Failure in public sector – The Reprise

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I read Vim‘s article on What Does Failure Mean for Public Services  and I wanted to respond. I wanted to build upon Vim’s thoughts from my own perspective. I’ve developed that perspective over a couple of decades working across front-line teams and supporting teams, transforming workforces across public and private sector. This results in me having to balance many different levels of change (including success and failure) ranging from a conversation discussing funding allocations over £100m, followed by a conversation discussing attitudes to change, shortly followed by another discussing the approach for very local decision-making such as choosing the ideal location for a printer.

It’s mostly the same

We should see failure in the public sector in the same way that we see failure in the private sector with the one, not so subtle difference; the public sector is there to make a difference to the population. Pick a public sector service, if it’s not making a positive difference to the population, then it’s failing. I can’t think of a simpler definition. Every other private sector metric (perhaps with some tailoring in the case of profit metric) should apply to the public sector.

Unfortunately, the more we pick it apart, the more difficult it becomes to define failure. And most of that difficulty comes from the difference between providing for the population and providing for an individual.

Most of the failure is seen at the individual level, but not extrapolated quickly enough to realise that the service is failing. Most of the success is also seen at the individual level but we don’t really celebrate these as much unless they’re specifically health-related. For many services, we only notice when they go wrong. For instance, how many local authorities celebrated 0 people in the queue for social housing back in the 70s when it was feasible? Perversely, we may be able to achieve 0 in the queue now, but that could be because eligibility thresholds have risen. It’s not the same service or the same level of service anymore.

At one extreme, we see the death of an individual, we see one person homeless. Then we see multiple people homeless due to congregating together, but it takes longer for social consciousness to become more aware of the deaths of increasing number of individuals. All of this could be failure.

Criminal or Incompetent?

“He’s either criminally incompetent or incompetently criminal”

It’s a phrase I heard years ago from a charitable organisation that raised no money after holding an event where lots of people attended and money changed hands but no profit was made to turn into funds for the charity. We’re talking small money here, margins were very tight, but even so, no-one quite knew what happened.

That’s partly how I think about the systemic failure within public services although I’ll broaden the definition of criminal to include unethical, immoral or against the mass of service users you’re meant to be serving. When a service is failing, I wonder where the decision was that caused it to fail. Was someone competently unethical or incompetently ethical? Competently immoral or incompetently moral? Bear in mind that leaves out the options of competently ethical (where they’ve chosen to improve services and made it happen) or incompetently unethical (where they tried to restrict services but enacted it poorly).

Was it an implementation or management decision by the team manager to assign a lesser-skilled worker to the case where a more experienced one was required? Implying incompetence on the manager’s part.

Or was it because there wasn’t enough money to pay for more experienced workers, resulting in only newly-qualified workers being available? Implying a deliberate decision to underfund on the funder’s part.

Did the funder underfund because they’d allocated more funds to other services? implying an incompetence on the funder’s part.

Or did that funder not have enough money to distribute to the services because of a reduction in centralised funds, e.g. from central government? Again, implying a conscious decision to underfund numerous services.

Expectations

Public services are funded to meet the demand that’s expected to present to that service, e.g. through referrals from other services and bodies, through walk-in or through outreach (where the team goes out educating the population on the service available). It’s always a balance between who is at most need of the service, the funds available, the skills and experience of the team available and the time available to respond.

Considering public services have a duty to provide for the population, if a service cannot meet the demands placed upon it, who is criminal and who is competent/incompetent?

The manager should understand the costs of the service and the variation based on demand being presented. At the point that it becomes underfunded, it’s time to shout. For many services, that point was passed many years ago. Underfunding results in some people not being served or the quality of service (in terms of what can be provided, e.g. the duration of engagement such as number of CBT sessions) is reduced. That then has a further human impact, e.g. people being homeless or in debt which both can lead to homeless and in debt, which leads to decreasing health, which leads to inability to work (but possibly not recognised as inability). Even one day of no service provision can escalate quickly, exacerbated by the climate of mistrust and unbalanced power between those services with funds and those people applying for funds. That one day can result in missing benefits, resulting in deteriorating health (have to choose between rent, paying heating/lighting bills, feeding children and self, getting to a job interview, clothing, etc). So underfunding a service so that it can’t provide to all it’s designed to deliver to has a cascading effect on the system through shifting referrals elsewhere or to a position of no services available and has a cascading effect on the individual.

When viewed that way, is the funder criminal (or at least unethical or immoral) if they don’t fund the service?

Reducing Inefficiency

The issue and opportunity to this point over the last couple of decades has been the inefficiency inherent in the public sector system. Public sector services do not get the same level of investment as private sector. A telco can choose to spend multiple millions of pounds on a transformation programme and it will happen. No questions (or at least no scrutiny other than board approvals and monitoring). A public service has to jump through many hoops (each costing time, effort and money) to prove it’s spending the money wisely. So public sector transformation programmes usually start smaller than private sector counterparts to make the programme easier to approve, and end up being smaller still after being watered down through many approval boards. Each of these transformations leaves an effect, usually positive in terms of efficiency, but often negative in terms of morale and capacity to flex for the next transformation.

There is still room to go in terms of efficiency. There are still pockets with severe inefficiencies, but they’re rarely on the front-line teams to the scale that’s expected. And it’s these teams that are usually the focus of funding pressures, especially in response to changing demographics, e.g. people living longer and living with more serious needs.

Active Maintenance

In addition, services need active maintenance, to some extent in the same way that you take your car in for regular maintenance. However it’s more than that. Active maintenance is not simply day-to-day management and keeping it running. It’s observing the service from multiple angles to understand what’s happening that shouldn’t be, to uncover why it’s happening and to resolve it so it doesn’t happen again. That takes an investment of time and energy.

In most public sector hierarchies that responsibility falls to the manager. The better managers (there are a few of them) have empowered their team to do this daily. They’re succeeding in keeping the service to acceptable levels (although still probably underfunded to do the job they were originally tasked to do) and keeping ahead of changes in demand. Then there are others who are just managing the day-to-day or take on adapting to change themselves. Even if competent as day-to-day managers, they’re incompetent overall since the service remains static.

Failed Culture

Vim mentions that “Failure in the public sector is also rooted in a culture that means you can’t fail”. The issue is wider than that. It’s already failing. It’s already underfunded. Austerity or not, there isn’t sufficient money to meet front-line services at their current level of demand in the way that they are currently working. Asking a team to be prepared to fail is an awkward request since in their hearts, they’re already aware of the people they’re not able to help. Most of the professional health colleges put a focus on treating the person in front of you, not those in the queue later on. Give proper treatment to the person that you’re currently treating. In a throughput setting, such as a hospital ward with a flow of patients in and out, that makes sense. In a setting where you have a caseload, such as found in most social care settings, that makes less sense overall. The opener to this conundrum of supply and demand is that we may be able to help more people and help them better than now through experimentation. And that has to be allowed to fail. 

Even with that opener, bear in mind that there are ethical considerations in most public sector departments, especially those in education, health or care settings. The Authority has a duty to treat everyone from an equitable position, not necessarily equally. So it can’t create an experiment that disadvantages a customer segment. This can be inadvertent, e.g. by promoting one customer segment’s needs, it alters that principle of equitability. So by improving the service for one segment, it can’t make the rest of the service worse. It’s also widening the gap between the treatment of segments. That’s not a blanket “no”, just be prepared to think it through and complete an Equalities Impact Assessment before you start.

Contingency as a Behaviour

plumbing
After a late evening fixing a plumbing emergency at home, I’m reminded of the concept of contingency and how it can’t be practically be used as a buffer for all non-planned events.
 
So with my current main client, I start out early in the morning, long before must people (or birds) have risen. My wife told me about an hour before I was due to go to bed early in order to wake early that we had an issue.
 
Applying typical contingency management as found in most projects wouldn’t help. That’s the type where a task is estimated to take 2 days, so you add in some contingency for that task. What would have happened in that case? All the tasks had finished, we were effectively waiting for a deploy (ok, it was a deploy of one person to a train, so I’m stretching the analogy a bit)
 
Applying a buffer contingency may have helped somewhat, but again, the tasks had all completed, there was no buffer to call upon before the deploy.
 
House alarms/Burglar alarms encourage similar behaviours. You only discover that the alarm isn’t working when you come to set it on departing your house. Again, no typical contingency would resolve the issues.
 
In the above examples, we’d usually have to add more time for the journey in the morning (possibly even travelling the day before). But the more we do that, the more ridiculous the timescales become and the demands on those involved become more exorbitant to accommodate for any issues. Even with buffer management, at some point we’ve passed the point where the buffer can be applied.
 
The only alternative that I’m aware of for this type of issue is one of preparation. It becomes more about damage limitation. So in my example, have I prepared for what I would do if I have to remain at home, if the train is delayed or cancelled, if the my taxi doesn’t arrive on time, if my car doesn’t start? Those are more the failure modes, as can be explored using an FMEA matrix for example.
 
From that perspective, contingency isn’t just a buffer (whether applied to a single task or applied to the project), it’s a behaviour and it’s planning about what if. It’s about ensuring that you know what to do, have the resources to do it and can execute in the time required, at whatever time it happens.

How much is too much training?

Hospital ward
I’m divided in this, but lean towards only brief training, just enough to inform them, rather than enough to practice.
 
On one hand, it pays to understand why change in general is necessary and specifically, why the change that you’re about to implement is necessary. Often I see professionals who spend time with the person sat in front of them (and so they are patient-centred) but ignore the mass of people also requiring the same service. It’s not that they can’t see the queue (whether a real standing queue or a waiting list), it’s that if they recognise the queue then they realise that they can’t serve everyone to the same level. For some, it’s a question of professional ethics, where their professional body demands that they treat the person in front of them to the best of their ability, regardless of the needs of others. There are good reasons for that approach.
 
Usually, someone, e.g. a manager or budget holder, recognises the capacity issue and so increases the eligibility threshold or reduces the professional time available for that treatment. This is an attempt to average it out. However it misses the point that some treatments take time to work, if you half the time available, then you may get zero results, not 50% of the results had you allowed the necessary time for full treatment. It also leads to a worsening service as the capacity gets further reduced through a series of cuts, so that wouldn’t be the answer that we’d choose given a choice.
 
More fundamentally, the communities that the local and regional health providers serve are different to those that existed 30 years ago and the changed communities have different needs. So, it seems obvious that we have to adapt the service to meet the changed needs.
 
On the other hand, the health professionals are just that; professionals in health. There will be some with additional skills; some complementary, some tangential. I wouldn’t expect health professionals to be experts at change. However they do need to be aware of the change and why they have to contribute. As do we all, no matter what job we perform, no matter which sector we work in.
 
By recognising the above issues, we can more easily understand why we have to continually change. It’s a matter of adapting to needs. However that doesn’t feel like it requires a formal training in the guise of a university module, more an hour or so during induction combined with some questions during the interview to assess their attitude to change. I expect the professionals to know the service best, so they should be best placed to change it rather than having budgetary changes applied without thought to impact on patients.
 
To get this message across and gain acceptance and commitment from the group, I usually go through the need for change at the start of any change programme and definitely before each intervention.
 
One area where I think some training could be useful is in negotiating and debating how services will change. The changes will happen, but being able to influence the changes could be invaluable. Oddly enough though, it’s probably not the health professionals who need the training, instead it’s for anyone who’s trying to change the service, e.g. performance improvement staff, HR/OD, commissioners, etc.
 
I think the reason for my varied opinions above is that I see a difference between management and change management. I acknowledge that management techniques should be taught in advance as well as broad concepts of changes management, whereas the required, more detailed parts of change management can be taught as required.
 
I don’t believe we should conduct changes without speaking to the end customer. Taking on the role of patient, I’d much prefer the consultant to have spent their time learning how to treat patients, rather than learning how to manage change. Let’s permit some degree of functional specialisation, with front-line professionals continuing to be good at what they do and change professionals helping them create/design the service that the patients need.
 
However, I recognise that many front-line professionals either don’t have access to change professionals or do have access but that they’re not listened to. Hence the need for a book that’s applied for front-line staff.

Exclusive Relationships

Exclusivity

Have you considered the exclusivity of your relationships?

This follows on from the post regarding the value of the data and the priority attached to the relationship or the data. I want to further explore the value of the relationship and shine some light on a different approach.

The Scenario

It’s the same scenario as the previous article, imagine you’re in a store, purchasing a product and you’re asked for your email address. How do you respond? Do you have a default answer? When was the last time you chose a different response and what prompted that change?

Rationale

Email
Email

Depending on how you value your time, how you value access to your time (and distractions) such as providing your email or how you value the privacy of your email address, you’ll respond differently to the request. All of these are currency that can be traded:

  1. Your time
  2. Access to your time – this is different to (1) since it relates to an acknowledgement that there is a route to your time, but you can safeguard it. Whereas (1) is more protective of time as a resource or possession.
  3. The privacy of your email address

These can be traded for items in the following non-exhaustive list:

  1. Discounts – immediately applied
  2. Discounts – off future purchases
  3. A free product/service
  4. Entry to a competition
  5. An item/service that others don’t have access to

The one I’m interested in exploring further is 5.

Different Perspectives

Reserved
Reserved

Let’s consider two ways of thinking:

  1. A company asking customers for email addresses so they can email them once a week with slightly reduced clothing that the company wants to sell before it has to sell in bulk to a discounter, so that it can clear space for the new season’s stock.
  2. The concept of fashion store charging for admission, maintaining exclusivity and ensuring that the experience warrants charging for entry.

That first option is the one followed by the majority of companies. We have to question, just how big a financial incentive is required to gain valuable email addresses/contact details. After all, we primarily want to focus on those people who are most likely to buy. More than that, we want to focus on those that we can convince to buy more than they would have done. It’s a balance between offering enough to get people interested but to keep the discount percentage low enough you’re not losing out. Isn’t this the attitude of 95% of retail companies? But it doesn’t feel an equal relationship. We’ll continue to explore the impact on emails, but recognise that there are other, more modern and interactive channels available as well.

That second option introduces another concept that alters the relationship. It focusses on entertaining the customer, providing a valuable experience that the customer would pay for.

Now let’s extrapolate that further by using the same principles.

Can we develop a mailing list that people would pay to be on?

What would we have to offer that customer in order for them to want to pay to access it?

Following the fashion store concept from above, exclusivity is the angle. That fits (5) as above. Instead of a situation where the item of value is the email address and we request that item so we can use it as the channel to contact the customer/prospect, we end up with a situation where the email address becomes the channel but is offered to us (potentially along with payment) so that the customer can access the list. The relationship is reversed.

Nightclubs, restaurants and social clubs/business clubs have been using exclusivity for decades (and centuries in some cases). This isn’t new. Before email, there were postal lists you could pay to be on. Again, this isn’t new.

That relationship reversal then implies one of two choices:

  1. We provide a service centred on exclusivity and customers will pay to access that service via an email list. But the service/product is what they want access to. Or
  2. We provide a service that is in the email content itself. And customers pay to receive that email.

The first is similar to exclusive wine clubs, members clubs, etc. The channel isn’t important, it’s the end product that counts. There’s little value to the email itself; it’s a conduit or an access channel to the product. Some of the crowd-funding platforms such as Kickstarter blend the mass-market with the exclusive by restricting access to early adopters or sponsors.

The second is interesting because it would have to be a information-only service since it’s delivered over email. We’re then left with the question of what content could be provided with a degree of exclusivity and create a demand from prospects? For that, we can look to previous centuries (and the current century and stock market information). The value is in the effort, skill and knowledge involved in the financial analysis that isn’t in the email. Part of the perceived value is in the brand and reputation. Hence the existence of con artists creating ponzi schemes on the back of fabricated or incremental reputations.

Conclusion

We’ve covered the concepts of the items of value that a potential consumer could be traded, the items that they could be traded for, explored the idea of creating a chargeable service and how exclusivity could apply to that service.

Where does that leave us?

We could create exclusivity in our relationship with customers by restricting the size of the segment (e.g. first 100), we could offer that email for a cost, we could create a difference in the products/services specific to the segment or we could create an exclusive product where the channel communication itself is the product.

How accurate is your testing routine?

Traynor Guitar Amp

Testing is not just for software, but for the business processes, organisation or service that you’re implementing?

I’ve seen many test routines that are too artificial, too removed from the reality of what the users will go through. Fortunately this factor has improved over time, especially with more focus on user stories.

Let’s consider one of the best examples of testing I’ve ever seen. Guitar amps are generally fragile. They’re usually robust enough for scrapes and minor bashes as you’re carrying them through doorways, but they don’t survive being dropped down stairs very well.

One amp manufacturer had a test routine of removing the glass valves (they’re replaceable consumables) and then throwing the test amp from the roof of the building to emulate the journey that some amps go through. On the ground, they inserted valves and powered it up to see if it would work.

How does that compare to your test routine? Is yours as accurate to the reality that it will be used in?

Here’s a clip of the actual test

Art requires rigour, science requires creativity

RigourAndCreativity

I heard this quote the other day, but I didn’t catch who originally said it.

Art requires rigour, science requires creativity

The first point is that it’s contrary to the standard view. The second point is that both perspectives are valid and that there shouldn’t be that much of a difference.

It then made me think of typical transformation programme roles and the relation between creativity and rigour. Most roles have a balance between the two, with that balance changing according to the standard role and, at times, according to the demands on that role.

RigourAndCreativity
Rigour And Creativity

For instance, process analysts should generally follow a set of standards. Business Analysts have to be more creative, but still have methodologies to follow. Service Designers have less rigour methods, usually a composition of tools and techniques rather than the standardised methodologies of previous decades. At the more rigorous side, project managers have their methodologies and frameworks to follow. Programme managers see a wider scope and have more creativity in organising the interdependencies. Which then fits nicely with my normal comment that a Business Architect has more in common with a Programme Manager than a Project Manager; there are more skills in common, even though the professional methods involved are different. Which leads me to the Business Architect who has to know when to be standardised and when to be creative. There has to be the flexibility to modify the approach to suit the needs of the client, depending on the stage of transformation.

 

 

 

 

Rain versus Innovation

rain

The following tweet made me consider, initially thinking about the place of Manchester in innovation, but also the wider concept of personal transport versus climate.

It rains in Manchester. From personal experience, Manchester doesn’t feel the rainiest place in the United Kingdom, but it does have a reputation for significant rainfall. That doesn’t dampen the city’s spirits. We just do things differently (that’ the obligatory Tony Wilson reference done)

The type of personal transportation afforded by a bicycle, whether electric or not, isn’t ideal in a climate that features rain heavily on its calendar. The cyclist has to wear weatherproofs, need a change of clothes in the office, probably a shower, and then the reverse on the way home. Or they could just get wet.

That doesn’t prevent cycling in Manchester; it just makes us think more about our journeys. We can’t be as relaxed in planning them.

That creates inertia to change. Which prompted me to think about climates where single person vehicle commuting could be more suitable. Regardless of Britain’s position in the world ranking of innovation, does that mean that Britain will get overtaken by other countries with more suitable climates?

Britain’s transport infrastructure always feels more intensive compared to any other country I’ve travelled to. I’ve seen the quizzical expressions when explaining to US colleagues that we may have to set aside a day to travel 250 miles in the UK (it doesn’t always but it massively depends on which 250 miles you want to travel). But I’ve yet to experience Japan or similarly densely populated countries. With innovation being driven by warmer climates, especially in terms of Silicon Valley, or countries with larger infrastructure (e.g. China, Germany and again, the United States), you can imagine solutions being solved for those countries and climates, not the UK’s. To be clear, it’s no-one but the UK’s and EU’s role to alleviate transport issues in the UK, let innovation solve the problems of each country. Some will be applicable beyond the geographical boundaries in which they were developed, some won’t be. Which then creates an inequality. It’s not the inequality created by resources or the centralisation of power or empire. Instead, it’s an inequality created by provenance of ideas in relation to the location.

Which reminds me, I wonder how the doors on Tesla’s model X fare in Manchester. Our rain is usually accompanied by wind so it blows sideways, not falls down.

Draft or Final

Agreement

Some organisations have a different approach to how they handle the status of a document. The approach belies a more fundamental culture of how work is commissioned and reviewed and how staff are viewed.

Background

Report
Report

One of my clients exhibited odd behaviour regarding commissioning work and approving it.

Due to the nature of the engagement, decisions were made by me and then relayed to the client. That, almost unilateral, form of decision-making has not be the norm for my engagements. Instead, I’d have preferred to have reviewed the actions while I was working on those actions (rather than after the fact). It was all a bit backwards compared to any other client engagement, where we would address scope questions early on and progress from that more detailed, joint understanding.

Even though I was assessing business capability maturity, it felt contractual. I would have preferred a more collaborative approach, but the organisation’s approach to generating change was a contractual one. It’s an issue I’ve seen before but not as stark as with this client.

Status

Correcting
Correcting

What I’d noticed with this client, was that if a document were released (no matter what version or draft status), it would be treated as final and published. The review comments would imply that the author had made mistakes and that it should never have been released in that format. Fortunately that didn’t happen to me, but that’s probably more to do with how I released documents. My documents had the same version control I’m used to including with many clients and consultancies. Draft documents (assuming little or no sensitive content) are published early to the intended audience for review, in order to influence the outcome and content of the report. The more sensitive the content, the more restricted the initial distribution and the earlier that guidance is requested.

With this particular client in mind, that approach would raise conflicting issues. The reviewers wanted to be able to influence the outcome of the commissioned work, due to the political status within the organisation. But the reviewers wanted to meet as a group to review the version, not necessarily as a steering group, to guide the work to completion, but as a review panel.

Implication

Review Panel
Review Panel

I had to tread carefully as to what documents I would release to anyone, regardless of draft status. While I’m used to not initially sharing electronic versions of documents with some clients, it was more important with this client. It created an odd culture, where people would complete work before releasing it, which then created rework and longer delays due to having to fit in reviews and changes.

Perversely, it also created a set of behaviours where many documents never reached a true state of finalisation or approval. Instead, they continued in some draft existence until ignored or replaced. That was a common occurrence, where I’d be looking for a previous strategy document, to find that it never reached completion, but became generally accepted as defining a destination or discarded. However, there had been no formal acceptance or rejection of the content, just a tacit decision across many people.

Reverse-Engineering the Culture

Hierarchy of pieces
Hierarchy of pieces

I think that much of the commission and review behaviour occurred due to the hierarchical nature of the organisation. That culture enforced a situation where superiors reviewed the output of their underlings. Couple that with an admonishing culture, rather than a praising culture, and you end up with a situation in which documents have to be final, or the critique becomes more about the person than about the document itself.

This was more than just a client seeing a document and then acting on it, treating it as a final document, e.g. to assist with negotiation or alter their position within the organisation. This was a systematic approach to not adhering to how artefacts are created and developed through to release and acceptance.

There was a severe hierarchy in the organisation where one grade couldn’t comfortably jump a grade when communicating, instead everything had to be passed up or down the chain. While organisations can work like that, many adapt and maintain the lines of communication even with flexibility and the exigencies of operating in any modern market. This organisation did not flex and those that did flex were generally put them back into place.

All of this led to gross inefficiencies and confusion due to navigating the corporate hierarchy. I’ll reiterate, the concept isn’t rare, but the ultra-strict adherence to hierarchy is rare.

This particular client compounded the inefficiencies from the hierarchy with the inefficiencies of poor document version management (or rather the document acceptance process), resulting in intricate, exhausting dance of what to share and what not to share, who to share it with and who not to share it with. All of this encouraged and promoted a contractual culture rather than a collaborative culture.

Gibson, where is the strategy?

Gibson Guitar

As news increases of looming bankruptcy for Gibson, the guitar manufacture, I’m left to wonder what happened. How did such an iconic brand end up in such a situation.

Gibson is iconic. Ask anyone to name a brand of guitar and it’ll be the answer roughly 50% of the time. I’m reminded of Harley Davidson (quick quiz: can you name another brand whose customers tattoo the brand name on their body?). Maybe Gibson fits more closely with Jack Daniels. Both represent a way of life, on the edge of 50s/60s rebellion, now more refined.

So what did happen?

Quality

I think of Rover, the once British car manufacturer, primarily based at its Longbridge plant, Birmingham. At one point, it was close to leading the world alongside other main brands, such as GM, Ford, Fiat. But over time, a lack of focus, resulted in cars that were of lower quality than those coming from elsewhere. From living in Birmingham at the time, and being subject to a number of Rover cars as fleet hire cars, I saw first-hand the issues with the brand.

Being at the head of the pack, it was easy to pick on Gibson. They were some of the most expensive factory-built, mass-produced guitars on the market. With that price tag, you would usually expect the best quality. Perhaps the best quality you can afford before having to stretch for hand-made guitars. But Gibson was releasing guitars from its plants with issues. Many of the issues may have been minor, but from a customer perspective, the severity of a minor issue inflates quickly in line with the cost of the guitar. So even a small issue on an otherwise-perfect guitar would lead to complaints.

Internet

Gibson suffered from being a old brand with the advent of the Internet, specifically newsgroups and forums where users could complain about their new purchase. Anecdotal of course, but I can’t remember seeing a good post about 90s/00s Gibsons, all posts were detrimental. For every post asking about Gibsons, there would be a number of responders pointing out how their guitar had issues, or how they’d avoided them based on having tried a few Gibsons in the past.

On the other side, Gibson benefitted massively from the increased reach that the Internet allowed them. Not solely direct advertising, but MTV + Internet showcased Gibson guitars in the hands of idols. This was back in the time before musical instrument sales had dropped significantly.

Inflation and Asian Manufacturing

The cost of guitars, especially US-built guitars was rocketing. The stronger the US Dollar, the more expensive the guitar to other purchasers in other countries. These price increases also impacted the cost of labour, with build costs increasing along with living costs (but not necessarily equal). There’s nothing special about that; it’s common for many industries.

Back in the 1970s, Japanese guitar builders started building US designs (sometimes under licence and at the request of the US manufacturer). The factories then had the ability to build their own brand guitars or for more local brands. This resulted in “lawsuit guitars” and a lot of mystique associated with them.

Following Japan, we saw Indonesia increasing the quality of basic guitars. It reached the point in late 90s where many starter guitars were sufficient for a lifetime. Similar to the concept of quick and dirty solutions being good enough, we started to see guitarists settle for cheaper guitars because the gap between the one they had and the next guitar up in quality was too much.

Following Indonesia, we began to see new successful plants in India and China. Each reducing the cost of production, but also increasing the overall quality floor, i.e. the basic guitars were improving.

Used Guitars

The used instrument market has changed. eBay, Reverb, Craigslist and other sites and apps allow easier access to buy and sell guitars. Every year, new guitars are produced, but not as many guitars are destroyed. So overall, the guitar population increases year on year. That means that for a purchaser, there are now more used guitars to purchase from than new guitars.

That becomes interesting for a few reasons:

  1. Used guitars are usually cheaper – considering inflation. Similar to most industries, the original purchaser has taken the bulk of the depreciation.
  2. Gigging guitarists use guitars – so are less worried about wear and tear than in other sectors
  3. Used guitars could come from a quality with a better perceived quality
  4. Used guitars could be more iconic – representing the guitar sound from a particular era

From my own experience, having bought new and used, I only buy used now. There are enough guitars in the world, I’m sure I can find a used one to meet my needs.

So if your business model is centred on selling new guitars, it’s going to get difficult.

Good now is better later

Unlike many products, there’s no obsolescence in a guitar. The general trend is the opposite to the trend in technology. Guitars are usually deemed to get better with age. That’s not something I necessarily agree with, but I won’t argue with the market. There are two elements here:

  1. Perception that guitars get better with age
  2. Perception that older guitars are better because they were originally built better

So there’s little point in buying new when used guitars are good enough if not better. Whether planned or not, technology has a tendency towards obsolescence; guitars do not. So there’s little incentive for a guitar owner to buy a new guitar, based on the state of their current guitar. A guitarist will buy a new guitar when they have outgrown their current one, e.g. if they bought a basic guitar and then wanted to upgrade to a better model. Guitarists can also be fickly and buy based on colour or other specification, but that behaviour is equal across all ranges and hasn’t changed with time, so irrelevant here.

Guitar2
Guitar2

Woods

The protection of certain timbers (and hence the living trees) as found in CITES regulation is a red-herring for this brand. On one hand, it affects all guitar manufacturers, or at least the majority of them. On the other hand, it does affect the margin by increasing the cost. It slows down transactions, resulting in some sellers and purchasers not wishing to go through the hoops necessary to sell a guitar, especially cross-border. Bear in mind that some woods involved in CITES were primary woods for guitar-building; it didn’t affect only rare woods. Gibson have had issues with the formality of wood laws, but other than a potential knock-on affect due to impacting cashflow a few years ago, I don’t see a major issue here. Like many guitar builders, alternative woods or sources of woods are considered.

Lack of innovation

My issue here isn’t the lack of innovation at Gibson, but probably the adoption of innovation. Gibson have innovated on the product, feature the much-maligned robot tuners, chambered bodies, locking sockets and so on. Most of those innovations have been ridiculed as moving the brand away from what it’s meant to be (in the eyes of the customer). Guitarists can be funny about this idea, they want the guitar as it was built in 1959, or any another famous year; complete with substandard components.

This applies to all the brands with historically, famous guitars. Guitarists can be awkward regarding innovation with cultural expectations influencing responses.

With innovation, I usually see types within a company. The first is the product innovation, i.e. what innovations can be added to the existing product line or new products created. That’s where Gibson have gone. The second is innovation in how the product is produced. I’m not sure if Gibson have done this or not.

Investments and Non-Core Business

Similar to other major guitar-building brands, Gibson have entered other related markets and customer segments. They acquired other guitar brands to appeal to other users – including the ability to separate cheaper related guitars, in the case of Epiphone. Gibson also acquire Cakewalk for its software and has very recently stood down that product line in order to focus on its core business.

The other main divergence from core is into audio electronics being the majority stakeholder in TEAC and the acquisition of Royal Philips consumer audio division, Woox.

Guitar
Guitar

What’s the Answer?

You can see evidence of a few well-tried strategies already in place in Gibson.

  • In light of reducing guitar sales, it reduced the workforce
  • In light of producing fewer newer guitars, it requires less manufacturing space and so can sell existing plants and search for cheaper sites
  • In light of reducing revenue and profit in its main revenue stream, it has been diversify; exploring other related markets. I’m reminded of BATS‘ diversification into more acceptable brands.
  • In light of reducing profit, it has stopped production on a non-core product (Cakewalk)

All of those are typical strategies, but in a way, they feel more tactical with the aim of reducing the current pain, without longer-term direction.

The longer-term direction may be more painful still, if the company is to survive. The guitar-building business and the consumer electronics business are very different. They could sell to the same segment, allowing for some positive combination of cross-product marketing, but they don’t need to be part of the same group.

At some point, we’d have to question how profitable the underlying core of the business is. Simply put, does Gibson guitars generate more money than it spends to build and sell the guitars? Then factor in the cost of loans and debts, what scale of business does actually work?

Ideally, we’d see Gibson retreat to a smaller size, concentrating on its iconic models, simplifying the product range to those that sell well. That company does not need to innovate in the product line, instead it needs to innovate in how it builds the guitars and how it sells. It could learn lessons from Schecter or PRS as they were back in the 1980s and 1990s. What scale worked for them? What did they focus on? How did they ensure quality? Unfortunately we may not see that see that comfortable retreat.

Notes

I’ve written about Gibson as a single entity. In face there are two main companies to be aware of::

  • Gibson Brands – this is the primary company
  • Gibson Innovations – home audio leisure company

There are other additional companies held by Gibson Brands, e.g. TEAC.

Primarily, my interest is with Gibson Brands. That’s the original company (although under different names previously). That’s the core business.

But regardless of how good, well-liked, or profitable a core business is (at least in terms of unit cost), if it is saddled with too much debt, then there are risks. If you want to read about the effects of debt on otherwise-healthy companies, the Rolling Stone article on Mitt Romney is a good starter.

From reading the post at Far Out Magazine, it could be that the recent news is a ploy regarding a struggle between investors and the board. Everything I’ve written above is still true.

Patents, MVA or GDP: None of them indicate innovation

Innovation?

In “When is it innovation?“, I introduced the idea of a sector’s familiarity with an concept. I’ve just read Bloomberg’s Innovation Index and I find a few of the variables used to be old-school to say the least. It made me wonder what the index should actually include to be relevant to innovation.

 Issue 1: Patents

The first item I noticed was the grading of countries based on the number of patents. I think of patents as being the enemy of innovation, especially when we consider the role of patent trolls in the marketplace. If someone can create an idea, patent it, but have no intention of delivering it. But only holds onto it in order to prevent the person who does actually figure out how to build it, isn’t that stifling innovation?

To some extent, I’m just shouting against a wall. The establishment and market of patents exists and I do not possess the influence to change it. I’m ok with that. However, considering the position of patents, why are they in the Innovation Index? Wouldn’t a better figure be, the ratio of patents created in that country against the number of patented, implemented products? That at least would account for ideas that have been translated into reality.

Issue 2: Non-innovation Metrics

There are several metrics in the table that do not fit with innovation, at least in any definition I’m aware of, and definitely not in the definition I’d proposed in “When is it innovation?“.

For instance, Manufacturing-Value Add is a good metric for assessing the transformation of materials in higher value, e.g. taking a raw material and refining it, taking sheet metal and producing a finished product, etc. But that’s not innovation. That’s just doing your job. It’s business as usual. You could innovate in that area, e.g. a novel way of refining, etc. But that metric doesn’t measure that.

Also, the Productivity metric based on GDP and GNI exhibits similar issues. It’s a measure of how much money is generated relative to the population. That isn’t innovation. True, a high productivity score could be attributed to high levels of innovation (in terms of increasing the output of each person), but not necessarily.