The Global Marketplace

Learning from failure

Recently I was asked to make an early stage investment in a Latin American IT firm, through the informal manner of investments common in the region.  The firm had suffered a serious of spectacular failures yet I am still contemplating a position--what did I see that was noteworthy?  Two things.

Learning from failure.  The gentleman who ran the firm's day to day operations had an amazing capability to look back at his mistakes and draw the right conclusions.  Why?  I believe his ability to check his ego at the door allowed him to rationally view his errors.  I have touched on this issue before, i.e. the need to strip out ego from decision making, and how truly rare this quality is at senior levels of corporations.  When you find it, you have found something valuable.

Mental flexibility.   Despite my admiration for the above quality, being mentally flexible and open may even be more important.  In this gentleman's case he spent many years as a technology analyst where he was forced to keep up on IT changes while not becoming wedded to any specific product.  "Falling in love with the gear" is the biggest pitfall to avoid with new products and/or companies, as it frequently clouds judgment.  The point is there are many reasons why individuals can have the mental flexibility to adapt--just recognize it when you see it.

Latin America and China: not our backyard anymore

I spent the better part of this decade working in Europe which took my focus off Latin America.  As I refocus on the latter one of the advantages I have is looking at the region with a fresh set of eyes.  One thing I have noticed is the surprising growth of China in the region.  What have I seen and why does it matter?

Military spending.  The Chinese have made inroads with some countries regarding arms sales.  This is not as cut and dried an area as you might think, as it effects other industries as well.  Once a country which does not produce arms becomes dependent on a producer like China it is practically impossible to switch to other nations like the U.S.  Most annual expenditures are upgrades to existing systems which force you back to the original supplier, for decades at a time.  This will give Chinese companies involved in both defense and non-defense industries a permanent presence in the region for years.  Watch and see.

Embassies.  The Chinese are putting diplomatic presences in all sorts of new places like the Caribbean.  Combine this with all of the historical baggage associated with the U.S. presence in Latin America, then add in American indifference to the growing Chinese presence (as compared to the Soviets during the Cold War), and what you get is a long-term power shift which will change the business dynamic in the region.  Remember the Chinese are concerned with growing their export industries as opposed to simple political power.

Risk: Are complex cyber systems more or less risky?

After studying cyber risks to several systems, both complex and simple, two counterintuitive conclusions were pointed out to me.  You might be surprised--I certainly was.

Complex systems are safer--with one big exception.  The more complex IT systems are usually safer to an outside attack, primarily because designing the right exploitation that takes advantage of all the target's vulnerabilities is practically impossible.  Too many unknowns to make it work right.  In addition the people who design and use complex tools are generally smarter when it comes to these threats and build in protections.  One big exception (which I discussed in earlier post):  the human factor.  If your competitor has inside help then defeating complex systems is generally easier.  As a rule complex systems have more vulnerabilities which can be seen from the inside and as opposed to the outside.  A mole is particularly dangerous in this situation.

Simpler systems are more dangerous.  Less sophisticated systems are generally more vulnerable because the designers and users usually don't understand the threat environment.  This is an area of particular concern in emerging markets where IT may not be acentral a point in certain industries, at least when compared to more developed economies.  Keep this in mind if you work in these areas.  Know your threats when working with various systems.

Risk: politics and business are not always the same

If you look at recent press articles Iran-Venezuela trade agreements have been the flavor of the month.  Several clients thought they spotted potential opportunities and asked me to explore the situation.  The situation looked promising, for two reasons.  First both countries have difficulties with the U.S. and thus a perceived common interest.  Second, and more importantly, both regimes are authoritarian (to some degree) and thus should be able to push their private sectors towards mutual cooperation.  Once I started digging I found through my sources that the situation was not so rosy.  Why and so what?

Business realities.  A state-owned company in Iran can be told by the Foreign Ministry to cooperate with a Venezuelan counterpart as part of a trade agreement.  The reality could be that the Iranian company operates under different pressures inside Iran, i.e. some other government organization wants it to make money to support the economy.  This fundamental business fact will trump a political desire not based in reality; perhaps it does not make sense for the Iranian firm to export to Latin America.  The bottom line is that economic conditions in a business environment will always trump political needs.

Common sense.  Once I looked at the information on these countries the truth seemed obvious, even though I missed it at first.  Always look at business realities and not at the political logic.  Tremendous opportunities exist in these countries, but not for reasons you glean from the newspapers.

Risk: lessons from the boom

I spent many years living in Luxembourg during the recent financial services boom that has since turned to a bust.  A couple of points that I picked up.

Keeping up with the Joneses.  For many of my friends in this industry, the intense pressure to keep up with competitors was the common theme that I recall.  As one institution posted good numbers the pressure rose to match these figures, the thinking being "if they can do it so can we".  This led to crazy hours and a stressful atmosphere that seemed to preclude the kind of reflection that would have asked "do we know what we doing in this market?"  Hindsight is great, but nobody I knew got themselves into problems because they were stupid or greedy.  This was human nature at work.

Nobody is that good.  While I did not see signs of ignorance or greed leading up to the best I did see human ego at work.  Capitalism being what it is, all of us start to believe the hype about our success the more we are complimented by our peers.  This is very insidious and hard to fight and is also the price of a culture of meritocracy.  I have been the best at everything since school, so what is wrong with the success I am currently enjoying?  The end of the movie "Patton" comes to mind, where the story of the Roman slave whispering to the conqueror that all glory is fleeting is recounted by the actor, and perhaps we could all benefit from such simple advice. 

Risk: Long-distance effects

As promised, here is the first of several musings regarding risk as I see it.  These will not follow any specific order but will be random observations from my international experiences.  Today I will review some of the unforeseen ways U.S. foreign policy in Latin America affects business interests.

Drug wars.  For the last twenty years drug policy has driven U.S. interest in Latin America.  The reason is not necessarily the threat posed by drugs but how the U.S. government comes up with a foreign policy.  We are one of the few countries with perceived interests everywhere yet like everyone else our leaders only have so many hours in the day.  As such the drug war jumps to the top of the list in U.S. policy towards Latin America because of the domestic effects.  This leads to the perception in Latin America that drug issues drive our interests in the region, which is not true.  The risk for business is that you have to account for this perception regardless of your business line.

Human rights.  Human rights issues also drive U.S. foreign policy towards Latin America from time to time, a swing we will certainly see in an Obama administration.  For business this touches many of our partners as these individuals have had links with conservative governments throughout the region.  Accusing these people, frequently honorable folks caught in bad times, of crimes can clearly rub a raw nerve.  I have seen cases where they link U.S. businesses with the U.S. government in these arguments to the detriment of the former.  Talk about risk hitting you from an unexpected corner!

Risk: a business model

My business colleagues know that I specialize in risk management focused on Latin America.  What does this mean?  The following series of posts are based on some questions I fielded in recent weeks, especially relevant given what is happening in the world's financial markets.

Definition.  I will not define risk in the larger sense, since despite some common definitions companies and organizations view this problem differently.  I specialize in identifying non-quantifiable risks for incorporation into both corporate models and overall strategy.  I do this in Latin America because culturally this is my home--I know how the region works.  I spend a lot of time in Washington, D.C. because the U.S. government plays a large role in many Latin American issues and I need to stay up on what is happening in the policy arena.

Business model. Per the above definition my business is rolodex based.  For my European clients (picked up while living in Luxembourg) I bring connections in both the Washington community (government and various other organizations around town) and throughout Latin America.  Having been lucky enough to sell a successful European consultancy before the bubble burst, I also have my own capital to invest in the region which adds to my credibility with clients.  This is not just an academic exercise.  Lastly my economics training helps me understand risk models and how they incorporate the product I provide.

Next, we move on to various practical examples of what I am seeing in this business.

War and business

With the growth of the state in modern times the overlap between the public and private sectors continues to worsen (from my point of view).  I have noticed this in my recent cybersecurity work, and two points worth mentioning.

Technology overlap.  Security agencies and the private sector frequently use the same companies and technologies for their respective missions.  Given the need that governments believe they have for state of the art technologies it was inevitable that they would take a keener interest in various technology companies.  Add this to the size of various governments (anyone have a bigger customer than the Pentagon?) and it should not surprise any of us that these agencies can call the shots in many large companies, affecting the products and services provided to the rest of us.  The change is subtle but can be seen.  Keep up on what governments are doing to see where these sectors which affect you are heading.

Interest overlap.  With the above point in mind a logical extension would be an aligning of missions for both security agencies and private sector technology companies.  Specifically, governments forcing companies to cooperate with them in their missions while conversely lending their capabilities to national interest companies.  Given the history of government support to companies in Europe, for example, should any of this surprise us?  Again, stay up on set of trends so as to not be blindsided by another somewhere important.

People and markets are strange

Having sold my company before the financial bubble burst put me in a good financial position to evaluate large equity positions in new companies.  I get many calls and evaluate many opportunities which I share here on this blog.  Recently I evaluated a group of smart individuals who unfortunately forgot that people and markets are not always logical.  They had a great product and decent vision but could not adapt to the vagaries of human nature.  Why?

The right experience.  One of their products looked good on paper because the lead engineer had a great resume and seemed like the right guy for the project.  One year later it had not panned out.  One of the company's leaders was looking for signs he missed while evaluating the engineer to prevent the problem from happening again;  "data points" was the expression used at the conference table.  Missing in this discussion was the one thing which could have spotted the problem:  experience with people in this industry.  People either have or don't have the makeup to accomplish certain tasks in every field.  Experience will allow you to recognize this and if the individual does not have this quality just move on to someone else or don't start the project.  This discussion showed me that the company did not have this people/industry experience to succeed and I moved on.  There is no substitute for experience with people, no matter what the field.

Choke Points

As I continue my projects on cybersecurity and cyberwar I keep coming across potential vulnerabilities throughout different organizations.  In an earlier post I discussed the human vulnerabilities to technical systems.  Today I look at unplanned technical choke points.  These are technological challenges that a system cannot foresee and therefore cannot process.  An example is searching data that changes.  It easy enough to look through text data for information (on market trends, for example) but what about voice and visual?  A couple of security points on this.

Pressure to fix it can leave you vulnerable.  If your company faces one of these problems then you will be under tremendous pressure to resolve it.  After all, if someone wants to study video for potential marketing information they want it now, perhaps because they believe their competitors are on to something.  This can lead to shortcuts which could leave you vulnerable to exploitation by those very same competitors.  Don't lower security procedures and remember that everyone faces the same choke points, even if the timing is different.

Don't lose focus.  Engineers don't like unplanned surprises like these choke points and non-technical managers tend to expect engineers to solve every problem.  Remember that these challenges are not core business competencies and will be dealt with.  In a couple of situations I have seen managers get overly concerned by frustrated engineers;  the analogy would be watching your doctor get confused with a medical procedure.  Not being medical experts we would be scared!  Don't be overly frightened by these situations.