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Published statistics had all gone through information manipulation- part 6  

2011-11-20 13:10:08|  分类: Economics (Unto |  标签: |举报 |字号 订阅

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Before you continue to believe in the statistics published by the US Federal Reserve and other news media, please take a look at how average, percentage, budgets and goal setting are being misused, or more accurately manipulated.

 

1) Misused of Average[1]

Two months into his new position as CEO of Hewlett-Packard, Mark Hurd announced in mid-July 2005 that he has hired Dell Inc.'s Chief Information Officer, Randy Mott, to fill the same position he then held at Dell. The month before, Mark Hurd split HP's personal computer and printer group back into its two separate divisions – it was a merger that was one of the former CEO’s last moves before her departure.

Why would someone merge two seemingly unrelated divisions? The printer division was known as the crown jewel of HP which profit was almost equal to the whole of HP’s profit for many years. The other four divisions in HP did not bring in any significant profit with the personal computer division as the least profitable.

In 2002, the former CEO acquired Compaq - a computer manufacturer. Unfortunately, the acquisition has made the company to suffer from losses, quarter after quarter. To hide the fact that the computer division was profitless, its account was merged with the printer division and thus combined, the net account of these two divisions showed profitability.

The sliver in the eye suddenly disappeared thanks to the manipulation – an approach often taken to hide poor performance.




The same practice was also applied to HP Services division and its IT department. Both of them offered IT services: HP Services division provides IT services to external clients while its IT department provides IT services to all internal employees. Even though HP Services division was much smaller in terms of manpower and operating expenses, it brought in substantial revenue contrarily to the IT department which was purely a cost center that did not bring in any revenue but had a burden of more than US$2.7 billion operating cost per year.

By combining those two income statements together, the IT department’s annual operating cost of US$2.7 billion did not stick out like a sore thumb anymore and hence, justified its operating expenses. In his third month, Mark Hurd saw that fallacy and brought in Randy Mott to be the Chief Information Officer to head the IT division.

Further down the line of command, this technique of using the averaging effect of several pieces of data to achieve information manipulation was quite pervasive in HP.

The Tij3.0 printhead consists of two types of pens that go into the commercial printers, namely half-inch and one-inch printheads. Half-inch and one-inch are the respective length of the die that forms the printhead.

In reporting the customer warranty replacement rates for these two printheads, the half-inch printhead performance was consistently below the goal line set at 1%. It was at around 0.8%. The performance of the one inch printhead was consistently above the goal line hovering at around 1.15%.

After combining the warranty replacement rates of these two printheads together, the merged performance was consistently below the goal of 1%. A performance better than the goal means there is no need to take corrective action to reduce the warranty replace rate. This is pure manipulation of the average.

 

2) Misused of percentage

In the inkjet division of Hewlett-Packard in Singapore I audited the management function of the supply chain department. Knowing the fact that Hewlett-Packard was renowned for being the best customer among all its vendors, I really wanted to see what makes Hewlett-Packard procurement function ticks.

I already knew that Hewlett-Packard always pay on time but that is not before a two-month wait after the invoice has been submitted to HP finance department. This is mere tardiness in honoring payments and I don’t think this alone suffices to make Hewlett-Packard the best customer. There must be something more fundamental to this obvious fact.

I asked for the management objectives set for the procurement department. One of them reads, ‘Percentage of non-conformance materials supplied by the vendors and the goal set for it was at 0.25%. The monthly report only showed the achievement for the month of November 2005 and it was at 0.19%. That was 0.06% point much better than the goal. Certainly it was considered a great achievement. No question about that?

You are wrong.

I suspected there are two underlying short-comings with this way of presenting the performance by the procurement department.

One, it did not show a trend over the last twelve months. Why am I asking for a trend chart? This is because a twelve-month trend chart will depict how well the procurement department has been doing over this longer period of time. Is it trending up or trending down or maintaining at about a consistently flat level?

The twelve-month trend chart certainly will give us an answer whether the situation is deteriorating or improving or just hovering about the same level without any change in its performance. Of course, management wants to see an improving trend.

However, by a simple stroke of presenting the statistics for the month of November only, the reviewing manager was effectively cut off from reading the bigger picture of how its performance has been doing over a longer period of time. He cannot read whether the situation is deteriorating, improving or flat. This is a fine act of burying the reviewing manager’s head into the sand like an ostrich.

 

3) Misused of Budgets[2]

Before the end of every fiscal year, every organization is busy preparing the following year’s annual budget. Budgeting has been the most important financial controlling tool that ensures the organization meets its targeted profit level for the next four quarters of the year.

However, very few people notice there is a severely flawed and ruinous side about the budgeting tool. What is that?

Imagine you are managing the IT (Information Technology) department of an MNC (Multi-national Corporation). The fiscal year ends, but you have not fully spent your budget. What will you do? You know very well that you have to spend it all. Otherwise, you may not be able to ask for a bigger budget for the coming year. You may even have to explain why your estimates at the beginning of the year were wrong. Since the money does not belong to you, the easiest way to resolve the excess budget is by spending it. A smart way out, isn’t it? That is, the second deadly behavior.

Ethically, there is nothing wrong with an OPM (Other People’s Money) mentality. You are not pocketing the money. However, few were aware of its snow-balling effect.

During his first visit to Boise, Idaho on 10th June 2005, the new CEO of Hewlett-Packard, Mark Hurd, mentioned about controlling costs. “I think our costs are too high, and I have been very public in my concerns about IT,” he said, “I believe it is a very big cost structure for us. We have IT costs that are roughly 3 times per user above our competitors’. NCR’s cost is $6,000 per user. Dell’s is $6,200 per user. And they do not sound big until you multiply them by 151,000 people, and all of a sudden the costs are gargantuan.”

When you multiply 151,000 employees by US$18,000 IT cost per employee, it is US$2.7 billion. That was what HP spent every year on IT alone. Assuming HP spends around $8,000 per user which is still 30% higher than Dell’s spending, HP can save US$1.51 billion every year.

HP’s revenue for 2005 was $86.7 billion dollars. With operating income of around 5.5 percent, its profit was around US$4.7 billion. US$1.51 billion could have added another 32% to HP’s annual profit. That would boost its operating income to 7.1%.

How much fat does HP have in other forms of waste?

IBM made 10-11% operating income on US$85 billion revenue. Dell made 8.5% operating income on US$48 billion in fiscal year 2004. NCR made 9% on US$7 billion revenue.  For HP, even at 7.1% operating income, there were still many things to work on in order to catch up with its competitors. A large part of waste has to do with the OPM mentality.

OPM is a dreadful disease that afflicts every organization, especially the Congress. Did they ever do the fiscal budget with the ordinary people at heart? No, they only care for their selfish needs. 

 

4) Goal setting[3]

Carly Fiorina was once the most powerful female CEO in the world, yet she failed to lead Hewlett-Packard out of its doldrums during her 5 years of tenure. On 9 February 2005, the board of directors asked her to step down from her role. HP’s share price at that time had been declining for five years and hovering at a PE (Price Earning) ratio of less than 17.

The root cause of her downfall laid in the HP culture, a culture that did not adapt to a changing business environment that was becoming more and more hostile to HP’s businesses.

During her tenure, HP evolved into a “great” company to work for. The so-called laissez-faire policy prevented the management from interfering with the way something being done as long as the job gets done. The unspoken rule was ‘do not rock the boat’. No one wants to be seen as the bad guy. Likeability fills the air in HP.

At the end, Carly failed to bring the slightest change in the HP Way despite her decisions to axe several top executives. The HP Way was the obstacle to improvement.

Next year’s goal is set based on the average performance of the fourth quarter of present year. Achieving next year’s goal is therefore a certainty. To prod employees to do a bit more, a stretch goal is set. The stretch goal is usually set at about five percent higher than last year’s goal. However, this way of setting goal certainly leads to mediocre performance every year.

I used to work for an American MNC where there was an assembly line producing ink cartridges. It took more than five years to reach an output level of 44,000 cartridges per day from an initial output of about 22,000 cartridges per day. Every year, there was a grand celebration for breaking the previous year’s record. Great effort, wasn’t it? The productivity level of the assembly line for the first year was less than 50%. Even at the output of 44,000 cartridges per day, the productivity was only close to 80%.

Comparing to more efficient companies, the performance was poor rather than fantastic. If only senior management had chosen to measure its assembly line machine utilization by productivity instead of raw output numbers, it would have achieved more than 90% productivity within a span of one to two years instead of five years or more. But it chose output quantity as the tool to measure productivity because it made them look good every year.

One of the Engineering Managers told me, “The art of keeping your job is to keep some room for improvement every year; otherwise you will have nothing to show as improvement in the subsequent years. Why should I work too hard to push myself now? Spread out the productivity gains over the years. That is called ‘working smart’.” 

Are you going to believe in the goals set by the US FED? They always said the goal is to increase the economy by x%, reduce the unemployment rate by x%, set a target for monetary expansion at x%.

[1] Please read chapter 3, ‘The veil of misinformation’ of the book, “7 Deadly Management Behaviors – CEO edition” by the same author, published by Eloquent Books, ISDN 978-1-60860-327-5.

[2] Please read chapter 2, ‘The veil of misinformation’ of the book, “7 Deadly Management Behaviors – CEO edition” by the same author, published by Eloquent Books, ISDN 978-1-60860-327-5.

[3] Please read chapter 5, ‘The veil of misinformation’ of the book, “7 Deadly Management Behaviors – CEO edition” by the same author, published by Eloquent Books, ISDN 978-1-60860-327-5.

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