The telephone and Internet service were so bad for the eight days we were away that we were effectively cut off from communicating with others except for very brief periods when we could find a signal at a handful of locations.  Moreover, when there were power outages because of weather and horrific heat, we also were unable to use the landline phones in the rented house or the wired Internet service the owners had provided us.

My purpose for telling this story is not to complain about Internet or cell phone service, but to point out the vulnerability we face in our modern, high-tech society.  People make the faulty assumption that paper-based communications, TV and radio communications, and face-to-face communications are less necessary and can even be allowed to deteriorate because we have electronic communications available.  The cover story in the July 3-9 issues of The Economist, entitled “Cyberwar: the threat from the Internet” highlights only one of the many risks associated with our increasing dependence on the Internet, the vulnerability of the Internet infrastructure to cyber-warfare tactics.

After the events on September 2001, cell phone service, as well as landline telephone communication became useless because the demand quickly overtook the supply.  ATT has created a similar ongoing problem by its success in marketing Iphones: it has insufficient capacity to address the huge increase in system demand for data downloads.  The GAO issued a report in October, 2009, which found that, in the event of a pandemic, and a quarantining of  a significant part of the working and school-age population, the Internet would break down, especially in residential areas, largely because school children staying at home would overload the system downloading YouTube videos and accessing Facebook pages.

There are four critical actions the federal government needs to take:

• It needs the power to shut down recreational uses of the Internet in times of national emergency, especially recreational uses that consume a huge amount of bandwidth.  Amtrak already precludes the use of YouTube when it provides Wi-Fi services on its Acela trains.  This is a simple example of what needs to happen everywhere during emergencies.
• If we are to become much more dependent on wireless Internet services for uses like having electronic health records on cell phones, we need to make it far easier and less expensive for common carriers like ATT, Sprint, Verizon, and T-Mobile to build cell towers.  Too many communities have a “not in my backyard” mindset that significantly reduces cell phone coverage.  This is actually what was a major part of the problem in Cape Cod: there are very few cell towers relative to the demand across Cape Cod and Martha’s Vineyard.  There are many advocacy groups who think that cell towers cause cancer in surrounding populations or simply depress property values.  There is no credible evidence to support the cancer fears, and the property values argument goes out the window if cells are essentially located in every community. Today, cells can be built in such a way that they are not visible to anyone who does not already know they are in place.
• Carriers have to be persuaded to charge for data usage.  The notion that a person who accesses billions of gigabytes of data by playing YouTube videos on a cell phone should pay the same fee as someone who uses the cell phone solely for low-bandwidth-consuming voice conversations is crazy.  In fact, if we believe that having real-time universal access to wireless communications is critical for national security, public health emergencies, and effective interstate commerce, the government may have to require the carriers, by law, to eliminate pricing systems that invite overload, and prevent wireless systems from being broadly used. We have a difficult time changing to usage-based pricing when something has been priced at either a fixed amount or given away, but our collective wellbeing depends on having the Internet shared in a thoughtful way.
• The public needs to be educated to the fact that the Internet does not contain unlimited capacity everywhere.  This is a myth propagated by advocates of electronic communication.  Ironically, when former Vice President Gore referred to the “information superhighway” in the 1990’s, he was being more accurate than he realized.  Superhighways are almost always overloaded, because they invite more people to drive than the available capacity can allow.  Bandwidth, especially wireless bandwidth that depends on the building of cells in residential areas, cannot stay apace with bandwidth-hungry uses of the Internet that result from downloading or viewing of color and sound intensive videos.  The Internet is like the proverbial commons in the center of a rural town: the more cows that graze on the commons, the more quickly the grass that provides nutrition for the cows gets used up.

People sometimes forget that the concept of the Internet was invented by the Defense Department in the 1960’s to protect us from the consequences of having our traditional landline phone systems incapacitated in the event of a war.  We have to get back to basics and protect both our wireless communications and wired Internet systems for everyone’s benefit.

• Excessive benefits for government employees and their families;
• Excessively high payments to vendors; and
• Excessively high welfare payments.

I would also suggest that states, over time, because of well-intended, but poorly conceived, laws, substituted unproductive clerical and bureaucratic rules-oriented employees for those who did productive work.  For example, governments today very likely have more clerical and administrative employees, but lack skilled professionals of all kinds to manage projects and programs.  In schools, there are many more administrators and service employees relative to teachers than there were a generation ago.

Benefits

Let’s look at each of these quickly.  Retirement benefits ballooned out of sight everywhere in government for a simple reason:  they largely escaped capture in a current budget year’s presentation.  The private sector has had to account for the totality of pensions and retiree medical obligations on its income statement since 1992, but government, to this day, only has to account for the current year’s costs, not any portion of future year obligations.  Like the stock option grants given to executives of large companies, which appeared to be “free,” and which were abused as a result in the 1990’s and in the first half of the past decade, current year salary increases could be traded off for future year retirement benefits, and politicians could look good for “balancing the budget.”  In effect, they were mortgaging the future.

For example, in Connecticut, a state with about 52,000 state government employees, our future retirement obligations are over $40 billion, or almost $800,000 per employee, and the collective bargaining agreement that granted these excessive benefits started in 1997 and runs through 2017.  Governor Rowland was irresponsible in doing this, but few members of the public knew about it at the time because it did not show up in any income statement.

Vendor Costs

State and local governments routinely pay more for goods and services, despite their larger purchasing power.  The reason is that they have so much bureaucratic process built into procurement that many potential vendors refrain from doing business with them, and those that do add significant dollars to the bids to cover the additional costs of doing business.

When I chaired the Governor’s Reform Commission on the Connecticut Department of Transportation, we did a confidential survey of vendors, who told us that they routinely added about 25% to their normal prices when doing business with the State because they were paid later and had to spend more money complying with useless processes and rules.

Many of these processes exist either because of pressure from special interests, or because the State has been forced by its legislators to put into place processes to insure “fairness” in contracting.

Welfare Payments

I strongly believe that government needs to help its poorest citizens, but I also believe that governments do a very poor job managing the welfare payment and service processes.  I was on the board of directors of a small social services organization last year, and I was amazed at the degree to which the State government loaded this organization with requirements that added cost and actually made service delivery more difficult.

State Workforces

If I think back to the early 1990’s and my dealings with the State of Connecticut, it had highly competent employees.  Even today, those who work for the State are driven to do the right things for the public.  The difference is the mix of workers the State has today, versus what it had a generation ago.

My interactions with the State in the last few years in serving as a volunteer on transportation and health boards have caused me to interact in a different way from the way I did 10-15 years ago.  At that time, when I was dealing with the Department of Transportation, the people with whom I dealt were subject matter experts who were focused on the core mission.

Today, I am more likely to work with lawyers and other clerical and administrative people who are assigned to enforce compliance with an administrative process.  In my current assignment as Co-Chair of a Prevention Advisory Committee, I have observed many dedicated and highly intelligent State employees reduced to communicating frequently with highly energized and very smart volunteers about process requirements.  Whereas these employees used to be able to help, they are now forced into roles that turn them into a hindrance.

Unfortunately, this is an all-too-familiar story: a governmental entity that irresponsibly agreed to rich pension benefits to allow government workers to retire very young, receive an exceptionally high percentage of their pay, and have taxpayers feel the financial burden decades later.  However, the example provided relative to Yonkers, New York, is especially outrageous.

Final Year Overtime

A pension is usually determined by multiplying a percentage determined by the number of years of employment by a number called the “final average earnings.”

Many governmental pension plans calculate final average earnings to which a pension plan percentage is calculated in terms of pay earned in the last year of a worker’s employment. The percentage calculation is usually in excess of what private sector workers get. The final year is always the highest year of pay for government workers, and the calculation of earnings based on the final year’s W-2 income invites abuse.  Most private plans prevent abuse by averaging the highest five years of earnings.

Many government workers volunteer for more overtime work and pay in their last year of employment than at any other point in their career.  As a result, one retired Yonkers worker, whose base pay is $74,000 a year, started receiving a $101,233 pension when he retired at age 44.  To put age 44 retirement into perspective, the worker’s life expectancy at retirement is around 81, which means that Yonkers taxpayers will carry him at his inflated pension for another 37 years, after he worked 20 years.

Overtime for Moonlighting

Moreover, many cities and towns stuck the taxpayers with pension obligations for work performed for private firms.  One example was the pension obligation for overtime work police officers performed as flagmen for Con Ed, the large private utility.  Con Ed paid the wages and work-related expenses for the police officers, but all the overtime pay went into the workers’ earnings base for pension plan calculations.

“Low-Ball” Estimates

One comment from a spokesperson for the mayor of Yonkers may have been the most outrageous of all.  The individual was quoted as saying that pension cost estimates were “often lowballs,” presumably so the city could agree to get stuck without arousing attention from the public.  Throughout the article, there were several points at which it was clear that estimates were wildly low of their eventual cost.  For example, according to the article, Yonkers city officials were told, and communicated to the public, that the richer pension formula for police would cost $1.3 million a year, but the yearly cost is now $3.75 million and rising.

One fundamental problem with government today is that we have excessive transparency for issues that do not matter, and no transparency on issues like pension and retiree medical costs that have huge financial implications.  Some of the assumptions on government pension liability are transparent:

• Financial reports typically reflect the discount rate used on future liabilities and the investment return assumptions;
• They identify the life expectancy tables used; and
• They also tell us whether pension benefits are subject to cost-of-living adjustments.

What is not transparent are the following:

• How numbers underlying the assumptions are derived;
• How the cost-of-living adjustments are calculated; and
• How compensation increases are determined.

The pension padding results from a total control breakdown on compensation increases in the last year of employment.  Employees who are part of a pension system that calculates pay according to the compensation obtained in the last year of employment will become expert at manipulating the system to maximize their compensation.

Cost-of-Living Adjustments

Cost-of-living adjustments, which are included in almost every government pension plan, prevent a government from growing its way out of the pension liability problem.  If the pension accounts for 10% of the government’s budget, and the economy grows by 5%, the pension liability will likely grow, after cost-of-living adjustments, at a rate comparable to the 5%, thereby negating the benefit of the growth.

Remedies

What can we do?

• Stop the bleeding. Governments should radically renegotiate these pension obligations for new hires, and for those far away from retirement.  At Pitney Bowes, we amended our defined benefit pension plan in 1997 to eliminate unsustainably rich benefits, but we provided a transition plan to protect those within a few years of normal retirement age.
• Increase transparency. Calculations should be shared with the public.  These calculations involve a certain amount of strongly supported scientific analysis, like life expectancy.  However, pension calculations also require plan administrators to estimate investment return on pension assets, which involves a huge amount of judgment.  Government plan administrators routinely overestimate investment returns.
• Modify cost-of-living adjustments.  Government retirees typically have health plans protected from inflation, and are usually not saddled with tuition increases and increases in costs of shelter.  In fact, many economists point out that both the absolute costs of living and the rate of increase in these costs is lower for the elderly (other than the cost of health insurance prior to age 65 when they do not have access to either Medicare or a retiree medical program through their employer).  Any cost-of-living adjustment should be modified to reflect this.
• Change the actuarial estimates by requiring actuaries to factor in behavioral responses to pension plan provisions. Common sense tells us that if someone can volunteer for overtime pay in one year to increase their income for the next 35 years, they will do that.  However, actuaries not only do not take this “gaming of the system” into account, they are probably not allowed by traditional actuarial pension calculation principles to do so.  They are required to take voluntary and involuntary employment turnover into account, but, for whatever reason, they leave voluntary overtime decisions out of the calculation.   This has to change.

This pension calculation issue illustrates a much bigger problem with government: the boring and highly technical work on budgets and cost forecasting is the most important and the least understood part of government.  There are many examples of flawed government cost forecasting that have profound implications:

• The Congressional Budget Office (“CBO”) costing of the recent health insurance reform legislation, which is already believed to have been $115 billion too low;
• The flaws in pension forecasting across all levels of government.  I saw this first hand relative to the U.S. Postal Service, where the federal Civil Service Retirement System overestimated postal service pension liabilities by $78 billion until the industry and the Postal Service found the problem in the Fall of 2002.
• The CBO assumption that preventive health practices and services would save no money in the Medicare system.  This may be one of the most monumentally stupid and consequential failures of the budget scoring system.  The CBO only looked at selective preventive screenings and looked out only three years (even though it forecast the rest of the legislation out 10 years), and did not take into account benefits for any other part of government beyond that covered by the legislation.

This defies common sense, but it had profound consequences. It caused growth-killing taxes to be added to the health insurance legislation to make the budget appear to balance.  It reduced the potential pool of money that could have gone to prevention.  It also reduced the opportunity for other vital investments in health care system transformation.

We have to get these flawed systems fixed, or else government will make some very big mistakes in its attempt to be stewards of taxpayer and bondholder money.

Recently, I re-read Michael Lewis’ great book Moneyball, which, on the surface, is a book about baseball, and, particularly about Billy Beane, the General Manager of the Oakland Athletics.

Lewis, who wrote books such as Liar’s Poker, Panic, and The Big Short, is clearly intrigued by fields of endeavor in which individuals succeed because they recognize the value of data when others are operating more by the seat of their pants.  Lewis described a baseball talent evaluation marketplace in which Billy Beane, who was obsessively driven by performance statistics, battled baseball scouts, managers, and coaches who tended to evaluate players based either on their visible physical and athletic skills or the performances these individuals observed.  As a result, when Beane overruled his organization and made decisions based on his statistical analyses, he tended to acquire undervalued talent and get a premium price when he disposed of overvalued talent.

Moneyball was a great book for many reasons, including its insights about how people trained and developed in a system in which a particular world view predominates have difficulty adapting to a different world view, even in the face of compelling facts.

However, what I picked up this time was how a handful of dedicated baseball fans, many of whom were engineers, rose up against the power structure of Major League Baseball in the 1980’s to gather statistical data that so-called “experts” had never collected.  For example, Lewis described Project Scoresheet, an informal baseball fan-based data collection system managed by a writer named Bill James, who wrote a series of books called Bill James’ Baseball Abstracts.

For example, James and the Project Scoresheet fans understood that, while it is clearly relevant in evaluating hitters to collect data enabling fans and teams to calculate batting average, determining where each hit was placed was valuable supplementary data, because it enabled talent evaluators to determine whether a player’s pattern of hitting would work across a wide variety of Major League Baseball fields, given their non-uniform dimensions.

However, what Lewis reported is that not only did Major League Baseball not capture some extremely relevant performance data, it was uncooperative in sharing the information it collected.  Lewis commented that it seemed absurd that, for an event for which individuals paid varying amounts of money to watch, they could not access the data that described that event.

There is a parallel to the health care industry.  Government agencies and others who pay for the health care we receive, whether it is a large employer or a large insurance company, get a great deal of data about our health care transactions.  The hospitals, clinics, and, sometimes, the medical practices we patronize, also collect a lot of data as well. What they share with us, however, is delayed, incomplete, sometimes inaccurate, and not provided to us in a user-friendly form.

I chair a personal, patient-controlled, portable, private, secure health record company called Dossia, based in Cambridge, MA.  When this initiative was started four years ago, the founders, one of which was Pitney Bowes, could not have imagined how difficult it would be to get some health care providers and insurance companies to give our participants, the employees who participate in employer health plans, the health data that had been collected as a result of their health care system encounters. Insurance companies report individual transactional data to patients with the same kind of obscure coding that health care providers and some government administrators use for their multiple purposes, not of which are centered around the needs of patients.

Moreover, this data is shared with us in paper form when we receive an Explanation of Benefis, or the EOB.  This EOB is not particularly helpful to someone who is not a health care professional in terms of explaining to us what happened when we visited the doctor.  While many insurance companies and some integrated health plans and payers like Kaiser-Permanente have made their electronic health records accessible to patients, these records are only usable when a patient is part of that health care system or health plan.  Moreover, the data that originates from health care encounters outside the system does not get captured.

For example, since Kaiser-Permanente is in seven states, if you were a Kaiser member who needed to consult a physician in New York or Connecticut when traveling there, you would have to consult with a physician unconnected to the Kaiser system.  It is not automatic that the transaction record will become part of the Kaiser record.

Similarly, if you moved from California, in which Kaiser is licensed to do business, to a state in which it is not, your record would not follow you.  The onus would be on you rather than Kaiser to get a copy of that record.

The same issue exists with respect to insurance plans.  Insurers and third-party administrators all have electronic health records usable when you are in their health plan or when you make a claim they process from an out-of-network encounter. However, they do not capture pharmacy, behavioral health, or other health data from a system they do not administer if an employer carves out a piece of its benefits program to be administered by a different benefits manager.

At Pitney Bowes, multiple insurance companies share the benefits management for the medical claims, but the company has a separate pharmacy benefits manager, and behavioral health services provider.  None of the insurance companies would include the pharmacy and behavioral health events in their electronic health records.

That is why ten companies, including Pitney Bowes, started Dossia and continue to build its capabilities.  The record is electronic and may not even have as much clinical data capability as Kaiser’s record or those of the different insurance plans, but it has four huge advantages in terms of its capabilities:

• It can be comprehensive, pulling in data from all different sources, including biometric data from the patient’s daily activities;
• It is portable, meaning that it will not stay with the plan or clinical care provider that owns it.  This is a patient-controlled record.
• It is designed to be easy for patients to use.  Clinical electronic health records, as well as insurance-centric records, were designed for the benefit of clinicians and to help insurance companies and health care providers manage relationships with payers, not for ease of use by patients.  I do not blame them for this; the systems were created for different purposes and are hard to retrofit for patient use.
• It is designed to be usable by the caregiver for a family.  Clinical and insurance records treat every patient or plan member as if he or she were unconnected to any other patient or plan member. Dossia is designed to help the caregiver, usually a mother, sign on to the record, and get immediate access to all of the family’s health information, not just her own.

This is why I am passionate about doing what the baseball Project Scoresheet people did, with the help of Bill James, with respect to baseball records in the health records space.  Patients need to take control of their own information.  This information does not belong to the insurance companies or the health care providers.  It is a record of a part of our life, so we should own and control it, and get easy and free access to it in the way we want it, not the way the government, providers and insurance companies want to provide it to us.

We have known for a long time that government is more responsive to a well-organized single-issue constituency, even if the vast majority of voters would oppose the position the single-issue group is taking.  For example, that is why government officials have consistently been reluctant to take on the National Rifle Association, even though the vast majority of Americans favor a more aggressive regulation of guns than is the case today.  I am not making a value judgment about this issue, other than to say that elected officials think of the electorate as a collection of well-organized, passionate special interest groups than they do a mass of voters to which they have to respond.

We also know that elected officials and the media are much more likely to respond to a single dramatic event or story than they are to a gradual, broad-based, statistically significant trend, even if the broad trend has profound societal impact.  For example, although the statistical evidence of the deterioration of our transportation infrastructure is overwhelming and has been for several decades, it took a dramatic event, the collapse of the bridge on I-35 across the Mississippi River between Minneapolis and St. Paul to get Minnesota to act on its infrastructure problems.

Finally, we know that closing or shrinking a major community facility, even one which has outlived its usefulness, is extremely difficult.  That is why it is very difficult to close military bases and post offices.

Put all three of these observations together, and it becomes clear that it will be extremely difficult to take the steps that would flow logically from true health care payment and delivery reform and from meaningful prevention initiatives.  If government officials are successful in developing a healthier population that uses the health care system less often, and a health care delivery model that is smaller and more efficient, the logical consequence is that much of the capacity we have today will be unneeded.

However, the three issues will come into play:

• Unionized health care workers, physicians trade groups, hospital associations, and pharmaceutical companies, although they represent a small part of the voting population, are single-minded in protecting and expanding what they have.
• Closing a badly performing hospital produces benefits that are hard to dramatize, even though the whole population will get better care.  The story of a hospital worker who may be a single parent who loses her job is a highly visible and dramatic event.
• Closing a hospital in a community is harder than closing a military base or a post office, because it is a vital resource.

What do we do about this set of dilemmas?

• Acknowledge the problem.  When there are debates about the proper payment and delivery architecture of the health care system, let’s recognize what’s really at issue, and accept the fact that we need to think of transition plans.  Let’s cut through the rhetoric and get to the real issues.
• Take advantage of the natural personnel attrition that takes place in any marketplace.  The U.S. Postal Service has shrunk its employment significantly since 1996 and has improved its quality of service.  Trying to recruit more people into health care other than making sure we do not drop below critical mass is not a good decision.
• Make changes in such a way that they do not radically and abruptly disadvantage any existing interest group.
• Get the institution to redefine its mission and find other markets for its services.  For example, the highest and best use of a hospital may be to provide remote telemedicine services to smaller, less equipped facilities in rural areas here and abroad.
• Find a higher and better use for the capacity that would otherwise be closed, and think through how those who lose their jobs can be redeployed.

This last point deserves a little more explanation.  Health care facilities are like any other organized activity: they are a collection of assets that have been assembled to accomplish specific tasks and purposes.  Those assets have the potential to be repurposed and other assets can be substituted in their place.  They also have far more potential marketing and delivery reach because of the Internet.

The best example of which I am familiar is the closure of St. Joseph’s Hospital in Stamford, Connecticut, and the construction of a wellness center on the same site back in the late 1990’s.  To accomplish this closure was not simple, because many stakeholders had to buy into the opportunity.  Moreover, getting the wellness center in place required significant philanthropic contributions, a process in which I assisted.  However, the end result was the creation of a more appropriate, more modern, and higher value community resource than the hospital.

This kind of process will have to be repeated in thousands of cases around the United States if we are going to bend the health care cost curve and migrate to a higher quality health care system.

“Good-paying jobs don’t come from bailouts.  They come from start-ups.”  Will start-ups address our structural unemployment problem?

Yes and no.  They will be a great solution for well-educated, enthusiastic young people who are currently unemployed and perhaps discouraged about prospects for jobs and careers.  Without some additional interventions, they are not a good short-term or even medium-term solution for older workers who have lost their jobs at big companies or government agencies.  As the former CEO of a big company and the current chairman of one start-up business, Dossia, and a board member or investor in several other start-ups, big company or government and start-up jobs and work situations are radically different.

Job Scope and Definition

Government and large companies attempt to create and manage well-defined jobs with clear accountabilities and boundaries between jobs.  They do not particularly like to have people take on work beyond their job description and like the comfort of evaluating people against fixed responsibilities.  Likewise, people who gravitate to government and large company careers like predictability and clarity in their responsibilities.  This is especially true in most unionized public sector organizations, which not only have a bias toward clarity and specialization that arises from the collective bargaining environment, but have the added component of bureaucratic rules established under civil service guidelines.

In the start-up environment, the needs of the business overwhelm the tasks defined in a job description.  Employees do whatever it takes to get the job done, and have to be flexible in how they do their jobs.  They tend to be paid for organizational results, so role clarity is irrelevant.

Unfortunately, our society has bred and developed a mindset among many older people that they should stay within the four corners of their job descriptions and the work rules associated with them. In fact, the territoriality of many big-company or government workers causes people to be criticized if they try to do someone else’s job. They are initially very poorly equipped to work within a start-up environment.

Doing Tasks Directly or Delegating Them

Governments and other big organizations breed in their employees a fear of taking on tasks that experts or specialists are assigned to do.  This is especially true of professional functions like IT, finance, engineering and technology, law, and now even HR.  The more specialized the body of knowledge, the more people in big organizations are taught to believe they must seek help beyond what they can do themselves.  As a result, they delegate to the “experts” and add a lot of cost to an organization.

Government and other big organization managers also believe that being able to delegate tasks is a status symbol.  I remember an older manager telling me as the CEO that I should never take notes at a meeting because that was what secretaries were for. Of course, he remembered less of what happened at the meeting than I did, because I had good notes and he didn’t, and I had a much better ability to diagnose and strategize because of the superior insight a review of my notes yielded.

Start-up employees think in exactly the opposite way.  They do tasks themselves if they believe they can, seek free help as much as possible, and outsource relatively narrow tasks to experts to keep costs down.

I found that when we transferred sales managers from the U.S., our largest market, to small overseas operations, there was an inverse relationship between the level of managers we transferred and their success level.  The first-line supervisors or even individual sales professionals we transferred overseas were generally successful because they were used to doing tasks themselves, which was required in small international operations.  The more senior sales managers had a far more difficult time because they had gotten out of the habit of doing things themselves, and were intimidated by the prospect of relearning hands-on tasks in a foreign country.

I question whether someone who has comfortably worked in a big company environment and who has been actively discouraged from doing tasks themselves and been encouraged to “delegate” to others can quickly adapt back to being hands-on.

The Degree of Formality and Standardization of Tasks and Processes

People in government and big companies are schooled to believe that standardization and process uniformity are critical, and that auditable, standard ways of doing things are preferable to more informal and variable ways of doing things.

In start-up companies, tasks are accomplished based on speed, flexibility, low cost, and revenue enhancement.  People are rewarded for the end result of what they do, and generally are less concerned with its auditability and formalization.

One example of the difference is how big and small organizations handle travel arrangements.  At Pitney Bowes, we use a single travel agency, HRG North America, to make all of our arrangements.  HRG, which was unsurpassed in providing travel services to large organizations, secured discounts and committed to do business with a handful of global air carriers, hotels, car rental agencies, and other travel service providers.  Even if someone could do better on their own by going to an online site like Travelocity.com or Hotels.com, they were actively discouraged from doing so.

Our travelers in the start-up businesses use online auction sites to find the lowest price, change arrangements from trip to trip to maximize flexibility and lower cost, and absolutely do not want to make a commitment to a small number of vendors.  They manage overall operating expenses, not travel savings against a specific procurement target set with an outside agency.

Older employees who suddenly have to make their own arrangements take time to learn how to be most cost-efficient, because they have been kept away from these processes in the bigger organization of which they are a part.

Adherence to Budgets and Plans

Governments and big companies are heavily driven by annual budget and planning cycles, and reward employees for adhering to the discipline of a budget and plan.  Compensation programs are organized around annual plans or multiple-year programs built from annual plans.

In start-up businesses, budgets and plans are starting points and they are modified rapidly and frequently as conditions change.  By the nature of the environment in which start-up businesses find themselves, their ability to predict the environment one quarter out, much less one year out, is nonexistent.  People get rewarded for how they respond to emerging conditions, not by how well they adhered to a budget or plan established at the beginning of a year under very different conditions.

Once again, I wonder how people schooled in a more static budget and annual plan driven environment can function in a much more dynamic situation.

Accounting vs. Cash

Governments and big companies are heavily driven by the way they are reporting their financial results to the outside world, which means that their behaviors are heavily driven by the predominant influence of the way accounting rules reshape financial results.  Even a metric like free cash flow is determined by accounting conventions that distort cash-flow-based financial thinking.  For example, since cash flow is determined as of the end of periodic reporting periods, like the end of a calendar quarter, there is very little attention to day-by-day cash flows, except in the organization’s treasury department, which has to secure cash to pay daily expenses.  In the Fall of 2008, a lot of attention was paid to liquidity because financial services firms borrowed daily and did not have matching incoming cash flows.  When their daily borrowings were interrupted, these firms suddenly started paying a lot of attention to daily cash flow, but a big industrial firm or a government agency usually is not built on a culture of top-to-bottom daily cash management.

In a start-up business, every employee recognizes the concept of “burn rate,” which is the daily, weekly, and monthly gap between expenses and revenues.  They have to pay attention to timing differences between when expenses are paid and revenues are received during a month or week.

Guaranteed Pay versus Pay Contingent on Results

People who work in big organizations want guaranteed wages or salaries.  Even when they get incentive pay, they want to know what the target pay range might be, and when they could expect to receive the incentive pay.  They want predictable cash flows in their personal lives.

Start-up businesses usually operate with well-below-market guaranteed wages and salaries, but offer significant upside through options and stock grants.  Employees in start-ups are not anxiety-ridden by knowing when or where their next paycheck will come.  People from big companies definitely are.

Overall Adaptation

As my blog indicates, these are major differences in the way large organization and start-up organizations function.  Everyone is capable of adapting to some degree to enable them to work in start-ups, but for older employees who have been used to operating in a particular environment for several decades, it is like getting a divorce and being asked to date people in an environment that is not only completely different from the one in which they functioned during their marriage, but also completely different from when they were last single.

It is psychologically traumatic for people to make this transition.  They have to go through a change process similar to what those who lose a loved one experience.  They have to get through denial, anger, grieving, fear, and toward acceptance of the new environment.  This is not a task that is accomplished solely through job retraining programs or through creation of make-work public sector jobs.  This requires a personal transformation of which development of new skills is only a small piece.

Lawmakers who are empathetic to those displaced in this economy do them no favors by offering quick fixes or stimulus-led projects.  These are stopgap and transitional packages at best, and ways for people to remain stuck in denial at worst.  Blaming the companies that displaced these people is also a stupid, shortsighted strategy.

Even when more steady big company jobs return, they will look very different and people will need to function more like they did in the start-up businesses.  The sooner we recognize that, the better.

Thomas Friedman has rendered a valuable service in pointing us toward the need to support the creation of start-up businesses, but that’s just the beginning of what we will ultimately need to do.

In it, George Clooney plays an executive named Ryan Bingham, who works for a company that enters into contracts with large employers that have neither the will nor the skill to handle mass terminations themselves, so they outsource them to Bingham’s firm.  The subject matter is painful because the devastation of losing a job has hit so many households. I had this type of experience back in1978 when my law firm told me I would not be offered a partnership.

However, the more interesting aspect of the movie is the way Bingham leads his life.  He travels over 320 days of travel a year, and has built a life in which he gets treated exceptionally well by airlines, hotels, and other service firms, and he has temporary relationships on the road that require no deep emotional commitments.  He has successfully avoided having to deal with the messiness of a family life or maintaining a substantial home base.  In fact, his one-bedroom apartment in Omaha, Nebraska, appears unoccupied, because it is so sparsely furnished.

Not surprisingly, one subtext of the movie is how messy reality intrudes itself into his antiseptic, perfect life.  The first intrusion comes from a young female manager who attempts to dismantle the whole process of having executives travel to terminate employees, by substituting termination conversations by video teleconference. Although she first appears to be a person who needs no emotional support, she ends up requiring significant support from Bingham as her relationship with her boyfriend sours.  The second intrusion comes from Bingham’s two sisters, one who is getting married and the other who is separating from her husband.  The third intrusion comes from what initially looks like a casual relationship with a woman named Alex, for whom Bingham develops a deeper emotional attraction, but whom he discovers is uninterested in a deeper relationship.

My life bears no resemblance to what Bingham is experiencing.  However, I ponder why Bingham would find the life he leads attractive, and I can understand it at some level:

• We all want others to function in a way that makes our life as easy as possible.  Because of the growth of corporate loyalty and rewards programs over the last 30 decades, we get predictably exceptional care from people in organizations to which we have given a lot of business. People treat us with great care because it is in their financial interest to do so, and because, within their sphere of activity, they have been well trained to do so. In the home or community environment, as well as the workplace, higher loyalty is not predictably rewarded.  Some of the people who have to treat others with great deference in service occupations get burned out, and manifest their burnout by lashing out at family and friends outside of work. One of the ironies of Up in the Air is that Bingham expects loyalty because of a long history of rewarding corporations with his business, but he destroys the predictable link between loyalty and reward in the corporations for which we works for the employees he terminates.
• Aside from wanting to be rewarded for our loyalty and patronage, we want a manageable and predictable level of demands from those around us. Stress comes to our life from highly demanding or unpredictable environments, especially when our capacity to meet those demands does not match what is demanded. Bingham creates stress in the lives of those he terminates, and then gets stressed by being forced to intervene with his sister’s fiancé just before their wedding ceremony.  He is thrown into a situation in which he is expected to act almost as a marriage counselor.

If I were to describe my past year relative to these points, I would make the following observations:

• Like Bingham, I like the idea of having a specific level of loyalty being rewarded with a predictable level of service.  Unlike the Bingham character, I actually get uncomfortable with too much luxury service. Exclusivity and isolation make me extremely uncomfortable.
• While I was fully prepared to accept much higher demands on my time and resources than Bingham, I, too, discovered my limits.

I found that leaving the Chairman and CEO positions reduced some demands on me, but spawned many others, and that I was unevenly equipped to deal with them.  I expected that some people would approach me to serve on boards, to make charitable contributions, to invest in their businesses, or to give them career advice.  To a degree, these demands were manageable.

However, I learned that my post Pitney Bowes life was not one in which I could substantially control the demands made on me:

• Demands for political support and contributions were far more complicated to manage when I left Pitney Bowes.  At the Company, I evaluated every request for support by the degree to which it furthered the Company’s goals.  As a private citizen, I have to make choices among good, but obviously imperfect candidates, without the simpler criteria I could apply as a CEO.  Deciding among friends and multiple candidates I respect is not fun or easy.
• With respect to charitable contribution requests or investments, I lack the very capable community investments and corporate development teams that did a great job evaluating charitable or investment proposals.  Moreover, there are many more desperate people today with more fragile organizations, so every contribution or investment decision is higher risk than it would have been two years ago.
• Similarly, many more good, desperate, unemployed friends come to me for advice and help. My ability to help, and their willingness to take my advice, is harder to assess in this more complex and challenging employment environment.  For example, the whole world of posting recommendations on Linked.in for someone is totally foreign to my experience.
• Political advocacy is more complicated, because, for whatever reasons, the task of seeing my work bear fruit, particularly on

health care issues, is far more complicated. I thought it was because I lacked a power base in terms of money, size of organization that I led, or political connections, especially when I watched CEOs, union leaders, lobbyists, and trade association presidents get face time with government officials.  However, many of these high-powered people have expressed extreme disappointment that their efforts were wasted, unless they intended to make sure nothing happened.

• Finally, like many people who have been in positions of significant responsibility in a large business, I am distressed by the indiscriminate anger and resentment directed at successful business people.  There are certainly many legitimate targets of public anger in the business world, but our elected officials have fostered an environment of indiscriminate anger directed at even very decent CEOs or other people who have been successful.  That’s wrong!

I am very energized by the many exciting things on which I am working, including my evolving effort to become a broad and deep expert in health, particularly the social determinants of health, and my efforts to break into the entertainment industry.

Nevertheless, there are times when the Ryan Bingham world seems very attractive because of its simplicity, its clear linkages between behaviors and rewards, and its lack of pressure. I would never want that world, but I can understand better the psyche of those who seek it out.

One of my favorite TV shows of all time, Rod Serling’s The Twilight Zone, frequently dramatized the message that people who saw the world differently from others often experienced difficulty and, in some cases, tragedy.  Two of my favorite episodes that made this point powerfully were “Terror at 20,000 Feet” starring a young William Shatner as an airplane passenger who sees gremlins trying to take apart an airplane wing while the plane is in flight, and “The Howling Man” in which an American is recounting a story to his housekeeper about why he is imprisoning a man whom he says is the devil.  In both cases, the passenger and the American seem psychotic and their perspective is disregarded.  In both cases, at the end of the show, they are proven right.

Thankfully, no one has ever accused me of being psychotic.  Unlike the William Shatner character, I did not get carted away in a straightjacket, and, unlike the American in “The Howling Man” the consequences of others not believing me did not result in the devil being unloosed upon the population.  Nevertheless, my experiences have been challenging.

In the early 1990’s, when I believed that Pitney Bowes could spend less on health care, increase employee contributions, improve health, and improve employee satisfaction, I was perceived as a naïve person going against several decades of conventional wisdom.  Even today, those who believe we can increase health, reduce costs, provide universal, affordable health insurance and improve quality and decrease government budgets are perceived as unrealistic.

I had to fight conventional wisdom, although there was good research to support me, the Dartmouth Atlas work led by Dr. John Wennberg, just as there is good evidence today.  However, my point of view was so threatening to those who had built careers on marketing services consistent with a different point of view that they fought me and the evidence.  I was right, and I believe that the Pitney Bowes experience is broadly applicable.  I believe that the reason Washington lawmakers have not tried to apply it broadly is that it threatens more deeply-held beliefs about the role of government.

When I believed that Pitney Bowes would need to sue the U.S. Postal Service for violating our contract rights in the 1990’s, almost everyone thought I was misguided, including, in the beginning, my general counsel.  Over time, the management and the board of directors supported me, the lawsuit was filed, we settled, and moved on.  Years later, I spoke with senior postal officials who told me that they felt I had no choice but to do what I did, but that their colleagues did not believe we had the courage to file the lawsuits.  At the time, my view was influenced by the notion that the Postal Service’s actions were based on the perspective that we were simply their agent, and that they should control everything about the mail system.  My position was that they were public servants entrusted with specific responsibilities relative to mail, and had inherently limited powers to go beyond that.  This was not just a test of power; it was a philosophical difference about the role of government-operated services.

In 1999, two start-up companies challenged us with online postage solutions. My chief operating officer, Marc Breslawsky, and I were in a minority among the senior team in believing that these companies posed no threat to us.  Many employees and high-level executives, one or two board members and many shareholders told me that the world had changed and that I was in danger of ignoring potentially disruptive innovation.  The reason Marc and I turned out to be right is that we understood that disruptive technologies are successful only when they are superior to the older technology they replace and when they can be marketed profitably.  Neither condition was met.

In 2003, I had my toughest challenge of all.  I recommended to our management and our board of directors that we exit the non-core financial services business.  The reasons for not exiting seemed compelling: we would experience lower earnings per share, lower net income, lower cash flow and lower investment return immediately after we would complete a sale or spin-off.  Moreover, the exiting process would require audits for 10-20 year-old leasing transactions that would create the risk of having to change the accounting for transactions because they were so old that the documentation might not exist or that people’s memories about why they made certain decisions would have faded.

The only argument in favor of exiting the business was the longer-term, hard-to-measure risk of being in the financial services business.  It took me three years to complete the process, and I had to overcome opposition from many who weighed the risk probabilities differently from the way I did.  We completed the sale in July, 2006, and, fortunately, were out of the business when the financial markets began their collapse a year later.  Those who disagreed with me were not wrong about they believed could happen, but they could not fathom how bad the financial market collapse could be, and what effect it could have on the company’s stock price and prospects.

I could give many other examples of where I took a contrarian position, and was perceived to be on the wrong side of the argument, but, suffice it to say, being visionary is not always a comfortable place to be. All of these situations were different in terms of why I had difficulty, but they had certain common characteristics:

• I was not perceived to have any special knowledge or expertise, so, despite my brainpower and authority position, others felt that they could look at the same situation and have equal or better insight. In each case, I had to get them to reinterpret common facts.
• My position did not lack for clarity or simplicity.  It was not a communication problem.  It was a difference of perspective or philosophy.
• The opposition often sprung from much deeper points.  What was at risk was not just the specific issue, but some bigger fear or anxiety, whether it was upsetting a broad world view, putting stakeholders at risk of being criticized or sued for a wrong turn, or calling into question how people were earning their livelihood, or even just weighing risks differently.

I have concluded that I really could not have done anything differently, except to have understood the difficulty going into these situations. That’s just the way visionaries have to operate.  As I have gotten older, I tend to take these situations, which, fortunately, do not come along as often, less stressfully, and just recognize that seeing the world differently is a mixed blessing.

What do these two situations have in common?  In both cases, a party to a dispute values continuation of the status quo and control more than they do economic benefit.

The Baseball Free Agent Negotiations

In 1976, after nearly 75 years of baseball operating under the legal notion that owners could permanently force players to contract with the same team year after year or be prevented from playing Major League Baseball, arbitrator Peter Seitz ruled that the standard Major League contract only allowed owners to renew the contract for one additional year, not perpetually.

As a result, the owners had to bargain with the Players’ Union over the terms of free agency, that is, when and how players could offer their services competitively.  One owner, Charlie Finley, proposed publicly that every player should be able to be a free agent every year.  As Miller said:

“The moment I heard Charlie’s proposal, I was worried that the owners would agree to it. He understood Economics 101.  If you made all the players free agents, every year, they would be competing against each other for a limited number of jobs.  It would not have been in the players’ interests.”

Using the laws of supply and demand, salaries would be depressed.  Instead, by having a more limited free agency, which ended up being in the agreement, the few free agents available every year were subject to competitive bidding that drove up salaries and severely hurt the economics of owning a baseball team for many owners.

Why did the owners reject Finley’s proposal?  As author Rob Neyer, in his book, Big Book of Baseball Blunders quoted Miller,

“ I think they (the owners) couldn’t envision an environment in which they no longer controlled the players.  It was not just about the money. They were accustomed to saying, “You must play for me or you can’t play professional baseball for anyone anywhere in the world.” That was a tremendous power and I suspect they didn’t want to relinquish it too abruptly.”

In effect, the owners valued the appearance of power and control, but did not understand that they were severely compromising their short and long term economic interests in so doing.

The Union Opposition to the Tax on “Cadillac” Health Plans

The opposition of many labor unions to the tax on high-cost health plans is in the same category as the owners’ opposition to unlimited free agency.  They are fighting to keep control of an economic model that is not in their best interests financially.  If the Dartmouth Atlas research has a single message, it is that more aggressive health care is not better care, and does not deliver better health.

Medical benefits are not like pension, 401(k) or even life insurance benefits.  In the case of pension, 401(k), and life insurance, the more the employer pays, the more the union member is enriched.  In the case of medical benefits, the more the employer pays, the more an outside doctor, hospital, or insurance company is enriched.  Whether making outside medical providers richer translates to better health care or health for union members is pure accident.

Think about it for a moment.  If I am a union member and go to the emergency department of my local hospital for a sore throat, instead of going to the local retail walk-in clinic, my employer pays $1,000 instead of $50 for me to get examined and to get a prescription for an antibiotic.  Am I better off for having triggered a $1,000 expense instead of a $50 expense for the employer?  Clearly not.  Yet, in many instances, these Cadillac plans cover emergency department and hospital care at 100%, but require a $20 pay for a visit to a retail clinic.  If the health plan created a $100 co-pay for a non-urgent emergency department visit, the union member would go to the retail clinic, not the emergency department, the employer would pay less, and the union member would have an opportunity for some form of gain sharing.

Wouldn’t I be better off if the employer paid $50 and gave me $400 worth of salary, pension benefit, 401(k) contributions, or life insurance premium money?  That’s what we did at Pitney Bowes in the early 1990’s in weaning our employees off these rich, dysfunctional health plan benefits.  They got more cash in their pocket, as did we, and the only losers were those providers who had benefited from overcharging us in the past.

Why do these unions not see this?  Going back to the Marvin Miller commentary, I suspect it is because they do not want to appear like they are “giving up” something, even if they could do better for their members by making a concession on the Cadillac health plan tax.  If I were they, I would propose a subsidy for pension, 401(k) or some other real economic benefit in exchange for “giving up” on the Cadillac health plan tax issue.  Their current opposition seems very misguided.

The only thing that happened as I anticipated was that I would disengage emotionally from Pitney Bowes very rapidly, because that is who I am.  Once I leave an organization, I leave with fond memories, great friendships, and insights of lifelong value, but I leave the organizational responsibilities completely behind.  I am not a person who is nostalgic about what I once had or did, and this was no exception.  Other than that, everything that happened was either a surprise or a disappointment.

• The biggest disappointment was the way the health care legislative process transpired.  As the leader of a coalition created late in 2008 who intended to play a major role in the health care reform debate, I came to the conclusion that any serious advocacy was a waste of time.  The legislation had some good elements, such as an enhanced focus on prevention, thanks to Senators Dodd and Harkin and those colleagues on both sides of the aisle who care about prevention, and there were some modest efforts to improve health care quality and delivery.

However, the entire focus on universal, affordable insurance was misdirected.  First, we cannot give everyone affordable insurance until we attack the fundamental drivers of cost, which was not done.  Second, the designs of the individual and employer mandates were flawed, and will end up taking us in the direction of greater financial insolvency, like Massachusetts.  Third, the public option is nothing more than an extreme expression of distrust a significant minority of our elected official population have toward insurance companies.  Their distrust may or may not be well-founded, but the public option is the wrong way to solve the problem.

It became clear to me early in the year that positions had largely hardened, that the legislative process was about scoring political points at the expense of others, and that many good principles would get sacrificed to get 60 votes in the Senate, which is what has happened.  There was very little interest in listening to new points of view once the legislative battle began.  So I withdrew, other than participating in attempting to get one very sensible amendment put into the legislation.

• My other disappointment was seeing Wyeth, a company whose board I joined in April 2008, disappear as a result of an unsolicited tender offer from Pfizer.  The board did the right thing for shareholders to negotiate the offer we ultimately accepted, and Pfizer will clearly have more capacity and cash to fulfill the promise from the research Wyeth had under way.   However, it is sad to see a great company with great people disappear, and to see some of the best of those people lose their jobs as a result.

• I was surprised how good the technology for doing my work has become.  It is easy to make appointments and to schedule travel.  It is relatively easy to be a mobile worker, and to put together speeches, presentations, resumes, multi-media communications, and research materials.  If I were in charge of any large organization, I would be pushing the IT function far more aggressively to use the technology that is now available and reliable.  I also would use assistants far differently than I did when I was at Pitney Bowes.

• I was amazed at the creativity, the profit focus, and the productivity of the people at the small, start-up companies with which I had contact.  Dossia, the personal health record business started by eight companies, including Pitney Bowes, has made amazing progress in the past year, although it still has a long way to go, and has a superior offering to its competitors.

• I am watching many large organizations aspire to achieve more entrepreneurial, fast-moving decision-making by downsizing rapidly.  I believe that is an extremely difficult result to achieve.  Pitney Bowes has been an unusually entrepreneurial organization, which generally maintained its ability to innovate, even as it downsized during my tenure.  However, getting acquainted with many large organizations all around the country, I am seeing those who remain inside these organizations getting more cautious as they watch others lose their jobs.  Rather than getting out more with customers and trying to learn more about what works, they are getting more of a bunker mentality, spending more time in internal meetings, and taking more time to make simple decisions at a time when those who move faster get bigger rewards.  I believe many large organizations will fail once the economy improves, simply because they have been too slow afoot when the opportunity for capturing rewards from innovation was greatest, which is the time we are in right now.

• I have become far more resourceful, and have watched our children became far more resourceful, in responding to these difficult times.  My older son had his car stolen when he moved into a new apartment in Los Angeles, but proceeded to buy a less expensive, older car and pocket the difference between his insurance proceeds and the lower selling price of the newer car.  My younger son became far better at online selling, and made significant money during the last few months he was home.  More importantly, he learned a lot about the need people have to buy more high-quality used items, and the way they need to be treated as customers.  My daughter became a much more confident musical performer and increased her ability to earn money and to do community service.  They probably would have found these skills anyway, but the bad economy accelerated their learning curve.

• I also learned to think about new business opportunities in a different way.  For example, could charities benefit from better tools for online auctions to get more unrestricted money?  Would we all benefit from lower-calorie, organic, healthier foods that people eat on the run?  These questions prompted me to make small investments in two start-up companies.

• I came to realize that my real passion is helping improve the health and well-being of people, and that the best way to do that is to work on the non-medical drivers of health.  I believe individual and community interventions on the prevention and wellness side will be key to this.  This insight is leading me to a very different plan for 2010: a fellowship at Harvard, a focus on community health interventions here in Connecticut, and a focus on investments in the performing arts, where the telling of stories changes attitudes and behaviors faster and more permanently.

• Finally, I started to engage in some projects that will be fun, and hopefully, make money and help get me launched in some new directions.  My older son and I completed a film script which we are now trying to market, (and would welcome any reader’s help), I have co-invested in a completed movie called Fog Warning ( a suspense-thriller/horror film), and am involved with a reality TV incubator/production company.

2009 was a crazy year in many respects, but I actually felt liberated by my ability to withstand what it brought and to craft new ways of solving problems and finding opportunities.  2010 should be an even more interesting year.

In my next blog, I will get back to talking about broader political, social, and economic trends that will provide a backdrop for some of my thinking.