Student Run Management Consulting Firms

February 25, 2011 · 10 comments · Image Source

in Management consulting

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OVER the last 3 years we have witnessed the birth of student run management consulting firms in Australia.

Student run management consulting firms harness the energy and enthusiasm of capable students to help non-profits enhance their social impact, and provide a platform to foster mutually beneficial relationships between students and the non-profit sector. Students benefit because they have the opportunity to take ownership of real world projects, learn valuable consulting and leadership skills, make a meaningful contribution to local communities, and take responsibility for their personal and professional development.  At the same time, non-profits benefit because they receive pro bono consulting advice targeted to their specific organisational needs.

Spawned in Sydney

In 2007, Nathaniel Ware founded Australia’s first student run consultancy to help socially conscious organisations achieve a greater social impact. 180 Degrees Consulting started at Sydney University and now has chapters in Sydney, Stockholm, Mexico City and Vladivostok as well as working with affiliated student groups in India, the UK, South Africa, the USA and Romania. During its short history, 180 Degrees has worked with a wide range of nonprofits including Youth Off the Streets, Make a Difference, STARTTS, Kiva, Energy in Common, and the Red Cross.

You can contact 180 Degrees here.

Multiplying in Melbourne

In 2009, Fabian Burmeister, Shiraj De Silva and Samantha Fu brought the buzz of student consulting to Melbourne. The Graduate Consulting Group (GCG) has its roots at Melbourne University’s Graduate School of Management and has already worked with a range of nonprofits including The Aussie Hands Foundations, Kenya Australian Charity Organization and the Hotham Mission Asylum Seeker Project.

Your correspondent was recently in touch with GCG’s Advisory Board Member Max Teo and others, and was delighted by the professionalism and passion that this budding young group has for making a positive impact in the social sector. Alice Hu, one of GCG’s project consultants on the recently completed Hotham Mission Asylum Seeker Project, had the following to say about her reasons for joining GCG:

I joined GCG because I believe something more rewarding can be derived from obtaining a degree at one of the world’s leading tertiary institutions. GCG gives me a platform to contribute to our community by directly assisting and supporting those on the frontline of our nation’s not-for-profit causes.

Tak Wong, Head of Marketing, outlined that GCG differentiates itself from traditional student consulting firms on three fronts:

  1. Advisory Board: Perhaps the most significant differentiator is that GCG has a team of consulting professionals who support GCG in an advisory capacity. Beyond providing general advice, Advisory Board Members help structure problem solving efforts on client engagements and run training workshops to help student consultants hone their skills. GCG aims to support its members with top tier training, and give them the support they need to provide high value results for clients.
  2. Diverse pool of candidates: GCG consultants are not just undergraduates, they are also postgraduates, MBA students and recent graduates. They’re all high performing and hand-picked via GCG’s case interview process.
  3. Functional roles: GCG has a range of functional roles, which provide opportunities for students who might not necessarily want to get into consulting – e.g. Marketing, HR and Finance. These roles allow students to take up responsibilities that they would not usually be entitled to as a fresh graduate, and are valuable in supporting GCG’s mission to help non-profits achieve their full potential.

You can contact GCG here.

Change is constant

January 18, 2011 · 2 comments · Image Source

in Economics

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NOTHING exists which is permanent.

Your current success is the result of your past efforts and good fortune, and how well you have responded to changing circumstances along the way by seizing new opportunities and avoiding threats.

An interesting example of a company that failed to respond to changing times is General Motors.  GM was the world’s largest car maker from 1931 to 2008.  In 2009, GM filed for Chapter 11 bankruptcy protection. The gas-guzzling Hummer SUV, a brand symbolic of GM’s failure to change with the times and deliver on fuel-efficient vehicles, was one of several brands that GM was forced to shut down.

Lasting success and satisfaction would appear to be possible only if we can constantly adapt to changing circumstances.

OZYMANDIAS
I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown
And wrinkled lip, and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
~ Percy Bysshe Shelley

What is the purpose of a business?

December 31, 2010 · 5 comments · Image Source

in Economics

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MAINSTREAM economics would have you believe that the purpose of business is to maximise profits.

If a business loses money it will soon go bust, this much is clear. Profit is necessary for any ongoing business operation, however the fact that a business makes a profit does not explain the purpose or raison d’être of the business. The Dalai Lama put it this way:

To state that the role of business is to make a profit makes as much sense as to say that the role of a person is to eat or to breathe. If a company loses money it dies, as does a person without food, but that does not mean that the purpose of life is eating.

Peter Drucker, father of the modern management profession, believed that:

Profitability is not the purpose of, but the limiting factor on, business enterprise. Profit is not the explanation, cause or rationale of business decisions, but a test of their validity.

Profitability allows a business to sustain itself, but it would be dangerous to make profit the most important objective of a business. A corporate culture that values profit above all else may lead to law breaking, excessive risk taking, unnecessary suffering for employees, or damage to society and the environment.

Instead of focusing on profit, a business should aim to satisfy customers while acting responsibly. By satisfying customers the business can occupy itself in a meaningful way. And by acting responsibly, the business can prosper without harming others. If the business can also make a profit then its activity will be self-sustaining.

Warren Buffett

December 25, 2010 · 1 comment · Image Source

in Leadership

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WARREN Buffett is an American investor born in 1930 in Omaha, Nebraska. Buffett is often referred to as the “Oracle of Omaha” and is the world’s most successful stock market investor.

Buffett is the largest shareholder and CEO of Berkshire Hathaway.  He has an estimated net worth of around $US45 billion.  In 2010, Forbes ranked Warren Buffett as the 3rd richest man in the world.

Buffett is noted for his adherence to the value investing philosophy and it is arguable that Buffett’s most influential mentor was Benjamin Graham. Graham was an influential economist and professional investor and is considered the first proponent of value investing.

Bank Bailouts and other Moral Hazards

December 4, 2010 · Image Source

in Economics

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In the previous post on Moral Hazard, we learnt that Moral Hazard refers to any situation where a person is not fully responsible for the consequences of their actions. As a result, they may take greater risks than they would have otherwise.

Here are 6 examples of situations where Moral Hazards arise in practice.

1. Insurance

The provision of insurance is the most common example of Moral Hazard.

For example, if you have comprehensive private health insurance you’ll be more likely to visit the doctor. You may also engage in more risk taking activities because you are not responsible for paying the medical costs if things go badly e.g. you go bungy jumping and throw your back out.

Malcolm Gladwell provides the amusing example of Universal Pepsi Insurance:

“Moral hazard” is the term economists use to describe the fact that insurance can change the behavior of the person being insured. If your office gives you and your co-workers all the free Pepsi you want—if your employer, in effect, offers universal Pepsi insurance—you’ll drink more Pepsi than you would have otherwise.

2. Mortgage Securitisation

Mortgage securitisation is an insidious and often misunderstood example of Moral Hazard.

The US government, motivated by a desire to expand home ownership, has for many years actively encouraged bankers to make loans to people with poor credit ratings. Fannie Mae and Freddie Mac, two large government sponsored enterprises, have carried out this policy through a process known as “mortgage securitisation”. Mortgage securitisation involves:

  1. purchasing mortgages from banks and mortgage brokers;
  2. grouping these mortgages together into large pools; and then
  3. selling “shares” in these mortgage pools to investors.

Moral Hazard exists because the banks and mortgage brokers who originate the loans do not pay the cost if lenders default. As a result, they have an incentive to make as many loans as possible, even to people with extremely poor credit ratings. These loans are often referred to as NINJA loans because they are made to people with No Income, No Job and No Assets.

3. The Greenspan Put

The Greenspan Put is another example of Moral Hazard.

Since the late 1980′s the Federal Reserve has followed a policy of significantly lowering interest rates in the wake each financial crisis (this policy is often referred to as the Greenspan Put). Lowering interest rates has the effect of increasing the amount of money available to the economy which prevents the economy from deteriorating further and stops asset prices from falling. As a result, this policy encourages investors to take excessive risks because they know that the Fed will lower interest rates if things go badly.

4. Bank Bailouts

Following on from mortgage securitisation and the Greenspan Put, we arrive at bank bailouts.

The provision of bank bailouts by government is perhaps the most topical example of Moral Hazard. In 2008, in the wake of the sub-prime mortgage crisis, the US government created a US$700 billion Troubled Asset Relief Program (known as TARP) to buy financial assets from banks and other financial institutions. The bailout was intended to stabilise financial markets, make sure that credit markets remained liquid and to prevent a repeat of the great depression. A worthy goal, however one small problem with TARP is that it creates a big Moral Hazard. If banks know that government will bail them out, then they will continue to engage in excessive risk taking.

Bailouts are now even being provided to sovereign states. In May 2010, the EU and IMF agreed to provide Greece with bailout money to the tune of €110 billion.

We can expect more financial instability to come.

Jeffrey Miron gives a great speech on the Financial Crisis and the case for doing nothing, which you may find interesting.

5. Private Equity

Private equity vehicles, popular until around mid-2007, are another example of Moral Hazard.

Let’s assume that investors give a private equity firm $100 million to invest. If the private equity fund makes a profit of $20 million after one year then the fund managers might take 20%, or $4 million. If the fund loses $20 million after one year then the investors lose $20 million and the fund managers pay nothing. Since the managers are not fully responsible for the consequences of their investment decisions they have an incentive to take excessive risk.

6. The Limited Liability Company

The limited liability company presents an often overlooked form of Moral Hazard (props to Stella Szeto for pointing this out).

A company will often link the amount that its executives get paid with the company’s performance on the stock market. The reason for doing this is to align the interests of the executives with the interests of shareholders, which makes sense on one level (see Principal-Agent problem).

If the company performs well and its stock price rises strongly then shareholders are happy and executives will get a bonus in the form of cash, shares and/or options. However, if the company performs poorly then shareholders lose, while executives still receive their base salary and are not required to compensate shareholders. As a result, executives have an incentive to take excessive risks in an attempt to inflate the company’s short term stock price.

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