I’ll Have Another Order of the Escalade, Please

My wife recently relayed to me an odd story told to her by a car rental agent. This agent told my wife about a woman who for months has rented the same Escalade over and over, renewing her rental agreement for a few weeks at a time. Escalades are considered premium/luxury rentals, so the bill has mounted quite rapidly. At this point, she could have easily taken all that money she spent and bought herself a new, albeit modest, car.

The question is why is she “wasting” so much money?

Given my past training in economics, I could not accept that this woman (let’s call her “Elaine”) is behaving irrationally – I searched the deepest corners of economic logic to explain Elaine’s behavior. One saving grace is that she has not spent so much that she could have purchased an Escalade outright. This condition allows me to create two key assumptions (every economic theory needs convenient, simplifying assumptions):

  1. Elaine’s, uh, business cannot be conducted without an Escalade. The style, the comfort, etc… is an absolute necessity to demonstrate to her customers that she is one of them, rich and powerful and ready to deal.
  2. Elaine’s business is very uncertain. She lives from deal to deal. She works hard to close every deal, but she cannot afford to count her chickens more than a few weeks out. (Maybe she sells real estate to high-end clientele?!?)

These rationalizations mean that Elaine cannot risk committing to a $60,000+ purchase or even a less expensive lease, but each deal earns her enough to generate the $500-1000/week it costs to rent the Escalade she requires for her business. When she closes another substantial deal, she happily skips to the rental car agency to ask for another extension.

So is there a point at which Elaine is better off purchasing the Escalade? Not at all. As long as she is never “sure enough” about a $60,000+ income stream, she is better off buying what she can afford and still conduct her business. (Not to mention few banks, if any, especially these days, would even consider loaning money to Elaine for buying the car or for funding the business given the looming uncertainties!) At some point, she may save enough money to buy the Escalade outright, but it is also possible she has other expenses that prevent her from saving enough Escalade-money.

In other words, Elaine may be doing what so many people do NOT do – buying what she can afford now and not burdening herself with debt she can only aspire to afford.

This parable reminds me of something Nassim Taleb – the famous author of “The Black Swan: The Impact of the Highly Improbable” – said about confidence and debt:

“…overconfidence translates 1-1 into accumulation of debt…I know I’m going to make an 8% return, and if I underestimate my error rate I will know with certainty I’m going to make an 8% return, so if I borrow at 5% I can leverage up the wazoo. (“Taleb on Black Swans, Fragility, and Mistakes“, interview with Russ Roberts on EconTalk, May 3, 2010).

Go Elaine! And happy deal-making!

A Cadillac Escalade
A Cadillac Escalade

Waste Management Collects Its Dirty Data in the Field

{Spoiler alert! This post reveals the story of a previously aired episode of “Undercover Boss“}

After watching this year’s Superbowl, I left the television remain turned on and discovered a CBS show called “Undercover Boss.” On this show, top executives disguise themselves as lower level employees to review company operations from the perspective of the average employee. The executives are essentially conducting field studies and collecting data to get the real “dirt” on their respective companies.

The particular episode I watched featured Waste Management (WM):

“Larry O’Donnell, President and C.O.O. of Waste Management, works alongside his employees, cleaning porta-potties, sorting waste, collecting garbage from a landfill and even being fired for the first time in his life.” (aired February 7, 2010)

O’Donnell visits five locations. He discovers not only is he incapable of doing most of the jobs his employee do on a routine basis, but also some of his efforts to increase efficiency are having the exact opposite impact and lowering employee morale. His path of discovery demonstrates the power of collecting data firsthand, the limitations of creating corporate strategy in the abstract or using numbers bereft of direct experience, and the importance of directly monitoring results from the bottom to the top. Granted, these observations occur in front of a camera, so employees have incentives to put on their best show. However I was convinced that most of the workers used this opportunity to expose the difficulties they face on the job.

I briefly summarize O’Donnell’s experiences by site and follow with some lessons learned:

Recycling Site
The conveyor belt transporting trash through the facility moves extremely fast. As a “trainee”, O’Donnell makes numerous mistakes and is exhausted by the time he retires to his hotel. He is dismayed to learn that employees are docked two minutes for every one minute they report late after lunch. The site manager maintains vigilant watch over the entire facility using a battery of security cameras installed in his office. The strict enforcement and tight surveillance are an on-going source of grief amongst employees.

First Landfill
O’Donnell is tasked with picking up litter blowing across a hill adjacent to the landfill. O’Donnell must fill at least two bags of trash every ten minutes, but, once again, he is not up to the task. His performance is so poor that the supervisor fires him from the job. It is interesting to note that the supervisor does not oblige O’Donnell’s request for guidance on technique because it is “…not rocket science. It’s a very easy job.” It turns out that this supervisor is disabled and ignores his pain to report to work every day. Thus, he has little sympathy for able-bodied employees who cannot perform. O’Donnell is impressed with the supervisor’s will, attitude, and stamina, but he fails to note the opportunity to improve knowledge transfer, even for such a simple task.

Second Landfill
O’Donnell is assigned to assist the office administrator who is doing the work of several employees as office manager, accounts payable/receivable, payroll, executive assistant, and scale operator. Cost-cutting has reduced the workforce, and the site manager has pressed his administrator to wear multiple hats with no promotion or increase in salary. O’Donnell becomes particularly sympathetic upon learning that the administrator is about to lose her house.

Carnival Site
O’Donnell trains to clean outdoor toilets. He encounters a worker who displays a lot of enthusiasm for his work. This employee cheerily teaches O’Donnell the tricks to clean the toilets as efficiently as possible. O’Donnell comes well short of the required cleaning rate of 15 toilets per hour, but his trainer still notes the potential to develop into a good worker.

Trash Collection Route
O’Donnell rides with a trash collector to learn how to load and unload garbage cans into the truck. He is horrified to learn that she must urinate in a can because she does not have time to stop and use a bathroom. His own productivity requirements are producing these time pressures. Constant surveillance from roaming and calling supervisors keeps the trash collector on edge. An example occurs in real time as she points out a white pickup truck that has followed her on her route. She also gets annoyed by a status check from a supervisor who wonders what is taking her so long; it so happens that O’Donnell’s “training” is slowing things down.

Some of the trash collector’s customers come out to show their appreciation and to talk, but O’Donnell notes that his productivity requirements prevent the trash collector from fully engaging with her customers. This limitation is significant given trash collectors are “the face of the company.”

This experience with data collection in the field taught O’Donnell that productivity and cost-saving measures can place extreme pressures on employees. Only the most “optimistic” of employees can thrive under such circumstances. Management must balance the drive for efficiency and productivity with employee empowerment. O’Donnell could not have learned this as effectively from verbal or written communications from his direct reports.

Of course, O’Donnell also learned firsthand the level of difficulty associated with the work of his employees. This fresh understanding and heightened appreciation should better inform future company initiatives.

Changes and Results
The trailer at the end of the show indicated that morale and productivity improved at the recycling plant after O’Donnell changed the onerous lunch policy. It was not clear whether surveillance practices were also adjusted.

The landfill administrator was given a promotion, a raise, and two new assistants. O’Donnell created a task force to think of ways to improve the working environment for trash collectors. He also channeled the positive energy of the toilet cleaner into a program on employee motivation. The determined landfill cleaner was given time off to better manage his disability and to help others with similar worklife issues. The show did not provide a status report on the impact of these initiatives.

Interestingly enough, O’Donnell did not mention his experiences during Waste Management’s latest earnings report on February 16. Even more surprising, analysts did not ask any related questions. Hopefully after another quarter or two, we will learn a little more about the quantified impact of O’Donnell’s changes.

In conclusion, here are some key quotes from O’Donnell about Waste Management’s operations from the transcript of the earnings call (from Seeking Alpha).

“Our residential collection line of business provides a very solid foundation because it’s very stable, but it carries the lowest margins of all our collection lines of business. The landfill business carries some of our highest margins, but it is very difficult to flex down costs, especially labor, as this line of business is less labor intensive than our collection line of business.”

“We will continue to work hard at aggressively flexing and eliminating costs. So for the full year 2010 we expect margins to continue to improve, and as many of you are aware, one of our key financial components to our annual incentive plan is expansion of our income operations margin as a percent of revenue.”

“If we don’t expand that margin in 2010 as compared to 2009, we will not receive an incentive payout for that portion of the bonus plan, so you can be assured that everyone will be working hard to find ways to control our costs and improve our margins.”