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Safety warning: if you use Skype, your contacts may now be exposed

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UPDATE: February 14, 2019: Since writing this article in late 2017, Microsoft seems to have made a change that makes it a bit harder to reverse engineer someone’s address book, but most of the problem remains. You can read my update on how Skype still exposes your contacts in problematic ways.

A quick public service announcement for anyone who uses Skype. Executives, VCs, journalists, researchers, and anyone who cares about the privacy of their contact list should read this.

I don’t usually post about computer security, but in this case, it seemed quite serious. It’s also the kind of thing we’re used to from Facebook and LinkedIn. But it could have very serious consequences, since people use Skype differently from those social platforms. People use social media with an expectation of public transparency, while many use Skype with an expectation of privacy.

As of a couple of days ago, the new Skype tells other people how many contacts you have in common. It also offers your contacts as potential new contacts to everyone else in your contact book. This is a surprisingly serious privacy breach.

This means if you use Skype for anything where your contact list is sensitive (conference calls with clients, planning a protest over the skyrocketing price of kitty litter, coordinating your monthly meeting of people relax by knitting exciting underwear), your contacts can quite possibly deduce who other contacts are. Furthermore, if they know about this new “feature,” they can make some smart deductions.

For example, you’re a mergers & acquisitions consultant. You are in talks with MergeMe, Inc. A prospect from WeMergeToo calls you. Immediately after you accept their contact request, they start seeing suggestions that they might know the MergeMe Inc CEO. They don’t, but they know they just connected to you —> they can quickly figure out MergeMe Inc is talking with you also.

I also just discovered I can look up a profile of someone I don’t know (they’re neither a contact nor a friend), log out and back in, and Skype will start suggesting their contacts to me as potential contacts of my own. (I can tell because those contacts have the same last name, physical resemblance, etc.) So this can be used by stalkers, bullies, harassers, and people who wish to research someone and learn who they know.

(This feature can be used for much more targeted research. I won’t go into details here. Suffice to say that you can get pretty specific.)

Microsoft’s support page says they’re considering changing this behavior someday. Of course, by that time, much damage will have been done.

I went through and deleted some of my contacts by hand this morning (it takes forever… in a triumph of “good for Microsoft, bad for the user” they make it super easy for you to give them your social graph, and super hard for you to take it back). Even deleted, Skype kept suggesting prior contacts to me. That suggests that they continue to keep that data — and probably call history and chat history as well — for use in “helpfully” building their social graph.

Important note: deleting your contact book isn’t enough. If your associates have you in their contact book, someone can still use the same mechanism to figure out the connection.

My reaction was to cancel my Skype account altogether. But because Microsoft cares so much about me, the best I can do is schedule it to be closed in 60 days. So for the next 60 days, like it or not, my contacts are going to continue to be exposed.

See: the Microsoft Skype support article

Also note Danida_U’s response from Microsoft: there’s no way to disable this short of opting out from being contactable at all. And no, there are no plans to remove the “feature.” They want to make it easier for friends and family to find you. My suggestion: if you want your friends and family to find you, tell them your Skype ID. Problem solved.

I recommend http://zoom.us or http://appear.in as alternatives that don’t “help” you by exposing your contacts to the world.

Millennials don’t save? Of course not. Neither would you.

Millennials don’t save? Of course not. Neither would you.

Why are millennials broke? Systems. Not choices.

I recently read an online discussion in which Baby Boomers and Gen Xers resoundingly chastised millennials who don’t save enough for retirement. It seems that instead, millennials are struggling with student debt. The crowd was quick to dismiss the problem as irresponsible millennials spending too much for college degrees that pay too little (e.g. Art History).

Really? Millennials (raised by Boomers and Gen Xers, by the way) are an entire generation of people who simply made bad college choices at historically unprecedented levels? Get real. Remember who chooses to attend college and decide on a major: An 18-year-old with no real world experience, who probably knows nothing about modeling lifetime financial implications of their decisions. Expecting them to be able to choose well is naive. Indeed, many Baby Boomers and Gen Xers made really bad choices. But when they were college age, the system was different. A bad choice, financially, wouldn’t—and didn’t—cripple you for life.

The fundamental economics of education and saving have changed.

That was Then

When Gen Xers were growing up, a college education cost a total of about a year and a half’s salary. MIT four-year tuition was $40,000 before books and expenses. A graduating student could get a job that paid a salary in the $30,000 range.

Furthermore, students could get jobs that paid enough to make a serious dent in student expenses. On-campus student jobs paid about $10, and a 1/4-time job would bring in $5,000 a year. That’s enough to pay half of the tuition bill. Today, student jobs still pay about $10. Needless to say, it won’t be covering half of the tuition bill.

To make up the difference, student loans fill the gap. Student loan interest rates were comparable to rates offered in savings accounts, so once a graduate started saving money, their asset base could compound at about the same rate as their student loans, so their net worth could be at least somewhat stable.

Starting salaries generally paid a living wage (enough for rent, food, utilities, a bit of entertainment, and savings), without the need for multiple jobs. And a college degree was a genuine ticket to a better-than-average job.

This is Now

Today, a college education costs closer to 4 years’ starting salary. MIT tuition is about $184,000.

Debt loads can’t be easily reduced by student jobs. No jobs available to students can make much of a dent in the $46,000/year tuition. Student jobs still pay in the $10-$12/hour range.

A starting salary of, say, $50,000 (higher than many are likely to get) isn’t actually enough to live in many cities while paying down student debt. While saying “move somewhere cheap” sounds attractive, the kind of jobs that make use of a college education are often located in big cities that aren’t that cheap.

Student loan interest rates are much higher than you can get in savings accounts, they aren’t dischargeable via bankruptcy. And the college degree that cost all this money is simply needed to get a job at all. Except from a certain class of top-tier schools, it isn’t a ticket to a comparatively higher salary.

Our Choices are as Bad as Millennials’

Everything I’ve read about Baby Boomers and Gen Xers is that we suck at saving money. We may have been living nice lifestyles, but we’re anything but role models when it comes to good lifetime financial decisions. But unlike millennials, we lived in a time where circumstances gave us decent lifestyles despite our bad choices. And our bad choices will, again, fall on the millennials. Our retirement years will make their middle-age a living hell, as they struggle to deal with an aging population that saved nothing and expects to be supported.

Millennials probably aren’t better at long-term financial planning than the rest of us, but they likely aren’t any worse. They were born into a set of circumstances, however, where the road to success that worked for us—a college education—had changed. That road, itself, costs more, benefits less, and creates circumstances that would be just as devastating for any Gen Xer or Baby Boomer.

Why business models matter: Understanding health insurance

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When you’re making business decisions, one of your most powerful tools is to understand business models. A business model is, simply, how a company makes money. If you want an in-depth definition with examples, check out my article on business models that was written during the first internet bubble, back when PayPal was a startup, Amazon only sold books, and cameras still used film. Almost every example in the article has since captured its market or gone out of business. (Challenge goal: read the article and consider how the companies’ business models did or didn’t change, and how that led to success or doom. Hindsight is a powerful learning tool!)

Become a compulsive business model collector

Often, a company’s business model constrains what it can and can not do. That, in turn, gives it strengths and weaknesses. Learning to spot business models, and do quick back-of-the-envelope calculations on them, will help you become a ninja at spotting opportunity.

When you see a hot pretzel vendor at a ballgame, ask yourself: what’s that person’s business model? How do they make money? How much product or service do they need to sell to make that money? How much does it cost them to make it? Is it a good business? Hot pretzels being one of my favorite foods as a college student, I was astonished to learn that the hot pretzel vendor cleared a six-figure income.

When you pass the neighborhood bookstore, ask how they stay in business? What’s their business model? Why does it work for them, and not for the bookstore down the block that went out of business five years ago?

When you use Facebook, ask and consider: what’s their business model, and what does that imply about the actions they’ll take? Or eBay? Or Uber?

Business models give policy insights

In a recent Facebook flame war, we were discussing different kinds of health insurance systems. Understanding the business model of an insurance company might give you some insight into their incentives and potential actions:

Health insurance companies make money through underwriting profits (premiums minus payouts and expenses) and investment income on the premiums they collect.

Insurance must ALWAYS be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, a for-profit insurance company wants to grow profits. That means raising revenues and/or cutting costs.

How can they cut costs? By streamlining operations and finding ways to avoid paying out on existing policies.

How can they raise revenues? By increasing premiums above what’s necessary to pay out on their pool of premiums.

(They can also find ways to increase their investment income, but that’s longer-term and much less under their control. They can even play in the the $1.2 quadrillion derivatives market, which no one really understands, and Warren Buffett considers a ‘Weapon of Mass Destruction’.)

Now, when we formulate our own opinions about healthcare policy (which we all do, rather than simply parroting our favorite pundit, right?), we can at least understand that the business model of insurance companies constrains their actions.

Your assignment:

Every time you interact with a business today, ask yourself:

  1. How do they make money? Where does their cash come from?
  2. In order to make that money, how much do they have to spend, and from where?
  3. What are the levers that their business models allows? What are the risks and benefits of their model?

Pretty soon, you’ll discover you can spot opportunities to bring business models to places they’ve never been used. Often, you’ll discover there’s a reason they weren’t used there. But other times, you’ll find that a shift in business model just might make you the next PayPal.

If you want to read more about [my thoughts on the insurance example implications, keep reading…

Health Insurance Business Models Drive Policy

IMPORTANT DISCLAIMER: This is intended as an example of how understanding a business model leads to confidence in predicting the behaviors of people who use that model. This post reflects my layman’s understanding of insurance business models. If anyone knows better, please please correct me.

For you gentle readers who also don’t know the inner workings of the industry, read this to understand how a business model leads to predictions of behavior. Do not read this for accurate information about the insurance industry.

For-profit health insurance companies must overcharge

I’m guessing that competition will not produce efficient health insurance. Health insurance companies make money only two ways: through underwriting profits (premiums minus payouts and expenses) and investment income on the generated float.

Insurance will always be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, as long as we have a market that defines “healthy” profits as profits that grow yearly, there will be ever-increasing pressure to raise profits. That means raising revenues and cutting costs.

You can only cut costs so far on the admin side. But you can reduce your payouts by writing ever more complicated policies that in fact cover less and less. You can also challenge payouts, make the reimbursement process deliberately more cumbersome, lower the ceilings of what you will cover, etc.

And of course, regulation caps permitting, you can always raise revenue by raising premium prices.

Every year, due to the market expectation of continually growing profits, all these forces will come into play. (Premium prices will rise, and people will blame Obamacare or the lack of Obamacare or greed or whatever. It’s just the way growth-oriented markets work.)

Any for-profit insurance company will feel all those forces as a simple matter of doing business. So any for-profit insurance company in a competitive market will be pressured over time to do these things.

Even if their investment income is reliably positive, they can’t control that nearly as quickly, easily, and reliably as all these other forces. And if the company is heavily invested in derivatives (which Warren Buffett calls “Weapons of Mass Destruction”), well, at some point there may be a “correction.”

There are competitive pressures at play, as well. Price wars. When a competitor lowers premium prices below the actual rational value for a given policy, a company is pressured to match that pride and write unprofitable policies in order to compete … resulting in pressure to make up profits from one of the other sources1.

That’s why private mutual insurance companies are a good thing. They still have these pressures, but at least the policyholders own the company so the company’s goals are more aligned with the goals of its members.

  1. This is one source of Warren Buffett’s wealth. When he acquire an insurance company, he gives them permission to stop pricing policies below expected payout values, even if there’s a competitive price war going on. ↩︎

Want effective communication? Drive with their agenda!

Persuasion, influence, or even simple education about a topic is central to most of the communication we send out. But readers today have too much to read and very little attention to spare. If you want to be heard, you need to hook them immediately with something they care about.

This arrived in my LinkedIn inbox today:

Hi! I don’t know you. We’ve never met. But I have a product or service I’d really like you to buy it. So let’s schedule a meeting in your busy schedule where I can convince you to buy my thing. Signed, your new LinkedIn contact.

Wow. Really? I’m impressed. I’m just falling all over myself to cancel the coaching meeting I have scheduled with the CEO of a Fortune 500 company so we can chat about the product you want to sell me. … NOT!

Drive a cold contact from their perspective

If you have a real area of expertise, and you’re attempting to foist it on, er, I mean, share it with someone, temper your sales eagerness by approaching the sale from your customers’ vantage point.

Make an impression on a sales prospect by learning a little about them: Take 2 minutes: visit their website so you know what they do. Read their LinkedIn profile and check out their interests and expertise, so you know where they put their time and attention. Then imagine what problem they might have. If you see someone is interested in “high performing organizations” and has expertise in “leading others,” the problem they might have is in influencing people in parts of the organization where they don’t work.

When you want to pitch them, start from their point of view: from the problem you believe they have. “Hi! You don’t know me, but you may be having trouble leading people beyond your immediate sphere. I’ve helped a lot of people lead from a distance using a variety of technological and in-person solutions. If you’d like a free consultation, let’s talk. Otherwise may I check back in six months?”

If you are selling a high-ticket item, you might even want ask them what problems they’re dealing with. “Hi! You don’t know me, but I work with leaders who are building high-performing organizations and need to lead people at a distance. If you have problems with that, would you mind taking 15 minutes to tell me about it, and I’ll offer any insight into solutions that might work for you?”

This approach is absolutely, utterly, completely not guaranteed to work. But it’s a lot better than reaching out one-on-one to someone with a message that’s all about your needs, rather than theirs.

 

Mind Reading for Fun and Profit!

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Want followers? Want to get more from a negotiation than you go in expecting? Want more loyal relationships with your employees? Want people to be committed to your cause? Want deeper friendships and romantic relationships?

Empathy is the key. It’s the ability to understand what another person is feeling, even if their situation is unlike yours. Empathy is the foundation for relationships, for anticipating others’ needs, for anticipating hot buttons, and for being able to help others. It’s even where great inventions and innovations come from—understanding someone else’s world so thoroughly that you solve problems they didn’t even realize were solvable.

Empathy is a skill, and it can be learned. It’s usually learned face-to-face, but in the wonderful world of technology, we don’t get nearly as much facetime as we once did. But it’s still possible to learn and exercise your empathy skills, explicitly.

We’ll use gender and race as examples, because we can all find someone of different gender and race, and this exercise will help us glimpse into their very different worlds.

In day-to-day empathy, you can even use this with very similar people. Because even people from very similar circumstances can have dramatically different experiences.

Their reality may not be directly knowable

My female friend Vinda told me she never walks home alone after 11 pm. I scoffed. I’d lived in that neighborhood for over ten years. We’d even walked home together. It was perfectly safe… no catcalling, harassment, or anything. Ten years.

I began casually asking women who lived in that neighborhood if they walked home alone. My friend Lauren is a black belt. I asked her, and she looked at me as if I was nuts. “Of course. I’ve always had to do that. All women do that. Why do you ask?”

That’s when I realized that my life as a man is fundamentally different from my friends’ lives as women. When I’m with them, the world is one way. When they’re alone, it’s different. And it isn’t knowable by me, because my very presence changes it.

Find out about their life

Ask them about their life. Let them tell you, and trust the answers. This exercise isn’t about deciding whether you agree with them; this is about learning how they experience their life, from their perspective. Ask them to tell you about what it’s like to be at home, at work. What do they worry about? What do they take for granted? Where do they feel safe? Unsafe? Loved? Ignored? Noticed?

If you have an opportunity to learn about and observe their life directly, take it.

Imagine their life from outside

Once you have an idea of their life, make a mental movie of what their life is, as reported by them or as you’ve seen it first-hand. Things to consider:

  • What is it like to live in their neighborhood? Their apartment? Work in their office? What is their commute like?
  • Who are their friends? What do they do together? What clothes do they wear? What do they do for fun?
  • How do other people treat them on a daily basis?
  • What do they worry about? What are they confident about?

For a short time, I was a “Big Brother” in the Big Brothers / Big Sisters program. My “Little Brother” was an African-American boy. When we would walk down the street together, people would turn and stare. Pretty much everywhere. It was a freaky experience for me, as I’d never experienced that. As a black boy, he experiences that every single time he walks through a predominantly white neighborhood.

I imagined what it’s like to live his life. Where he’s never experienced walking through a group of white people without having them look at you with curiosity or suspicion. Where the only people he can relax with are people of color, with cultural norms, language, hopes, and fears that aren’t the same as white people.

Now, take their perspective, literally

Now that you’ve got the movie of their life, rewind it, and mentally step into it, so you’re looking through their eyes. Roll the movie, and notice what their experience is like. The notice the feelings that you/they have as they live that experience.

In one of my more dramatic examples, I was talking with a friend who had said “Yes” when they meant “No,” and ended up doing drugs they really didn’t want to do. My friend explained how important it was to be liked by the group. And in that situation, from their perspective, they thought saying “No” would make them look scared and foolish in front of their friends.

Succumbing to peer pressure is really not a big issue for me. So I decided to empathize.

I imagined the scene from the outside: a group of friends sitting around in a circle, passing around drug paraphernalia. Everyone’s laughing and joking, and saying, “C’mon, just give it a try. We’re all doing it; it’s fine.” I imagine my friend cringing back, but nevertheless accepting and taking the drug.

Stepping into the movie. I suddenly felt a clenching in my chest. A thought came to mind: “I really don’t want to do this, but if I don’t, I’ll be an outsider. They’ll stop inviting me places. I’ll be all alone.” My friend’s fear, longing, and conflict; it all became real to me in that moment.

Your results will vary; that’s a good thing!

Empathy is individual. My Little Brother’s experience may not apply to all black people. Maybe just black men. Or maybe just him. And maybe my imagination of what it’s like to have all eyes watching distrustfully is nothing like the way he experiences it. You can always describe your experience and ask. With practice, you’ll get better at it. We all have the ability to feel empathy Your brain is built to make this work.

Give it a shot

There are a lot of chances to practice this empathy technique. Start with friends and family members, people you already know well. Then branch out. Try someone of a different race or religion. Try someone of a different race or gender. Try someone on the opposite side of a political issue. Try someone of a very different socioeconomic class.

This will be a stretch. You’ll need to learn something about the other person’s situation in order to gain the insight. While you can still get a surprising amount of benefit by simply constructing your own idea of what their life is like, you’ll get the most by seeking out the other person, asking questions, and listening. You won’t be listening to engage or react, however, but to learn. And to trust that, at least during this exercise, they’re reporting their real experience to you.

Empathy is the foundation for human relationships. It’s what lets us build bridges to people who aren’t like us, and even to people who are. Take the time to build your empathy muscles explicitly.

The Fourth Circle of Focus: Scaleability

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In my article on focusing your life around what you’re good at, what’s needed, what you love, and what’s scaleable, the “what’s scaleable” is a piece that’s new to me, and may be new to you. It’s worth talking about, though.

Four intersecting circles

The Myth of Hard Work says that if you work hard, you’ll get ahead. And if you work harder, you’ll get aheader. If you work super-hard, you’ll be Bill Gates. (And if you work hardest of them all, you’ll be Batman.) Sadly, that’s wrong.

The Industrial Revolution enabled fortunes to be made because it allowed scale. A lone blacksmith could only make a single horseshoe an hour. In a horseshoe factory, however, a lone machine operator can make dozens of horseshoes an hour. What makes the riches possible is that machines and technology allow us to scale.

Scaleability matters to whatever you do

When I’m working with a coaching client around any project that involves a lot of people (generally it’s a business), we often spend some time honing in on scaleability. The business buzzword “leverage” comes into play here. We look for ways they can scale their results without scaling the work and cost to the same degree.

Some businesses don’t scale well at all. To add one more diner’s worth of revenue, a restaurant needs more kitchen capacity, more food, more server capacity, and time to cook that diner’s meal. Some of those elements can be squeezed out. By offering a limited meal, cooking in advance, and dispensing with servers, fast food restaurants can serve more customers with fewer resources. But even so, scaling still requires a lot of effort and systems.

The internet allows unprecedented scale

The internet’s joys and woes come from the fact that it makes new kinds of scale possible. Craigslist, a single website, can handle all the classified ads. All of them.

How does your business scale? In non-information company, growing a business requires resources up front. If Ben and Jerry’s wants to add a new product like Oreo Ice Cream cake, they have to buy honkin’ truckloads of Oreos, then find customers for all that delicious Oreo goodness.

But in information businesses, growth happens by reaching more people.

How the internet enables scale

Before the internet, some people who sold information sold it in physical form, books and reports. Scaling required more physical resources. Other people sold it electronically, but charged for the access points. Bloomberg made his billions by renting out Bloomberg terminals, over which he was able to cheaply send his real product, the information.

The internet provides a common access point that anyone can use: the web. And everyone already has the physical stuff they need to read the information, monitors and computers. So internet businesses don’t require hard, upfront investment to scale.

That’s why, when revising our company strategy, we shifted from a coaching-driven model to an online course driven model. It fulfills that fourth circle. It scales better.

A 20-minute video about online businesses and scale

I’m helping my mentor Danny Iny achieve scale by introducing him and his products to my list. I happen to believe very strongly in him and what he has to say, so we’ve become affiliates. We introduce each others’ products and services to our audiences, allowing us to reach more people without the kind of investment that would be needed for a traditional business to scale. (WalMart, for instance, grows by having to buy or rent a new store location. Then they have to sweep it. And then hang curtains. And get the utilities connected… Who wants to work that much?)

Danny has a video that lays out the fundamentals of why online businesses are a good thing from a business perspective. Danny grew a seven figure business in just a couple of years, and I’ve found his grasp of business to be superb.

Danny’s video explains the fundamentals of online business. You can check it out here:

Entrepreneurs aren’t primarily risk-takers; their main mindset is something else entirely

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Entrepreneurship isn’t about taking risks

Entrepreneurship is all the rage these days, and I’ve had a lot of people ask me if they have “the right personality type” to be entrepreneurs. They think entrepreneurship is about risk-taking. Entrepreneurs must love risk, right? Since obviously, corporate employees love safety, and they’re the opposite of entrepreneurs. This sounds like a great story and a great rationale. It’s just wrong.

Entrepreneurs generally are not huge risk takers. Indeed, non-monetary considerations are often more important. In fact, many entrepreneurs try to minimize risk. What makes them different from corporate employees is that entrepreneurs maximize experimentation.

A business starts with an idea for a product or service that benefits some market: pink widgets. The business launches the widgets, trying to sell them to football players. No one buys. So they make some blue widgets. Some football players buy, but unexpectedly, many teenage goth girls buy. The next year, the company tries selling blue widgets to teenage goth girls in a different country. They sell tons. They’ve found their product (blue widgets) and their market (teenage goth girls). Now they expand into more and more countries, creating billions of the same products to sell to the same market.

In the early lifecycle, the startup is rapidly experimenting and testing the product idea and the market. Once they’ve found the combination that works, the mindset shifts from rapidly-experiment to scale-the-business. Scaling requires getting good at doing the same things over and over and over. Suddenly, it’s all about doing the same thing over and over, getting better as it goes.

This is a profound shift. Experimentation needs quick decision-making, creative thinking, and a willingness to cut corners as long as you get the learning you need. Scale requires rigor, process improvement, and a willingness to have single-minded focus, and tweak the details so you can be as efficient at mass-production as possible.

That is what you need to assess when deciding whether to pursue something entrepreneurial. Yeah, it’s risky if you don’t control your costs. But that’s only part of the equation. Think less about taking risks, and more about doing experiments. Because at the end of the day, entrepreneurship is about minimizing your risk while maximizing the learning you get from rapid experiments with your product and market.

President Trump, viewed as a CEO, part 4

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President Trump CEO, part 4: Allocating Capital

 

This is part 4 in a series on President Trump viewed through the lens of being a CEO. Part of President Trump’s great appeal is that he’s perceived as a successful businessperson. He’s even been talked about as being a President with CEO experience.

My article on the duties, responsibilities, and job description of a CEO, lays out four inherent parts of a CEO’s job. These are the parts of the job that, by definition, make a CEO a CEO. The CEO can delegate some things, but others simply can’t be delegated. Capital allocation is the CEO’s fourth main duty.

Allocating capital is the ultimate expression of strategic priorities.

Trump manages money

So far Trump has shown that he takes money very seriously. His position on many international bodies and on America’s role in the world is that all countries should help foot the bill for international costs. His stance so far has, indeed, prompted some countries to step up and contribute more to the U.N.

Domestically, Trump has instituted a hiring freeze on the Government and is presumably going to look at spending within the government.

Like everything else, this is more complicated than it seems. Government spending is a huge driver of the economy, and the government is the largest employer in the country. A business certainly wants to lay off as many employees as it possible can and still keep functioning. That’s how we boost profits.

A government, however, is walking a trickier line. A business is generally not affected by the employees it lays off, or by any reduction in its own spending. But not so, a government. Stop spending too quickly and lay too many people off and it simply drives up unemployment and slows down the economy.

Will spending cuts be done wisely?

In companies, spending cuts can be done by declaration: “cut 30% costs across the board.” This is an attractive way to do things. It’s easy to understand and easy to calculate. But it’s a bad way.

This kind of cutting assumes that there’s 30% waste across the board, and it assumes that all cuts are equal. All cuts are not equal. If you consider a company like Microsoft, cutting 30% of their administrative expenses might be a reasonable goal. But cutting 30% of their programming staff would boost their quarterly earnings while probably destroying their ability to fix bugs and develop products to stay competitive.

Spending cuts + process improvement = win?

The fundamental way to reduce costs in an ongoing business is through process improvement, finding ways to do existing things better.

While the stereotype of the Government is that it is extremely wasteful, that is an oversimplification. Some Government programs (e.g. Medicare) are extremely efficient, much moreso than their private counterparts. Other Government programs (e.g. famously, the Defense Department) have huge amounts of waste.

What matters isn’t whether or not the Government runs a program. What matters is whether there are incentives and structures in place that encourage people to work smarter, work better, and improve continuously.

What gets measured gets … measured

George W. Bush was a Harvard MBA who famously was going to bring business principles to the Government. It’s not clear he did much of that. No Child Left Behind introduced measurement into the educational system, but did so in a way that many teachers view as hindering education, not helping it. The Total Quality movement of the 1970s and 1980s showed that simply setting numeric goals without adding process improvements to reach those goals isn’t, in practice, particularly effective.

The business practices that might help the government use its money more efficiently are those of aligning incentives, re-engineering processes, tying employee pay and promotions to customer feedback, and so on. If Trump implements this kind of thinking in the government, it could, indeed, signal a major shift in how efficiently we use our money.

Big allocations reveal priorities

The capital allocation I was referring to in the CEO job duties article weren’t just cost efficiency. The most important capital allocation decisions are the ones that decide which strategic initiatives stay, and which go.

Whether Trump’s spending will be thoughtful or abrupt remains to be seen. He has already declared his intent to increase military spending, while freezing other budgets. He has given directions for us to build a wall between the U.S. and Mexico. He has stated we will increase infrastructure spending, while possibly withdrawing from international bodies (such as the U.N.) to which we pay dues.

The President doesn’t control the budget

Though Trump can control how capital is allocated within the Executive branch, it’s Congress that sets the overall budget (or often doesn’t, in the cases where we’ve had a Democratic President and a Republican-controlled legislature). Trump can fund or defund the efforts to implement programs created by Congress, but there are limits to how much control he has over the national budget.

Summary

At this point, it’s too early to tell how Trump will allocate capital. If his skills match his claims as a successful businessman, he may well find ways to steamline the government and put it on a path to being more efficient. His larger capital allocation decisions remain to be seen, however.

 

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