Monday, December 12, 2005

Dell's mistake reflects on the Oracle's wisdoms

"We don't worry about our businesses. We have a diverse group of good businesses with great managers. What we worry about is something going wrong. We have 180,000 employees, so it's guaranteed that something will go wrong. We know it will happen. We just try to have - we do have - the right incentives in place.

For example, when I get on a NetJets flight, even if I'm in a hurry, I don't say to the pilot, ¡°Hey, I'm in a hurry. Can you speed it up.¡± The last thing I want is a pilot rushing through his pre-flight checklist, etc.

But companies do this all the time in the way they incent people. They should not have a system that encourages a focus on quarterly earnings. Our managers have no quarterly budgets - I don't know what our numbers are going to be next quarter. I'm also careful not to communicate anything to the contrary via body language.

Insurance companies in particular can report pretty much any numbers that they want. With $44 billion of reserves, it would be easy to adjust the reserves to show whatever profit was desired.

Even if quarterly numbers weren't tied to our managers' compensation, if I went to Wall Street and promised X, the managers, who wouldn't want to let me down, might play some games to achieve X.

Munger: What we don't like in modern capitalism is the expectations game. It's not the kissing cousin of evil; it's the blood brother.

Buffett: People who predict precisely are either kidding themselves or others. We've seen people get their egos involved. And everyone in the organization knows what the CEO has promised in public. It's setting up a system that sets up financial or psychological pressure for people to do things they probably don't want to do. It's a terrible mistake."

Dell Inc. is making the mistake recently. Trying to achieve the CEO's grant target - 80 billions in 2008, both their product and service qualities went down.


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