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  • The “Dick” Economy

    Posted by Carl from Chicago on March 3rd, 2012 (All posts by )

    When I was a consultant I traveled throughout the US and worked in many different states and regions. I grew up in the Midwest, where my core values were shaped. A general description of these values in business would be a variant of the “golden rule” – from wikipedia:

    The Golden Rule or ethic of reciprocity is a maxim, ethical code, or morality that essentially states either of the following:

    (Positive form): One should treat others as one would like others to treat oneself.
    (Negative/prohibitive form, also called the Silver Rule): One should not treat others in ways that one would not like to be treated.

    This concept describes a “reciprocal” or “two-way” relationship between one’s self and others that involves both sides equally and in a mutual fashion.

    This sort of approach wasn’t out of the “goodness of your heart”, it was a fair and reasonable way to approach your customer or supplier. An example – you are working on a job at a price that you both agreed upon, and then you find that things are significantly different than planned and you will come up far short of your original profitability or even lose money on the job – what do you do?

    You approach the customer, subtly, and describe some of the new or unseen events that have changed the scope of the project since inception. The customer has a few options – they can 1) give you nothing and tell you to “eat the difference” 2) split the difference on some of the unforeseen items which may not make you whole but softens the blow 3) not change the current deal at all but implicitly or explicitly tell you that there are future opportunities to make yourself whole.

    More often than not, we eventually came to a #2 type resolution, although it was often linked with a #3 type opportunity. Rarely were we just told to “pound sand” and take the #1 option.

    Why is it this way? On the surface it would seem that, as a customer, #1 would always be preferable. You have a binding contract, why not stick it to your vendor? A few reasons – a bitter vendor is unlikely to do good work, and will look at the contract in detail to find a way to stick it back to you by living to the “letter” not “spirit” of the agreement. An additional component is that if you behave as if life was a series of single transactions with no consequences to others (i.e. a series of #1 events), you eventually end up with a reputation as a “bad customer” and this will come to damage you in various ways; often it will get raised from the vendors boss to the customers’ boss at the golf course or some other type of less formal venue; and most companies don’t want a reputation for being difficult and vindictive. An additional element is that this type of behavior is generally not how people in the Midwest live their lives – it will probably be correlated with other types of behaviors (selfishness, not looking out for co-workers, extreme ambition) that will lead to at least a mild ostracism or at least career damage.

    The second part of a series of #1 issues is that the SUPPLIER can just walk away from the job in the first place if they aren’t going to earn a sufficient profit. Sure, you can sue them, but the courts take forever and meanwhile, whatever project you hired the supplier for in the first place is languishing (i.e. a product launch, or a cost reduction project, etc…). This is a variant of the golden rule on the part of the supplier, which means that they have an obligation to do the best work possible under the spirit of the agreement to make the purchaser look good.

    In my limited experience the apex of #1 experiences on all side was New York. Even the simplest item became a desperate bargaining scrum, with both sides scouring the other for weaknesses and gleefully “sticking it to them” whenever possible. If you approached a NY transaction with the attitude of a midwesterner, you were going to get screwed, because they were going to walk all over you and push for favorable terms and lord over you their advantages while you would be loathe to use the same tactics in return. Soon even the dimmest types have to take on #1 attitudes, and then regular update meetings are just taking turns throwing the other guy “under the bus” and scheming to leverage the fine print. A real joy.

    The difficulty with #1 behavior is that it “negates” itself when confronted by both parties using this set of tactics. Now you get back to equilibrium, but the entire transaction and work effort is bitter and poisoned. As far as future work, you just “roll forward” your grievances into the NEXT transaction and find ever more creative ways to win with #1 tactics in the future, as both sides escalate.

    The total of #1 behavior on both sides over time isn’t better than “golden rule” or Midwest behavior – you get back to the same equilibrium either way – and in the Midwest model of reasonable assumptions and giving the other guy a break and not living by the “letter” of the law, the entire process isn’t poisoned and miserable all along.

    The “Dick” Economy:

    Recently I read that lenders were paying homeowners not to “trash” their houses during short sales; the lenders would give an amount of money sometimes in the tens of thousands to current residents (don’t want to call them “homeowners”, because they obviously own nothing it is a short sale) to keep the homes tidy and work with prospective buyers as they tour the home. In this instance the current resident isn’t even paying their mortgage, and yet the bank is paying them MORE to not trash the home, to boot. This is an example of “the Dick economy” where we have to assume negative, single-transaction behavior on the type of actors.

    A similar example is a horror story of someone in Chicago I know who rented to a prosperous engineer who promptly failed to pay any rent at all and then due to the slow process of eviction was able to live rent free for six months. The time would have been far longer except that the home owner had a contact with the sheriffs department that allowed the process to get expedited. It is interesting to speculate that the type of moral indifference that lets people strategically default on loans wouldn’t come up in more forums; after all, if you don’t pay your mortgage and live free in your house for years, why wouldn’t you play that same trick on the stupid landlord who lets you come into the building?

    New York, on the other hand, has this figured out. Want to rent in New York City? You need to have your income verified and have a co-signer. If you can’t pay, they go after whomever co-signed. And you can believe that they are going to do this. New York expects #1 behavior among all players, and the game is played that way.

    It will be interesting to see if “walk away” behavior infects more of the Midwest and we all end up like NYC. If people start to walk away from mortgages and then push the rental situation to the same place, you can bet that soon a co-signer or many months of pre-payment will become the norm here.

    Cross posted at LITGM

     

    10 Responses to “The “Dick” Economy”

    1. Bill Brandt Says:

      Interesting post Carl – and while reading it the following thoughts came to mind.

      Too much management in this country is concerned only with price and their entire product development cycle revolves around price. Vendors are added or discarded based solely on price.

      If the Japanese didn’t invent it they certainly popularized it to the notion that a manufacturer wants a long standing – and profitable – relationship with its vendors – and by profitable it means mutually beneficial.

      Toyota has had relationships with suppliers for decades, to the point that when they first started coming here to make cars, they brought their suppliers, to the surprise (and disappointment) of many here.

      I think the reason so much of our stuff is made in China now is to get that cheap price. Eventually this will come back to bite them.

      On Steve Jobs – read an interesting article on him in of all things Time Magazine.

      No I don’t subscribe to it; it was given to me; my personal feeling is how far it has sunk since the Claire Booth Luce days – but even a broken clock is right at least twice a day.

      Stanford – Harvard Business schools are starting to teach the “Jobs Style” of management.

      No they aren’t fond of his personality – he was a jerk to his fellow workers by most who knew him.

      Jerk is putting it too politely. The writer of the article inferred he succeeded in spite of his personality.

      So what interests the business schools about the “Job’s Style”?

      1. He didn’t rely on focus groups. Didn’t care what people would think of his ideas. He badgered and pushed his people to develop what he thought people would like.

      2. He didn’t let bean counters dictate what his products would end up becoming. He developed the products, then let the bean counters decide how to price them.

      While I have no way of knowing I am sure he valued his vendors too.

      BTW – the “Midwestern style” – my sister, since her Iowa State days, decided to stay there and it is different – many things are to me for the better.

      For one thing her house in Minnesota has no fences nor do the yards of her neighbors. They all seem to work out the mowing chores among themselves.

    2. Dan from Madison Says:

      We have discussed the Midwestern values/working philosophies many times and I find it a very interesting topic. I absolutely hate dealing with vendors who are based on the East Coast, UNLESS they have non natives in their CSR and/or sales roles. If I am dealing with a hardcore East Coaster, at least I always know what is expected and what to expect. Of course this isn’t a hard and fast rule but it true the vast majority of the time.

      I highly doubt that much of this will creep into flyover country, especially the small towns. In rural communities you have to cooperate with your neighbors to survive. If you are, for example, a farmer and get injured you are toast if you don’t play nice with others. I have seen communities rally to help others many times on the ag side due to a death or injury. I am doing this right now for a neighbor farmer who just got seriously injured. Many others are pitching in as well to cover his work while he recovers. What was interesting wasn’t the fact that everhyone helped, it was that not ONE PERSON was asked. We all instantly called the wife and just said what do you want us to do and when to you need us there? It is just understood.

      Back on topic, I deal with a lot of people from all areas of the country, and there doesn’t seem to be such angst dealing with vendors and business partners except for the East. Fortunately the vendors are pertty much disappearing from there to right to work states and other places that maybe aren’t as caustic and this pleases me greatly. Serves a lot of them right.

    3. Sgt. Mom Says:

      I think the Midwest, shake-hands on a deal and word-is-your-bond applies to Texas as well .. although I can’t say that I have done enough business with the high-rollers to say, definitively. But I do have one semi-regular employer who is very much an exemplar of that type of Texan who did million-dollar deals on a handshake. He is so decent, so good, so straightforward in his dealings that he tiptoes along the edge of financial disaster most years, since some people do take awful advantage … but on the other hand, he will do anything for his friends, absolutely shirt-off-his-back anything. And they will do just about anything for him. So he has friends and relations all over town who will loan him money in a crisis, because they know that he will pay them back out of the profits of his next deal. And he does.His reputation is so good that he carries on in business that way.
      The last financial crisis I had – he paid me for work in advance. The last crisis he had – I worked for him on spec. That’s how it rolls in flyover country.

    4. Michael Kennedy Says:

      A potential negative of “midwestern” behavior is that you can be a mark. The old saying is, if you have figured out who the mark in a poker game is within a half hour, you are.

      Two years ago, I sold my house of 20 years. I decided to move to a resort area I had always loved. Nobody told me that resort areas are bad news in tough economic times, but I should have known. I found a very cooperative realtor. Eventually I settled on a nice house with a large level lot, rare in the mountains. A couple of things should have made me suspicious but I ignored them. The house need a new roof (shake roofs are illegal in California after next year) The seller agree to split the cost of a new roof. There were a couple of other items. One was that I had trouble sleeping and felt short of breath. I was assured that this was just getting used to the 5200 foot altitude. A week before the escrow was to close, the seller refused to pay for the roof and I learned that the realtor was representing him, a personal friend of hers. I had the perfect right to back out but didn’t.

      A few months later when my breathing didn’t improve, I saw a pulmonary doc who had been a friend for 30 years. I had never smoked and had no suspicion of a problem. I had testing and learned that my maximum breathing capacity was 50 % of predicted.

      Anyway, I now have to sell the house. I invested about $150,000 in it including a 20% down payment. I had it appraised recently and it appraises at $149,000, less than I paid 18 months ago. I will rent a condo for a couple of years and than probably try again. The realtor I have now doing the short sale (I expect the bank will agree as they are losing much less than I am) told me that he could not believe an appraiser would arrive at the value I paid and which the bank agreed to.

      Live and learn I guess. I think I ran into #1 situation with my eyes wide closed.

    5. Michael Kennedy Says:

      Have NOT figured out…

    6. Bill Brandt Says:

      I have learned over time that what goes around eventually comes around.

      Lake Tahoe real estate is very volatile unless you’re talking about a place on the shore. (these values are artificially kept up because the states – I guess the Tahoe Regional Commission since it falls in both NV and CA – anyway they control who can build. Point is when times are good everyone wants a second home there; when times are bad they all go on the market.

      Sgt – your Texas friend – I would say is an old school Texan – one who has been there a long time. The world sure seems nicer when you don’t have to think the guy with the next deal is trying to burn you – but they are out there.

      I remember reading in the SF Chronicle some years ago – 10-15? There was a man whose murder – to my knowledge – has never been solved but he had the habit of suing people on the slightest provocation – and of course “settling” outside of court – as a defendant it takes a lot of money “defending” yourself from even frivolous things – and I guess he finally pushed someone too far.

      He had sued about everyone in his neighborhood – and extended neighborhood – at one time or another. People were terrified of him.

      Along the lines of “who do you trust” some of the biggest scams have come through churches – by members against other members.

      But all in all it would be a good feeling to live in a community knowing others are looking out for you.

      Michael – it would seem that you would have a good legal case against that realtor but what goes around will come back around.

      But there’s skunks everywhere ;-)

    7. Carl from Chicago Says:

      Good comments. If I had to bet I’d say that co-signing or pre payment on apartments here in Chicago might be the norm in a few years. We have a huge amount of apartments here and people from all over who are non-Midwesterners and I think many, many of them have gotten into the “walk away” mode. Once you get something for free (?) it is hard to wean them from that habit.

      One interesting item is that per the condo laws in Illinois you can personally sue people who don’t pay their assessments even if the bank forgives them on the mortgage. The only way to escape this is by bankruptcy or likely to move to a state out of Illinois where it becomes a hassle to go after you. It is relatively easy to garnish a paycheck on that topic here.

    8. Bill Brandt Says:

      Out here in CA in our small HOA we have had several walk offs – I remember one guy – was behind in his assessments $3,000 – he met with the Board and a member, who had grown up through the Depression, took pity on him and suggested that we allow him to make payments to us.

      Well 1 or 2 of these and they stopped – the house foreclosed and our only remedy is to take him to small claims court.

      Bottom line there is no feeling among many that they are honor bound to anyone.

      Quiet a change from my UVA days where you could be kicked out for bouncing a small check.

      All the merchants in Charlottesville would take a personal check from a student today because of that rule.

    9. renminbi Says:

      A substantial part of NYs business class is descended from people born in the Russian Empire,in its several iterations, such as my father,who was a real piece of work. These cultural attributes, or attitudes can probably be passed on for centuries,I would guess. I suspect you also see this type of nastiness in the entertainment industry,particularly Hollywood.

      It might be best to pass this business up, and let the sharks eat each other. Sorry I can’t offer more palatable advice.

    10. sol Says:

      This why we have the Rotary, the Shriners, The Moose and the Elks. Clubs where the members share the same ethics and priciples. Small businessmen like to get a clue about who they can trust.

      You can tell alot about a stranger by the way he/she plays golf, drinks and brags which is why country clubs grew.