21-May-02
From Dan Peña – Executive Coach and Mentor to the High Performer.
Dear Friend and Subscriber,
My last newsletter got more long emotional responses than I have ever received. I hit upon a subject virtually all could relate to – wanting to be liked! Thanks for your response!
I have decided to ask you, the readers, what you want me to write about in the months to come. I will spread your requests around my own ideas. OK what?
New Bulletin Board
Shortly I will add a Bulletin Board to my website. You, the readers, probably understand how they work better than I. It should be up by 1 June. This is a request from you the subscriber. The Chat Room has had mixed results. I believe this is based on peoples dislike for hearing the truth in my responses!
In the past a number of QLA devotees have joined together in business relationships. These relationships range from getting simple advice to getting capital for investment. As you can imagine we have some extraordinarily bright and gifted readers. We also have very wealthy, very sophisticated subscribers. To round out the continuum we also have high school and college students as readers, along with beginners in business. As we used to say "we have a potpourri of readers and talent". The Bulletin Board will assist you in interfacing with other QLA devotees and practioners.
Getting Value for Money (VFM)
I was going to write this letter on "Deals that Create Value". One of my colleagues, Sally Hall, who heads up TGG as Managing Principal sent me a newsletter she thought I would like to read. The irony was I am already a subscriber to this quarterly report. It was even stranger that it was from Quarter 1, 2001, or more than a year ago. When I first saw it in my reading file I glanced at the name of the world renowned name (brand) of the consulting group that published it. Scrolling down, now I scroll past the title "Deals that Create Value", past the schematic showing a pile of value, through the first few paragraphs to the phrase "acquisitions create the most market value overall, despite the well-known "winners – curse" in which buyers pay too high a premium". As I read the last couple of words of that paragraph my eyes scanned upwards to the by line. Unbelievably I recognised one of the three authors names. Actually this is an understatement of Biblical proportions. The name in the middle was a name I knew for almost 20 years. In fact it was a quasi mentee of mine. I had helped shaped his career through his MBA at the London School of Economics and beyond. We had worked together off and on for many years. We have probably done £250 million in deals. I’ve known him since he was 23!
I then read the entire seven pages – twice to make sure I understood. Of course the article was merely saying something I had preached for more than 20 years. "It is easier and more effective, when done correctly, to add value through acquisition!" Now, what I just wrote is infinitely more simple than the explanation that accompanied the short report which I later found out had hundreds of pages as back up material. It was a work of art based on "multivariate regression to access the correlations between excess returns created by each deal and various characteristics of that deal …… deal size-weighted -least squares – multivariate regression model, in which all dependent and independent variables for each transaction were weighted by size of that transaction relative to the size of the company undertaking it… the dependent variable was defined as excess returns relative to the local stock market, corrected for the risk – adjusted cost of capital…The R2 of the regression was 57%".
Well! As I continued to read I knew this study was based on 479 deals between 1994 – 98. This was the core sample for their multivariate regression analysis.
Hell, I said to myself! I wonder how long it took to do this study? I reasoned (wrong word as you will see) three guys working on 479 deals – plugging in the results only, etc – say 2 weeks each or 6 weeks in man hours for one person. After all the team didn’t have to work through every deal. They only needed to plug in the various sums for their analysis! I couldn’t wait! I called my good friend of 20 years. Being British his mobile number was turned off "at the weekend". Of course I still work over weekends because I like – no really love – what I am doing! (Remember like vs love from the last newsletter) It took my assistant a week to catch up with him. A dinner was arranged for two weeks hence to meet at a favourite restaurant of his – he is an owner. It actually took a lot longer because he literally forgot to put it in his diary. He is an "absent minded professional" now! He is truly a genius in the real sense. In all his years of education he has never received anything less than a perfect 100% grade! I could write an entire newsletter on him.
We met and the first question out of my mouth was about the Quarterly report. I asked why was it written? And doesn’t everybody in the finance world know what was written?
The reason it was written was unbelievable to me! He said, it was not commonly known by the readers of and devotees of his most prestigious consulting firm. He told me the analysis took four months. I swallowed hard on my beverage and quickly ordered another – a double this time! I immediately thought, what if a big client had asked for such an analysis. Perhaps a major investment bank might have instructed such an analysis be done with the consulting firm’s name on it. I wondered how much would it have cost? And more importantly would the group paying for it have received value for money?
The following is my regression (of sorts) analysis that I spent many sleepless nights labouring over:
The three involved in the analysis were, two consultants (as they are called) and one a principal with the consulting firm. A principal is kind of like a partner.
The assumptions I made were simple. If it took three financial professionals four months to do this work they should all be fired and the firm should be closed down in the interest of bettering the financial community in particular and world in general. Though I knew, or should I say hoped, this was not a full time endeavour for the three chaps I decided to start with 100% case (as they say). In my days on Wall Street it was called "the old 100% case trick".
As of the first quarter of 2001 principals of the major consulting firm charged / billed at a rate of £10,000 per day for a seven hour day, knowing they work more than seven hours a day. Consultants were charged / billed out £5 – 7,000 per day for the same seven hour day. I decided to use a very sophisticated methodology to ascertain the cost of the two consultants. I used a VC (Venture Capitalist private equity provider model) spreadsheet to average £5,000 and £7,000. After conferring with a MBA/Chartered Accountant colleague (which would be a billable event of course) over a two week period I decided £6,000 per day was a good number to help build my base model on. I was a little apprehensive. I knew I might be taken to task for such an aggressive hypothesis – but I decided to live dangerously – to live on the edge! I assumed after 31 years, 700 deals, 65,000 business decisions, thousands of high level meetings – it was time to get outside the box!
Consulting firms receive these hourly rates, plus expenses and travel time. During most of 2001 such firms added 20% of the daily rate as expenses to their bill! I had a PHD/MBA colleague (more billable time) write an appropriate program to determine what this did to our economic model vis-à-vis our billing methodology. The result was astonishingly £12,000 per day for a principal and £7,200 for (our model) consultant. I felt very good about this and would have told a client (if there was one) what "value added" had been produced! It was truly another win-win situation.
As my analysis got more involved I enlisted the assistance of another colleague, Herr Professor Doctor was kind enough to do the sums for me. He said the preliminary analysis revealed the rate was £26,400 per day. He said it was a good enough # to move forward with. He reminded me travel time needed to be considered as well. I was grateful for his insight and thanked him for the gentle reminder.
After considerable time and effort I took a very difficult decision. I decided on my own, without any further consultation and at great risk to my personal and firms reputation that no travel time was (probably) necessary, or envisaged. I further speculated if anybody travelled to gather data for such an analysis he should be driven out of the financial community on a burning rail! Or conversely be made "sales manager ementus" at his local caravan (mobile home) sales centre.
Based on my extensive scientific research I have ascertained a maximum of 240 billable days are possible. The fee can be no more than 240 days of time, at a yet to be decided rate. The 240 days is based on a 5 day week maximum for 4 weeks a year. A 48 work week per year is used. Though 4 weeks holiday is a very low # for a consulting participant I decided, again, to go outside the box and be aggressive. In reality 6 – 8 weeks are lost to holiday time. Though the permutations seem endless, please follow the rational closely.
MONTHLY / DAILY ANALYSIS (At 20 days per month)
|
Month
|
1
|
2
|
3
|
4
|
Total
|
|
Principal
|
20
|
20
|
20
|
20
|
80
|
|
Consultant 1
|
20
|
20
|
20
|
20
|
80
|
|
Consultant 2
|
20
|
20
|
20
|
20
|
80
|
|
Total
|
60
|
60
|
60
|
60
|
240 |
It is interesting that the horizontal and vertical axis equal in total, though the individual months and participant sums don’t. This needs further investigation, but gives a clear enough (though obtuse) picture.
DAILY RATE /MONTHLY ANALYSIS
|
Month
|
1
|
2
|
3
|
4
|
Total
|
|
Principal
|
£240,000
|
£240,000
|
£240,000
|
£240,000
|
£960,000
|
|
Consultant 1
|
£144,000
|
£144,000
|
£144,000
|
£144,000
|
£576,000
|
|
Consultant 2
|
£144,000
|
£144,000
|
£144,000
|
£144,000
|
£576,000
|
|
Total
|
£528,000
|
£528,000
|
£528,000
|
£528,000
|
£2,112,000 |
Same horizontal / vertical phenomenon.
Following this revelation I enlisted my colleague (another) Herr Professor Doctor #2 to assist me with the difficult calculations. After working around the clock for several days (as a personal favour to me and in the name of the firm) he gave me the results of (£12,000 + £7,200 + £7,200) x 20 x 4 = £2,112,000, our 100%, or high case! This would be the best case scenario – meaning it would be the most we could be paid! (If you want to have some fun ask any firm of consultants, lawyers or accountants if the bill/charge is based on a matrix system. The details of this system are TOP SECRET!)
Now I was left to my own devises to determine the 75% (medium) case and 50% (low) case. Whilst my education was math orientated I had to use my mere 14 years of maths including three years of advanced calculus, two years of advanced statistics and five years of astro physics to determine the answer. I knew I was not qualified but I pushed forward bravely!
In due course and many permutations later, I found the medium (75% case) to be: .75 x 2,112,000 = £1,584, and the low (50%) case to be: .50 x 2,112,000 = £1,056,000. Thank God this very time consuming (all billable) exercise was finally over. I took a well deserved two week holiday, already knowing it would not be enough. (It was an expense to the client).
FORGET ABOUT IT.
Whilst you may think I have lost my mind for writing this dribble I can assure you I have read countless reports by professional consultancies that didn’t do much more than I did writing this Bull! What’s worse it wouldn’t be a mere few pages like this, it would have been hundreds of pages in a leather bound book – and it would be at your expense!
For those of you that know, and or have worked with me you realize I am short on written analysis and long on experience and don’t need a 200 page report to give you the answer! In fact this letter is the most verbose thing I write – except for a few "not so nice" letters to people I feel incumbent on taking to task.
I am glad I didn’t compose a serious newsletter about a report.
Moral to Story
The overall point to this story: If the people who advise you and, or are part of your Dream Team go through any semblance of the aforementioned, get new people ASAP! And run, don’t walk the other way!
To Your Quantum Leap
Daniel S. Peña, Sr
P.S. I have decided not to write a comprehensive newsletter on the adoption of FAS 142 and the great goodwill write-off ploy, in my next newsletter! I had planned four, or five such letters in the future. After a great deal of billable thought I decided I would list four of my favourites quotes now and forget about such dribble! Here is a question for you:
Who said, "Grief is the price we pay for love?"
QUOTES:
"Only those who risk going far can possibly find out how far one can go"
(TS Eliot 1888 – 1965)
"You cannot teach a man anything, you can only help him to find it within himself"
(Galileo 1564 – 1642)
"All knowledge is but remembrance"
(Plato 428 – 348 BC)
"What is coaching? This is Gerard O’Donovan’s definition……
– "Coaching is about performing at your best through the individual and private assistance of someone who will challenge, stimulate and guide you to keep growing"
Answer to question – Her Majesty Queen Elizabeth II, vis-à-vis September 11th.
