Reinventing the Wheel
Being a company in a free market economy ain’t easy. It means subjecting yourself to the faceless, emotionless and ruthless forces of the market where every day you are judged not by what you were in the past but what you will be in the future. Companies who forget that do so at their peril (Nokia, Research in Motion (Blackberry), Kodak are but a few examples). In such an environment the need to innovate, to reduce costs, to create more value is constant and relentless. At no point does the market allow you to take a breather, to sit back, relax and enjoy your success. Because if you do there is always a competitor breathing down your neck who will take advantage of your ‘holidays’ and come out with a better and cheaper product than you.
IBM blinked, Microsoft emerged. Microsoft stagnated, Apple re-took the crown. Microsoft ignored smartphones, search and social media; out came Samsung, Apple (again), Google and Facebook. Sony used to be synonymous with cool devices such as the walkman and flat screens TVs; now Samsung and LG dominate TV screens while iPods are the walkmans of the new generation. Kodak used to be synonymous with cameras, today it is bankrupt. Blackberry and Palm were pioneers in smartphones, now both are fighting for survival. Yes, life for companies in a capitalist system is solitary, poor, nasty, brutish, and short (apologies to Mr. Hobbes for stealing his quote).
Which in turn begs the question why would anyone in his right mind design such a system; why would anyone want to live in a system where a misstep can prove fatal, where there are no points for seniority, where an upstart (Google) can displace the dominant player (Yahoo) and where customer loyalty needs to be earned day in day out? Well to answer this we need to look at a completely different constituency, the consumer. For it is the latter who is the huge beneficiary of this system. She benefits by getting low prices and better products. She benefits because constant innovation by companies translates to new products, new services and many times to lower prices. She benefits because if there is a way to produce the same product for a fraction lower then someone will do it. She benefits because as a consumer she has power and companies bow to her. Yes, life for consumers in a capitalist system is fun, varied, exciting and cheap.
That is until someone figures out how to game the system or better still how to change the game. And this is a lot easier than it sounds for the system described above while complex in some ways in many others it is simple. As a matter of fact one could condense all the complicated micro-economic equations and all the long winded analyses of why a free market economy works so well in two simple words: profit and competition. Remove any one of the two pillars and the system crumbles, remove both and you get something so inefficient, so slow moving, so expensive that in my opinion should be made illegal. In our small island though it actually has a different name… it is called the Electricity Authority of Cyprus.
Now I concede that I am unfair in singling out the EAC to bear the brunt of my complaints. So let me rectify this by inviting some other illustrious names to join our play date. Please welcome to the stage: the Cyprus Telecommunications Authority, the Ports Authority, Cyprus Airways, the State Fair Authority and the Cyprus Broadcasting Corporation. What do all these companies/organizations have in common? All of them operate without having a real motive for profit as any organization that is managed by a politically-appointed board and a CEO whose pay is not linked to performance and whose performance is not linked to his tenure inevitably will not be as efficient, or innovative or cost conscious or customer friendly as a company that is. Similarly, any organization that operates without competition, as is the case with the EAC, inevitably will operate at a leisurely pace, without much concern for innovation or cost control. For EAC, being a monopoly is being in paradise, wish I could say the same for the poor consumer who ends up paying one of the highest electricity costs in Europe.
And while you would expect that consumers, being a lot more in number than the business owners, will be cheering the plans for privatizing or introducing competition in these companies, consumers are siding with the likes of Mr. Stathis Kittis who back in February was arguing that CYTA et all should borrow up to €1.5bn to give to the troika and thus avoid privatization. From the point of view of Mr. Kittis this makes perfect sense. I mean if it were me being paid the salary he was getting, and the perks he was enjoying plus the opportunity to engage in all those extra-curricular activities he was participating using as petty cash the employees Pension Fund, well I would be up in arms as well, calling the idea of privatizing CYTA the biggest crime since the Holocaust.
But the consumer is not enjoying the high salaries and the nice perks and that is why it is truly puzzling, or better maddening, that most of us have joined ranks with the likes of Mr. Kittis and fail to understand that all these organizations that have been operating without a care in the world for the last few decades inevitably, not by fault of its employees but because of the nature of all human beings, would become inefficient, slow, expensive and slow to innovate.
We know this when it comes to the education of our children. Can you imagine a school where students would be given their textbooks and told that there will be no exams, no penalties for not performing well and everyone would graduate with A+? Do you think this would produce excellent students? We know this in sports. Can you imagine athletes training until exhaustion, in cold weather, often risking injury if there was no competition or no reward for profit? And yet for some reason we seem to think that employees that have no risk of being fired (and this goes for our civil servants as well), no reward for performance, where profit is not the driving force and where managers are there to stay for ever, that somehow this group of people will be different than any other group in history and that somehow this group will motivate itself to be as efficient and as hard working as all these other groups that work in companies where they are forced to be all these things for the alternative will be bankruptcy and the loss of their jobs.
UPS, the global parcel service, in its never ending quest to reduce costs changed the way they calculated driving routes as to minimize not only the distance to be travelled but also the number of left turns in a route because they realized that left turns slowed down their trucks but also increased the risk of accidents. You know how much they saved by doing this? 98 million minutes of idle time per year! Do you think this idea could come from an organization like the Cyprus Postal Office?
Some of you might have smiled at the thought but why do you think is that? It is not that there are no bright people working there. Rather it is because you know and I know, that in order to come up with such an idea you must have employees and managers who really spend time and worry on how to improve on their costs and the only reason you would spend this time is if you felt that by reducing costs it makes a difference to your compensation or to your assessment by your superiors which in turn affects your chances of a promotion. If neither of these incentives are there then it is makes no sense to wreck your brain trying to figure out better and smarter ways to reduce costs.
Innovation is difficult. Cost cutting is painful. You would not engage in these activities unless you were forced to and few things are better motivators than the quest for profit or the threat of bankruptcy.
Semi-governmental organizations have been operated under a model that ignores everything we know about human nature, everything we know about incentives and motivation and everything we know about the workings of free market economies. This model was dead upon arrival but unfortunately it took us a long time, and a lady from Romania, to realize this. There are many models of privatizing such organizations and there are nuances to each one that I will not go into for they are not relevant. What is relevant is that as we are waking up to the reality that our resources are limited and if we want to prosper we must work hard but also work efficiently. We need to understand that we do not have the luxury of inefficient organizations, of mismanagement of public resources, of under-utilization of infrastructure. And what smarter people than myself have long since realized is that the best way to ensure the optimal usage of resources and people is through companies operating in a competitive environment and pursuing profit within a legal framework established by democratically elected governments.
In the world of economic ideas, Adam Smith invented the wheel a long time ago; Mr. Kittis and his friends should stop trying to compete with a cart on square wheels.
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