“We need a good war to kick start the economy”

As we commemorated two days ago the 11th of November 1918, I thought it was topical to come back to this assertion and check whether it had solid backing. You may have learnt at school that prosperity followed the World Wars. But first, one thought for the millions who minded their own businesses and had to be called up front or struggled at the back.

Remembrance Day Poppies

Remembering WWI

Mind the (output) gap
When a war bursts, it changes significantly the way an economy performs: staff is diverted to the front or at the back, industries are forced to produce for the military, etc. It ensures that an economy’s performance will differ from what its potential is, either positively or negatively. We can link it to the concept of output gap, the difference between actual GDP or actual output and potential GDP.

During a conflict, an output gap is created and needs several years to close, even after reconstruction efforts have started in earnest. For instance, analysing the World Wars, I took the data from 12 advanced at the time countries in Europe (Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Sweden, Switzerland and the United Kingdom) and computed their average GDP growth from 1900 to 1913 (la Belle Epoque): 2.13% annually. Next, I calculated the output gap, had growth been maintained at that pace through both World Wars periods. The results are astonishing.

Simulating the output gap had World Wars not happened and la Belle Epoque continued.

Simulating the output gap had World Wars not happened and la Belle Epoque continued.

So when you are told that war is good for the economy, chances are you wait an awful long time to enjoy the benefits… And remember that this is just GDP: externalities such as the value of human lives lost during both conflicts are not reflected directly in GDP. It may have taken more than 51 years to close this theoretical gap.

I ain’t got no money
Another way a conflict imposes big losses is on the savers. To fund the conflict, governments borrow money. Obviously, this money has to be paid back one day. To pay back debts, you have several avenues such as:

  1. Cut your expenses: relatively impossible in a conflict
  2. Increase your income: income tax was invented in the UK to fund wars against Napoleon, it was also introduced in the US during the Civil War and in France after WWI. Wars help create new tax – I do not know about you but I do not like like to encourage the creativity of the tax authorities
  3. Do not pay back: for instance Russia defaulted on its debts in 1917 as it turned Bolshevik
  4. Print money which as a consequence generates inflation, which crushes savers’ wealth.

Why is that? Foreign lenders will want to be reimbursed in a money that keeps its purchasing power, a hard currency. If the post-war government cannot find the income domestically (i.e. higher taxes), it will create some money to purchase the hard foreign currency which in turn is handed over to the foreign creditor. If this is done in too large proportions, it will trigger a rise in domestic inflation. When this is out of control, it is hyperinflation, such as in Germany in 1922-1925 where cumulative inflation reached 2,500 trillion percent. A trillion is 1,000 billion (see here my explanation on how big a billion is).

German hyperinflation

Not very comfortable to sleep on if this is under your mattress

Why is this important?  Look at the following principle: savings are needed to fund investments. If you agree with it, then as the savers class is slowly eradicated, fewer savings are available to fund investments and growth suffocates.

Academics’ war
If it is not great to be the country at war, maybe a better position would be supplier to warring countries or having limited exposure to a conflict? Vernon Ruttan, a US economist, developed in Is War Necessary for Economic Growth? the theory that large scale and long term government expenditures, such as during a war, were necessary for new industries to emerge and productivity leaps to happen. Think how aviation developed during WWI and WWII or how women entered decisively into the workforce.

Career dilemma: should you fit the job or the job fit you?

Career dilemma: should you fit the job or the job fit you?

However, in a 2006 paper, The Impact of the Second World War on U.S. Productivity Growth, Alexander Field from Santa Clara University, suggests the opposite view: “whatever positive shocks may have been associated with progress in the mass production of airframes, ships, penicillin, or munitions/fertilizer were largely counterbalanced by the negative shocks associated with the disruptions to the economy resulting from rapid mobilization and demobilization”. The paper also expands on the fact that the best brains, who did not lose their jobs in the Great Depression, were affected to military production, which slowed down commercially viable research to focus on weaponry. So even for the US, WWII penalised growth.

Peace and wealth
To conclude, it seems to me that some current real-life examples are appropriate. The Institute for Economics and Global Peace, a think tank, published its 2015 Positive peace report  where it indicated the countries with very high levels of peace. Unsurprisingly, wealthy countries are in the top 10. And did you notice that most of them have a history of neutrality and relatively small size of their military industry?
I am glad to report that the economy grows the fastest when there is peace and not war.

How a strong focus on your top performers will pay: the All Blacks

This week, a sporting story. However, stay with me because this is an illustration of a real life dilemma. I am a rugby fan – I even played the game a few years back. The Rugby World Cup just ended last week-end and New-Zealand retained its title and became the first team to retain the trophy. The New-Zealand team, the All Blacks, under coach Steve Hansen, have won 51 games out of the 54 they played, a 94.4% success ratio, including a 100% success ratio for the whole of 2013. At the same time, host England crashed out in the group stages of its own World Cup while my home country, France, nearly matched the ludicrous 2010 football team on and off the pitch. I am looking at the way rugby operates in these three countries to find key success factors and potential lessons for our personal and corporate world.

the Haka

The All Blacks – World Champions in Rugby and Air Guitar

Let’s talk about money
A first caveat here is to compare the competition setups. France and England have strong clubs and a relative weak federation while in New-Zealand, clubs are weak and the federation is strong.
In New-Zealand, this implies that the federation contracts the top players and can decide how much exposure to the game it wished them to have. Obviously the Federation cocoons them so they are available in peak form and mindset for the National team. In France and England, broadly, the clubs contract the players – the Federation can just hope they are released in good form for the National Team. However, this is not the only difference. Take a look at the following table.

Rugby Federations comparison

I tacked 6 annual reports

England rugby dwarfs its peers in terms of budget. This is explained for one third by the fact that the Federation owns the Twickenham stadium, the national 82,000 seater. It can derive from this asset large hospitality revenues. The Kiwi and French federations rent their stadia when the national team play, a less lucrative option.
What is interesting is seeing how revenues progress and how they are spent. England has been very strong at creating new commercial opportunities, with the Kiwis operating well while France has struggled markedly, not being able to capture revenues from the lack of popularity of the football team.

In terms of spending, running expenses are pretty matched – they include staff expenses and the costs to raise income (a big expense for England Rugby), at half the income generated. The difference is in the allocation of the other half. While New-Zealand bid the house on the top-level teams, as a window-display for its income raising operations, France, at the other hand, subsidies heavily grass-root rugby.

Real life strategic decisions
The French strategy is to sprinkle the wealth all over the territory, in order to achieve a wide base uplift in rugby skills. New-Zealand is clearly choosing to focus on a smaller but stronger elite, while accepting that the overall rugby level suffer (in real life, this is not true, as I suspect the educational system cross-subsidize rugby, lowering the expense for the Federation – if you can confirm this, I would be glad). Think of it as real life strategic decisions.
For instance, imagine that you are a manager at work, with a budget for raises for your team the next year. Will you spend it all on a few individuals, encouraging their contribution or will you share the budget with everyone? Or, think of education systems: should we offer a basic level of education, say up to 18years old but also select a few cleverer pupils and give them more support so they achieve more?
Ironically, France and England Rugby federations chose to level spending. In education, both countries chose exactly the opposite route via the Grammar schools and the Classes Préparatoires.

The All Blacks hardly share victories nowadays

The Future.
Currently, the elitist strategy of New-Zealand is rewarded by strong performance on and off the pitch. The French federation is in doldrums, unable to grow revenues that can be injected in high level teams. England had chosen to go neither way and therefore is lacking focus. It is even underperforming more relative to the French counterpart since its budget dwarfs its rivals. Until these two federations change course (read management), New-Zealand will continue to dominate World Rugby. At least, they play excitingly well.
As in the corporate world, a focus on well-funded small teams also look appropriate to outperform your rivals.

The Case for Space Exploration


Last week I went to the cinema to see the Martian, where Matt Damon plays an astronaut stranded on the planet Mars, in the near future.
I am highlighting the near future term because it is simply unlikely given the current circumstances that humans will be on Mars very soon, within a short time as the definition of near future requires.
Maybe you remember the TV series Space 1999 – I was quite fond of it.


What the future used to look like in 1975. 

Alas, no such thing happened.
Nowadays, it is even worse: there is simply no more appetite for space exploration for many reasons like:

  • There is no more technological contest like during the Cold War – the US won
  • Space exploration appears dangerous – deaths have big media coverage. This is despite the US having lost a mere 40 people in 60 years. Malaria kills 700,000 a year!
  • Space exploration takes time: from planning a mission to executing, 10-20 years can pass (in politician language: “too far away to be re-elected on this”)
  • Space exploration seems like a high spending item today with no visible return on investment for many years or decades (in politician language: “it will not necessarily help me get re-elected”)

NASA's New ShuttleThankfully dreaming remains free

One should keep in mind that space exploration is an investment today to generate innovations that will improve growth and create wealth in the future.

I could write pages about the key inventions of the space programme (CAT Scans, LEDs, lubricants…) but it is easier to think about my everyday life.
I sleep on a memory foam mattress (invented to cushion space suits), I wear glasses which have a scratch resistant coating (invented to solidify astronauts helmets), I use a Brita filter – invented by Nasa to recycle water in the space stations…
This wikipedia link has many more items.

But space exploration also gave us some cooler stuff. Engineer Lonnie Johnson was looking for a way to create a heat pump using water rather than Freon, a harmful gas.
Little did he know that a test in his bathroom would create this:

supersoakerkid-e1424912842886The Super Soaker, a heat pump masquerading as a toy

Why is space exploration so creative? 
There is one main reason: because it is very hard and unforgiving.
Space is a merciless environment, where approximations cannot happen. This requires the proverbial “out-of-the-box” thinking.
The next big challenge is human space exploration is landing humans on Mars. It is an immensely complex endeavour which will generate many innovations such as:

  • On Mars, humans will need tools. Bringing them is costly because they are heavy so better fabricate them arrived on the planet. They will probably have to be 3D printed from local materials – today 3D printing is in infancy, it lacks in particular the flexibility to use random materials
  • Energy will be rationed: how to create solar panels from local materials, create further energy savings devices, improve batteries or even build batteries from Martian materials
  • Growing food on Mars: if we can grow something on an alien planet, we could improve agriculture anywhere on Earth
  • Construction: how to create a habitat fast, cheap, insulated, with local materials? Maybe some robots will be designed so that they can dig themselves autonomously the foundations, prepare some concrete and create the home sweet home for our explorers. In turn, these techniques could be employed on Earth to slash construction costs. Cheap house prices anyone?

These solutions will create new products which in turn will be ubiquitous in our daily lives years after. Obviously we need to invest now to reap these benefits.


“With all the people starving, you want to spend billions for your toys”
This is the kind of comments I read regularly. So let’s put them in perspective.
In 2015, the global spending on space agencies was around $45bn, or 0.06% of world’s GDP.
However, at the same time will also be spent:

  • US spending at fast foods: $100bn – 2x more
  • US spending on clothing: $250bn – 5.5x more
  • Fossil fuel subsidies: $550bn – 12x more

I am afraid these critics need math lessons.

jfk-moonClick here to watch John Kennedy’s moon speech

Inspiration from a great man
As a conclusion, I am quoting John Kennedy’s moon speech:
“But why, some say, the moon? Why choose this as our goal?

We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.

The growth of our science and education will be enriched by new knowledge of our universe and environment, by new techniques of learning and mapping and observation, by new tools and computers for industry, medicine, the home as well as the school.”

This was pronounced in 1962, 53 years ago.
Increasing space exploration budgets is urgent.

How long before robots steal your job?


Two days ago, on the 21/10/2015, was the day where the heroes of the film Back to The Future arrived in the future. SciFi films have often used the theme of robots being in our everyday life and even replacing us for many tasks. You may have noticed in recent months more and more alarmed press coverage of the progress of robotics and automation and how these machines and computers will make us humans obsolete. If you type “job replaced by robot” in your browser, this is what you could get:

job stolen robots google page

A machine gave me these results – it might be biased

A little bit of history
Throughout history, technological progress has enhanced human lives and allowed our species to thrive. Jobs have been lost to new techniques and machines repeatedly. If you look way back, a few thousand years ago, agriculture made the hunter less relevant. Machines made some professions irrelevant. Before the printing press, monks were copying books. They had to adapt and do other monk things (it may explain why they have so much time on hand since they don’t copy much these days).

Often, the transition from hand-made jobs to machines was met with resistance. One very famous episode is the Luddite movement, emanating from England in the early 1800’s. Now, a lot was written about the Luddites. A Wikipedia entry tells us that the Luddites were textile workers who protested against the new weaving machines, primarily between 1811 and 1816. The stocking frames, spinning frames and power looms introduced during the Industrial Revolution threatened to replace them with less-skilled, low-wage labourers, leaving them without work. The Luddite movement culminated in a region-wide rebellion that required a massive deployment of military force to suppress.

From that moment was coined the concept of luddite, which is a person opposed to industrialisation or technology.

FrameBreaking-1812See how the posture on the left is all wrong for that type of exercise

However, this is not what exactly happened. Luddites were actually pro-machines but they were also high-wage workers, crafting high-quality textiles on machines. They protested against factory owners who set up new lower quality machines, producing lesser quality garments, and using staff with no prior training at a much lower wage. In fact, Luddites were rather closer to a “trade union” of highly trained professionals who wanted machines to help them do a better job. It had to be said!

In the year 2086, crime fighting machines replaced superheros so Batman, Superman and others are reduced to begging on the street.

I could not find the right comment on this comic but I liked it

Common pattern of fear
What is true though, is that the people of this time were experiencing rapid change and wondered about the impact on their everyday life and their future.

The common pattern is the following. A new technique/technology is introduced, enhancing productivity and reducing cost of production. As the new technique/technology is spreading, job losses mounts in this very segment as machines replaces human labour.
Former workers, who acquired a lot of specialized skills, are unable to retrain fast enough or unable to move location to start new jobs. A mass of unhappy people forms and becomes restless, drawing attention from the media or local politicians.
However, often the economy as a whole does not perceive a disruption.
This is where economics can help us to understand: as the cost to provide these goods and services drop, so do their prices. Consumers reap the benefit of these lower costs and can use the surplus for other goods and services, growing the economy elsewhere.

One major example throughout centuries is food. As new techniques and tools were introduced, the cost of food progressively decreased as a proportion of income and jobs were lost in agriculture.
The surplus income was used to buy other goods while jobs were created to manufacture these goods. Below you can see how there used to be 90% of the labour force in agriculture 200 years ago in the USA. It is now less than 2% and the USA is the largest exporter of food stuff globally. However, there is not 88% unemployment: new jobs were created elsewhere.


Not a lot of career choices in 1800

Obviously, machines have been targeting a lot of manual labour throughout history. But service-based jobs have also seen a lot of tasks being automated or facilitated by machines/computers: think for instance how few secretaries or bank tellers remain.
Automation is now gaining jobs where intellect is needed such as lawyers, doctors, professors. For instance, new algorithms can look through thousands of pages of court cases to find the right angle for a trial. Or they can look through tons of published medical research to find new questions to ask for new studies.
This is what is creating new fears currently: the only jobs spared by robots would be the creative ones, which not everyone can do.

dilbert robotI thought the robots designers would be safe!

The fallacy
However, this is probably over dramatising. Let’s be wary of those who lament the disappearance of jobs such as a bank clerk as if keeping them would ensure a strong economy. The luddite fallacy, an economics term, is linked to the false fear that technological advance will destroy jobs because as machines take over, there is less to do for workers. This is seeing an economy with a static view. In real-life, and this has been proven for the past 10,000 years, technology leads to an increase in productivity and wealth. That in turn leads to increased demand for goods and services and thus more jobs, including ones in fields which I cannot imagine today.

It is actually quite exciting that these alarming articles are spreading – they suggest we are living in times of intense technological advances and historically they have corresponded to times of great job and wealth creations. In 2014, the USA added 3 million jobs, the most in a year since 1999, despite many news innovations being brought to the market.

So let’s be positive about these advances and try to embrace them as well as we can. Professor Stephen Hawking mentioned artificial intelligence recently as either a great opportunity or something that could one day “wipe out the human specie”. Guess which part of the quote was kept by the media?

terminator youthThe wrong one

How can the multinationals pay so little tax?

This week I am plunging right into the subject of taxes paid by multinationals. I am sure you have seen in the media all these large corporations accused of not paying their fair share of taxes. It is very easy to see in tabloids but also on more respectable sites this kind of tables:article-2287216-18663FC8000005DC-684_634x766Some tax shy companies

However, we need to distinguish many concepts here to avoid being lost in the complexity of corporate taxation. Here are a few you should consider.

  • Tax avoidance is the legal usage of the tax regime to one’s own advantage to reduce the amount of tax that is payable by means that are within the law. This is legal albeit frown upon.
  • Tax sheltering is very similar, although unlike tax avoidance tax sheltering is not necessarily legal. Money is then placed into Tax Havens, which are jurisdictions which facilitate reduced taxes. Think of Virgin Islands, Monaco, etc.
  • Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means.

While there is bad press for all these concepts, it is important to remember that these large corporations are accused of aggressive tax avoidance. However, as the former CEO of Google Eric Schmidt famously answered UK members of Parliament: “I think the most important thing to say about our taxes is that we fully comply with the law and we’ll obviously, should the law change, we’ll comply with that as well.”


Hello Motto*

But how do they do it?
There are many ways but they all follow the same pattern.
A multinational which we will call Megacorp has operations in many jurisdictions. Its headquarters are in the US, where the corporate tax rate is 35%.
Examples of markets where it operates are the US, the UK (corporate tax rate of 20%), France (33.33%) and curiously they also have a small office in the Bahamas (0%).
Megacorp sells a range of consumer electronics with few equivalents on the market, to consumers and professional clients.
The equipment Megacorp sells is the fruit of many years of research while its large audience is the consequence of a strong brand image, developed over the years. Megacorp products are also protected by patents.

Tax regulations stipulates that Megacorp should be taxed in each country on the profits it generates locally.
So how can Megacorp reduce its tax payments?

The solution is to split itself in a myriad of companies and lodge different types of assets depending on the tax rate of a country.
In the US, Megacorp created Megacorp Inc, a subsidiary manufacturing the key products of the firm.
In the Bahamas, Megacorp created a subsidiary, Megacorp Limited, which owns the patents and brands of the mother company.
In the UK and France, Megacorp created  distribution networks.

view from office

View from the Bahamas office

Megacorp Limited can now charge Megacorp Inc a fee for using its patent in its manufacturing process. The fee is calculated so that Megacorp Inc does not generate any profits from manufacturing.
Megacorp Limited also charges a fee to the UK and French subsidiary for the right to use its brand when selling products. Without surprise, the fee is so high that the UK and French businesses are barely profitable.

Eventually, Megacorp Limited is generating very high profits, which are taxed at a 0% corporate rate.
However, if it wants to bring these profits back into the US, Megacorp will have to pay some tax on these earnings abroad. This cash abroad is “trapped” or “stranded” until corporations like Megacorp manage to lobby the US government to create a tax amnesty to repatriate these dollars to the US, at a lower than 35% rate.

stranded dollarsShipwrecked – new season

There are many ways to actually go about this process. Here is a document which explains them pretty well from the bottom of page 2.

What is important to remember is that corporations can lower their corporate tax rates because they are allowed to do so. Many countries have created a race to create exemptions to attract the empty shells like Megacorp Limited. Multinational corporations set up new subsidiaries looking at where they can minimise taxation but at the same time repatriate as much cash as possible to pay shareholders dividends.

What can we do about it?
I can see three potential solutions.
First, one could do nothing about it. If this is legal, there is no need to react. After all, we could congratulate corporations for trying to maximise profits, as this is the essence of capitalism.

Second, you could start boycotting the firm’s products. Stop using Google as a search engine, stop posting on Facebook, do not smoke BAT’s cigarettes (do not anyway), stop having coffee at Starbucks… The worry is that you would need to exclude a lot of products and services from your list given the widespread phenomenon. The OECD, a group of rich nations, computes a value of €250bn as legally avoided every year.

Last but not least, write to your local politician. Large corporations employ battalions of lobbyists to sway laws in their favours. But your local politician is often worried about reelection. Write to him/her. If politicians thought their local election would be partly based on them acting against tax avoidance, this problem would be solved quickly.

hollande brushNow brush up the tax code please

Actually, pressure groups are already succeeding.
The OECD has managed last week to get 80 major countries to sign an agreement called Base Erosion and Profit Shifting – BEPS. It opens the gate to a revision of international tax treaties in such a way that the mechanisms I described a bit earlier are reduced or sometimes eliminated. A downside of the agreement is that it is not binding. However, OECD has managed to convince many countries that actively benefited from tax avoidance to ratify it and the organisation itself has a strong track record of delivering and monitoring new changes.There is hope that tax avoidance by multinational corporations can be reduced.
Ironically, this major impulse is coming from an organisation whose workers are exempt from tax on their wages!

*Say it with the voice of the Motorola advert

The real demographic timebomb


I am sure you have read multiple times about life expectancy and how it has been rising steadily over the last decades if not centuries.
I am in my early thirties today and if I were living two centuries ago, I would be enjoying the last year(s) of my life, on average. I do not know how I would be dying, but some kind of infection spreading to my limbs or some tuberculosis / smallpox would probably take me away pretty soon. Also, you may not find my smile very enticing.

rotten teethSay “Cheese”!

Life expectancy has risen so much that in major developed countries, it is now expected that there will be millions of centenarians by 2050. There are many consequences of this longevity which are heavily discussed – I will give you a few examples:
–          Productivity: as retirement ages are pushed back towards 70 or even beyond, I am wondering how productive will be a 75-year-old manual worker?
–          Pension: if people retire at 65 and live up to 100, they will need income for 35 years after contributing to their pension funds for 45 years. Can the retirement systems of most countries cope with that equation? Probably not under the current form!
–          Healthcare costs accelerate past the age of 75. Think of hearing aids, eye surgeries, heart conditions, hip replacements, etc. An aging population equals larger outlays. Can our health systems afford this outlay under current conditions? There again, this is unlikely.

Until now, forecasts of rising life expectancy have been welcomed mostly positively. We live longer as a result of progress. That must be good, or ist it?


Progress looking better in blue

However, while life expectancy in Western Europe has steadily climbed, what has lagged this increase is the life expectancy in good health or as called by Eurostat, the EU statistical agency, the Healthy Life Years.
This is a very different concept which has major implications for our economies and for us as individuals.

Healthy Life Years, abbreviated as HLY and also called disability-free life expectancy (DFLE), is defined as the number of years that a person is expected to continue to live in a healthy condition. A healthy condition is defined as one without limitation in functioning and without disability.

If I take my home country, France, the latest statistics produced in 2013 showed that the HLY at birth in 2013 in France were 64.4 years for women and 63.0 for men. Compare this to the overall life expectancy of 85.6 and 79.0 years respectively. This implies 21.2 and 16 years lived not in good health! Do note that the HLY gap is much narrower than the overall life expectancy. Women, you will live longer but you will live more years in poor health.
In the US, this number, using the Eurostat methodology is closer to 61 years!
See how Malta score very well. Many some secrets of the Templar knights are relevant to good health. See how Switzerland perform poorly despite being a very wealthy country. I cannot resist highlighting the cigarette butts as the only litter on the pavement in Zurich as a proof that the Swiss have their little dirty bad habit.

HLY Europe birth 2013Greece beating Germany easily in a positive contest!

All this means that even if life expectancy has risen by a quarter of a year per annum in the last 20 years, you will be living on average longer in poor health. Would you like to live until 100 in bad health?
More importantly, will you be able to afford it?

The good (affordable) old days
If your life expectancy goes to 100 against 80 currently while your HLY stay at 65, the healthcare system will have to cover you for 35 years instead of 15. This is 2.33x more costs, without accounting for a worsening of ill health through time. We could guesstimate a cost multiplied by at least a factor of 3 times. Your health insurance premium may balloon as a result.
You would also have to be sure that your pension can withstand any downturn to avoid running out of money. In the past, it was possible to draw down 5% of your capital each year to meet your ongoing expenditures. In the future, given the low interest rates prevailing, you may be able to only take 3% (there is research showing that 3% is the new 5%). This means that to keep the same level of income, your egg nest will have to be two third bigger. Can you save an extra 67% today for your retirement?

Finally, in the Western world, older generations are used to take care of themselves financially. This could change as grand-parents cannot afford their retirements.

To sum up, unless governments come up very soon with new policies to encourage healthy lifestyles, you will need to take care of this problem by yourself: plan your retirement, save more and be healthier now rather than later. Then you should be able to afford living longer healthily.

The way it looks at the moment

Last week, I submitted to you a little enigma. I have a few good answers and the breakfast is set up.
The current leader of this global organisation is Argentine Jorge Mario Bergoglio, also known as Pope Francis. Yes, he was a bouncer shortly.
Yes, I was referring to the Catholic Church.

There are three main activities indeed: tourism in the Vatican (they make money out of you visiting the Sistine Chapel), operating the churches (which send some money back to Rome) and the financial services arm, named Institute for the Works of Religion.
It has around 420,000 priests, bishops, sisters, cardinals across the world. And as I said, there are uniquely only 5 hierarchy levels. You start as a priest, then can become bishop, archbishop, cardinal and then Pope. A pretty fast way to the summit if you so wish.

Since his appointment in 2013, Francis has cleared out the old workings of the Church and there are now more people entering the movement as clergymen or as flock.

That said, I am not advocating any religion but I always found interesting that multinationals have a life expectancy of 40 years while the religions have managed the tests of time, despite not being professionally managed.

Will you find out the name of this top global organisation?


Last week, the star-filled roadshow of the CEO of this global corporation has driven me to write a bit more about this enterprise. It is a business that is been turned around by the current management team (appointed in 2013).


Adapt or die?

Before giving you the name of this global enterprise, let me describe it to you in numbers and facts.

This business is a conglomerate, with 3 main activities.
The first is a tourism business, where they own and operate world-class, high footfall touristic facilities in Western Europe.
The second can be characterised as producing and selling intellectual content, and we could classify it as a publishing company.
The third is a financial services division, supporting the activities of the main two divisions and managing a very diversified portfolio of assets (cash but also equity, property and precious metals).

Today, this conglomerate has around 2,880 direct employees, another 2,000 indirect ones and has established franchises globally with around 420,000 sales representatives.
These representatives are in direct contact with the client base while the head office takes care of global marketing. This is like many retail or food franchises.
This corporation has a current addressable market of around 1.3bn consumers (around 18% of the total world population, probably similar to the number of Facebook users) across all continents, although it lacks operations in many countries.

'I can dream, can't I?'

I like three unique characteristics about the business which makes it very resilient and defend it against competitors.
The first, concerning the publishing division,  is that the cost of expansion is fully funded by the client base or by local governments. Growth is free!
This saves capital which can be used to upgrade the tourism facilities and/or reinvest into publishing content, which will in turn generate both higher revenues and larger client base.

The second attractive quality, again in the publishing division is that the content cost is very low. If you own a cable TV company, you need to spend a fortune acquiring content such as football or movie rights. For instance, in the UK, BT and Sky, two companies vyying for UK TV subscribers, will disburse £5.1bn over 2016-18 to broadcast the English Football Premier League. At the other extremity, Facebook has also no content cost since it is created by its users, which enables very high margins.

Another key characteristic of this organisation which has always amazed me is the incredibly flat structure: from the bottom-rung worker/sales rep, there are exactly 5 hierarchy levels.
Said otherwise, 4 promotions are enough to get you to the top job.
Academic background is less useful than what you deliver as a sales rep and manager of sales rep. For instance, the current CEO was briefly a nightclub bouncer before entering the organisation! However, anyone starting at the firm will commence employment at the bottom-rung of the ladder. Management positions are not given to outsiders.

promotion dilbertThe downside of internal promotion systems

Now, all is not rosy. Challenges for the organisation include replenishing the sales rep contingent, keeping costs under control at the head office level and increasing the size of the addressable client base despite heavy competition from a very commercially aggressive competitor (their clients often like to display the brand as part of their personal appearance, akin the Harley Davidson clients!).

Also, over the last few decades, the organisation suffered from unethical and illegal practices at many levels of the organisation, which were left unchecked and culminating in lost sales and loss of trust for the brand. This worsened the profitability of the conglomerate, which was not addressed by an aging management team.

In early 2013, the new CEO brought in top-levels consultants. KPMG helped implement International Financial Reporting Standards (IFRS) accounting standards to upgrade antediluvian systems. Ernst & Young helped review the tourism operations, with an emphasis of securing better conditions from suppliers.
Deloitte audited the financial services division, helping identify around €1bn of unaccounted for assets and €222m of liabilities! Moreover, McKinsey advised on the publishing operations.
Key hands-on managers were appointed to deliver a financial turnaround. The East-Australia division manager was appointed chief financial officer and has led to a return to profits in 2013 and 2014.
The client base is increasing again and more and more hopefuls sign up as sales representative, in particular in a number of countries where the corporation was previously barred from operating.
The current CEO is coming back from a roadshow in the US where he was a guest of honour of Barack Obama.

The Art of the Consultant: 'It's nine thirty.'

While I am not advocating the products of this corporation, I believe that any wannabe manager should study its corporate structure to gain some insight.

If you know the name of this global company and are the first to send it to me, I will be delighted to have breakfast with you. Next week, I will give you the answer. The last clue is this one: the current CEO is Argentine.