In the January 21, 2012, issue of The Economist, the main focus of both the feature articles and the special report was on the resurgence of “state capitalism.” The magazine’s reporters described a world in which major companies in major markets were either owned directly by national governments, or subject to control or heavy influence, even if they were privately owned or had issued shares to the public.

The stories reminded me that, for the last 21 years of my Pitney Bowes career, I dealt continuously with the encroachment of state capitalism in the postal sector.  In the late 1980’s and throughout the 1990’s, we successfully fought a series of battles with the U.S. Postal Service to keep it from becoming another entity with all the powers and privileges of the federal government, but with none of the regulatory constraints associated with federal government agencies.  Several senior postal officials aspired to create a power base similar to many government-owned entities, such as the Tennessee Valley Authority (which Marvin Runyon, the Postmaster General from 1992 to 1998, had led) or the New York-New Jersey Port Authority.

Fortunately, we defeated efforts by the Postal Service to regulate the mailing industry and compete unfairly with it at the same time.  The Postal Service leadership teams succeeding Runyon and members of his senior team generally tried to operate within the boundaries set by Congress. We had a very collaborative, and mutually respectful, relationship with the Postal Service during most of my tenure as CEO.

The story was very different outside the United States.  While we had similarly respectful and collaborative relationships with the postal officials in the UK, Canada, Spain, Denmark, and Norway, we had a variety of challenges with postal authorities in many other countries.

We saw three distinct challenges:

• Some postal operators, which had appeared to become privatized, acted in very anti-competitive ways in their own nations, and also secured rights and privileges from their national governments that stacked the deck against partners and competitors.  The most extreme example was Germany, during the leadership of Deutsche Post by Klaus Zumwinkel, who resigned in early 2008 for reasons unrelated to his work-related performance.  Throughout Zumwinkel’s 18-year tenure as CEO, Deutsche Post acquired companies all over the world, including a disastrous acquisition of Airborne, a major package shipper, and the worldwide operations of DHL.

In Germany, where Deutsche Post realized most of its profits, postal rates were exceptionally high (well above $.60 per piece), service was not exceptional, but competition was ruthlessly suppressed.  At the end of 2007, a few weeks before Germany had committed to open its market to full competition from within the EU, Zumwinkel successfully prevailed on German legislators to pass a law that created a minimum wage for postal sector employees only, a wage pegged at Deutsche Post’s minimum pay grade.  The immediate result was to destroy its two largest mailing competitors, since neither could secure labor cost advantages over Deutsche Post.

In Italy, Poste Italiane took advantage of complex and onerous labor laws to fend off competition, since these laws made part-time and temporary workers prohibitively expensive.

• In many countries, postal operators expanded into businesses in which the marketplace was amply served by the private sector, but in which the postal operators would immediately have a competitive advantage, because of the implicit protection from national governments.  Australia, Belgium, Ireland, China and New Zealand all started retail banks.  Japan had always had a sizable postal banking system which paid almost no interest to depositors, but which became a huge source of loans to projects favored by politicians.  Prime Minister Koizumi staked his political career on an initiative to privatize the Japan Post, not because there was ferocious opposition to privatizing the mail or package business, but because the heavy governmental control of the flow of bank loans would be jeopardized. He barely avoided receiving a vote of no confidence because his initiative upset the way government favors had been delivered for generations.

Postal operators have played heavily in the money transfer business (competing with Western Union), in retail government services, in the sale of greeting cards and stationery, and in the sale of gift items often transmitted through the mail.  Postal operators like Australia, China, Finland, and Sweden moved seamlessly into mail services businesses. In countries with a strong tradition of state capitalism, these postal operators were able to operate freely in more businesses in which they competed unfairly with the private sector.

• The postal operators often carried mandates and missions inconsistent with a business focused on cost-effective customer service.  France and Canada were prime examples of this problem, as were Japan, Spain, and Portugal. In these countries, postal operators were saddled with explicit and implicit requirements that they keep a minimum number of people employed, even if the demands of the business would not justify such employment.  For Pitney Bowes, the government employment mandates made many of our productivity enhancement tools unusable by these postal operators.  They could not improve their productivity, even if they wanted to, because they were fulfilling social mandates.  Postal ratepayers paid more, in the form of a disguised tax, to create a welfare system for workers who probably could not have secured employment at comparable wage and salary rates.

I was able to experience the ugly underside of state capitalism for over two decades.  It made me realize that the United States should think long and hard about migrating down the path these other countries have followed.  It also is a cautionary tale for large multinational corporations that aspire to compete fairly in major markets in which one or more of the competitors are state-owned or state-controlled enterprises, or in which the state considers a particular industry strategically important.

In the January, 2012, issue of The Atlantic Monthly, there is a lengthy article on the future of American manufacturing entitled “Making it in America”.  In profiling an individual company called Standard Motor Products and a few employees performing manufacturing operations, particularly a 22-year-old single parent named Maddie Parlier, reporter Adam Davidson concludes that the company will continue to perform manufacturing operations in the United States, but it will do so only if it can continually compare the cost of employees versus automated technology, and extract the best economic value from the process.

Employees who do not have high levels of education and technical skill will be continually insecure and will be displaced if they are not continually keeping ahead of the marketplace.  The most painful point the reporter makes is that anyone who starts his or her work career with major family or other responsibilities will have difficulty keeping current with the skills needed.  Maddie Parlier is 22 years old, has completed high school, but has not gone beyond it, is a single mother, and has no spare time or money to take courses and upgrade her skills.  She will be vulnerable to a future replacement by technology.

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On the morning of September 11, 2001, I was in Pitney Bowes Stamford Main Plant building, having a difficult meeting with a group of factory employees, explaining why we needed to outsource much of the low-end product then manufactured in that facility.

I received a call a little bit after 9 am from Karen Garrison, then President of Pitney Bowes Management Services, who had seen the video footage of an airplane crashing into the first of the World Trade Center buildings.  I immediately began to return to the World Headquarters, a few blocks away. During my brief trip back to the Headquarters, an airplane crashed into the second World Trade Center building, One World Trade Center.

As I tried to absorb what had happened, I reflected on the fact that my wife Joyce had worked at One World Trade Center when we first lived in New York City in 1981 and 1982, and that I had been in the building many times over the years to visit customers.  By 10 am that morning, we had set up a command center in our boardroom, from which I ran the company for two weeks after that.  I left the boardroom many times, to address groups of employees both in the Headquarters and in other buildings, and to visit our New York offices.

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Our family was fortunate this past weekend in not experiencing any property damage or loss of power from Hurricane Irene.  700,000 other residents of Connecticut were not so lucky.  However, as I have thought about this disaster and others through which I lived during my lifetime, I have increasingly realized that much of the devastation of natural disasters is not “natural.”

Sometimes, the influence of bad human decision making on the scope of a disaster is obvious: Hurricane Katrina would not have been anything more than just another bad Gulf Coast hurricane, had the levees protecting big portions of New Orleans not failed to protect the city against water damage.  The levees were not built to protect against Category 4 or 5 hurricanes, so a disaster of the type that happened was inevitable and experts were not surprised when it happened.  Experts warned of this kind of problem, but were ignored year after year. Nevertheless, most of the time, we forget the degree to which we can anticipate disasters and minimize their impact.

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There are so many subjects about which to write a blog every week, but, this week, the retirement of Steve Jobs has spawned two separate blogs.  The first was a celebration of his many successes. This will be about his many failures.  The Wall Street Journal quoted an article written by Nick Schulz in The National Review on August 25, 2011.

Unlike Walt Mossberg, whom I quoted the other day, or the many other commentators who celebrated Jobs’ successes, Schulz focused on the fact that Jobs had many major failures along the way, including the Apple I computer, the Lisa computer and the NeXt computer.  He was asked to leave Apple in 1985 and did not return until 1997.  Steven Jobs failed repeatedly and publicly, and he paid in the short run.  However, today, the Apple employees and shareholders are more secure and richer than they ever could have imagined.  He invested repeatedly for the longer term.

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Steven Jobs resignation from the CEO position at Apple has given all of us a moment to reflect on how profoundly, as reporter Walt Mossberg observed in the Thursday, August 25, 2011, issue of The Wall Street Journal, in a piece entitled “Job’s Legacy: Changing How We Live.” We Jobs was transformational in his work with Pixar animation and made Apple Computer one of the most valuable companies in the world, I will focus on what he accomplished at Apple Computer as a creator of great products and services.

Today, I have an I-Mac desktop computer, as does my wife, a MacBook Air laptop, as do my sons and my daughter, an I-Phone, as does my wife, and an I-Pod, as do every member of my family.  My wife even has an I-Pad, so she can read her emails more easily.

I prepared this blog, along with most others, on my MacBook Air, which is my work computer, since I take it everywhere.  It holds my PowerPoint presentations as well, and my Kindle software that enables me to read books anywhere I take my computer.

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I have occasionally written blogs on the degree to which the jobs crisis has been made worse by government laws and regulations.  However, even I was shocked by what guest columnists Chip Mellor and Dick Carpenter wrote in an op-ed piece in the July 28, 2011, issue of The Wall Street Journal entitled “Want Jobs? Cut Local Regulations.”

I had previously understood the excessive licensing requirements states impose on professions that can be available to people without 4-year college degrees. For example, I learned this past year that, in Connecticut, a person aspiring to cut hair at a beauty salon must take a course costing $20,000 for one year and pass a licensing exam.  While requiring barbers and beauticians to be licensed is a reasonable exercise of state regulation, because of the degree to which a beautician is handling and applying dangerous chemicals to their customers’ hair, scalp and face, I believe that there has to be a lower-cost way of preparing and qualifying individuals for this profession.

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Every once in a while, something happens at a sporting event that provokes a discussion of much deeper societal values. Such an event happened Saturday, July 9, at Yankee Stadium. Christian Lopez, the fan who caught Derek Jeter’s 3,000^th hit, a home run, made an instant decision to give the ball to Derek Jeter, even though he had an absolute right to keep it, and maximize the economic benefit from securing a ball that is very important in the history of baseball.  To put this into perspective, the value of what the Yankees gave him for the ball was probably worth around $50,000.  The ball could have fetched $400,000 in an auction.

Whether he made a values-based judgment that he had simply received a windfall and did not deserve to profit simply from being in the right place at the right time, or whether he believed that he would receive more long-term economic benefit from giving up the ball does not matter: he did an admirable thing.

Everyone’s behaviors are on a continuum from being totally generous of spirit to others to being totally mercenary and interested only in helping oneself.  To be generous of spirit does not mean that one withdraws from the capitalist system, lives like Mother Teresa or Paul John Paul II, and deny or give away everything material.  A person whom I consider an example of practicing behaviors that are generous of spirit, and whom I have always admired, and got to meet by serving briefly on a board of directors with him, is Neil Armstrong, the astronaut who was the first person to walk on the moon.

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In the July 6, 2011, issue of The Wall Street Journal, Roger Bate has written a column entitled “Beware the Risks of Generic Drugs.” He specifically zeroes in on drugs produced from ingredients sourced in China.  Although this story is about the issues associated with generic drugs, the bigger question it raises is why pharmaceuticals would cut corners on such critical processes as the sources of ingredients for their drugs. At least one of the root causes is the relentless pressure governments, insurance companies, and employers feel to reduce costs by reducing the acquisition prices of drugs.

When governments, private insurers, and self-insured health plans try to drive drug prices down and, specifically, to convert patients from using generic drugs instead of branded drugs, there is a limit in terms of cost-saving opportunities available, without putting patients at risk.  To push cost savings beyond that point inevitably raises a huge risk of acquiring generic drugs priced at a level that does not optimize patient safety.

We cannot solve our health care cost crisis entirely primarily by driving prices down for drugs, supplies, devices, and medical services.  We have to reduce unnecessary usage of the health care system, and to drive the healthier behaviors that are the most sustainable way of reducing health care system usage.

Publicly held businesses and governments under stress for excessive costs often have the tendency to flex their muscles in procurement processes to demonstrate their ability to save money.  The unit cost savings are visible, the savings opportunities are often immediate, and the purchasers can present themselves as fiscally responsible.  Moreover, it is far more comfortable for payers to beat up on suppliers through the procurement process than to deal with the messy questions associated with inappropriate usage of the health care system, or driving people to engage in healthier behaviors.

There are two things wrong with relying on procurement strategies as the primary cost reduction tool:

• Unless there are tight controls on what is purchased, cost reductions are often covered by sellers cutting corners in what they are providing, or reserving the right to charge for what had been given away.  Government contractors have mastered the process of low-balling initial contract price offers, and then making huge profits from “extras” which are inevitably required by the government at a later time.  The so-called savings are phony; they are merely costs that are deferred to a later time and are often higher than a more comprehensive competitive bid.
• The sellers who agree to accept lower prices and try to honor them according to their terms often find themselves unable to perform profitably.  Over time, the pool of sellers willing to bid on business that is consistently likely to be unprofitable shrinks.  Eventually, the purchaser has no competitive options.

In the pharmaceuticals context, the corner cutting can be fatal to patients, as was the case with heparin.  Although I obviously cannot know what happened in every health plan procurement negotiation, I would not be surprised that purchasers which drove a hard bargain on pricing for generic drugs created an environment in which the supply chain functions of pharmaceutical manufacturers attempted to acquire ingredients for the drug at a price that could not be supported with the extra cost of a tightly controlled supply system.

There are no “magic bullet” ways to take drug prices down beyond a certain point.  Major drug manufacturers are administratively inefficient; they spend excessively on marketing and sales; and they may still have less efficient research and development processes.  However, beyond a certain point, cost cutting will cause people in their organization to take actions that put processes at risk.

Employees of pharmaceutical companies are not excessively evil or reckless compared to other businesses or governments; this is true of every large organization.  Employees under severe pressure anywhere to cut costs make stupid and reckless decisions to keep their jobs.  They particularly cut costs in areas in which the consequences are less visible or more likely to appear at a later time, especially if they can transfer the risk to someone else.  They are unlikely to go after the most sustainable cost reductions, which involve messy structural reform of their organizations.

In the health care marketplace, this was illustrated particularly with the Johnson & Johnson manufacturing safety problem in the last few years.  Much of the publicity about that case demonstrated that the root cause was a culture that, over time, became excessively focused on cost cutting at the risk of patient safety.

Relative to other areas of health care, the same principle applies: there is no free lunch when costs are cut excessively in the procurement space.  One major firm was very happy with the fact that its insurance plan administrator significantly reduced the payments due to physicians, hospitals, and other healthcare providers. The plan administrator secured a very good long-term contract because it presented itself as having a better ability than other administrators to negotiate prices with providers.

Unfortunately for the Company, the consequence of this hardball negotiation process was that many providers left the network and stopped treating patients with whom they had long-term relationships.  As a result, the Company lost in two ways:

• Some patients stayed with these providers, who were now out of the network and were charging much higher prices.  Even with lower reimbursement percentages for out-of-network care, the Company still paid more.  Out-of-network costs shot up.
• Some patients changed providers, received disruptive and suboptimal care, and were very unhappy with the Company for causing this to happen.

As a CEO, I was never comfortable with strategies based predominantly on procurement-based price reductions.  They tended to work for 2-3 years, and then fell apart.  The better strategy was to work with vendor-partners to get better products and services through sustainable cost reductions.  For example, I always liked solutions in which parts were re-engineered or packaging was reduced, or a less expensive, but equally reliable, way to ship the product was found.  These kinds of cost reductions were more challenging, but they worked.  Cost reductions based solely on price concessions struck me as a very lazy way to reduce costs.  I supported them, but, to a limited degree and for a limited period of time.

Ultimately, the challenges of reducing health care costs will require us to make deep and broad structural changes on how we live our lives, and allocate societal resources.  The move from branded to generic drugs is a small step in health care cost reduction, but, like every other, it has limited value and has to be managed with great care.

I have been struck by the huge perception gaps between those in positions of decision-making authority and the broader population affected by their decisions.

These gaps matter because leaders cannot make good decisions when they do not understand that categories within which they think about the world are out-of-date or even just plain wrong.  Aside from the increasing complexity and interconnectedness in the world, there are three reasons for this:

• Senior leaders continue to be isolated from the day-to-day environment around them, even though isolation is having progressively riskier consequences;
• Everyone is operating in more fragmented media environments in which it is harder to get a holistic view of what is happening; and
• Even if we understand a particular issue, geography, country, market, or culture, it changes so fast that our knowledge become obsolete more quickly.

Senior leaders, particularly older white males, are isolated from what is happening in their organizations, as well as the societies of which they are apart.  In particular, they broadly underestimate diversity and complexity in our society, as well as other societies.

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