Transcript of Flip's speech [LONG!]. As transcribed by themayreport.com's mailing list. My oh my, Flip totally bashes Bank One, Sears, GE, indirectly Motorola, etc... === A verbatim transcript (or as close as we could come to it) of Andrew J. "Flip" Filipowski's speech to the Better Business Bureau's Anniversary Dinner attendees at the Hilton on Thursday evening, March 23, 2000. ________________________
It is definitely my pleasure to be here; I hope I didn't give anyone any heart attack about my arrival. I'm always here when I need to be here, just in time.
Now, you would expect that my major topic of conversation tonight would be about the Internet, and I certainly won't disappoint those of you who think that. On the other hand, I think that by the time I'm through, you will find out that the Internet is not necessarily the whole point of this conversation or discussion that we're going to have. It is certainly a very important inflection point in all our lives, it affects not only the businesses, but perhaps all of the social structures that we have. It is an inflection point that rivals that of electricity and perhaps many of the other inflection points that go from as far back as the introduction of the steam engine, the railroads, or the automobile, or the telegraph, it just happens to be the most recent of the inflection points that is having an impact on our society in general.
However, just like those inflection points, it is not always obvious what the changes are. One could claim that the automobile was one of those major inflection points, and it is said that nobody will argue this but if you take it a little bit deeper and study the impact, you'll find out that the automobile was just simply a catalyst, that in fact what really revolutionized the world, what really made the cities that we all live in, Chicago included, what really made it possible for us to re-arrange our life, for better or for worse, was the highway system that developed in support of the automobile. It was that network of roads that created the cities, the opportunities to deliver things to people in those cities, and created the infrastructure that created a mobile society. And believe me, without that infrastructure of the highway system, the things we see and take for granted as cities today and all the things are a very integral part of our business and personal lives would not be here.
And before I'm done today, hopefully I will have left you with a whole bunch of things to give you pause for thought, perhaps a bit of discussion. Some of the things that I'm going to say are going to be quite controversial, I do that on purpose, I make sure that when I say things that I at least first explain to you that I'm not doing it with the intent of being devious, I'm not doing it with the intent of being harmful, I do it for the purpose of illustration. And there will be some companies, some local companies here in Chicago that I will mention by name, some of them will wish that I didn't, but on the other hand, it's the only way I know of making a point. So with that apology up front, I'll proceed.
What really is going to change and what is changing is that the Internet is making all of us become different. The workforce, the employees, are different today than they were just a few years ago, because of the Internet. Investors are different today than they were just a few years ago. They act differently. They perhaps will act differently forever. And, I know that many of you had that impression through 1999 and into the year 2000 that perhaps the investors have just become lunatics, that they perhaps had some administered drugs, that perhaps they're not acting rationally, and that if you wait long enough things will get back to normal, things will be sane again, and you can back to the way it was before the arrival of the Internet.
And it's certainly my thesis, my theorem here today is things will never, ever go back to the way they were before. They never have in any of the inflection points that arrived, never did it go back to the old way. Sure, there were periods of time in which some of the pendulum swing looked like it was going back, but it in fact it traversed on new property, on a new trajection. It was never back to the way it was.
Let me illustrate some things and put them up for you to examine. Number one, things are changing very rapidly right now. If you ever want to know how quickly, I would suggest that you take out the Fortune 500 equivalent list of 1950, 1960, 1970, '80, '90, and the current list of the Fortune 500 organizations, and look carefully. If you ever want to be shocked about how quickly things change, that will give you some insight on how quickly organizations come and go. Not too many generations ago it was possible and plausible to expect that most of the companies we knew, most of the organizations would last longer than our own lifetime. I suggest to you that today all of the companies being formed have lifetimes of their own far shorter than that of a human being. That takes some adapting to. If you ever want to test out some of that, let me give you the following as an example: A generation ago, perhaps with some of you even in this room, but certainly to your parents and grandparents, it was plausible that they would look for a career when they exited the educational system and entered the workforce, where their goal was that they were going to join an organization that provided them with a degree of security and compensation, and that they would one day retire with that organization. I submit to you that if you walked in front of the MBA class at Kellogg or the University of Chicago or Stanford or Wharton or any of the top business schools and stood in front of the MBA class, and told them that that was a rational thought, they would think that you had taken some very bad drugs. They would be sure that you were joking; no one could be as stupid as that to have even mentioned that as a possibility. They know that is impossible. They will not finish their career with one company, more than likely most of the companies they have careers with will be born and will probably die within their single lifetime. That is basically because the inflection points are arriving with more frequency.
There was a time many generations ago where they, as inflection points, would arrive perhaps once every 10,000 generations of humans. That was back in the days when if you knew when the herd was going through your neighborhood tribal area, if you had a calendar, if you had some notches on a horn that you picked up or was passed on by your parents, you were the knowledge broker of your tribe, and you could pass that knowledge on to generations and generations of your children, and believe me, it would have served you well, and you would have been the knowledge person of that community for many generations.
Let me give you the test. You're probably still skeptical that companies are going to be coming and going with that frequency. But as the new technologies arrive, that's exactly what happens. It doesn't matter what occupation you will have, whether this was an audience of individuals from the medical community, from the car, from the sales community, it doesn't matter what. Every audience that I could possibly stand in front of would answer the following question correctly, perhaps even in four-part harmony.
Who is the biggest, largest, most successful software company on the planet today, the biggest, the baddest? Let's do it folks. [audience: Microsoft]. You know, you did it in four-part harmony. Now, how many of you were around 15 years ago, raise your hand. How many of you were conscious 15 years ago? Now, 15 years ago was 1985. You don't have the 70's as an excuse. In 1985 there was a big, bad software company identical in power, size, relative to the others in this space that was the #1 biggest, baddest software company on the planet. I challenge you right now, in any way, in four part harmony or otherwise, to give me the name of the Microsoft of 1985. Don't mention hardware companies, make sure you mention software companies, let's hear it.
[Lotus]. Lotus wasn't even in the top 10, and IBM was a hardware company.
[Computer Associates] Computer Associates was in the top 10, but the number one was a company by the name of Cullinet Corporation.
Now, I know what I remember, because I was the Chief Operating Officer of that company in the seventies. Who was the #2? You'll not get it. Now, think about this, we're here again, in the year 2015. How many of you are still going to be alive, 15 years from now? Imagine coming back to the whatever annual BBB of Chicago banquet, and some speaker's standing up here going, "and remember back in the year 2000, what was the largest single software company on the planet?" And you scratched your head, and went "God, wasn't it somebody with an 'M' or something like that?" Now, if it could happen in the last 15 years that you can't remember, it could happen in the next 15.
I'm going to give you another test, this goes back 25 years. Do you know that in the mid-70s there were approximately 80 publicly-held word processing companies? I bet you will only remember one of the names. Whip it out, tell me the name of that company. [audience: Wang] Right, I've heard enough. Only name you can remember, very few of them could come up with the others. And today, do we even care that Wang exists? Is it even a relevant company? No, it is not. Things really do change. And I could give you many, many examples that would confirm that, but much as parents we really have a hard time seeing our children grow up, if we see them every day, we don't get the full impact of an incremental change as we watch them every day. It's only when we reflect back on some old photograph and then take a glance at our children that we find out that they've really changed a lot. As grandparents we get that opportunity a little bit more because as we get older and as grandparents we don't see the children perhaps as often as we can every six months perhaps notice how dramatically they changed. It is no different.
In fact, my thesis here will be that ultimately, organizations are in fact very similar to human beings. There are tremendous parallels. The only reason we thought that companies would be around forever is because they used to last longer than us. They will never again. And so now, certainly the next generation, those MBA students are quite clear that companies will not last that length of time. That creates an incredible dynamic that permeates the careers and the objectives and the way that people think about their jobs and the way they participate in the economy.
The major change of the Internet is not the Internet, it's not the network. The ubiquitous availability of the Internet whether it becomes wireless or not, the big change that you will see that will make life different forever, is the impact on society and the way human beings will look upon the world as a result. I'm going to make that point several times, and before I'm done, we'll build up to the case I hope that will be quite clear.
Do you know that when we look at some of the antiquities that we today live with, some of the oldest antiquities are the organizational structures that power our operations and our companies? Partnerships and the way we build corporations have been around for more than a hundred years, 200 years. Don't you think they're wearing out a little bit? And of course they are. They're primarily based on hierarchies. If you want to see how dramatically that change is being reflected in our current incoming job force, take a listen to this one: Two years ago, Morgan Stanley, no longer a partnership, already a corporation, has the investment bankers got it quicker, more than the lawyers and accountants ever get it. The investment bankers knew how obsolete partnership structures are, how unscalable they are. They, two years ago, went to the Harvard Business School and they have what is globally known as their dance card, they went on to meetings with job applications and the job placements that they want to have out of the Harvard graduating MBA class. Two years ago they went there and 400 MBA students showed up to fill the dance card. Four hundred I believe represents something like a third to a half of the Harvard graduating class. Do you know how many showed up last year? 40. That is the velocity with which the changes are happening.
Imagine walking up to that MBA class of Kellogg, the University of Chicago, Harvard, and walking in with a proposition of here is what you have for your career, we want to sell you on this. (A) we're a partnership, think lawyer, think accountant, think whatever. The proposition is that in 12 years you get to join us. Work 24 hrs, 7 days a week, you get to make an idiot partner really rich, and then in 12 years you get to be an idiot partner and amuse the next set of MBA graduates. How many of them are stupid enough to take that job today? Zero. You can hardly find a one. They're no longer graduating them that stupid. And it will be a universal change that will impact dramatically. If you miss out on 10 years of the MBA draft, it's equivalent to missing out 10 years of the NBA draft. You want to know what it looks like, take a look at the Bulls. And, the last set of employees you got 2 years ago, 5 years ago, 10 years, also aren't as stupid as they were then. They see the opportunities. They see that you can get a job with an Internet company, they can aspire to being funded. They know you can become a billionaire in 3 weeks. They don't need to get involved with those systems.
Let's go to corporations. Let's take a look at the business proposition for an entry-level MBA student. Most businesses have a proposition today of "I'll tell you what. You come work for us, and we've got a very good company, a very powerful company, it's got 300,000 employees, everyone works here and we have 7 or 8 divisions, and when you work in one of those divisions, our stock price is affected, not by what you do in one of those divisions, but by the errors that you've made in all of our divisions. And if you do really, really well and one of our divisions screwed up, your net worth goes in half." As a result, believe me, those MBA students are no longer dumb enough to do that, either. And I'll pick on a very nice company in Chicago, in fact, some of them we do cherish, nevertheless deserving of this comment. Imagine having to go work for Bank One. You could go work for American National Bank, work your butt off, end up owning the middle market, but guess what, your credit card division screws up, and you're screwed. You get to work at a company that includes brand names like First Chicago, but we don't use that any more because we want to use Bank One. So that when you're in Frankfurt or Hong Kong, nobody knows who the hell you are, but they would have know if you were First Chicago. That proposition doesn't work. In fact, I found it pretty humorous that a few weeks ago there was an award given out to a fellow by the name of Jack Welsh. It was "Manager of the Century." I found it really funny. And I was really happy that he was given the award for the last century, because that shit ain't gonna work in the next century. If you ever want see something that don't work, watch GE.
Now I'm going to say a few more very sacrilegious things here. If you think that one's bad, wait till you hear the next few. What do you think really happens to companies as they get older? This is the parallel between the human side and the organizational side. They can grow more conservative; they put in more processes; they try to avoid any mistakes; they try to continue to grow earnings. They do all of the things that do what? Eliminate innovation, and age an organization. Go back to 1975, that magical moment, and read up on any book about how to do retail right. And what would you think you will read about? Who was the example, right here in Chicago, of how to do retail right? Sears! What did they do, get a lobotomy between now and then? Did they just get stupid? No, they just got older. And older companies age. When you see a 120-year old person, do walk up to them and say things like, "How come you got stupid when you got to be 120?" No, you go and say things like "Tell me how you got past that 18 year segment when you were 18 and had that tendency to drive at 95 miles an hour drunk? How'd you get through that?" And you know that everyone at 18 does that, you're invincible, you cannot possibly think of that as a risky operation, but by the time you're 40 or 50 driving at 95 drunk, it's not something you consider rational. In fact, that's exactly the way organizations work. Innovation ends, emphasis on the process, risk avoidance, not making mistakes, that's what happens.
Now, what are the tell-tale signs that you are introducing that process? What are those things that kill organizations? Well, let me give you the two big culprits: If you ever hear of somebody telling your organization that the number one key to your success is asking what? The number one reason for organizations aging, getting decrepit and old is: listening to customers. You hear that, someone gives you that advice: shoot them! You're about to commit suicide. You know exactly what a customer will tell you, you don't need to ask. You know every time what the customer wants: ask any researcher, ask anybody in the laboratory or in R&D, and what is the customer going to give you? The same old bs, I want 15-15. What's 15 & 15? "Give me 15% more features for 15% less price." You could have predicted that. Ask a customer, "Should I go innovate in some new area and create a whole new product that will do this?" What are they going to tell you? "I'm dependent on that product that you're building for me right now, you stick to your knitting and don't go on some crazy spending your money somewhere else. Make sure what you're doing for me keeps working. By the way, I want 15-15, give me 15% more features and then you can give it to me for 15% less cost."
You don't need to ask. But if you're in the mode of maturing your organization, which is ok, if you're in the mode of becoming a bond as opposed to an innovator, then start putting in those processes cause sooner or later you have to, and I'm not saying don't do it, just recognize that that's a sign of aging which will ultimately link to the organization's death. Don't worry about death because it comes to everyone. If death didn't come to corporations, then when we'd look at the Fortune 500 companies today, they'd all be 1,000 years old, and they're not. The reason is they die like they're supposed to, just like we die to make room for the next generation. Live with it, they're supposed to die, I know they try to fight it, but ultimately they're just the same dead anyway. There is no eternal organization.
So..another thing: what's the second worst thing you can do, the thing that will age your organization? The pursuit of quality. You can be dumb and stupid, listen to your customers and go for quality. It kills you every time. Now, believe me, you go to most educational institutions, which are going to have to change dramatically based on the internet anyway, but if you go to most educational institutions, I think that what you should actually claim they are is museums of obsolete business practices, because that's what they teach. I could prove to you in one second that you do not want quality. I can tell you that every engineer knows exactly what quality means. It means don't innovate, don't change, because if it changes that's where the bugs and problems are going to show up.
If you ever want to know what the single minded pursuit of quality yields, it yields Iridium. When you make quality the engineer's mantra then you get Iridium. Instead of innovating and using CDMA technology you stay with the tried-and-true TDMA technology, that's how you get into that mess. When you tell engineers that they must achieve 6 Sigma quality above all else, they know how to get there, they eliminate all innovation and risky technology. I emphasize these issues to make a point. I am truly not denigrating quality and attentiveness to customers, it is just if I do not make these exaggerated examples the point will be missed.
Stick, stick to quality means only one thing to an engineer --- and I'm not saying that some degree of quality and some degree of listening to customers is not right but for the emphasis for this organization, to you, I want to make sure that I don't mince my words. I want to make sure that I'm clear. Aim for quality, and you're not going to get innovation. You're going to get people using tried-and-true stuff, you're going to make them eliminate the mistakes they know that when we tell them to do that, they don't make changes.
Now here's the one, one-sentence, proof that you hate quality: How many of you want to drive a perfect Pinto? Not a whole lot. Proof positive you don't care about quality. In that sense, what you want is somebody to innovate and somebody to fix the problems when they occur, but you want something interesting, something new, something innovative, with a minimum of problems, but that has to be way down the list, otherwise we'd all be driving in perfect Pintos.
So...with certain apologies, I'll continue. Now you have had inflection points more frequently, organizational structures might be obsolete, we got the fact that certain things age organizations, and if you really want to read up on this last part, read a book called "The Innovator's Dilemma," that you will hear and read in much greater depth that I can possibly do tonight, the impact of some of that process and aging on a organization.
Now, I will go on to explain on a positive what some of the brightest and best organizations do, and they do it sort of just like human beings do this. The best of the bunch spin off businesses, and treat their new businesses just like we treat our children when we're good parents. You want to be a great parent, what do you do? You give all knowledge you can to your children, you give them all of the experience and background to let them think through what they want and don't want, they get to accumulate their own experiences and add to it, but you give the right to go off into the world and do what they will do, to succeed with everything you can give them as an advantage. You don't hoard that knowledge, you don't laugh when they fail because you didn't tell them about really a neat secret. You don't hide, you don't hope they fail, you spin them out, just like the best organizations spin out. They take their brightest people, they give them all of their secrets, all of the experience and they tell them "Go off in the world, and I hope you destroy us in the process, 'cause we're getting old, we're in the bottom of the business now, we're going to die anyway, it might as well be you, our spinouts, that kill us, rather than our competitors."
Just like parents, the best of organizations do that and I always highlight a positive story in Chicago about that. If you want to see how to do that, study the Tribune. When the newspapers were challenged by radio, what did they do? They got into the radio business. When television challenged all of that, they got into the television business and spun it out. When they were challenged by cable, they did that, when they got challenged by the Internet, they did that. And today they're 140-and-some years old, still a vibrant organization that has in fact elongated their life by doing the right thing, and that is taking their best and brightest and spinning it out. It's actually a rejuvenating activity. And I use them as the example because, frankly, I haven't found a better one anywhere else that can be used as an example for this process.
Now, if organizational structures --- the organizational structures of the future --- what will have been impacted by the Internet is that individuals will want to work for atomic units where their work will be fully appreciated and that the results of that team's work will be valued in the marketplace. What that means, if you want me to translate that into the real world, is that I believe for GE to survive they're going to have to spin out 300-400 companies. Otherwise, they will not attract the human capital with which they've succeeded to date. The reason why GE is a successful organization today is that they've used in an extraordinarily positive way, all of the technology, all the knowledge to stretch the old hierarchical business model of a corporation to the extreme. And that is a compliment, no one does it better with the old stuff than GE.
But it will not work in the future. You cannot convince the workforce of today entering the marketplace to work within a homogenous unit like that. You cannot have a management team anymore that their relationship to their employee is as it is at GE. You can no longer have a chief executive who says to the board "Pay me all the money, and I will make sure that all of them do what I tell them. You don't have to worry about paying them, just pay me."
In the old days when loyalty was describable in the context of, if you joined a company, if you did what they told you to do, you didn't get fired and your family didn't starve --- that equation no longer works. Today the equation has to be "Come work for us, and we'll share --- a lot more equally than we ever have in the past --- the fruits of the labor. So atomic units are going to be important, because that's where you can build the value directly in association to the work effort of the individual.
Let's go to investors. Investors want those atomic units. They don't want to invest in homogenous units. How else would you explain the fact that Palm is worth more outside of 3Com than all of 3Com? Is it because someone is truly just stupid? Is it because the investors have swallowed a pill? No, they just know that it's a better deal that way. Investors have always been conned into stupid things. We absolutely have a history of that. There was a time when tulips were important. There was a time when people thought porcelain was very important. In fact, the Chinese convinced Europeans that you had to bury the stuff in your backyard for 80 years before it became porcelain. And they believed it! That's why it was expensive! Today, we are equally stupid in believing stuff like gold is important, or expensive. Who said? Why?
It's because we believe it, that's all. Who said earnings have anything to do with anything? There are people who absolutely think that it's relevant to something. There are people that even today that when I speak to them say, "Earnings are important because ultimately the shareholders get part of the earnings." When's the last time that you ever saw any earnings? They keep it all, they don't give it to you. They let you play with Monopoly money. You get to write down on a piece of paper, if they gave it to me, I would have gotten $2 a share but they never give it to me! And yet they're stupid enough to think that it actually counts! The fact is, it's just a game, it's like golf. 70 strokes is better than 72. It's a bet, and exactly what the story is is that investors are bettors, no different than a crap table or anywhere else, no, there's no more sanctimonious part of gambling. No, there's not any safer, more honest way of to do it. It's all gambling, it's all risk. It doesn't matter if it's on craps or a horse or a stock, it's the same stuff. And what's neat about it is that investors are finally figuring out that it's a game and they're finally figuring it out that it's not what happened in the past that counts, it's in the future.
And they're making bets. And they found out that venture capitalists tend to make more money than most that invest in bonds. So they decided that they might as well get in on the action. They want to be part of the venture capital community. They don't mind investing a little bit earlier, whether their names are pension funds, mutual funds or individual investors. They all decided, they no longer like to invest in bonds. If they wanted to invest in bonds, they would, and some of them do, with some of their money, and they invest in companies like McDonald?s --- that?s kind of like a bond. Frankly, if you invested in McDonald?s today, what do you know? Well, you know if they spun out their Chinese unit, that would maybe be a good bet. It might roll real fast. But you know what's going to happen in the United States they can't eat any more hamburgers! You don't want any part of that, why would you want it? Well, you would if you wanted to just get a steady return like a bond. But you want the organizations to spin out those things that are better bets.
So, what good are those earnings? What does it tell you if somebody says "I've had 60 consecutive quarters of earnings?" In the old days, when companies lasted a really, really long time, it meant that they could have another 60. What it means today to investors is you're old enough to die you may not have any more than 1 or 2 left in you. Just ask the folks invested in P&G. Right? You know I'm not lying to you, I'm telling you the truth. If you're only going to last a few years, a big long track record means that you've done it for a long time.
Now, a test. Two baskets. Let's put all the stocks into one of two baskets in 1999. In this basket, in 1999, let's put all of the shares that were traded anywhere that had earnings. Let's put in this basket all the shares that had no earnings. Now let's answer the question: in 1999, was it a great year for the stock market, a medium year for the stock market, or a shitty year for the stock market? What was it? A banner year! The best ever! Except if you had basket A, that was the worst year it ever had because it was a down year. The average stock with earnings lost value. This basket with no earnings went up astronomically in value.
Lunacy, you say, stupidity? No, what if it's the way it will always be from now on? And why would it be that way? Well, because if companies don't last that long you want to get in line. You want to bet on the ones that are going to really win big. You want to get there before everybody gets there. Because if they report all their earnings already, even five consecutive years of earnings, you know what that means: they're old. They're gonna die. So when you want to invest up-front, you want to do it to the ones you think are going to be the winners. And what tells you a winner today? They've got to move fast. They have to invest now. If they're a small company making earnings now, what does that mean? They're not spending enough to be the monopoly of next year, next decade or whatever. They will get destroyed by the company that is losing but investing. That's real obvious. And, the good news is that in the old days, if a company was losing money, and companies lasted 200 years, you might not live long enough to see them be profitable. So, it was a good idea to see them profitable now. But today, they're not only going to get profitable before you die, they're probably going to die before you die. So your bet is, how do I get in on something that's going to be really expensive in five years? 'Cause I can't wait five years, that's not past the time I'm alive, I need to do it now, I need to invest now, I need to take a bet, I'm a venture capitalist, I'm aggressive |