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Wednesday, 29 October 2014

KLM probably won’t layoff 7500 employees… yet, but still seems on a flight, ‘leaving with destination unknown’.

First to fall over when the atmosphere is less than perfect
Your sensibilities are shaken by the slightest defect

The massive strike at Air France made the financial problems of Air France-KLM more imminent for the general public, but might distract airline watchers from the structural, hard-to-overcome problems of this ‘in between’-airliner. To these eyes, the shaky financial position of Air France-KLM is more than a ‘temporary inconvenience’.

Today was the day of the quarterly data for KLM, the Dutch branch of Dutch/French airliner AirFrance-KLM. In spite of the fact that there was still an operational profit of approximately €250 million for this Dutch airliner, in contrary to French branch of the company, Air France, the data were yet generally disappointing.

The following snippets come from Het Financieele Dagblad:


Airline company Air France-KLM is trailing in Europe.This was stated by CFO Pierre-François Riolacci, during his statement at the presentation of the Q3 data. He tried to mitigate the unrest surrounding the challenged airliner, by stating that the stories regarding a technical bankruptcy of the company are fairytales.

In spite of the loss of €416 million at Air France, as a consequence of the pilot strike in September, the airline combination sticks to the earlier submitted targets for 2014. The operational results (ebitda), corrected for – among others – a share of the lease obligations, should hit the €2.4 billion mark at the end this year. However, after the first nine months of this year, there is only €1.3 billion on the counter. Traditionally, Q3 should be the best quarter of the year.

Riolacci did not offer a more detailed draft of the additional austerity measures, which are required now in order to keep the bi-national airliner afloat. According to him, that was not necessary, in spite of the commotion that emerged around KLM during the past days. ’Numbers, like the 7500 required lay-offs at KLM, came totally out of the blue’.  

The financial executive maintains his story that Air France-KLM is well on course with its current austerity programs. More clarity will be offered in February, during the presentation of the annual data.

This indifferent attitude of Riolacci is heavily contrasting with the negative equity of the airliner combination. Yet, Riolacci is not bothered. ‘Analysts and financiers always look at the operational cashflow. This cashflow is still satisfactory within the company.

Negative equity is like a dead canary in a coalmine for Air France-KLM: an undisputed signal that there is something seriously wrong with the company. It means that the consolidated assets of Air France-KLM have less value than the total amount of debt of the airliner.

Yet, as long as the analysts and the financiers of Air France-KLM recognize the satisfactory operational cashflows as the ‘clothes of this emperor’, the company will remain in business. And perhaps Transavia’s transition – from a Dutch, national low-cost carrier into a pan-European low-cost carrier – will succeed in such a way that the company can indeed run the gauntlett against Easyjet and Ryanair. I have serious doubts about the probability of this scenario, but sometimes miracles do happen.

I also guess (and hope) that Riolacci did not lie to the press, when he stated that the story of the 7500 required lay-offs at KLM, which was brought by the AD and De Telegraaf yesterday, was a ‘canard’ (i.e. a hoax).

Still, you might wonder where the future, structural profits of Air France-KLM will come from after all?!

At this moment, Transavia is absolutely not able to offer fierce competition to Easyjet and Ryanair, due to its current, small size and to the fact that Transavia has not been a genuine pricefighter from the beginning of its existence. The latter means that Transavia does not have the concept of price-fighting, as well as the required killer instinct, in its genes like the other two airliners do.

To name an example: if it would be possible to fit chairs on the wings of a plane and subsequently fly it on water, Ryanair would probably manage to put 40 chairs there and settle for only 500 gallons of water for the whole flight, while asking its customers additional payments for the wing-view.

This is the main reason that Transavia will trail its biggest two competitors by years at best and will probably never surpass them in revenues and profitability.

On top of that, the chance that the French pilots will soon fully embrace the Transavia business model and settle for a much lower reward, in exchange for keeping their job, is that of a snowball in hell. Unless Transavia will start to hire pilots from low-wage countries, through opaque labour constructs and off-shore employment agencies, the company will remain too small, too poorly funded and yet too expensive to become a true competitor for Easyjet and Ryanair. One could call this Transavia plan ‘dead on arrival’ for this very reason.

At the other end of the airliner scale (i.e. the high end scale), there is fierce competition for Air France-KLM from Turkish Airlines and other Middle-Eastern airliners.

Turkey is currently developing a mega airfield near Istanbul, which should pale Heathrow in comparison. Besides that, the country is trying to turn Turkish Airlines into ‘the world’s favorite airline’, through generous sponsor contracts and commercials featuring some of the biggest sport celebrities in the world. To achieve this goal, the country offers government grants, regarding taxes and investment subsidies; probably to the tune of millions and millions of Euro’s.

Countries like Dubai, the United Arab Emirates and Qatar on their behalf, have invested heavily in their cities, as well as in their airliners and air infrastructure. In order to earn this money back and warrant future employment for their populations, these countries do litterally everything to lure visitors and transitory travelers to their freshly built tinseltowns-in-the-desert. Money is not an issue for them, due to their nearly infinite, oil-based resources.  Consequently, money isn’t either an issue for the airliners and airports that these countries support, although these countries themselves categorically deny handing out forbidden government grants.

If Air France-KLM wants to fight its battle against the pricefighters at one end of the spectrum and the high end airliners at the other end, it seems to be a fight, which is impossible to win.

In The Netherlands we have the beautiful expression that ‘a company – in this case Air France-KLM – is too big for the napkin (i.e. the price fighters), but too small for the table cloth (i.e. the high end airliners)’. Air France-KLM is stuck somewhere in the middle between these two, very contrary targets and still seems to be on a flight, ‘leaving with destination unknown’. 

Although the required lay-offs at KLM – to the tune of 7500 employees – have fortunately been recognized as a canard at this very moment, the bitter truth is that such an event still could come any moment: rather sooner than later in my humble opinion. Until then, future profitability remains a mirage at the horizon.

Sunday, 26 October 2014

Are British animals more equal in Europe than animals from the Baltic States, Bulgaria, Poland and Rumania? If it is up to David Cameron, in his new role as straw man for UKIP and the really conservative conservatives, they are!

“All animals are equal, but some animals are more equal than others.”
George Orwell – Animal Farm

British (i.e. in most cases English) knowledge workers are yet indispensable within most Western countries in the European Union.

With their specific and thorough knowledge from f.i. developments in ICT (information and communication technology), business services and the financial industry, as well as their unbeatable, native knowledge of English, these skilled professionals are very sought after by various larger and smaller companies all over Europe. British people can ‘blend in’ in any modern team of programmers, marketing people and financial wizards. They do so, without causing any commotion, as a consequence of mutual misunderstanding (“being lost in translation”) or due to having a different culture with uncommon habits. The British do what they do and we all do what the British do.

Often these British people wander about from one country to another country, as business, financial or ICT 'nomads': they work at a certain place or in a certain country for a number of years and then move on to the next country and employer, before eventually moving back to Great Britain.

Where knowledge workers from (for instance) Eastern Europe or India often do their best to learn the native language in their new host countries after a number of years, the British don't even bother to do so. “We're British and we speak the ‘Lingua Franca’ of the 21st Century. Why should WE learn another language then our own, for God’s sake. Don’t be ridiculous!” And everybody in – at least – The Netherlands accepts this without protests. To quote George Orwell in this matter: some animals are indeed more equal than others!

And so it can be, that in a common meeting at a financial institution in The Netherlands, with nineteen Dutch people present and one Englishman, the whole meeting is held in… English (some would call it ‘Double Dutch’ in The Netherlands) and nobody even blinks with an eye.

Still, these British ICT, financial and business ‘nomads’ get their chances to work abroad and earn their wages there, without the slighest hassle for permits and ‘green cards’, due to the free traffic of workers in the whole European Union.

Every day tens of thousands of Brittons take advantage of this fundamental right, derived from Great Britain’s membership of the European Union.When this is such a fundamental and utterly important attainment, you would think that even the most Europhobic Brittons would respect this fundamental right, as one of the foundations of the European Union.

Well, you might be wrong about that… If you listen closely, you can almost hear the British PM David Cameron sawing the legs from under this fundamental right in the European Union. Not because he wants to do so, deep in his heart, but rather under the electoral pressure of UKIP’s Nigel Farage and the really conservative Tory MP’s and grassroots. In other words: David Cameron is turning into the straw man of the British anti-EU lobby.

The following snippets come from the Financial Times of 20 October:

Urged by members of his own Conservative party to curb immigration and harried by the anti-EU UK Independence party, David Cameron is under pressure to formulate a policy to tackle the issue – and fast. But with the rest of Europe in no mood to rip up the rules allowing freedom of movement within the union, the British prime minister risks angering everyone while pleasing no one.

The prime minister’s aides claim he will set out his position on immigration before Christmas. Whatever he says, he is unlikely to satisfy the eurosceptic bloc of Conservative MPs, let alone quieten Ukip, which wants Britain to leave the EU completely.
At the same time, the rest of Europe has no appetite for abolishing the EU’s founding treaty, which covers freedom of movement for citizens of the union. Angela Merkel, German chancellor, wants to curb benefits for migrants but has no thought of limiting their right to travel for work in the first place.

Speaking on a visit to Ford’s factory at Dagenham on Monday, Mr Cameron said: “We need to address people’s concerns about immigration. I’m very clear about who the boss is, about who I answer to and it is the British people. They want this issue fixed, they are not being unreasonable about it. I will fix it.”

He now wants to limit the movement of workers from existing EU members – but even his own colleagues admit he has yet to work out exactly how. José Manuel Barroso, outgoing president of the European Commission, on Monday repeated his warning that a cap on migrants would be against the EU treaty. For once, he found common ground with Nigel Farage, Ukip leader.

“You cannot do what Mr Cameron is pretending to do and remain a member of the European Union,” Mr Farage said. “It is one of the fundamental cornerstones of the European Union that you have the free movement of people.”

Britain used to be an ardent advocate of the principle, recognising that a single market in goods, services and capital required a fluid labour market. As in the US, Europe’s workers had to be able to go where the jobs were. One European Commission source said: “[The UK government is] driven by an idiotic attempt to out-Ukip Ukip.”
In depth

Vince Cable, Lib Dem business secretary, said Mr Cameron’s warning on immigration could hit jobs and investment: “Once you start putting up barriers to free movement of workers within the European Union you destroy its whole essence – which is why the rest of the European Union is not going to allow it.”

The most powerful quote about Cameron’s “misbehaviour” in this discussion about the free traffic of workers within the EU, is the anonymous EU source, who states that Cameron tries to behave more UKIP-ish than Nigel Farage himself (see first red and bold text).

In earlier years, the discussion in Great Britain with respect to immigration had mainly been about the ‘floods of low-wage immigrants from former Eastern Europe’, who would be claiming the jobs of the lower-class British workers in the not too distant future. Yet, this didn’t happen.

Besides that, there have also been fears in the UK (and also in The Netherlands) that herds of East-European immigrants would visit ‘our’ shores to pick up ‘our’ welfare payments and unemployment benefits, after a few months of working (or after not working at all). Apart from a view relatively small scandals, I am still waiting for those herds to show up.

Frankly, we hear more often stories about extortion of East-European workers by Dutch (and probably British too) companies and bosses, than that we hear stories about East-European “workers” sponging on our societies. Most workers from Poland, Romania and Bulgaria are very hard-working people and they often do the work, for which the Dutch are either too expensive, too clumsy or too unfit and spoilt.

As an example: can you imagine a Dutch unemployed person, standing for eight hours in a row behind a flower packaging machine, bundling roses or Gerberas? Or do you see that same unemployed guy or girl picking asparagus, strawberries, tomatoes, cucumbers or paprikas for six to eight hours a day? Most Dutch unemployed people don’t see that either. The East-Europeans are more than happy to fill up the void and earn those Dutch luxury salaries, even though they often get paid less than a genuine Dutch worker would.

So in my humble opinion, the repression of domestic workers by workers from the East-European low wage countries, for which so many Dutch and British people fear, is a smaller problem than most anti-EU parties let you think. It is not that I try to downplay the problem, but I really think it is a containable problem.

Of course, we need to be cautious about the excesses, caused by the free traffic of workers, for our domestic workers, as well as for the foreign workers themselves.

When we suspect abuse of labour protection regulation by obscure temporary labour agencies or witness breaches of collective labour agreements and minimum wage arrangements through opaque fiscal/legal constructs, we should warn the government about that. (Local) government officials should interfere and they should severely punish deliberate (multiple) offenders.

Nevertheless, the free traffic of workers is one of the most treasured attainments of the EU and it will never be put under jeopardy by the rest of the EU member states. Vince Cable of the Liberal Democrats (see second red and bold text) was 100% right about that. And when the British are indeed so senseless to fumble with the European immigration laws in their own country after all or even plan to leave the EU, they should think about the consequences for their own British nomad workers all over the European Union.

They should consider that this could even become the end for ‘British workers being more equal than all other workers’ in Europe, as they are hard, but not impossible to replace. These British knowledge workers now receive a warm welcome all over Europe and most of them do truly deserve that.
However, when the UK indeed abolishes the European immigration laws and turns into an ‘inpenetrable island in the European sea’, like even Switzerland has never dared to be, these British workers all over continental Europe could possibly be replaced with knowledge workers from Southern and Eastern Europe or Asia. 

In retrospect, these South European, East-European and Indian knowledge workers are willing to learn the language of their host country after all. And at least they don’t pride themselves on perfectly speaking the ‘Lingua Franca’ of the 21st Century, which allegedly “discharges them for eternity” from learning another language!

Wednesday, 22 October 2014

“Why so many government projects fail”. Ernst in discussion with Jeroen Gietema, co-author of the book series “The Project Saboteur”

Last Saturday,  I have written about the Dutch, parliamentary Ton Elias Committee and its investigation into the failure of numerous governmental ICT projects.

This extremely sloppy and superficial investigation only seemed to push paper around and did hopelessly fail at looking for the real reasons, why so many governmental ICT projects fail.

After I finished my article last weekend, I had on Monday a very interesting discussion with my colleague Jeroen Gietema; except for being an excellent and amiable ICT consultant with expert knowledge in financial business, he is co-author of the small, but interesting management book series The Project Saboteur. On top of that, he has years and years of experience with change processes at the government and in the financial industry.

Jeroen Gietema, Co-author of
The Project Saboteur series of management books
Click to enlarge
Today, I asked Jeroen to speak out frankly about the topic of change and explain why so many goverment (ICT) projects failed hopelessly in achieving their main goals.

The following article is an integral representation of our ‘interview’, for which I thank Jeroen very much.

Jeroen: In governmental ICT projects, you need to look at the context in which a software supplier is acting. That is always a personal context – for instance where the account manager of the supplier is involved – but also a corporate context.  

The main corporate context is always that a commercial company wants to make profits and wants to achieve continuity for a longer period.

Depending on how the national ICT market is, at the time of the assignment, the company will try to extend or not to extend the assignment. That has to do with direct yields from the project and other opportunities beside the current project, which could yield more money possibly.

State officials, civil servants and employees of commercial companies often go through organisational change projects. And then certain eternal truths are highlighted: the change project should almost always lead to diminished numbers of personnel. In nine out of ten times, the business case for a change project is personnel reduction.

Irrespective of whether you take McKinsey, PWC or KPNG, they all sing the same ole’ tune. Personnel reduction is the only real business case that these companies have. But as a matter of fact, this is exactly the business case which almost never gets realized.

These companies argue, however, that their business case does get realized in a profitable way indeed. Still, at the bottom line, one will see that the expenses of the McKinsey consultants and the costs of outsourcing of employees have almost never been added to the final financial result of the project. The reason is that the costs of outsourcing and firing personnel are dramatically high.

There is a simple calculation for that, to prove my point.

I suggest that we have two companies, which want to go through a merger. Both these companies have an ICT-department. One ICT-department has a 60 year old manager and the other department has a 35 year old manager. It makes sense that these ICT departments will be merged together and that one of the two managers has to step down, for the point of being superfluous.

The manager that probably will be forced to step down is the 60 year old manager, who has about five years to go before his retirement. How much money will this man cost the merged company, when it pays him until his retirement, do you think? This is what many companies do these days.

Say, that it will cost you a total amount of about €500,000 during five years. The cash value of this is about €480,000 (at the current interest rates).

However, when I want to lay off this man, I need a consultant from an outsourcing company. This guy will probably cost me €250,000 annually and this kind of guys always manages to get themselves a contract for a whole year: €250,000!

So I have to pay this 250 grand now and when I say goodbye to my 60 year old ICT manager, I have to bring a large bag of money too: perhaps 20 to 30 times his monthly salary. Including the fees of the outsourcing consultant, this lay off will at least cost me also 500 grand and probably a bit more..

When the ICT manager has worked at the company for a long time (more than 20 years for instance), his resignation will cost me between €500,000 and €1 million. This already happens to be a very poor business case, as it costs more money to fire the man than to keep him at the job for five more years, until his retirement.

And there is more: when I fire this man, quite a lot of knowledge walks away from the company.

Ernst: Perhaps you should hire him back as a freelancer then, after he has been fired?!

Jeroen: That could very well be. The second thing that happens, is that these people start their resistance against the project in the days that they have left, as genuine project saboteurs.

They resist against everything and silently refuse to share their vast knowledge – which is always very useful knowledge, gathered in years and years of experience – among their colleagues. This is a double whammy, which makes the merger inefficient, as you cannot disclose all available knowledge, in this situation.

In other words: the added value of the merger diminishes strongly, even when the merger itself is a success. Such success, however, is definitely not a no-brainer, as a merger of two departments often leads to the situation that the ICT systems of both departments all remain operational. Then you have a merger without merging the available computer systems. This costs double the money.

The solution for this conundrum starts with not hiring McKinsey, KPMG or PWC, as these people always come with an unachieveable business case.

The second thing that you should do, is to keep the “superfluous” manager (or personnel) in service. Instead of firing them, you use these people to prepare and train the other people at the department, through a master / student relation for knowledge transfering.

In the example of our ICT manager, you let him coach the other workers, making him important in the process, instead of futile. You could even make him projectmanager for the transition, with a guarantee that he can stay the full five year period until his retirement or that he can go with a solid early retirement arrangement, at the moment that his knowledge has been transfered successfully.

What will happen? The process of the transition will actually accelerate, as this experienced ICT manager with 20+ working years, from the example, had always been the most qualified guy to hamper the transition process.

By making him important, he will stop doing so. This has to do with the Pyramid of Maslow. This Pyramid actually goes very deep in explaining the motivations of people.

Pyramid of Maslow
Chart courtesy of commons.wikimedia.org
Click to enlarge
People in the lower stages of the Pyramid have interests, like making money to feed themselves and their families and to let their children go to college. The upper stages of Maslow focus at self-esteem and self-achievement.

When you make someone important, by letting him transfer his knowledge to his colleagues, you add to his self-esteem. So I save serious money in the process by keeping this guy and actually making him important!

Summarizing: when you have a business case for change, you need to get the human factor out of it (i.e. personnel reduction), as making a profit on this is exactly the thing that you won’t achieve… ever!

However, you should take the human factor into consideration, in order to force yourself to investigate how you can mobilize these people in a positive way. Positive people are enthusiastic to participate in the change project. This is the conundrum that you need to solve.

Every change project where executives fail to do so, is dead-on-arrival. You see that happen at almost every merger and at all systems and departments which should be merged together.

This is my statement and this is where things go horribly wrong, nine out of ten times, at government change programs and large ICT projects. Employees have great interest in their jobs being continued. Executive managers should never forget about that.

I thank Jeroen for his elucidating insights in change processes.
   

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