We are often asked, “What do I need with a consultant, I have been running my business successfully and so has my father before me. We don’t need neighborly advice but want to expand our operations both in this country and internationally. “We are unfamiliar with tariffs, transfer pricing, shipping and dealing with foreign governments. We have a week or so to devote to learning it due to the fact that our union is walking out and we need alternative manufacturing, where do we go and how do we get there?” Let us circumnavigate the answer for a bit and talk about what a consultant is and what he does.
We at Chapman hold that an advisor or consultant is a fiduciary, and is obligated to give 100% to his employer. Possibly more importantly, consultants are also the ultimate whipping boy that can be sacrificed when carefully laid plans result in disaster. One of the most famous examples of using a consultant as an excuse for poor behavior and tarnished decision making hunkers back the nascent Supreme Court when John Marshall was holding sway. Unfortunately, it appears that after hours the Justices would gather together in what they called “consultations” and imbibe seriously in the fermented grape that were made available by subordinates. However, it was not long before the Supreme imbibers caused numerous rumors to circulate in Washington regarding drunken behavior on the part of our senior lawmakers. A decision was reached by the court, the lawmakers agreed that they would not “consult” if it was raining outside.
Justice Marshal, the moving force for tee-totaling was never one to go back on his word and the very next day he advised one of his fellow judges, Joseph Story to look out the window to determine whether or not it was raining before opening the wine cellar. His associate immediately reported back that the weather was indeed clement without a hint of rain. Marshall without so much as a hesitation countered this statement with “I think that this is the shallowest and most illogical opinion I have ever heard you deliver. You forget that our jurisdiction is as broad as the Republic, and by the laws of nature it must be raining some place in our Jurisdiction. Waiter, bring on the rum!” Some of the greatest decisions in our nation’s history came from this court of justices who were usually drunk by noon.
The point of the above anecdote is that no matter how circumspectly enumerated and no matter how thoroughly researched a subject has been, there can still be any number of observations on both its implications and end result. In the investment banking community we call the action of hiring a consultant who you know will share the decision that you have already made, “covering your ass.” “Covering your ass” serves a duality of purposes but the primary one is that if the decision you reached turns out wrong, you can always point to the fact that some very learned authority who received a substantial stipend for his services agreed completely that you were correct. Folks that can argue any side of an issue for a price are readily available for a price and we wonder how these folks are able to sleep at night. However, the consultants, right or wrong serve a higher purpose with their mental gymnastics which is called “avoiding a lawsuit” or “keeping your job” by entrenched management. Thus the expression, “A consultant is someone whose approval is sought after the decision has been made” or even better said by the Oscar Wile, “A consultant is an ordinary man away from home giving advice.”
This concept is especially accurate when your adviser was a member of the bosses’ family. As E. B. White once said when someone asked him who went about the analysis of humor; he stated that “it was like dissecting a frog. Few people have any interest in the project and the frog dies of it.” When the “cover the ass” consulting document is completed a number of things can happen to it; it can be sent to the firm’s lawyer for safekeeping to be removed when the plan it embraces breaks down, in the alternative it can be kept in a drawer and shown to admirers for its excellent binding or when no longer needed it can be put up for sale on Internet to graduate students working on their thesis. However, in the last analysis, the report was probably so compromised by corporate necessity that it would probably be awarded a failing mark in spite of the extraordinary talent put too work in its creation.
Consulting can be perverse as well. Many of the grand wisdoms offered by the eminent thinkers of our time in reality are hopelessly redundant and only because there is a certain rhythm to their output is anyone whelmed. So are many of the issues that these monoliths are asked to address. Willie Tyler, one of the intellectual giants of our era was asked for his opinion as to why lightning never strikes twice in the same place. Without too much hesitation, the ingenious Mr. Tyler stated that “it didn’t strike the same place twice was simply because that place was no longer there once lightening destroyed it the first time”. Or the advice offered by Ann Landers, the self proclaimed authority on relationships between men and women, “If you want to catch a trout, don’t fish in a herring barrel.”
You can clearly perceive from that response why the woman appeared in over two hundred newspapers every day with explanations for one and all about what you should or should not do on your second date. However, Landers’ statement on sexual relations pales when compared to Silent Calvin Coolidge’s retort when asked how unemployment occurs from a macro economic point of view with emphasis on the time value of money. He correctly articulated the fact that “When more and more people are thrown out of work, unemployment results.” WOW, what perception, now you can understand why Cal was elected President.
All of us have certain expertise and to be a consultant, one doesn’t necessarily have to go to school. As a matter of fact, many politicians are consultants but are wearing clothes that identify them as representatives of the people they are supposed to serve. While this is true in many cases, in many others it is not. What was the job that Senator McCain was hypothetical job the Senator was supposed to be doing when he was engaged by the head of Lincoln Savings and Loan to keep that corporation alive in spite of their wallowing in red ink and fraud. Instead of the money going directly into McCain’s pocket most of the money that was paid by the bank went to the campaign funds of McCain and four other senators’ political campaigns. All were either censured or cited by their cohorts for questionable conduct. Senior Government people that lobby fob undisclosed clients are breaking their faith with the American People and in this case, the senators were acting in their own best interest with little though about but protecting the public. Their little capper cost American Taxpayers over $2 billion in this matter alone and that is excluding the money that went down the in the stock market when the Lincoln Savings and Loan was flushed down the tube.
I am a New Yorker and I can well remember the time when the city’s economy went south and the South Bronx began to look a war zone. Buildings began to decay, crime and drugs ran rampant and industry packed up and left; causing a appalling situation to become a disaster. Things became so bad that the area was designated as a disaster area and the politicians in New York and at the highest levels of the Federal Government attempted to find a solution. Through this ugly mist, an unlikely hero came forward to save the day. His name was Fred Neuberger and he was a gun totting ruffian of the first order who knew enough to bring in John Mariotta, an Hispanic with all of the right credentials; a born again Christian and a high school dropout along with having the morality of a skunk. These two characters took a Bronx garage, named it Wedtech, took it public, hired drug addicts and minorities, became a defense contractor that was exempt from critical evaluation because of their hiring practices and proceeded to steal everything that wasn’t tacked down.
The deadly duo didn’t have enough credibility to pull their stunt off by themselves so they hired a string of consultants to affiliate with them and advise them on how best to milk the public. These included such political heavyweights as Bronx Borough President Stanley Simon, Vito Castellan, a National Guard General who had several wives, Congressmen Mario Biaggi and Robert Garcia and Edward Meese’s (then Attorney General) number one honcho, E. Robert Wallach. All of the above folks were not only helpful but well paid and there is not one who wasn’t ruined by their association with Wedtech and many of these clowns went up the river. These folks had signed on as political consultants in order to get Wedtech none-bid government business and get business they did. Wedtech was able to get over-the-market prices for defense orders and simultaneously was able to pay minimum wages to their ghastly crew of employees who were mostly permanently out to lunch.
To some degree, lawyers have become consultants as well, by being willing to advise their clients that the contemplated business that the corporation is entering conforms with all of the necessary regulations and is a legal enterprise. Smart corporate executives understand that if they receive a memo stating that their honorable attorney’s have examined the issue and found it pure as the driven snow, they have received a get out jail card. The lawyer goes to court and defends his client of the criminal charges that have been levied and when the client loses the case, the lawyer claims that his client would not have taken that path without the lawyer’s evaluation that everything was indeed legal and proper. This defense tactic raises issues regarding intent and certainly, more often then not, allows the corporate criminal to not only walk, but more often then not, pocket his ill-gotten gains. Interestingly enough, such an action if it could be proven would become an illegal collusion between the lawyer and his client; however, attorney client privilege doesn’t not usually allow courts to go down that road. The old saw espoused by Howard Scott that “A criminal is a person with predatory instincts without sufficient capital to form a corporation.” Apparently Mr. Scott was born in another generation before we learned the term, “White Color Crime.” Balzac, was right-on when 200 years earlier he stated that “Behind every great fortune there is a crime. “
To a large degree, I am being somewhat flippant in addressing this serious subject. However, in reality, within the litigious society in which we find ourselves, class action lawsuits have become a way of life in our economy and protecting the corporate decisions makers is not only coherent, but it also operates to decrease the expenses which are incurred regularly for the corporation’s annual bill for Directors and Officers Liability Insurance Policies.
How would you have liked to have Bill Gates, Microsoft’s founder as your personal consultant? This can be answered with an affirmative, maybe. When acting as keynote speaker at one of the COMDEX computer Expos, Gates stated that “if General Motors had kept up with technology as the computer industry has, we would all be driving twenty-five dollar cars that got 1000 miles per gallon. However, General Motors was hardly pleased with this analysis that held them up to ridicule and vowed reprisal. They put their greatest minds to work on this critical project and hired consultants for their consultants to give them feedback on a counterattack. General Motors in their infinite wisdom came out with their analysis of the question as to what the computer industry would look like if they had the same logistics as those producing automobiles.
1. Every time they repainted the lines on the road you would have to buy a new car.
2. Occasionally your car would die on the freeway for no reason, and you would just accept this, restart the car and drive on.
3. Occasionally, executing a maneuver would cause your car to stop and fail and you would have to reinstall the whole engine. For some strange reason, you would accept this too.
4. You could only have one person in the car at a time, unless you bought “Car 95” or “Car NT”. But, then you would have to buy and install more seats.
5. Macintosh would make a car that was powered by the sun, was perfectly reliable, ran five times faster, and was twice as easy to drive, but would only run on 5% of the roads.
6. The Macintosh car owners would get expensive Microsoft upgrades to their cars which would make their cars run much slower, and begin to crash.
7. The red “oil”, “gas” and “alternator” warning lights would be replaced by a single blue “general protection fault” warning light.
8. New seats would force everyone to have the same size butts.
9. The airbag system would ask “are you sure?” before going off.
10. If you were involved in a crash, you would have no idea what caused it, or what you can do to prevent subsequent crashes from occurring in the future
There are always two sides to every story, and as they say, what’s sauce for the goose is sauce for the gander. However, firms such as McKinsey & Co., and Booze Allen and Hamilton hire some of the brightest people available and have impeccable standards. While these folks have high IQs, they also are primarily concentrated into meticulous disciplines. The CPA firms also offered consulting but in the anxiety to grab some extra bucks from their clients they were creating a captive customer and the charges began running as high as 10 times what they were charging for their accounting services. The United States Government looked at this setup and determined that this was not an arm’s length transaction and the reality was that accounting firm was sending its client to a sub of its own firm and that this was about as far from dealing from the top of the deck as you can get. Interesting enough, there is certainly a price for experience and while the accounting firms pushed their customers to do business with themselves, the local contractors usually depend upon word of mouth or satisfied customers for referrals. The story about the plumber is literally a classic. “A plumber was called to fix a leak. He looked at the pipe, gripped the hammer with both hands, struck the pipe as hard as he could, and the leak stopped. He presented the customer with a bill for $250.35. The owner was furious. “This is outrageous; you were here only two minutes and all you did was hit the pipe.” The plumber itemized his bill. Wear and tear on the hammer – 35 cents. Knowing where to hit — $250.00.”
Enron was able to visually demonstrate the problem that is created when the accounting firm picks themselves as consultants. If you had one problem to begin with you now have doubled your trouble. When push came to shove, Arthur Andersen over the years it acted as an accountant for Enron, averaged about $1 million a week in billings with fully 50% of that total being used to pay their captive consulting subsidiary . God only knows what they were consulting on, for sure it was not in trying to keep their client on the right path. As for Andersen’s role in fraud, the Big Five went to the Big Four when the firm was criminally indicted for fraud by the Federal Government. In the final analysis, Enron was not paying Andersen for accounting work; they were paying them to certify a series of phony numbers and not to do the accounting. In other words, consultants and others can be either paid to do something or they can be paid to appear that they are doing something when they are not.
As it related to Enron, when the rubber hit the road, everybody that lost money started to scream and out in front of everyone else was CALPERS, the California morally oriented money manager that probably represents the largest single cache of investable funds in the universe next to the Japanese Post Office. They made a stink that about the bad guys at Enron that was loud enough to be heard half way around the world. However, what they didn’t say was that they were one of the lucky investors in the Enron private partnerships that were in reality siphons primarily in exist with the sole aim to remove money from the Enron shareholders and reroute it to the members of these elite partnership. On one hand CALPERS was complaining about fraud and on the other they were part of the gravy chain. They had created what is called a novation by investing in one of the vehicles that actually led to Enron’s downfall. As the philosopher Joe Mirachi said when referring to a particular senator, “Early today the senator called a spade a spade. He later issued a retraction.”
So many of the great financial schemes in history are aided and abetted when a gluttonous advisor loses his objectivity by being lured away from his firm with the promise of substantially more remuneration by the corporation the he is advising. The advisor suddenly is compromised and becomes the advisee and from this point forward he is a captive of his own greed. Faster than you can count to ten, our now less than solid citizen initiates inter-relationship with his form associates and endeavors to push every button they have in order to all the right buttons to compromise their judgment, including compromise, bribery and gifts. It has been argued time and time again that accounting independence is a failed concept having no bearing whatsoever in reality. The folks that do the auditing are paid by the corporation to agree with them and if and when they don’t, they are relieved of their position. Sadly, this does not happen often enough and the public is loser due to the fact that we are always reading things through the rose colored glasses designed by well paid auditors.
You can read their ratios until you are blue in the face, but they do not show the fact that on occasion, the accounting firms that are the company’s outside auditors, have been compromised or are just plain stupid. We are all guilty of at least an occasional stupidity but a compromise can take many forms. However, the majority of companies who have shown fallacious numbers have been aided and abetted by their accountants. Some of the classic examples of cooperation by the accounting firm are Phar-Mor, Crazy Eddy and McKesson and Robins which was the first company to be charged with violating the 1933 and 1934 Securities acts as well as the Exchange Act. However, they were only getting started and in 2001 got caught against and thus had become the not only the first but the last at this point in time.
W. R. Grace became a classic case in accounting cover ups orchestrated by no lesser a person than the highly esteemed, Peter Grace himself. However, most accounting problems occur because there is no rational inventory count or an inaccurate one. A classic example of that was ZZZ Best where a prepubescent president was able to show massive assets through the gullibility of their outside, then Big Eight accounting firm. This act of cooking the books was accomplished in spite of the fact that they neither had any assets nor did they have any sales and the only workers they had were out of work actors hired for the day to pretend they were busy when the auditors stumbled around the location to see if everything was going as planned. Congress had a field day with this at best sloppy work in a transaction where two sets of accounts were censured, and sued, where one of the lawyers for the company was bared from practicing in front of the Securities and Exchange Commission for life and the to cost investors was over $200 million. The accounting firm and the lawyers were made to cough up an equal amount.
While our firm does not have the unlimited horses to compete with those consulting firms that are able to hire specialists in every industry, we are able to concentrate on defining what ewe believe will be the successful products and industries of the future. We simultaneously attempt to redefine our client’s corporate route. No industry on earth has guaranteed permanence (other possibly than the world’s second oldest profession) in and of itself and those managements that tend to sit on their laurels also tends to evaporate with the same rapidity as that of the Dodo Bird. Change is omnipresent and as sophistication and technology become de rigor many former monoliths of industry are going to be lost in the shuffle of the current ever increasing economic evolution. Newspapers, radio and movie theaters are quickly becoming pass?8217;. Service industries are prospering while blue collar occupations are moving to greener pastures abroad. We are becoming a nation that is mortgaging its national resources while continuing its ability to exert a pull on the international brain drain. We have gone full circle essentially in the arena of economic competition. We are brawny at the bottom of the barrel, (the sale of our natural resources and agricultural products to others) while, still maintaining a tenuous hold on the gold ring at the top by leading the technology charge.
However, from an administrative point of view, we may be seeding our manifest destiny to intellectual and religious hacks that prefer to accept as true in an essential order of things as opposed to scientific explanations for hose matters which are presently beyond our ken. This is a dangerous philosophy and is dangerously flawed. Religion along with its recently evolving first cousin, Creationalism caused minor epiphanies such as the Dark Ages and intellectual stultification. While this may have been all well and good thirty years ago when China had a somewhat different agenda, they will eat our lunch if we give them any room at all. We are in an economic war which will not be fought by the infantry of the Crusaders.
China will hardly allow creationist views stand in their way of potential world economic and intellectual domination. This is a holy war of survival fought with weapons inconceivable a decade ago. War is waged through the Internet and secrets are stolen with a stealth that would make the KGB proud. What will the religious fanatics have to say when we have been officially downgraded into a third world country? “We are sorry or it won’t happen again”; sorry, it is too late for that my friend. You can cry to the heavens that the universe was created by this or that deity, but there will be no answer. WE are fighting a Moslem enemy that although fleeting and hardly visible at least exists. In giving away our technologic heritage we are effectively resigning from control over our own destinies. We are engaged in a battle of philosophy not bombs and until our leaders begin to smell the coffee burning, we are up the creek without a paddle.
Future generations along with our industry will suffer from this inane folly and there is no known cure for the disease once it became entrenched within us. The historic problem of pandering to idiocy has been endemic and it is akin to a computer virus that has run rampant over our entire system. One of the best anecdotes relative to this problem is the age old story of the young banker and the older banker. The young banker asked his senior what the secret of his success was. The old banker stated that it was “Good judgment.” The young man questioned further, “How do you get good judgment?”, and his mentor logically replied, “Experience.” Not satisfied the young banker asked “How do you get experience?” and the old banker responded, “Bad Judgment.”
Thus, in consulting as in life, youth is indeed wasted on the young and you don’t really know where you are headed until you have been there more than a few times (It never sinks in the first time). Sadly, those that have not been through the muck have little understanding of how the good things in life such as avarice and greed can lay to rest before your time. By the time, the light shines, the shooting match has ended and you have become a dead duck. Consultants that are able to give solid advice are folks that have been around the block more than a few times. Many of the youngsters caught in the Dot-Com disaster had never seen an entire industry go south and didn’t believe that it could happen. We are all poorer for their miscalculations but this is indeed what occurs whenever there is a pre-emption of responsibility. However, all these youngsters had to do was to study economic history or have gone through the vicious cycles which are like the waves hitting the beach. Each one had its own particular character, change is nature’s way of maturing and it is inevitable. Cycles while varying to some degree are omnipresent and tend to recur with obnoxious regulatory. The Gold Crisis in the 19th Century, The Tulip Bulb Craze in the 17th Century, the New World Schemes in the 18th Century and the Savings and Loan debacle in the 20th century and these are only the highlights. Change is an absolute imperative and as Thomas J. Watson Jr., the founder of IBM explained, “Of the top 25 industrial corporation in the United States in 1900, only two remain in that select company today. One has its original identity; the other is a merger of seven corporations on that original list. Two of those 25 failed, three others merged and dropped behind. The remaining 12 have continued in business, but each has fallen substantially in its standing.”
Countries as well are subject to change and animals mutate or evolve. First it was Egypt, then Greece, than Rome, then the Huns, the Visigoths, the Ottoman Empire and then during the period shortly after the Reformation, it Holland was at the top of the heap, when it fell, Portugal assumed international control followed by England, Spain and France; each of whom assumed a leadership position. Shipping and agricultural production in those days were the keys to power. Mass production gained cache in the 19th century and the United States began a century and a half of leadership. Today, there are many nations vying for the gold ring of world domination and China appears to have drawn the ace of spades. This is a country not weighted down with stagnating religious vibes or entrenched bureaucracy that is losing its way or biased by pork. As we cede our industrial power to them, we also will be ceding technology, creativity and dominance.
Chapman’s advice further defined in our “Point of View” section of our Web Site attempts to refrain from hackneyed concepts of any divine birthrights or other entitlements which anoint us with foul smelling vapors. These will-of-the-wisps do not exist in our modus operendi and we attempt to remain objective, untainted and immune from palm readers, crystal ball gazers, religious and economics faddists, witchcraft, sorcerers, goblins and soothsayers. The facts will ultimately speak for themselves and those that delay on tenterhooks for economic salvation may well achieve it but surely not in this universe unless a better road can be traveled.
To take a look at the kind of analysis the firm does you would probably enjoy reading a History of the World’s Real Estate with quotes directly from the construction team.
 Financial Times Survey, Friday September 19, 1997