5 lessons I learned from Américo Amorim

Some lessons I learned by working with Américo Amorim:

  1. Never rely on anyone. You should not depend on a single supplier, bank, or person. If you offer someone the chance to influence your actions, you are effectively exposing yourself and this will become a source of weakness sooner or later. We live and work in a market economy, you should only depend on the system. Use the system to your own advantage;
  2. Walk the talk. Working in a company (or a bank) is a choice and a lifestyle. Some chose to become an artist, a politician or a civil servant – you made your own choice. You will meet people from all walks of life: understand what they expect from you and walk the talk;
  3. It is often physical. No-one ever seriously developed a business just by sitting in an office. If you work in an industrial company, you need to talk with people on the shop floor. If you sell a service, you need to meet your clients. Travel if you need to. Spreadsheets are good, being on the ground is absolutely fundamental;
  4. Keep your promises, and ask others to keep their own. While some people are good at delivering on what they promised, most are not. Remember what you were promised and demand it. Conversely, you should make a real effort to honour your promises;
  5. Talk with everyone - including politicians. While you may have your own political views, you cannot afford to alienate a group of people based on their political views, as you may need their support further down the road. This is more tricky to carry out than you might think, since you should make yourself scarce at the same time. Find that balance.
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The situation in Kiev

Russia depends on its natural gas exports to Europe. In fact, 50% of Russia’s Federal budget stems from duties on natural gas exports.  European countries, on the other hand, could easily find alternative natural gas supplies – albeit at a higher cost.

From this strictly economic perspective, Russia has much more to lose from cutting off natural gas supplies to Europe. While European countries would probably see a significant reduction in their economic growth if natural gas supplies face disruption, Russia would face a major budgetary crisis. From this perspective we are in the clear, for now.

To complicate matters, while the aspirations of the Ukrainian people are legitimate, some supporters of the new Government seem to be political extremists. One suspects that this matter is no longer in the hands of the Ukrainian Government, in any case.

As usual, the US is playing its role as international arbitrator. The fact that Ukraine is actually in Europe does not seem to bother the Obama Administration.

This is not Hollywood [Economics and Policy]

Whenever a company faces financial trouble, one of the first restructuring measures is to cut the number of non-core subsidiaries. Company restructuring is about specialisation: a business with negative operating income usually needs to make what sells and drop everything else.

A similar approach could be taken by the Portuguese Government to limit spending and improve the country’s public accounts. Following a prolonged period of low GDP growth (or recession) and very high Government debt (128% of GDP and growing), there is a pressing need to cut the size of the State.

Yet, almost 2 years following the intervention of the IMF, ECB and European Commission, the major tangible results of the so-called restructuring measures imposed by the country’s main lenders were a reduction in the wages of civil servants and pension cuts. Any improvements in the State’s efficiency remain to be seen.

Improving efficiency means cutting costs and this could be achieved in a number of ways. The most obvious fix is to cut salaries, which is what  Government did so far. More cuts are likely in 2014, after the European Parliament elections in May. Any serious Public sector restructuring should also involve a reduction in the number of institutes, independent entities and associations that are financed using Government money. One estimate places the total number of Government and Quasi-government entities at over 13.000, for a country with under 10 million inhabitants. These are estimates since not even the Bank of Portugal knows for sure. In fact, no-one appears to know – a tell-tale sign that restructuring is badly needed.

Yet this is not likely to happen. Everyone now understands how things will turn out: there will be no fundamental reforms, nor will the State’s efficiency improve. A significant reduction in the number of State entities is not strictly needed, and will not be executed. The political system as we know it would have to change dramatically. No-one in the political arena really wants that to happen.

All that is strictly needed is to cut wages and pensions, transfer a massive amount of debt from the balance sheets of certain banks to the ECB  – and that is it. Economic miracles happen in Hollywood. Around here? We will probably go back to the usual muddle-through economy. It will go according to plan.

Need for speed [Economics and Policy]

Ever since the country went into financial assistance mode, the Portuguese Government has cut costs essentially by reducing wages and pension benefits. Why is it so hard to admit that, inevitably, some Government institutions are less efficient than average and less efficient than in other European countries? Would it not make sense to conduct some benchmarking and implement reforms?

There is a pressing need for efficiency improvements and this would almost certainly involve merging the significant amount of small institutes, independent entities and regional authorities that were created in the past 20 years.

Hopefully for the better...

Hopefully for the better…

The advantages would far outweigh the disadvantages: fewer needless consulting committees, boards, and commissions. Increased efficiency, leaner organisations employing more qualified civil servants would all result in sustainable cost savings.

This Government’s stated aim of tapping financial markets ASAP could create the wrong incentive. This need for speed could well become a way to avoid deeper reforms which would result in a leaner Government sector.

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Se vogliamo che tutto rimanga com’è bisogna che tutto cambi (2)

Are there any alternatives to the measures currently being implemented by the Portuguese Government under the supervision of the IMF, the Commission and the European Central Bank? The actions implemented up to date amount to an increase in taxes and cuts in civil servants’ pay and pension costs. While this is an effective way to make sure that the country can meet its debt obligations, little is being done to increase Government’s efficiency.

Current estimates show that 12,000 entities can carry out public procurement (according to OPET). That compares to about 800 in Ireland. In 2013, Government entities spent an estimated 15 billion euros in the acquisition of goods and services to third parties (similar to operating expenditure in company accounting). This represents roughly 20% of total Government spend. A simple 5% reduction in this expenditure would cut costs by 750 million euro on an annual basis.

How can this be achieved? It would almost certainly involve merging the plethora of institutes, regional entities, hospitals and other institutions. In Portugal, nearly every State-run hospital is a standalone company, as is every school. It would also involve using electronic procurement platforms in a more efficient way. Local Government and indeed political parties would have to adapt to this new reality.

What are the odds that this will happen in the coming years? As I wrote before, everything needs to change, so everything can stay the same.

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A Bloggers’ Conference (#ABC)

This coming Saturday 14 December, I will attend #ABC – A Bloggers’ Conference at the LEAP Centre in Lisbon.

The event is organised by Coworklisboa, Marta Valente and IAMIN, who have invited a number of speakers to discuss subjects including creative writing, social marketing and web design.

It is the first time I attend a bloggers’ event. I am certain that there is a lot to learn from bloggers and marketing specialists. If you are in Lisbon and would like to attend, follow the link above.

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Way over budget

The Portuguese Government’s 2014 budget is being discussed in the so-called “specialised” committees in parliament. The budget approval process consists of 3 steps: first, a “big picture” version of the budget is approved by Parliament- this was done at the end of October. Second, representatives of parties with a seat in the National Assembly discuss the budget in more detail. The representatives are organised in various committees (the so-called commissions) which are mandated to discuss specific themes. This is underway. This coming week, the National Assembly will again cast its vote on the budget, following its review by the parliamentary commissions. This last step is largely pro forma.

In practice, this means that the true political decisions are made at this stage, within the various parliamentary commissions. The process is relatively opaque, which gives politicians some leeway to do their job. Negotiations are often disguised as technical arguments, with each party using an army of lawyers to bring some credibility to what is largely a political debate.

PS, the main opposition party, has put forward several proposals which are small and have no real economic impact on investors or economic growth. Sentiment seems to be that PS does not really have any alternatives to the austerity measures which are being put forward by Government.

Yet there are alternatives. While the 2013 budget was largely about raising taxes and getting more income to service debt, this one is about cuts in expenditure. The cuts are being carried out essentially via reductions in wages and pension obligations. Very little is being done to improve the efficiency of Government’s consumption. Specifically, Government could use electronic procurement platforms to optimise public spending. The gains in efficiency could be real. Various proposals have been put forward in this direction, none of which seem to have been taken into account.

This budget represents another lost opportunity to improve the State’s efficiency. The Portuguese State is like a huge tanker which follows its course. Trying to steer it takes extremely long and the only way to reduce costs seems to be via cuts in wages and pensions. Any attempt to improve its efficiency seems to be futile.

Leonardo da Vinci, innovation and execution speed [story]

It is not easy to write about Leonardo da Vinci, a man of genius. Various serious authors (i.e. more qualified than me) have written about him. Here are some notes following a visit to an exhibition at the Accademia in Venice.

Leonardo was perhaps the original Renaissance Man, highly competent in a variety of disciplines, from painting to engineering. His technical notes, much like his paintings, are both detailed and beautiful. He was incredibly advanced for his time – we are talking about the 16th century.

Vitruvian man

Leonardo used analysis and research to solve a variety of problems, both artistic and scientific. As a trained artist, the observation of reality was one of his priorities. He was also fascinated by mathematics, which formed the basis of his investigations.

Drawings by Leonardo DaVinci

It was interesting to find out that he was rather slow in execution. This infuriated some of his patrons. One of the most famous episodes is Leonardo’s horse, a sculpture commissioned by Ludovico Sforza, Duke of Milan. It took Leonardo 7 years to produce a clay model. By that time, the French had invaded Milan and ousted Sforza. French soldiers ended up destroying the model.

The conventional wisdom is that Leonardo was not particularly concerned with producing results but rather with tackling difficult problems. However, it could have been the other way round: the world around him was not sufficiently organised to channel his creativity, or his sponsors were too impatient to invest in what you would today label as R&D. There are other, more elaborate explanations for Leonardo’s behaviour, namely a psychological analysis by Merleau Ponty which suggests that Leonardo had a deep-rooted problem with authority.

While da Vinci was clearly a genius, today’s innovators are likely to share a number of traits with him, including the drive to solve problems in a new way. But innovation and speed of execution do not always go hand in hand. Specifically, product development often takes longer than expected and shareholders are impatient by nature. There is evidence that in the case of quoted companies under intense analyst scrutiny, managers feel pressure to meet short-term goals and invest less in long-term innovation projects. These managers are not slackers, they just tend to get more cautious when the amount of scrutiny increases. The other side of the equation is that equity research analysts are often knowledgeable about an industry but do not always understand the mechanics of innovation (to put it mildly).

From this perspective, the world has not changed much in the past 400 years.

 

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Farewell António Borges

I met António Borges in London some 10 years ago. Our conversations were always lively, as he had a rare ability to be pleasant yet to discuss an issue in-depth. While he dressed as a banker and worked at Goldman then, he was certainly funnier than most bankers I met.

We will not discuss again, we will not hear him throwing jokes around. More importantly, we will not benefit from his business and economic acumen. He was a man of deep convictions – a lesson to all of us. He was extremely confident in the future and he believed in people – especially young people.

Farewell António.

Integrity implies that competitive advantage and commercial success are derived through the application of superior individual and collective skill and not through the use of manipulative or deceptive devices or practices.
European Venture Capital Association Handbook, January 2012

This quote, taken from the EVCA’s handbook, appears slightly idealistic at first reading. We all know that superior personal and collective skills are not always rewarded in business life. However, innovation in business is probably based on the same ideals. From this perspective, an innovative company can be seen as a group of individuals that have superior collective skills.

 

Integrity impli…

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