“When the tide goes out, we find out who’s been swimming without a bathing suit,” wrote Warren Buffet to his shareholders about the housing crunch rooted in the credit debacle that continues to batter the US as well as the global economy. If one picked a mere two examples out of dozens of known blunders, managers in any industry can draw lessons to preempt such outcomes. Countrywide Financial Corp.’s Fast and Easy mortgage program resulted in a $893 million loss in the first quarter alone because of overly optimistic underwriting without due diligence. Société Générale, the venerated 144-year old French institution, has lost €4.9 billion to rogue trading resulting from process controls so weak that a relatively junior employee could evaporate all this wealth.
The discipline in transaction pricing in most companies follows, to varying degrees, the dynamics of Fast and Easy underwriting (which is also a pricing process). Sales teams when pushed to generate volume turn around to push for short-cuts in how business is conducted with customers. Sound familiar? While a few ill-advised (out-of-spec or badly specified) pricing transactions go unnoticed or ignored, in a repetitive process such actions represent the tip of the proverbial iceberg that brought down the Titanic in waters as frigid as our current economy – inflation in a recessionary environment. Therefore, senior managers charged with safeguarding earnings need to closely monitor their company’s pricing processes as well as cause and effects of their actions.
Many companies are pro-actively reviewing their pricing strategies in light of the shrinking economy. Nowadays, my conversations with business leaders focus on the importance of quality of pricing operations to ensure successful execution of pricing tactics as well as strategies. Announcing price increases to cover fuel or raw material cost inflation is risky if such actions are hardly practical due to weak internal processes. Why invite the ire of customers and undue attention from competitors when stakes are so high! Smart companies who align their pricing operations with strategies for the economic downturn will enjoy competitive advantage. In any case, no conscientious manager who cares for her customers and shareholders deserves ruin or embarrassment when the tide goes out.
1. The Wall Street Journal, Countrywide Loss Focuses Attention on Underwriting
2. The Herald Tribune, Report Pinpoints Faults at Société Générale
3. The Wall Street Journal, The Loss Where No One Looked