Business Blunderers #1 - cont: it gets funnier

Continuing the story of Sir Archibald Forster's Big Business Blunders ...

For a period in the 1980s, the old monopoly British Gas had been paying ever higher prices for new long-term purchase contracts from North Sea gas producers: it was a sellers' market.  This came about from an archetypal monopoly planning cock-up: they'd contracted vast quantities of gas in long-term contracts during the huge boom of the late 1960's, priced in single-digit pennies per therm.  Being thus sated, they'd bought very little in the 1970s.  One day, they re-did the supply/demand sums and noticed - guess what? - a looming shortage!  Owing to the low gas price and, at the same time, booming oil prices after the twin crises of 1973-4 and 1979, everybody was exploring only those hydrocarbon plays that looked set to yield oil.  And new gas developments take several years to bring on stream.  

So, being a monopoly and not caring what things cost (they know who's gonna foot the bill, haha!), BG did the rounds, telling everyone that they'd be willing to pay more than 20 p/th - a gigantic price increase - for any new gas supplies that anyone could develop.  (The output of an entire field would be sold under a single contract for decades of delivery, years in advance.)  This sent every NS producer back into the vaults where they stored their old drilling logs, looking for long-forgotten gas discoveries they’d ignored as being totally uneconomic at those 1960’s prices.  Sure enough, new gas fields began to be offered and, true to its word, BG started a price-ramp of several years for new gas that by the mid 1980s saw prices in the high 20s of p/th.  A classic sellers' market phase in the great commodities cycle. 

Though no gas expert, Archie, headstrong Esso Chairman & CEO, somehow got it into his head there was no end to this ramp.  Esso had enjoyed a couple of big sales at stonking prices in this period, and one of his JVs now had a couple more new gas fields to offer BG.  Forster decided that he would triumphantly be the first to breach 30 p/th.  He convinced the JV partners to go along with an eye-watering opening offer of 34p.  Many of us were unconvinced, but were willing to go along for the ride.   Unfortunately, thus emboldened, Forster flamboyantly guaranteed to his Exxon overlords that a price in the 30s would in due course be delivered.  Sadly, he’d failed to notice the laws of supply and demand grinding slowly into action.  High prices bring forth, errr, lots of supply; and he’d not heeded warnings that a glut was coming inexorably down the production-line.  

When his hapless negotiators rocked up at BG, in response they got given a long and detailed list of new fields currently on offer.  BG stated it would only need to buy a couple of these, and told them to go away and recalibrate their aspirations to less than half of what they’d walked in the door with.  Yep, we were now in a buyer's market.

Cue carnage at Esso: was this right?  Why didn’t "we" see this coming?  Etc etc - the usual search for scapegoats.  It would have been fun to be a fly on the wall when Archie broke the fell news to his US masters; but BG was right: it was indeed sitting on a glut, as a bit of belated due diligence readily confirmed.  For its new gas fields Esso subsequently settled for 16 p/th**.  A salutary tale indeed. 

So many life-lessons - as my 11-year old granddaughter would say.

ND

________________

**  There's another lesson here.  In order to "justify" asking for 34p/th, the negotiators had been primed to say that detailed engineering confirmed this was nothing more than was needed, based on the ever-rising cost of offshore development.  Gosh, yes.  The JV had indeed concluded internally that a price in the high '20s was needed, even if 34 was taking the piss.  So: how come we didn't pack our bags and just go home, sadder and wiser, and leave the stuff in the ground?  

Answer: huge engineering projects build up serious momentum (see HS2, Sizewell C etc etc).  Big project teams had already been assembled: plum jobs awarded: a great deal of engineering work already done: we were not about to walk away from these sunk costs.  The teams were told to take out their sharpest pencils and bring the costs down - massively.  And lo - they succeeded!   As I've found many, many times in business life, engineers, like so many of the rest of us, are basically lazy and complacent; and if they think money is no object, they pile it on.  ("Safety" is the usual reason given for gold-plating - and who dares to second-guess them on that?)  But if they are told their jobs depend on it, suddenly they are capable of amazing innovation and rationalisation!  It is ever thus.  Only a good kicking does the job.

Business Blunderers I Have Known (1)

Continuing from Jailbirds and Rogues ...

Archie Forster (Sir Archibald, 1928-2001) was Chairman / CEO etc of Esso = Exxon-in-the-UK.  I met him occasionally, he being the top Esso participant in a joint venture I was involved with.  He was a cheerful, bustling cove, but his business history told clearly of a dynamic and steely character, with much conventional success along the way (within the one-company career - and Exxon is an odd company). 

Once he got to the top, however, there were reasons to doubt his judgement and what must have been a heads-down, over-confident, solo decision making style ...  

The first story revolves around his determination to cash in the very valuable SW1 HQ property Esso occupied for many years - 1,200 people, multi-storey carpark, occupying more than an entire block on Victoria Street - and move somewhere cheaper.  Esso's geography dictated somewhere west and possibly south of London: its worldscale refinery is at Fawley, near Southampton;  it had a smaller refinery at Milford Haven; a research centre at Abingdon; and, not coincidentally, Forster lived in Winchester.  When we met Esso folks, they'd give us the latest office relocation update like Father Ted used to update Dougal on tales from the confessional: although it was meant to be secret, all the Esso guys had their contacts in the company treasury who would tell them the addresses of where they were sending the latest batch of cheques made payable to estate agents.  And so we learned of the search progressing along the M4 corridor, right out to Swindon - but seemingly there was something wrong with all of the sites they were offered.

Suddenly, a breakthrough!   A big, cheap, brownfield site (the old Goblin Teasmade factory) became available near Leatherhead, right on the M25, on the London side of the motorway.  Forster was delighted.  Excellent transport links; south-westerly from London; and, he had heard from somewhere, if the move was within the M25 - and it was, just - no redundancy would need to be paid to staff that didn't want to leave SW1.  Shedding staff without cost was part of the cunning plan.

Boy, was he wrong.  (a) The 16 miles between SW1 and Goblin is far further than a move which is of such short distance, it lets you off making redundancy payments.  Oh, and (b) although smack on the M25, it was not on a junction, and the nearest one is an absolute pig at rush hour.  Loads of staff considered Leatherhead / M25 a much different proposition to the comfortable public-transport journey to Victoria SW1, and took the money.  Being an upfront cost, the fat redundancy bill significantly impaired the deemed economic benefits of the relocation exercise, even if losing staff was part of the plan.  But he ploughed on anyway.

Embarrassing enough for his dealings with his masters in Florham Park NJ: but the second tale is, if anything, even funnier worse ...  to be continued.

ND

Middle-class morality tale: 'Rogues' ... continued

Having moved on from Jailbirds I have Known to mere Rogues, here's the story of a man we'll call Desmond.

I met Desmond via my in-laws, who lived in a classic and very respectable English market town.  A tubby, bustling, jovial fellow, Desmond was well known to all in the Rotary / Conservatives / Probus circles (Freemasons too, I'm guessing).  He had been brewery manager at a well-known county firm, and was now comfortably retired with his wife in a smart bungalow, very much playing the latter-day country squire.  When he wasn't out shooting, he attended every good lunch and dinner going - and that's quite a lot in a town of that sort.  He was easy to like, but behind his back there was a lot of cheery laughter at his expense, because at every meal, his roving eyes were on the lookout for extra helpings: "... If you're not going to eat those parsnips ...", and he would brazenly help himself to his neighbours' (plural) unwanted scoff.  This is not at all the done thing in these circles, but Desmond was shameless.  And tubby.

The other aspect of note was that Desmond plus Mrs were always off shopping in the smart stores in the bigger county towns, and would invariably lunch there too.  This small-scale but relentless extravagance was also widely commented upon - even well-off county folk tend to abstain from conspicuous over-consumption - and one day it came to a juddering halt.  The consumerist couple had, it transpired, taken out all the equity from the bungalow, spent themselves into the ground, handed the keys back to the bank and, accurately presenting as homeless and penniless, threw themselves on the mercy of the local authority.

By some miracle, they were immediately found a small but comfortable flat at minimal rent in a sheltered housing complex based around a smart 18th century town house in pleasant grounds, not two miles from where they lived before.  Doubtless, several other welfare benefits flowed: if means-testing was involved, they qualified!  After the immediate disbelief had worn off, the reactions of their many acquaintances were critical, but by no means terminally outraged: nor were Desmond & Mrs shunned from polite society.  Somehow in all this they had managed to keep the shotguns & car - and proceeded to continue with life much as before, less the shopping and lunching expeditions.  Well, there was nowhere to put new purchases any longer.  Amazing stuff.  Over time, the commentary perceptibly shifted from "feckless bugger" to "not sure why we don't do that, too!"  As periodic visitors to this saga of everyday county life, Mrs Drew and I were possibly even more surprised by the widespread eventual acceptance of Desmond's dissolute doings than we were by the deed itself.  We even half-wondered if we were detecting a faint new hint of "oh well, eat, drink and be merry, eh?" in the general attitude of Desmond's circles.

Anyhow, notwithstanding his shameless insouciance there was probably some stress involved in all this for the portly Desmond, and some months later he suffered a heart attack.  He lasted but a few days in hospital and suffered a fatal relapse after lunch one day.  Fittingly, his last words were reliably said to have been: "I never did get my pudding..."   Middle-class entitlement, eh?  

He would have wanted to go that way, everyone agreed.

ND

Harold Wilson: rogues I have known (cont**)

Well, sat next to him several times.  He wasn't very communicative.  The crazy affair of Biden's Brain, plus a random news story brought him to mind this week.

For me as a lad reaching some kind of juvenile political awareness in the late 1960's, Harold Wilson was omnipresent in current affairs, a masterful politician in difficult circumstances, atop a restless and quarrelsome Labour Party.  By the time I was at the university he was PM (for the second time) and a veritable local legend for his 'congratulatory First' as an undergraduate, his adroit SCR politicking as a don, smart analytic capabilities as a wartime civil servant, and, above all, his astonishing memory[1].

Then, abruptly at the age of 60, in 1976 he stepped down as PM and almost directly into obscurity.  WTF?  There were all manner of conspiracy theories but the truth was, the previous year he realised he was fast losing his marbles; and full dementia set in shortly thereafter.  Without his memory he was nothing, and he knew it - not for him the pathetic Biden conceit.

Wilson off duty:  ciggies for him

A bit later I often found myself in the Victoria district, SW1, where Wilson had a flat overlooking Westminster Cathedral.  One could lunch handsomely at eye-poppingly low prices in a number of modest eateries outside Victoria Station - cheap, but totally respectable (in case you were thinking of Kings Cross in the same era), and heavily populated by office workers brandishing Luncheon Vouchers - remember them?[2].  Ultra-cheap + guaranteed high turnover was the formula.  Two of the favourites were known as the Old Maple, a tiny dive, 100% formica everywhere; and - no relation - the New Maple, on two floors, the upper of which even ran to some imitation wood panelling.[3]

Anyhow, if you weren't in so much of a hurry you could join Harold Wilson and his detective, who frequently lunched there too in the upstairs section.  You knew immediately something was very badly wrong: he wasn't any kind of physical wreck, but what in Heaven's name was a man who only a couple of years beforehand was PM, doing there silently nursing a plate of steak and kidney and his habitual ciggy?  (Occasionally a cigar - but the pipe was only ever for show.)

All very sad.  And it now turns out he quickly ran out of money as his care requirements escalated.  Thatcher's people arranged for the Bodleian to buy his personal papers, rather than have them go abroad, for a decent sum to keep him going.  He lasted until 1995.

ND

__________

** see also Jeff Skilling and Keith Best

[1] A really tremendous memory can cover for a range of what otherwise would be mediocrity in other intellectual attributes.  Whenever you meet someone highly regarded for intellectual attainment, it's worth considering whether memory is their actual superpower. 

[2] LVs, that is - though I could have meant office workers ...

[3] 'Known as' because IIRC those had been their historical names and that by the 1970s they were actually trading as something completely different.

Jailbirds I Have Known (2)

The second of my three criminal acquaintances is former Tory MP Keith Best.

When I first met him, Best was an ambitious and hyper-active young Brighton-based barrister and TA artillery officer.  In the late 1970s he was nursing the safe seat of Brighton Pavilion, on the wrong-headed assumption that the incumbent (the Tory grandee Julian Amery, brother of the hanged traitor John), would soon retire.  In the meantime he had to fight the mandatory no-hoper seat and was duly selected for Anglesey (Ynys Mon, if you must) in the sure knowledge he'd lose.  Unfortunately for his Brighton plans, in 1979 he won it on a three-way split with Labour and the Welsh Nats.  Never mind, he thought: I'll lose it next time for sure.  Meanwhile, let's enjoy the gig - and he threw himself into foreign affairs interests, travelling extensively on parliamentary boondoggles (as well as continuing to be active in Brighton ... and Westminster ... and Anglesey ... like I said, he was hyperactive).

Then along comes the 'Falklands Election' of 1983 and, wouldn't you just know it? - he gets re-elected in Wales!  Damn!  That wasn't the plan at all.  Still, there are always those overseas boondoggles, eh, Mr Q?

And then came the era of the big 'Sid' privatisations.  Stagging was all the rage, and when the BT flotation came along, Best didn't just stag it, he made multiple applications for shares - a criminal offence.  But not just multiple bids: he made them all in different variations of his own name!   It didn't need much detective work to run him to ground.  He was caught, convicted, gaoled (briefly), and had to resign from everything he held dear: the Bar, his Commission, his seat - the lot.

But here's the thing.  He wasn't any kind of Alan B'Stard whatsoever.  At one point I had a lot of contact with Best, and would have unhesitatingly classified him as a good chap.  He was very much on the 'social conscience' wing of the party, which doesn't always sit easily with hacking away for a safe Tory seat: but he didn't hide or compromise his views.  Hyperactivity aside (which can be a bit of a syndrome), he was level-headed and fairly sage - certainly thoughtful.  I've chatted with him for many a long hour over a drink or two in a German pub, and he's the sort of fellow I'd reckon you'd go to for his views if you had a problem.

So where does he get off on blatant, nay suicidal multiple share applications?  I've pondered this one long and hard.   

One possible explanation is a blown gasket - to hell with it, I'm never gonna get that safe seat, nor any ministerial promotion: let's throw caution to the winds!  But that cap never really fitted: like most young and ambitious politicians, he was playing a long game (he was well in with the whips - hence the boondoggles - and reliable in the lobbies) with time on his side.  The nearest I can come up with is that he fell into a kind of entitlement trap:  everyone does multiple applications and makes a fast, victimless buck - why shouldn't I?  Remember that around this time, in lieu of a recommended pay-rise (which the privately-wealthy Thatch decided wasn't on), MPs were explicitly told by their whips to get a copy of the John Lewis catalogue and fill their boots on expenses, no questions asked.

Not a very satisfactory explanation, actually, but it's all I can come up with.  He never explained himself to me, anyway - and it's hardly a topic you press someone on.  (Come on, Keith - what sort of loony are you?)

And since his time in the slammer?   He's gone for the Profumo path to redemption, quietly working away - with characteristic commitment and energy - in leadership roles for several charities, see wiki for details.

A strange story indeed.  Human beings, eh?

ND

PS: there won't be a separate post on Jaibird 3 because nobody will have heard of him.  I'll add something BTL in comments over the weekend on him ...
UPDATE:  done - in comment #5

Jailbirds I Have Known (1)

So - Elon Musk slips past the slammer.  Not so lucky was Jeff Skilling, also done for misleading shareholders (and a couple of other things).  The SEC was in a more vengeful mood after the Enron meltdown - at the time, the biggest corporate crash there'd been - resulting in a $45 million fine, and 24 years inside.  He thus became the third chap to enter my short list of personal acquaintances who've partaken of the porridge.

Skilling was an amazing chap: not only a visionary, but someone who could execute on what he envisioned and implement it - a rare combination indeed.   He was the kind of leader who commands by sheer force of knowing exactly what to do, in circumstances where everyone else is scratching their heads over the sheer impossibility of the task they've been given.  He's often described as arrogant, but that was no part of his demeanour - he's a small chap, and as personable and approachable as could be imagined for someone perpetually under enormous pressure and with huge responsibilities.  He wore his intellect lightly, and while he probably had no time for fools, well, he didn't have time for very much at all, which was far more to the point.

The pressures, responsibilities and impossible tasks were all of his own making.  He had a vision of the gas and electricity markets that was as radical as Bill Gates' dream of putting a computer on every desk.  He was going to take those two commodities - previously the preserve of monopolies the world over - and make them into traded commodities in open, liquid, competitive markets.   Enron was to be his vehicle.   Nowadays, what he envisioned might almost seem commonplace; but consider two gigantic reasons why this was highly visionary and utterly revolutionary. 

Firstly, there was a body of economic doctrine holding that natural gas was a "paradigm example" of a commodity that could not be traded - for specific, real and enduring phsyical reasons.  No-one was even contemplating the idea that electricity, too, could be traded; those same physical aspects were present in even more extreme form.  These things were impossible!

Secondly, the status quo was dominated by statutory monopolies with considerable political clout and absolutely no interest in seeing things changed.  Indeed, they didn't even believe change was possible - a weakness in their position, because they didn't exert themselves against Enron quite as fully as they might.

That isn't to say the acquiesced.  Far from it: they lobbied and stalled and blocked and abused their monopolies royally to fend off the coming of open markets.  Albeit clumsily, every man's hand was turned against Enron - hardly what Gates faced when promoting his own ambitious vision.

But Skilling was a true Field Marshal, understanding the multi-front theatre spread before him and judging exactly how to conduct operations across so many battlefields.  He chose his subordinates well, commanded their complete confidence, turned them loose with compelling orders and strategies - and won engagement after engagement, battle after battle against his powerful but sluggish and uncomprehending foes, until the whole world of gas and electricity rolled up before him. 

There's a load of rubbish written about Skilling, and Enron in general.  It's fair to say, not a single true insider has written a book yet (Sharon Watkis wasn't remotely 'inside').  Yes, manifestly, the whole Enron thing devoured itself in the end: the reasons are for another day.  Yet Skilling gave a pedestrian medium-sized company - a gas pipeline company! - an extraordinary 14-year run of non-stop growth.  By the end, it was the largest commodities trading empire and market-maker the world has ever seen.  Trading gas and electricity, as Skilling had foreseen, was not impossible, even though it was very difficult.  And then coal ... and paper-and-pulp ... and base metals ... and financial derivatives on everything ...   A mere 18 months after inception, Enron Online was the world's largest B2B site, transacting some $2.5 billion a day, click-and-trade, across more different contracts than you could shake a stick at (approx 2,000).  In every large energy company you visited, you'd find at least of third of their trading books were with EOL: in the smaller ones, often more. 

By the end, everyone was an Enron wannabe.  David had taken on a score of global Goliaths, one after another, and felled them all.  Now, even China plans to open up its electricity markets - and Enron hasn't been on the scene for 17 years. Skilling's legacy is everywhere you look, and very tangible indeed.

Incidentally, he was "released to a halfway house" in August this year.  That's 12 years inside, albeit mostly in low-security.  Few people enjoy being locked up:  but as a rule, middle class people really don't enjoy it.

ND