation, Raju admitted to inflating his numbers by $1.4 billion and the number of people he employs by 10,000 so he could siphon more money out of the company. Now he's been caught red-handed, having stolen corporate cash and diverting it into family real estate funds.
Satyam’s clients include 30 percent of the Fortune 500 companies. Among them: GE, Cisco, State Farm, Nissan Motor Co., John Deere, General Motors, Nestlé, ArcelorMittal (the world's largest steelmaker) and Telstra Corp. (Australia's largest telephone company).
As an avowed BPO hater like Andrew Mickey, I can only hope that the money-grubbing, un-American CEOs and bean counters of the 150 Fortune 500 companies relying on Satyam are sweating bullets and will start in-sourcing PDQ.
So far, State Farm disintermediated by firing Satyam. With a cash crunch and Satyam employees deserting in droves, who’s next?
Since I'm using what Hemingway called "ten-dollar words," here’s what I am feeling about Satyam: schadenfreude (delight in another person's misfortune).
A Personal Digression
In my early years as a freelancer, I had a client whose business was serving a real estate community in South Florida. Every week, he would deliver free magazines crammed full of ads for housing developments and condos to realtors and street-corner “honor boxes.” As you can imagine, the enterprise was time sensitive.
This was long before computers, and designers had to set type for advertisers and paste illustrations by hand onto "mechanicals"—boards that were photographed by the printer and turned into booklets.
One day, a full week’s worth of mechanicals were at the printer, who promptly went bankrupt. The judge ordered the facility locked, which meant my client could not retrieve his mechanicals and go to another printer.
The printer was a necessary intermediary between the magazine publisher and his end users. My client could have invested in a simple kind of insurance—making photostats of his mechanicals, which he could take to another printer if the worst happened—but he didn't.
He missed his deadline, was forced to refund money to all his advertisers and promptly went out of business himself.
In 1989, Key Book Services, the warehousing and shipping facility for 850,000 books belonging to 65 publishers, was locked down by the Federal Bankruptcy Court in Bridgeport, Conn. The publishers—owners of the books—were not allowed access to their books. They could not transfer them out of the facility, fill orders or accept returns. A number of publishers were forced out of business.
These are corporate horror stories where intermediaries destroyed the businesses they were hired to support.
What about personal intermediaries?
Catherine Austin Fitts
What triggered this edition of Business Common Sense was waking up at 3:00 a.m. and turning on my tiny portable radio with earpiece, hoping to find some nightly prattle to send me back to sleep.
Instead, I hit on "Coast to Coast AM" being hosted by one of the legends of talk radio, the mellifluous-voiced Art Bell, who has a true Renaissance mind and whose probing questions and patience with tongue-tied callers is unmatched.
Bell’s guest was Catherine Austin Fitts, of whom I'd never heard. Her background: managing director of Wall Street firm Dillon Read & Co., assistant secretary of housing under Bush 41, president of Hamilton Securities Group and founder of Solari Investment Advisory Services.
The subject was the subprime crash, Wall Street and disintermediation.
I'd heard about disintermediation but never really understood it until Catherine Austin Fitts told two stories:
- Fitts was talking to a woman who was roundly complaining that her investments were going south and her water bills through the roof. Fitts suggested that she take some money out of her portfolio and hire someone to dig a well, thus dealing with two money-losing intermediaries at the same time. I thought it elegant in its simplicity!
- Fitts, whose headquarters is in Hickory Valley, Tenn., 63 miles east of Memphis, was sitting at dinner between three women. The two women on her right had CDs with a New York bank that paid 4% per annum. Coincidentally, the woman on her left had a credit card issued by that very same bank to which she was paying a 23% APR. The bank—the intermediary—was more than 1,000 miles away. It was being empowered by these women to issue subprime mortgages, which directly contributed to the current recession and the great taxpayer bailout. As a result of TARP and Obama's proposed infusion of cash into the system, the national debt will exceed $14 trillion—more than the GDPs of Germany, Japan, China and Great Britain combined. Every newborn baby will enter the world owing $40,000 on the national debt. Thanks, ladies.
What followed was a long and fascinating discussion among Art Bell, Fitts and callers about the horrendously complex business of subprime mortgages, collateral debt obligations and credit default swaps—investment vehicles that nobody in the financial community understood from Alan Greenspan on down to a broker in the local Merrill Lynch office who foisted them off on his sucker clients.
Fitts maintained that Wall Street and the banking industry are in the business of “pump and dump” (pumping up the value of lousy investments and then dumping them on unsuspecting rubes around the world). These industries were (and are) hopelessly corrupt, and Fitts said she wouldn't be surprised to see the Dow go as low as 4,500 before it begins to head upward for the long term.
Needless to say, I got no further sleep that night and was a zombie the next day.
But my outrage is intact.
Update on a Prior Story
Last Dec. 2, I wrote a column about the bureaucracy trying to take Barack Obama’s BlackBerry away from him. I said:
If President Obama believes he'll govern more effectively by employing a BlackBerry—getting information and input from myriad sources in real time—he need say just three words to the Secret Service, lawyers and White House staffers: “Make it so.” He might add, “And if you cannot make it so, you will be replaced by people who can.”
From Marc Ambinder’s blog of Jan. 21 for The Atlantic:
President Barack Obama is going to get his blackberry. On Monday, a government agency ... —probably the National Security Agency—added to a standard blackberry a super-encryption package ... and Obama WILL be able to use it ... still for routine and personal messages.