The Challenge Dividend

Keeping Ad Agencies Off Balance

Regular readers will have noticed that I was on a little hiatus last week.  The reason is our advertising agency had a large, global pitch competition come into the shop and I had the privilege to take an active role.  I use no sarcasm in the word "privilege" - in fact, as mentioned previously, new business pitches are an intense period of challenge that brings out the best in each individual and the agency overall.  We're going against several global agencies for a huge brand in a new technology area, and it is so exciting I can think of little else!

But we have a weekend break between pitch rounds, and our global team is catching up on sleep and family time.  As I try to catch up and write ahead of future pitch work, I noticed an interview in Advertising Age of Maurice Levy, CEO of Publicis, the 4th-largest agency holding company in the world (two spots behind our parent company, WPP).  According to Levy, too many business leaders continually seek to find stability in their organizations.  But his approach is different; amid the marketing and media revolution surrounding us, Levy's goal is "to break down people's natural resistance to change by throwing them off balance."

This is an interesting concept that is completely consistent with The Challenge Dividend.  Continuous challenge and change keeps people on their toes and adjusting ahead of the competition.  As Levy says:

"If we do not consider it urgent to change, people will not. Why should they? People hate to change. They become scared about not only their own job, but the way they will do their work, if they will be up to the task, if they will have a role. I have never stabilized an organization. Crystallizing an organization is freezing the energy. In chemistry, instability is very good because it creates some combinations you don't expect. It is very important to create this destabilization of the mind in order that they don't feel secure, [so] they spend a lot of time trying to understand the new world."

I completely agree with Levy's philosophy and find myself working to create the same embrace of change on a daily basis within our company and with the clients we serve.  In our changing, globally competitive economy, an ability to master change is the key to survival. 

And in the advertising agency business in particular, change is why we exist; we are in the business of creating new strategies and ideas that are meant to change consumers' opinion of our products and services.  Bring it on!

Vacation Find: Escape To Alcatraz

The Series:
One of the great things about traveling is the opportunity to see how the world works from a different perspective - and I always takeaway a few new lessons for the Challenge Dividend.  Two months ago my wife and I spent a week in San Francisco and Sonoma, and I knew the Left Coast would provide some good blog fodder as well as food, wine and relaxation.  Previously I wrote about Sonoma wine & dining and the panhandling problem in San Francisco.

Today:
Usually in my research I have found government massively unable to deliver for its citizens due to its lack of significant challenge.  Governments hava a monopoly on many services, its workers do not have to fight to keep their jobs as much as others, and voters have little means to change it due to special interest manipulation, among other issues.  But in San Francisco I found a spot of great service by a government-related monopoly: tourism on Alcatraz island.

My wife and I were very excited to visit Alcatraz on the last evening of our anniversary trip to the San Francisco area.  But at the same time, I held great doubt going in on the quality of the tour itself.  Government running a very unique tourist destination suggested poor service compared to the dozens of other tourist alternatives competing for our dollars.  Knowing that this would be excellent fodder for The Challenge Dividend blog, I paid close attention to every detail.

From the start we were surprised to find the tour to be outstanding and run nearly as well as any Disney resort.  For starters, the park runs an excelleng web site for trip details and ticket purchase at www.alcatraztours.com.  At the Pier, the boarding process was simple and efficient, and as soon as the boat pushed off a friendly guide from the National Park Service (NPS) began taking us through the history of the island.  Our tour continued as we arrived on The Rock and began walking to the prison itself.  Once inside, we were led to more friendly guides providing complimentary audio units for a self-guided tour.  The audio tour was one of the best I have ever heard, with stories from actual former guards and prisoners.  In addition to the tour, there were extra sessions that showed details like the working of cell block locks and the story of several attempts to escape the island.

At the end of the day, I think there are two key reasons that this government-run monopoly service vastly exceeded my expectations:

First, the National Park Service contracts most of the tour business out to a private company.  This means that the NPS is not in the tourism business, and instead and use competitive contracts to award the business and keep the winner honest.  In fact, the contract was just put up for competitive bid again in May 2006 and was awarded to Hornblower Yachts, which partially won due to its plan to operate more environmentally-friendly ships (Prius-like hybrid boats!).

Second, I discovered that the NPS ranger/tour guides are mostly volunteer citizens.  In fact, our guide said they were looking for more volunteers to join their crew.  The passion of local volunteers, and the competition to become one, helps ensure that the quality of tours is strong; and it is much easier to fire volunteers than government employees.

So, instead of serving as a contradiction to the thesis of The Challenge Dividend, the story of Alcatraz might help build the case.  The challenge of on an outside contractor and competition to be one of the volunteer tour guides shows that government, too, can implement the lessons of the Challenge Dividend and build a wonderful experience for visitors.

Vacation Find: San Fran Panhandlers

The Series:
One of the great things about traveling is the opportunity to see how the world works from a different perspective - and I always takeaway a few new lessons for the Challenge Dividend.  Two months ago my wife and I spent a week in San Francisco and Sonoma, and I knew the Left Coast would provide some good blog fodder as well as food, wine and relaxation.  In the last two posts I wrote about wine and restaurants in Sonoma; today I take a 180-degree turn back in to San Francisco to examine the issue of panhandling.

Today's Topic:
I've been to San Francisco about once a year for the past five years, and every time I go the biggest eye-opening annoyance is the sheer number and aggressiveness of panhandlers on the streets.  This past visit I enjoyed three firsts; my first view of a guy firing up a crack rock on the street, my first panhandler following me into my hotel lobby, and my first smack by a cup as I walked by.  Priceless.  Each time I go my reaction is twofold: (1) How much does this hurt San Francisco in the competition for business events and tourists?; and (2) What can the city do to fix the problem and keep its relaxed culture (that also draws visitors)?

I have been to a hundred major cities around the world and lived in New York City for two years, but nothing comes close to San Francisco in this department.  In fact, research shows that San Francisco has as many homeless as NYC, but with only one-tenth the city population; and the city spends $100 to $200 million per  year on the problem.  I think there are a two key reasons for the number of panhandlers in the city.  First, the city itself has a historically laid-back culture that is more lenient on every type of alternative life-style.  Second, the weather is comfortable year-round.  Third, some cities, like San Francisco, actually distribute cash to its homeless ($395/month in San Fran). 

To be clear, many panhandlers vote with their legs and manage to travel the states looking for the best fit.  When I lived in Orlando for three years, for example, I noticed a doubling in the panhandling population each time winter arrived for the rest of the country.  In the market to "attract" the panhandling citizen, San Francisco gets the win, with second place probably to Key West.

But San Francisco cannot be proud of this victory, and it seems to have recognized the need for change in recent years.  In 2002, the city's business leaders banded together to make a modest proposal.  They pushed and won support for Proposition N, "Care Not Cash", which stopped the city's historic practice of issuing cash to the homeless (most cities provide food and housing vouchers to keep the dollars from going to drug and alcohol habits).  In addition to feeding these habits, cash distributions - whether from the city or passersby - might even increase the cost of drugs, thus upping the aggressiveness of panhandling.  Simple economics shows that when you have a flood of new money on the street and a fixed supply of product, the price goes up.  This is the same reason college tuition keeps rising each time the government boosts its support.  Other cities across the country have similarly realized that businesses and tourists will avoid the pressure from panhandlers.  In another example, Atlanta surveyed the nation's event planners recently and discovered that the amount of panhandling there was a major issue in recommending convention locations.

As for a solution, there seems to be two major directions open for San Francisco.  First, they can go "Giuliani" and pass laws that significantly challenge the of panhandlers that annoy visitors and residents.  Beginning in the early 1990s, Giuliani's focus on the "squeegee guys" and other aggressive panhandling worked amazing well to clean up the streets and revitalize New York City.  Many conventions returned, people moved into the city, and businesses stayed-put.

But this option might be too strong for the Left-leaning people of San Francisco.  Instead, they might look to Seattle for inspiration.  In 2005 the city found 75 of its long-term homeless and provided them with free housing, along with the freedom to get as drunk as they wanted in their rooms.  These individuals previously cost the city $40,000 per year in jail and other costs, but now are supported for only $13,000 in superior living quarters.  Early research shows that they are even drinking less the longer they stay.

Both of these options seem to be strong paths for a city challenged by the competition for businesses, residents and tourists.  I am actually a fan of both approaches.  First, any reasonable society must enact laws that keep citizens safe from negative externalities; in other words, just like smoking at a restaurant hurts innocent people's health and food enjoyment, pushy begging on the streets hurts comfort and safety.  This is a free country until you get in other people's faces. 

Second, we must realize that the homeless, panhandling and drug/alcohol problems will never go away completely.  Some people have a disease (addiction or mental) while others simply have chosen a vagabond lifestyle.  It has gone on since the first city was erected in the fertile crescent. But we can choose to evolve as a passionate society and provide them with a safe environment to ease their pain, without judging them for their choices.

By recognizing the challenge and making steps to improve it, both panhandlers and tourists can enjoy a better day.

Next: Escape to Alcatraz

Moblog Test

 

Typepad just launched support for mobile blogging from Treos.  Here's a test of photo posting.  The label is from Loxton Wines, which was highlighted two posts ago.

Vacation Find: Sonoma Restaurants

The Series:
One of the great things about traveling is the opportunity to see how the world works from a different perspective - and I always takeaway a few new lessons for the Challenge Dividend.  Two months ago my wife and I spent a week in San Francisco and Sonoma, and I knew the Left Coast would provide some good blog fodder as well as food, wine and relaxation.  Last post I wrote about wine, and today I tackle the second-best reason to get to Sonoma, dining.

Today's Topic:
The overall dining experience in Sonoma is fantastic.  The region boasts incredible, local foods and wine, of course, but also a wealth of culinary talent.  Many of the world's best and brightest chefs come to this small town in the country in hopes of winning over legions of food lovers, and to test their skills against each other.  Like the wineries located in the valley, the density of restaurants means that there is a kind of "Iron Chef" competition nightly.  This continual challenge means only the best can stay, and the result is better and better food for the visitors who make the pilgrimage. Clearly, challenge leads to improvement here.

I heard one particularly interesting example of this heated competition from one of the local wine makers, who shall remain nameless.  For years, the unofficial crown of best restaurant in the town of Sonoma has been held by Cafe La Haye, which serves a mix of Californian and American food in a bistro atmosphere.  About a year ago, a new restaurant came to Sonoma and started making an impact.  Its staff was extremely knowledgeable, the environment comfortable, and the food divine.  Its popularity began to rival Cafe La Haye.

This did not sit well with the owner of Cafe La Haye.  He felt the competitive pressure to keep up to the newcomer and began retraining his staff and upgrading the food.  He knew that the competition could not be ignored and chose to improve the experience at his restaurant in response.  Given that Sonoma is a hot spot for dining, it does not take long for everyone from the locals to the guidebooks to catch up to what's new in the market. 

As for me, I liked Cafe La Haye, but it was not my favorite.  Instead, I would most recommend The General's Daughter.  It is located in a historic farmhouse and serves an incredible menu.  Take the time to choose five items and "always go with the wine pairing" (one of my philosophies of life!).

Next: San Francisco Homeless

Vacation Find: Sonoma Wines

One of the great things about traveling is the opportunity to see how the world works from a different perspective - and I always takeaway a few new lessons for the Challenge Dividend.  Two months ago my wife and I spent a week in San Francisco and Sonoma, and I knew the Left Coast would provide some good blog fodder as well as food, wine and relaxation.  This is the first of three posts on my challenge-worthy takeaways.

Obviously, you go to Sonoma for wine.  My wife and I are far from wine snobs, but we're on our way to a little bit of expertise.  We've traveled in France, been to several wine tastings, and started a small wine collection at home.  But we had never been to California's wine country together - and our 10-year anniversary was a perfect time.  Equipped with a convertible and a backpack of guidebooks, we hit the road for three days of tasting.

Early into our trip we got the gist of the landscape.  There are big, busy wineries that are most known on-shelf and with the tour books, and small, hidden, family businesses where you get a personal experience from the actual owners and growers.  We definitely favored the latter; and our best experience came with a visit to Loxton Cellars. 

Loxton is owned by Chris Loxton who has been building the business since 1996, but has been producing wine from his estate for only a few years (it takes seven years for new vines to start producing usable grapes).  He runs the business by himself with a little help in the tasting room.  He grows Syrah grapes just like his father and grandfather did back in Australia.  His grapes have only been producing suitable wine for a few years but business is strong.  He makes 90% of his revenues from winery visitors and his wine club. 

Chris is a very humble, open and honest guy and kept us there for over an hour talking about the in's and outs of the wine business.  I found one story in particular interesting.  Chris mentioned that he was looking for grapes from other farms to use in an upcoming wine and spoke with the owner of a high-quality operation.  The farmer said he could give him grapes for one price that are good and treated fine, or grapes that are more than twice the cost, that have been much more carefully maintained and are sold to wineries who make $50 wines.  Although his wines sell for less than $25, Chris chose the latter, more expensive grapes.  According to Chris, the choice was easy:

"When you're a small, up-and-coming wine in this very crowded marketplace you have to do everything you can to stand out...Really that means making the best wine possible."

In other words, the challenge of tough competitors fighting for sales and visitors in two small, densely-farmed valleys in California forces each one to continually improve just to stay in business.  And unlike France, where most wine land has been owned and settled for centuries, Sonoma and Napa still offer the chance for an upstart like Chris Loxton to buy-in and start a seven-year investment toward success. 

His strategy to succeed is twofold: (1) make great, hand-crafted wine using generations of expertise; and (2) meet and greet each visitor that comes in the door, so that they have a personal wine experience.  This strategy certainly worked for my wife and I; we bought two cases of wine and joined the club.  And when the wine arrived by UPS a few weeks later, we found that Chris had signed one of the bottles with "Happy Anniversary".  Priceless.

I'll certainly treasure our chat with Chris for a long time, and, of course, his wine.  My favorite was the 2002 Reserve Syrah.

Next: Sonoma Restaurants

A Tale of Two Airlines

Dallas, Texas, 1979.  It was the best of times, it was the worst of times for Southwest Airlines.  Only six years earlier the company had managed to eek out its first profit in a highly competitive market riddled with failures.  But thanks to political maneuvering from giant American Airlines, a law was passed (The Wright Amendment) that prevented Southwest from flying nationwide from its home base at Love Field in Dallas.  Instead of adjusting its strategy and outwitting Southwest in the skies, American cast its lot with $3.7 million in federal campaign contributions since this time (versus Southwest's $400,000).  But challenge begot improvement in this story, and while American toasted its success in 1979, it created a juggernaut.  The best of times came to Southwest and the worst of times to American.

For the next 27 years, Southwest Airlines took on bigger, badder competitors with some of the smartest strategy in the history of business.  As an underdog fighting for success in each new city it served, Southwest was forced to think differently and innovate.  Time and again the large airlines undercut prices when Southwest entered their cities, but the upstart outlasted and has continued to gain momentum.  It has turned a profit every year since 1973 and continues to expand its footprint across the country.  The company succeeded by going against the establishment in almost every way, for example:

• Point-to-point flights instead of a hub-and-spoke system
• A single standard airline type (737s) instead of a range of equipment (and higher training/maintenance costs)
• No frills, no meals, no special boarding and no first or business class
• No frequent flyer points or upgrades
• Competed against the cost and time of driving, rather than other airlines
• Avoided unions and created a culture of great, fun service
• Its people took on multiple jobs in order to reduce costs and cut turnaround time
• Used hedges to reduce fuel cost risk

Meanwhile, American Airlines, like most of its fellow former leaders, slipped from dominance into tragedy.  The company built up profits by using pricing schemes and keeping competitors out of its hubs.  Like the other historic leaders, it fought wars with its employees, wasted money on everything from stock options to acquisitions, and sought government protections and bailouts from 9/11 and pensions.  Legroom was expanded, then quickly crunched when passengers returned.  The company lost $861 million in 2005 alone.

Today, the market has come full circle.  Southwest is the industry leader by almost any financial measure.  In terms of market cap, the company is more than 3 times the size of American.  In fact, just this month, the federal government is set to repeal the infamous Wright Amendment that started these two airlines on their decades-long dogfight.  BusinessWeek reports that negotiators are close to unwinding the restrictions on Southwest's Dallas flights, which will seriously threaten American's last remaining profit center.  Meanwhile, "a July 12 study by aviation research consultants estimated that 2 million North Texas airline passengers will save $259 million a year because of heightened competition."  That's more evidence that more people than Southwest employees benefit from competitive challenge.

Amazingly, American seems to finally have recognized the error in its ways; according to American lobbyist Dan Elwell:

"We're fatalistic about it...Let's get on with making this a better airline going forward than expending a lot of effort fighting this."

If only American had reached this conclusion 27 years ago... 

Web May Even MLB Playing Field

We are just now entering the exciting months in Major League Baseball where playoff spots are in contention and every win is meaningful.  On the other hand, now is also the traditional time of year when many fans in small markets with no playoff hopes whine that only the big payrolls have a shot.  But an article in July's Wired magazine suggests that baseball's rich/poor gap is closing.

At least on the surface, there does seem to be empirical truth that big budgets produce wins in Major League Baseball.  Of the top five teams in terms of 2006 payroll (each spending over $100 million), all are leading their division or in the wildcard hunt (Mets, Yankees, Angels, Red and White Sox).  Meanwhile, none of the lowest five payroll teams is even at a .500 win percentage.  Looking all the way back to 1929, an Economics Bulletin paper by Daniel Mizak and Anthony Stair also confirms that payroll imbalance directly leads to competitive imbalance.

One of the key reasons for this disparity in wages is a disparity in revenues.  The more your team pulls in, the bigger the salaries you can pay.  But some teams make significantly more than others.  In particular many "large market teams" have grown rich by creating cable TV networks around their teams.  The Braves became known as "America's Team" because the entire country could watch each of their 162 games on WTBS.  This gave teams like the Braves, Yankees, Mets and Red Sox an large new source of revenue, a good percentage of which went to salaries.

But now the Internet is helping yet another industry lower the barriers to competitive challenge.  Here, the solution is MLB.com, which is becoming a powerful source of content.  The site is showing all games online, thus giving each team the equivalent of its own "superstation".  The good news is that all revenue from the site, along with revenue from other new media properties like satellite radio and online ticket sales, is divided equally among its 30 teams.  The future trends of new media promise that this could be a huge source of funds in the years ahead.  And it is already making an impact; last year the site's subscription audio and video service alone brought in $60MM.  That comes to $2MM per team - enough to keep a star player or sign a utility free agent.

A "level playing field" in terms of revenue helps ensure that teams field comparable lineups.  This, in turn, provides a more competitive league, and the benefits of the Challenge Dividend kick in: better games, bigger/longer playoff chases, and innovative strategies, line-ups, and risk taking by managers and GMs.  Players work harder and play better because they have a greater shot at the playoffs (and the incentives it offers in fame and fortune).  And fans see their local games matter farther into the season, as well as enjoy better play each game.  They watch and attend more games later into the year, and keep talking about the sport even when football starts in the fall.

Major League Baseball is wise to start sharing its revenue in this and other new ventures.  Although this might seem "unfair" to individual owners, it is for the greater good of the sport.  After all, the game is less between the Yankees and Royals, but between MLB and the NBA, NFL and NASCAR.  Each sport is fighting the other for viewers and TV dollars, and the better the games, the more fans will watch.  Ultimately, the popularity of the sport leads to long-term effects like the number of boys who choose to play growing up, which in turn helps ensure a supply of better talent - the future big names to draw fans and set records.

The concept of a "level playing field" does not mean that new rules should restrict players or teams on the field, just as government regulations aimed at improving competitiveness should not tell businesses which strategies to pursue.  Good rules simply ensure that teams focus on winning on the field, rather than winning in the board room or media booth.

Whether they win or lose on the field, every MLB team really wins with a level playing field.

"Light" Pressure on Gov't Actions

Challenge leads to improvement.  But challenge comes in many forms.  Often challenge takes the form or "bad" things like tough competitors, and the goal is survival.  Alternatively, the challenge can be "good" opportunities like prizes and profits.  Sometimes, however, a good challenge is just publicly available information.

After years or working on the Mr. Clean brand, I learned a little something about cleaning.  One lesson is that simple sunshine works great at eliminating mold in the bathroom.  This property works in other ways as well.  For example, public light on government spending may be the best way to unleash pressure needed to cleanse wasteful spending by our elected officials.

This lesson comes courtesy of Senator Tom Coburn (R-OK), who is co-sponsor of a bill that would create a searchable database on the Internet of virtually all government spending.  Coburn's goal is to shed light on the spending of government, thus enabling millions of American citizens and organizations to see where their dollars are going.  The bill is gaining tremendous support, as liberal and conservative groups alike are eager to expose pet projects and conflicts of interest.  Or, as Coburn puts it, this bill is "the best thing we've got to control stupidity." 

While Coburn's law gathered support throughout Congress, there was a setback in the Judicial branch.  In one of newly appointed Chief Justice John Robert's first public speeches, he pushed to disallow television cameras from broadcasting proceedings in the Supreme Court.  Chief Justice Roberts made this move in spite of the fact that cameras are already allowed in several state and federal courtrooms.  He chose to protect he and his fellow justices from the pressure of the public eye.  I believe we have a right to see this most powerful courtroom in action.  Further, maybe a little "light" pressure on a group of lifetime appointees would result in more responsible discussion and decision-making.

I think my local Cincinnati Enquirer put the entire issue best: "Openness and accountability in government aren't liberal or conservative or Republican or Democratic concepts.  They're American concepts."

UPDATE: (9/25/06) The House and Senate appear to be days away from passing a bill to create this searchable database of government spending.  At the last minute, Senator Ted Stevens of "Internet Tubes" and "The Bridge to Nowhere" fame stopped his block on the bill.