The Big Idea Blog

My friend Rob blogged about an observation he had in his MBA program, namely the propensity of his fellow students to act like Monday Morning Quarterbacks when it came to issues of ethics. Rob's case was the fraud that went on at WorldCom during the '90s.

Robs keen analogy to the monday morning quarterback is spot on. The element that's missing for the casual outside observer is situated context. The best example I can think of is sitting in the pilot seat of a Cessna, actually feeling the plane pivot and tip when practicing a cross-wind landing. Simulator alone won't prepare you for it. It's why I used to joke that after my morning lessons that my clothes would have the smell of avgas and fear! Situated context means "being there".

What happened at WorldCom, and Enron and what happens at thousands of other companies around you everyday is that the organizations do not have, nor value, empowerment. People have to feel empowered -- not enabled -- to stand up and "pull-the-chain" on the factory floor when they see a defect.

Social psychologists have studied this bystander effect, where shockingly the more people in a crowd or group, the LOWER the level of collective responsibility drops; in otherwords diffused responsibility. The "Genovese syndrome" so named after Kitty Genovese, a 1964 case of where her stabbing death was witnessed by 38 of her neighbors and not a single one called the police. By all accounts, we haven't progressed much given the disgusting gang rape incident that happened last year.

Essentially the same thing happens in businesses. An ethically impaired executive, in a position of authority, exercises bad judgment, putting the company, its employees and shareholders at risk. It usually starts with something small, an inappropriate charge to the company credit card here, a swank junket to play golf in the desert there, and eventually escalates into full fledged influence peddling. All the while their direct reports, those not in for the fun of the ride, are quietly whispering among themselves about how wrong it all seems. And yet no one is willing to stand up and pull-the-chain.

There's a line from a movie, and for the life of me I can't remember which one it was, had something to do with the idea that "most bad things people do in the world are because of a mortgage." (I thought it was "Thank you for Smoking"??)

When people have mortgages and families and "good jobs" -- they tend to let their high-minded ethics take a back-seat. Let's be perfectly honest for a moment:

There is no such thing as permanent employment.

If you let the fear of losing your job guide your ethics, you have no place in management.

Today's Big Idea: If you feel like your ethics or sense of right-and-wrong are being compromised by the company you keep, it's time to find a new company.

You might need a job, but you probably don't need this one. You should have faith in your own abilities and the courage to lead by example. Don't be a bystander.

Late last year I decided to give Peer-to-Peer lending a try after making the happy mistake of checking up on my portfolios and promised to blog about my experience for a year. It's sort of the end of what would be the first quarter, so I thought we should check in and see how things are faring.

A brief background if you haven't read the previous post yet. I opened up accounts with both Prosper.com and LendingClub.com. Both sites basically allow you to browse individual loan requests, and then bid a minimum of $25 to create a "note" out of the loan. Prosper allows you to bid any amount to the penny over $25 which is great if you want to re-invest the interest you're earning, while LendingClub only allows fixed bids in $25 denominations ($25, $50, $75, etc).

Both sites keep a listing open for a fixed period of time until the note is funded or cancelled. Prosper works more like eBay and a "dutch auction" in that even if a loan is 100% funded, investors can still come in and bid lower interest rates to win the bid. This has the effect of lowering the overall rate for the borrower. LendingClub on the other hand, fixes the rate based on its credit scoring formula (which it publishes) -- and once funded, closes the listing. Personally I like the Prosper approach, since I can basically "rely" on other lenders to do a bunch of due-diligence for me (crowd mentality I admit) -- and if it fits within my own criteria, I can usually "snipe" a successful bid by offering my own $$ at a lower rate. Kind of like swooping in and outbidding someone on eBay at the last minute!

LendingClub has really nice graphics to help show your note allocation (based on borrower risk) -- so that you can visually help keep your portfolio(s) diversified. It also offers you the ability to assign any note to any "portfolio" you'd care to create, be it based on lumping all your "C-grade" notes in one folder, or as in my case, I just create them based on age.

Both services charge the borrower some closing fees, and the lenders pay a fraction to a full percent of the loan for servicing -- usually a few pennies per transaction.

Prosper overall is faster -- literally, I don't know if they have more or better servers, but the site is always more responsive. Another thing I like about Prosper is that it also allows you to see if someone has or had a previous prosper loan and that repayment history. You show me you can borrow money and pay it back, you're automatically more creditworthy in my opinion. If LendingClub has the same feature, I haven't found it.


Lets talk ROI (Return On Investment):

Here's where things really diverge between the two sites. So far I've been earning what looks to be about a 12% return from LendingClub, and around 15% return on Prosper. The numbers are a little hard to nail down since I've already had six notes get completely paid off on Prosper (hey if you can improve your credit and get a lower rate, wouldn't you?) -- and I have two notes on LendingClub that are now 31 days late, and one looks like the borrower may have declared Chapter 7 Bankruptcy, so hard to know exactly what the annual rate will be just yet. The good news is that I've already earned more than the $25 that's at risk in interest. The bad news is that I would basically be at about break-even for all my time to date doing the loan evaluation which leads me to...

Time investment on the other hand -- well that depends if you find the process interesting. Personally I find it kind of, I wouldn't say 'addictive', but riveting, fascinating, would be words to describe it. There's something between a karmic feel-good from helping other people out and being a savvy investor knowing that at 17.5% interest, it's STILL cheaper for the borrower than paying off their credit card at 28% interest. It's all a matter of perspective.

Q1 results (real numbers from my personal accounts)

Prosper: 106 active notes, 6 notes paid in full, Average note yield at acquisition: 17.13%. Total payments $326.64 ($274.12 in principal, $52.51 in excess of principal, e.g. interest)

LendingClub: 100 current notes, 1 note paid in full, 2 notes late 31-120 days. Weighted Average Rate: 12.96%. Total payments $112.96 (85.98 in principal, $26.98 in note principal, $1.31 in service fees)

Both accounts have about the same amount on deposit, but you can see that due to the paid in full status in Prosper, I'm turning those notes faster into new loans. I did open the Prosper account about month before the LendingClub account so it has a little more runtime in it.

Initial Recommendation

The early leader from my perspective is Prosper.com. I like that the site is faster, the dutch-auction approach attracts more borrowers, and the note quality seems higher at this point, plus you can bid to the penny over $25 which means your money isn't sitting idle. One more thing: "instant transfers" from your bank account for any amount over $500 which means you can start lending literally within minutes instead of waiting the 4-5 days it normally takes for account-to-account transfers.

The two delinquent notes on LendingClub has me a little leary, but we'll see what the final outcome is. FYI, the credit scores for borrowers of those two notes that are now late were "B&C (FICO equiv to 600-679)" which are considered higher-quality, but clearly your individual mileage will vary. Both companies have aggressive internal collections departments that provide up-to-date status information on their progress. Since both monitor borrowers FICO scores, they also will have an impact on borrowers scores if they default. Also, if you default, you're not stealing from an anonymous bank, you're stealing from individuals who lent you the money. Bad karma.

I promise to blog about my own selection criteria strategy in a future article and would be interested to "compare notes" with other "P2P loan officers" !

So, today's Big Idea is this: Peer-to-peer lending could be beginning of the end for traditional small banking.

So far it doesn't seem any more risky than giving money to large corporations that in the end just burn the money up in fuel for the corporate jet or million dollar software licenses that never get deployed. In a way, doing so might have a better "karmic boomerang" effect for you. In other words, more rewarding in ways other than purely financial....

Who are you guys and what are you doing here distracting me? The Big Idea Blog is written by David Duccini & David Walbridge

Why are the first job titles in the management chain usually called "team leaders", but then quickly change into "managers" and then "directors"?

If we think in terms of stewards, shepherds, tour guides -- pick a metaphor that works for you -- you have an active, engaged person who is charting or scouting ahead in order to bring their team forward.

Managers by comparison walk perimeters, to check on fencing and boundaries. They often describe their job as "herding cats".

Directors normally don't walk anywhere -- they are far removed from the teams they are charged with leading, often focused on their own fiefdoms and concerned with the activities of rival princes.

In typical, silo (or stovepipe, again, pick the metaphor you like the best) -- the information flows upward, filtered at every level -- distilled if you will, by someone who is presenting (or word-smithing) the information in a way that they think (or hope) the next level up wants to hear.

Time for some humor to illustrate the point, and lets reach back and pull a classic management telephone-game style joke:

The Plan.
In the beginning, there was the Plan. And then came the Assumptions. And the Assumptions were without form, And the Plan was without substance. And darkness was upon the face of the Workers. And they spoke among themselves, saying, "It is a crock of shit and it stinketh."
And the Workers went into their Supervisors and said, "It is a pail of dung and none may abide the odor thereof." And the Supervisors went unto their Managers, saying, "It is a container of excrement and it is very strong, such that none may abide by it."
And the Managers went unto their Directors, saying, "It is a vessel of fertilizer and none may abide it's strength." And the Directors spoke amongst themselves, saying one to another, "It contains that which aids plant growth and it is very strong."
And the Directors went unto the Vice President, saying, "It promotes growth and it is very powerful." And the Vice Presidents went unto the President, saying, "This new Plan will actively promote the growth and vigor of the company with powerful effects."
And the President looked upon the Plan and saw that it was good. And the Plan became Policy. This is how Shit Happens.

Sound like a project or two or ten that you've worked on recently? They all have secret code names, usually named after wild-life

How is it that projects that are doomed to fail, and everyone knows it, continue to get funded and proceed in a death march towards oblivion? The kind of projects that sap financial resources from companies, stealing shareholder value, and wasting time which translates to lost opportunity.

I would argue it comes down to the fact that the "management chain" isn't about leading at all. A leader would stand up and pull the chain and stop the factory -- it's that whole "you can't inspect quality into a product" mantra.

Today's Big Idea: People follow the leaders. Stop managing and start leading.

Start by Walking Around....

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Change happens. When it does, someone, somewhere has to figure out what the implications of that change are. Little, seemingly innocuous changes can have long-lasting and far-reaching ripple effects.

Take my friend Ivan, a Security Systems Engineer for a manufacturing and service company. He works in an environment where change to the current products and services he's charged with protecting is only half of his problem. The other half is the fact that about every 9-13 months he has a new boss he has to re-educate thanks to the constant mini-reorg's that ripple through large companies. It's hit or miss for Ivan, and lately his latest string of bosses don't have a clue as to what he does nor the value of the role he fills. His latest manager has hamstrung and marginalized his contribution and seems to think that what Ivan does should be some other groups responsibility. That's the bad news. The good news is that he's probably due for a new manager in a couple of months.

Here's a short quiz to get the conversation started:

1. When you board an airplane, are you more secure in the knowledge that:
A. the fact that there are now locks on the cockpit doors, or
B. you bought trip insurance

2. When you visit your doctor or clinic, are you comforted by the idea that:
A. your personal data is encrypted on their computers and thumb-drives or
B. the fact that the clinic has you sign a HIPAA disclosure form?

3. When you log in to your bank, brokerage, or retirement account, do you pay more attention to the fact that
A. you have to select a personal image, a phrase, possibly validate the computer you're on, answer a few questions the first time if you haven't used this computer before -- or
B. are you just glad that the website shows that your deposits are FDIC insured?

If you answered "A" above, you can thank a Security Systems Engineer like Ivan!

Security, as embodied in the "holy trinity" of C-I-A : Confidentiality, Integrity, and Availability, has to be "baked in, not bolted on." It's about understanding the first principles of Systems Engineering and that change has consequences.

From the six-sigma/lean world:

"You can't inspect quality into a product"

The same is true of security in terms of Information Risk Management. You have to consider the people, the places, and things that touch and interact with the system under consideration. It's about understanding situated context.

Today's Big Idea: Systems are complex and any change requires thoughtful analysis to understand the butterfly effects.

It's not about compliance. You can't buy an insurance policy big enough to cover your loss of goodwill.

Hopefully Ivan's next boss will understand that.

Who are you guys and what are you doing here distracting me? The Big Idea Blog is written by David Duccini & David Walbridge