Twenty Third Floor
Technical Business Advantage

CNN article on Zim’s currency billion for one consolidation

Zimbabwe’s inflation is accelerating towards Germany’s 1922 record of 204 billion percent.

Estimates currently put Zimbabwe’s inflation at between 2.2million and 15million percent. The effect on the exchange rate is proportioate.

So what would happen if Zim were to abandon the Zim Dollar and use the South African Rand as legal tender? It is a possible natural path for Zim to follow once they have removed the “political impediments” to change. However, given that much of Zim’s manufacturing and production facilities are running at 20% to 50% of capacity, in a recovery most economists would recommend an expansive monetary policy to expand production until aggregate demand gets closer to full employment. It should be possible to do this without major inflation since the economy is so far behind full employment.

Namibia, Swaziland and Lesotho are all part of the common monetary union that pegs their currencies to the Rand. Botswana used the South African Rand for a period during the 60s and 70s. According to the SARB, the Rand is legal tender in 21 countries around the world. Ironically, proposals in around 2006 for a common currency across all the SADC countries were based on all SADC countries managing single digit inflation by 2008.

So, clearly Zim is out of the low inflation club. So is South Africa. I’m guessing that has dampened the condescening attitudes that were developing durng a few years of the boom.

Perhaps this indicates that our economies are still too unstable, too unpredictable, with too large differences in output potential and economies in different parts of the business cycle to merge our currencies into one. If European countries were (still are, some might argue) wary to hand over control of their monetary policy to a central entity, one that could not take into account differences in economic growth levels in different countries, how much more should this concern us.

The interesting result of Zim adopting the Rand would be that it would remove the ability to print money (literally and figuratively) to pay soliders and party supporters. That sounds like the collapse of an entire power system. I don’t know whether I really want to recommend that particular path of chaos.

Marketing is naively thought to be mostly art and very little science. While it is true that there is are elements of inspiration and creativity and passion involved, the balance of an effective strategic marketing role is heavily in favour of science.

As a further point to consider, I put forward the proposition that much of really great science involves inspiration and creativity in passion in more than equal measures to a successful marketing decision. Newton’s development of the laws of motion and gravity, Copernicus’ solar-centered world, Pasteur’s painstaking experiments to support and understand germ theory are all well known examples of brilliance and flair combined with method and rigour.

But where does science contribute to marketing? Is it possible to reap the benefits of logic and analysis and rigour without damaging the creative process?

The answer is “absolutely without a doubt” for numerous reasons. I will touch on just one in the next few paragraphs to demonstrate the idea.

Introducing analytics

The most commonly thought of analytics when it comes to marketing is customer analytics. Better understanding of customer behaviour, preferences and ultimately buying decisions is enormously valuable. Take what was done in the past, compare the success rates of the different initatives, and stop doing the ones that don’t work.

Any organisation can benefit from understanding what works and what doesn’t, and shifting resources to those functions that work. Good organisations also understand the value of play and experimentation, and will continue to allow an element of trial and error. Truly excellent organisations combine experimentation with analytics to truly understand on a measurable level which experiments work and which should be tossed.

A real life example of the place of analytics

Let’s consider a very specific example. An old university friend of mine has started a new venture with a unique offering that clearly means a great deal to him. He has the passion, and presumably the product, to make his idea a success. He also had the good sense to plug into social networking platforms such as Facebook to spread the word of his new website and associated content. So far we have an excellent platform for success.

Mistake #1: Ignoring pre-existing science and analytical results

However, the design of the website appears to have been performed without understanding the hard, measurable evidence from a range of pre-existing studies and material. The website makes it difficult to buy. A long slide-show intro precedes access to the main page, frustrating regular visitors to the page (the intro cannot be skipped) and severaly damaging the ability of his site to be spidered and highly ranked by search engines.

So several mistakes have been made by disregarding the clear evidence that has been accumulated through analysing customer behaviour on similar projects.

Mistakes #2: Not performing analytics on web page at the outset

An excellent first step in understanding how customers will interact with your sales channel is to watch customers interact with your sales channel. Before a site goes live, invite some representatives from your target market (friends and family will do in a pinch if budget is tight, as long as you are confident they will give honest feedback).

Watch them interact with your website (or other sales and information channel). Where are they confused? Do they ask many questions? You won’t be there in person for most of your customers. What do they say is good, what do they say is ugly. If one guinea pig says something doesn’t work, that could be personal preference. If all 3 or 4 give similar feedback, the scientific evidence is mounting and a wise marketer would make changes.

This can be a very quick and easy, but amazingly valuable way to understand the strengths and weaknesses of your approach. Don’t assume you are just like your customers.

Mistakes #4: Not starting to collect analytics and data from the start

It is so easy to collect useful information, if you plan it in from the start. Once the system is set up and the process is working, invaluable information will flow with every visit, every call, every surf and every purchaser.

Not setting up to collect data is usually the first sign that the marketer doesn’t understand the value of understanding the customer.

Mistake #5: Thinking science cheapens the experience

Perhaps this should be mistake #1. Many people with great ideas feel that their ideas should sell on their own merit. They view logical, analytical understanding of customers to be beneath them. If the product is good, if customers will benefit from purchasing the good or service from you, then you owe it to them to make it as easy as possible for as many as possible of them to effortlessly find their way from oblivious potential customer to satisfied repeat customer.

If your aim is to build the perfect mousetrap, perhaps it is worth finding out what customers want in a mousetrap, where they like to buy it and how they like to buy it.

Employee Share Options became popular during the tech boom of the last millenium. They were used before, but the explosion across more companies, across more levels of employees and as an expected part of executive remuneration was a product of the Silicon Valley boom.

There are pros and cons for share options. Used correctly, they help to align management’s interests with those of shareholders, share profits objectively and allow startup companies to attract heavy hitting staff without needing to reach deep into pockets for cash salaries and bonuses – especially when the cash doesn’t exist yet. The complexities, abuses, high cost, relatively low perceived value, warped risk taking motivations and difficulty in understanding the workings outweigh these benefits in many cases.

A specific problem is that of underwater options. If the share price decline significantly below the original issue price (commonly used as the strike price), the incentives created by the options are changed. Typically, the incentives either:

• disappear since management isn’t confident of being able to turn the problems around before the options expire; or
• management take on excessive risk in an attempt to benefit from the upside of successful gambles while being largely protected from failure.

In the case of Old Mutual’s Black Economic Empowerment (BEE) deal, the situation is a little different. Direct managerial control is limited, which reduces the problems of the second point. However, the first point will likely lead to polite requests for sweeter deals, restriking or the issue of additional instruments. All in all not a great deal for shareholders.

If nothing is done, and if the share price continues on its current trajectory, it’s likely the deal could expire without the permanent transfer of ordinary shares to BEE shareholders with grave consequences for Old Mutual’s BEE deal.

I’ve used Old Mutual purely as an example. There are many other companies facing similar problems given the state of the stock market and the higher interest rates (to which notional loans are often linked). I’m also not aware of all the details of Old Mutual’s deals and arrangements.

This is a continuation ofa post considering the relevance of an individual investment product development position to a career in actuarial consulting.

An old contact mailed me a couple of days ago asking my view on two possible actuarial positions. He was interested in whether either would be suitable preparation for a consulting or actuarial consulting role in future. I thought the answer might be of broader interest, so I’m copying it, with a little editing to protect the innocent into a couple of blog posts.

Please note this shouldn’t be taken as categorical always applicable advice – just some thoughts:

In-depth knowledge of policy systems and admin is a tremendously useful skill-set in its own right. Companies are always struggling with legacy systems, and the speed, efficiency and flexibility of current systems can generate a competitive advantage in getting new products to market, improving customer service and reducing costs. Although this role would introduce depth rather than breadth to your skills and experience, it could potentially be a stepping stone into a solo consulting career focussed on these areas. Alternatively, if you enjoy that sort of work, there is probably a long-term future for you at the potential employer moving up from coding to systems analysis and improvement.

All insurers struggle with these issues, and I can’t see how this will ever change. As insurance takes off in other developing markets (rest of Africa, Middle East and so on) there will be a range of new companies selling new products to new customers with new designs and special features. This role will always be in demand.

An old contact mailed me a couple of days ago asking my view on two possible actuarial positions. He was interested in whether either would be suitable preparation for a consulting or actuarial consulting role in future. I thought the answer might be of broader interest, so I’m copying it, with a little editing to protect the innocent into a couple of blog posts.

Please note this shouldn’t be taken as categorical always applicable advice – just some thoughts:

Insurers are facing stiff competition in the investment space, both on the individual and corporate side. Competing against investment banks and asset managers, often on more direct terms than in the past, and with the albatross of poor reputation, sluggish reaction to changing market conditions and often a higher cost base mean that insurers need plenty of help in this area. Depending on the specific role, you can get involved in anything from market research and customer needs analysis, creative product design, model coding, profit testing, distribution analysis, customer segmentation and analytics, financial reporting (IFRS, FSV/PGN104, EV, EEV, MCEV, Solvency II etc.), administration system design and implementation, liaison with distribution force, sales team training, product profitability monitoring, policy documentation wording etc.

There is plenty of scope to gain breadth of knowledge, but it is likely that you won’t be doing all of this. I’d check out what they envisage you actually doing, see what is in your “performance contract” if this exists and see whether it is a narrow or broad role, and whether it can become broader over time.

Aside from its relevance to an actuarial consulting career, this is an interesting space to be involved in at the moment. Around the world, insurers are only touching on possibilities of product design and customer information and analysis. South African insurers are probably a little further behind the curve.

Good luck!

Was watching CNN last week, and heard that at least one major US airline, South West, has been making significant use of hedging to manage their fuel costs. Many other US airlines have not been hedging significantly.

Another article mentioned that Lufthansa hedged around 83% of their fuel requirements for this year. Air France-KLM hedged 78%.

Ryanair has gone against a vow not to hedge. Silly thing to vow in the first place.

Typically, the masses aren’t saying what a bad decision it was to hedge given that the oil price has been on the up. Hopefully some will remember this next time airlines hedge and the price drops. It’s not about the outcome, it’s about risk management, focussing on controllable factors and being able to make decisions without the paralysis that huge macro swings can have.

Was enjoying coffee and scones at a Woolies cafe recently. Well, actually I wasn’t enjoying the scones because they had run out. They’ve been making a habit of running out of scones recently. Strange.

But the amusing part of this story came from reading the coffee “Things you didn’t know” table thing. Point number 1: “500 billion cups of coffee are consumed every day”.

Which is fine. 6 billion people on the planet. Many of them in countries that don’t drink much coffeein the rural or poverty stricken areas (India and China I’m talking about you). Then we consider that not many youngsters below 12 drink much coffee. But even if we ignore all of that, they are still saying that on average every man, woman and child on the planet drinks around 80 cups of coffee a day. Every day.

Sometimes basic sanity checks work. Pity they aren’t applied more often. This goes all along the continuum from coffee consumption to investment guarantee costs.