Alone at a Christmas party given by First Republic Bank for its clients a couple of years ago (my wife hates such events), I decided to do an informal, unscientific study of who was there and their banking experience. Total number of invited guests (about 1,000) included pretty much what you would expect for the Silicon Valley—lawyers, entrepreneurs, VCs, some doctors, scientists. I asked everyone I met that night three questions. First, how long they had been with First Republic? For the most part the answer was not very long, many just some months, and few more than two years. Second, where had they previously banked? Invariably the answer was Wells Fargo or Bank of America. And third, why had they left? Mostly it was small, irritating junk fees (for example, charging for an incoming wire) and the bank not having any branch phone numbers so clients could talk to people who knew them and their circumstances.

Doing a back-of-the-envelope calculation and conservatively assuming an average individual net worth of $10 million (this is low given that many people were on their second or third going-public startup), $10 billion in net worth was in the room that night. They were people who need investment advice, financial services for themselves and their businesses, trust services, and so forth—enough to start a decent and profitable bank just with this clientele. To make matters worse, not one person told me that, as they closed their accounts at their previous bank, anyone had contacted them to try to keep their business.

As the large, poorly run banks lose retail and business customers by the boatload—profitable customers at that—they need to do all sorts of weird and risky things to figure out how to make the money they used to make by providing straightforward banking services.

Not First Republic. After being bought by Merrill Lynch and then owned by the Bank of America following the financial meltdown, First Republic is back out on its own and publicly traded. Named No. 4 on the ABA Banking Journal’s list of top performing big banks in 2012 and No. 5 on Forbes’s 2013 listing of the best banks in America, First Republic has a truly tiny number of nonperforming loans and enviable returns on assets and equity. The bank provides a phone number for each branch and business cards for every branch employee (many of whom are long-tenured), so customers have people to call for help, free use of any ATM in the world (it rebates fees charged by others for accounts with a fairly small minimum balance), and few to none of the aggravating fees others charge. In other words, First Republic actually acts as if it cares about its customers and their experience.

This story illustrates a simple, but oft-forgotten message: If you take care of your customers, you won’t lose them, and you can therefore be profitable without any sort of financial or strategic gymnastics. This is a lesson delivered long ago by Bain’s Frederick F. Reichheld in his book, The Loyalty Effect. Sadly, it is a lesson lost on the many big banks that have forgotten the essence of banking.

(This post was originally published in BloombergBusinessweek on May 17, 2013)

And it’s not just Apple. CEOs are obsessed with their companies’ stock price. So companies faced with falling shares frequently announce share buybacks, even though research shows (pdf) that many such buybacks are not completely consummated. Other data suggest (pdf) that companies’ market timing is often quite off, with the businesses buying their shares at high prices and issuing them at low prices, a buy high, sell low strategy that benefits no one. Meanwhile, CEOs spend lots of time doing analyst presentations, conference calls, and the increasingly ubiquitous industry investor conferences where they sell—not their products or services to real customers, but their investment attractiveness to kibbutzers.

Although many people believe that total shareholder return (TSR), which consists of changes in stock price and dividend payouts, actually reflects something about the quality of the company’s management, I am far from convinced. Justin Fox, editorial director of the Harvard Business Review group, wrote a book, The Myth of the Rational Market, that pretty thoroughly debunked the idea that stock prices efficiently incorporate all available information instantaneously to provide accurate signals about a company’s (and by implication, its management’s) performance.

So Apple, with trailing 12-month sales of $164 billion in sales, $42 billion in profits, and $57 billion in operating cash flow, according to Yahoo!, dwarfs its high-tech competitors, not just the inept Hewlett-Packard and dying Dell, but Microsoft and Google, as well. Think about those numbers—Apple turns approximately a third of its sales into cash flow, a ratio that would be the envy not just of retailers but the of pharmaceutical industry, even as many bemoan the company’s performance.

As research (pdf) by Stanford accounting professors Ron Kasznik and Maureen McNichols has shown, stock price returns are related to whether companies either beat or fall short of expectations, and earnings surprises can be a more important determinant of a stock’s price than actual operating performance. Holding aside the perversity of this empirically demonstrated fact, as Toronto business school dean Roger Martin perceptively noted a while back, the current regime of “TSR above all else” seems to reward senior executives for, to use a sports analogy, “beating the spread.” Although few baseball managers or football coaches would hold their jobs long if they had horrible won-loss records but managed to exceed gruesomely low expectations, that is precisely what goes on in industry all the time. Moreover, because of the enormous and perverse incentives to game the system, virtually all professional sports have banned players and managers from participating in the expectations market, and when such bans fail, there are often prominent scandals. Meanwhile, in business, executives are encouraged or even compelled to play in an expectations market, with people being surprised when the leaders game the system.

Don’t get me wrong. I’m all for underpromising and overdelivering in jobs at all levels—it’s a nice way to build your managerial reputation. But we ought not to confuse image management with substantive performance. Some of the best-managed companies have share prices that don’t move much because their superior management and results are already reflected in their stock price. (Southwest Airlines is one example.) That fact does not negate their outstanding results in the least.

Put simply, executives should spend more time on product development and customers and less time worrying about something (their stock price) that is more outside their control. And in thinking about Apple or any other company, observers should focus more on profitability and cash flows. After all, that’s what Warren Buffet does.

(This post was originally published in BloombergBusinessweek on April 25, 2013)

But the thing that few people talk about, and that no serious policy proposal attempts to fix—the arrangement that accounts for much of the difference between health spending in the U.S. and other places—is the enormous administrative overhead costs that come from lodging health-care reimbursement in the hands of insurance companies that have no incentive to perform their role efficiently as payment intermediaries.

More than 20 years ago, two Harvard professors published an article in the prestigious New England Journal of Medicine showing that health-care administration cost somewhere between 19 percent and 24 percent of total spending on health care and that this administrative burden helped explain why health care costs so much in the U.S. compared, for instance, with Canada or the United Kingdom. An update of that analysis more than a decade later, after the diffusion of managed care and the widespread adoption of computerization, found that administration constituted some 30 percent of U.S. health-care costs and that the share of the health-care labor force comprising administrative (as opposed to care delivery) workers had grown 50 percent to constitute more than one of every four health-sector employees.

What remains missing even in the discussion of the enormous administrative burden is not just how large, both in absolute dollars and as a percentage of health costs, it is, but also how few incentives there are for insurance companies to stop wasting their and everyone else’s time. Most large employers, including mine, Stanford University, are self-insured, which means they pay for their own medical claims. These large employers invariably hire health insurance companies to “administer” their health-care dollars, doing things such as paying claims. Employers typically reimburse the insurers the amount of money they pay out to health-care providers plus a percentage of these costs. In Stanford’s case, we pay Blue Shield 3 percent of the amount, about $3 million a year. (Note that the overhead costs of Medicare are less than one-third as much at slightly less than 1 percent.)

Because insurers are paid a fixed percentage of the claims they administer, they have no incentive to hold down costs. Worse than that, they have no incentives to do their jobs with even a modicum of competence. To take one small personal example, I have reached the age of Medicare eligibility but, because I continue to work full time, have primary health insurance coverage through my employer. Blue Shield, of course, wants to be sure it doesn’t pay for any claim it doesn’t have to, so I was asked to attest to the fact that I have no other insurance. No problem there, except such attestations seem to be required on almost a monthly basis—requiring my time on the phone (and on hold) with Blue Shield’s customer service, an oxymoronic term if there ever was one, and also requiring my doctor and laboratory to call me, call Blue Shield, or both, and thus also waste their time and resources.

This story and the many others of the same sort but even worse, magnified across the millions of people subjected to private health insurance companies, is why American health care costs so much and delivers so little. Unless and until we as a society pay attention to the enormous costs and the time wasted by the current administrative arrangements, we will continue to pay much too much for health care.

(This post was originally published in BloombergBusinessweek on April 10, 2013)

Let’s begin with some facts. It is almost impossible to overstate the devastation wrought by an HP board that couldn’t shoot straight.  Although recent commentary has focused on the ill-fated Autonomy acquisition and an associated $8 billion charge, that is scarcely the only snafu. As Pete Carey of the Mercury News documented last fall, HP since 2008 has spent some $32 billion on acquisitions, which included Electronic Data Systems ($8 billion writedown of the $13.9 billion purchase price) and Palm ($885 million writedown of the $1.2 billion purchase price). In the fall of 2012, HP’s market capitalization was $10 billion less than it had spent acquiring companies over the preceding four years. And speaking of acquisitions, there was also the controversial deal for Compaq that left HP with a dominant position in the low-margin and slowly disappearing personal computer industry.

But it’s not just in overseeing ill-fated acquisitions that the H-P board has failed.  One of the most important responsibilities of boards is to ensure effective leadership development and succession. Indeed, HP used to be a source of talent for the entire Silicon Valley. It was a company that practiced promotion from within and had an organizational culture that inspired admiration. When David Packard died in 1996, the company’s stock price was about $100 a share, and The Economist obituary noted that “some 25 of the Valley’s top executives are HP alumni.”

No longer. George Anders, who wrote a book about the company, has persuasively argued that HP’s lousy acquisition record is due in no small measure to its constant board reshuffling and revolving door of outside chief executives brought in as the organization tries to find its salvation in external hiring.

Unfortunately, much of this tale is all too common. As Bob Sutton and I noted in a book on evidence-based management, too few companies base their strategies on facts, and the evidence is clear that most acquisitions are failures.  Harvard Business School professor Rakesh Khurana noted the rise of outside succession and how flawed the external search process frequently was, while his colleague Boris Groysberg has documented the limited circumstances in which talent, even if it can be accurately identified, is portable—in the sense people of performing equally well in a new company.

Meanwhile, few directors suffer from overseeing succession or acquisition failures or even from more outrageous scandals. No one from the Enron or Worldcom boards was prosecuted because of those massive frauds, and it would be tough to name, let alone observe, any adverse consequences for the directors on the boards of Citicorp, Bank of America, Countrywide, Lehman Brothers, Bear Stearns, or any of the other financial disasters requiring government bailouts.

So while proxy advisory firms such as Institutional Shareholder Services do, on rare occasions, recommend against some board member or slate of candidates—something that occurred in the recent HP annual meeting—mostly nothing happens. No accountability = no change. Even though there is lots of talk about corporate governance and its improvement, I, for one, don’t see much action.

(This post was originally published in BloombergBusinessweek on April 8, 2013)

Wonder why its customer satisfaction is below competitors’? Here’s a recent experience I had (I’m sure every reader has his or her own example): I am at my local post office and there is no line—but then again, although there are two service windows open, there are no employees at either one. And why am I at the post office to buy stamps? Because the USPS has instituted a policy that it won’t accept checks for its stamps-by-mail program without printed addresses on the checks. This means I can buy a $20,000 Toyota Camry with a check, but not $36 worth of postage. In general, lines at the post office are long, service is poor, mail gets misdelivered, and, most significant, as a consequence the USPS is losing revenue and market share to its competitors.

Let’s be clear—the Internet has decreased the volume of first-class mail as people send fewer cards and letters and pay bills online. But people now shop on the Internet in increasing numbers for an enormous volume of goods. Online commerce totaled $289 billion in 2012 with retail shopping comprising some $186.2 billion, and one market forecast of online shopping projects $362 billion in sales by 2016. Many, if not most, of these retail purchases get delivered to people’s homes. That’s why UPS (UPS) and Federal Express (FDX) are doing pretty well. Not only are both companies profitable, but UPS, for example, had 2012 U.S. package delivery revenue of almost $33 billion, compared with the Postal Service’s $11.6 billion. Simply put, there are plenty of available customers and business for the USPS to obtain, presuming it enhanced its operations and service to be able to do so.

Research demonstrates two things, both of which help account for the USPS’s underperformance. First, companies that blame their problems on seemingly uncontrollable, external factors do worse—for instance, in terms of subsequent stock price—than those that attribute underperformance to controllable, internal causes. This finding makes complete sense because seeing a problem as something external and uncontrollable reduces everyone’s motivation and sense of efficacy to fix it.

Second, financial performance is not about the industry—in this case, package and mail delivery. Although there is much discussion in the strategy literature of the importance of being in the “right” industry, a recent study by consulting firm Booz & Co. confirmed what several previous studies had shown: that industry didn’t matter that much but organizational competence and execution did in explaining company performance. The study of more than 6,000 companies in 65 industries from 2001-2011 revealed that there were top-performing companies in every industry and also that the intra-industry differences in returns were many times larger than the differences in returns across industries.

Ironically, the Postal Service’s efforts to cut costs may drive even more business away as both small and large shippers seek reliable and convenient service. So instead of complaining about external factors over which it has little control, the USPS should do what it takes to enhance the service and customer experience that would enable it to compete effectively in the many package delivery markets that are actually growing.

(This post was originally published in BloombergBusinessweek on March 18, 2013)

One criticism is that employers will adjust employees’ hours to avoid having to purchase health insurance, thereby harming workers by reducing their total incomes (because of the reduced hours). Since hourly workers generally earn less, the argument is that it is the most economically vulnerable who will be most at risk. This argument fails to acknowledge that the practice of employers adjusting hours to avoid paying benefits is already incredibly widespread, particularly in retail, and is already harming the most vulnerable workers in the labor force. Employers for decades have adjusted employee work hours so they can avoid offering not just benefits such as health insurance but also vacations and paid time off — any benefits that have minimum hours for eligibility associated with them. The health care law will not change this pre-existing behavior. However, ACA will allow people currently not receiving health benefits to get coverage through the new health insurance exchanges, with premium tax credits to make such insurance more affordable.

The second fallacy is often called “the perfect is the enemy of the good.” There is no question that employers will try to game the Obamacare rules. Employers currently try to game overtime rules and regulations defining who is and is not an employee to avoid paying payroll taxes; there have been numerous high-profile settlements (think Microsoft among others) penalizing companies for incorrectly classifying employees as independent contractors. While Obamacare is not perfect, providing health coverage to more people is desirable, both from the moral standpoint of stopping the 50,000 needless deaths that occur each year because people do not have access to health care, and from an economic standpoint of increasing workplace productivity and job mobility. Waiting for a law that ensures employers won’t engage in any attempts to game the system will paralyze us from ever achieving any progress.

A third oft-repeated fallacy is the “benefits destroy jobs” argument or its variant, benefits reduce wages. This was the argument used by the restaurant association to try and stop Healthy San Francisco, a city ordinance requiring that employers either provide health insurance to their employees or else give their workers an hourly pay subsidy so they can buy their own coverage. Healthy San Francisco was to be the end of business in the city, in particular the restaurant business. Ha! Try getting a dinner reservation in a city with an expanding workforce and with technology and media companies moving into the city, not out.

The most pernicious fallacy about ACA pertains to “costs.” As OECD and World Health Organization data amply demonstrate, health care costs too much in the U.S. and delivers health outcomes below those of many other developed nations. The problem is partly one of getting care too late–in the emergency room rather than when disease is less advanced and more easily treated. That’s why initial evaluations of Healthy San Francisco show a reduction in emergency room visits when people are able to see primary care doctors. But Obamacare also puts in place several paths to improve quality, efficiency, and outcomes — reducing hospital re-admissions, health care associated infections, and fraud and waste, among others. And, by expanding health care coverage, Obamacare will eliminate the billions of dollars of lost productivity from an unhealthy workforce who cannot access quality care. That just makes economic sense to us.

The current system of delayed care, sporadic follow-up, and cost shifting not only harms people’s well-being, it is economically inefficient as well.

(This post was originally published in the Huffington Post on March 7, 2013)

Pick your preferred performance measure, and see if it shows any relationship with size.  The well-known ranking of U.S. airline performance by Brent Bowen of Purdue and Dean Headly of Wichita State listed these airlines as best in 2012: AirTran (AAI), Hawaiian (HA),Jet Blue (JBLU), Frontier (FRNT), Alaska (ALK), Delta (DAL), Southwest (LUV), U. S. Airways (LCC), Skywest (SKYW), and American (AMR). United (UAL), following its well-chronicled integration problems with Continental, ranked 12^th. In general, the bigger the airline, the lower the ranking.

How about internationally? Measured by total passengers carried, the top 10 list from the International Air Transport Association (IATA) contains not one of the top 10 of the World’s Best Airlines from 2012 as reported on the CNBC website, a list that includes, in order, Qatar Airways, Asiana (020560), Singapore (SIA),Cathay Pacific (293), All Nippon (9202), Etihad, Turkish, Emirates, Thai, and Malaysian.

But who cares about passengers—certainly not most U.S. carriers. What about profits?  From the second quarter of 2011 through the second quarter of 2012 (the most recent period available from the U.S. Department of Transportation), three of the four highest average operating margins were earned by Alaska, Skywest, and JetBlue, which ranked 7^th, 8^th, and 9^th in size. Same story with unit costs—ExpressJet (XJT), JetBlue, and Airtran had the lowest.

The simple fact is, as Gary Hamel commented years ago, zero plus zero still equals zero.  Or in the airline business, if you take one troubled airline and combine it with another, all you get is a larger catastrophe.

The problem is not size—economies of scale are not that important in many industries, not just airlines, and are achieved in any case at sizes much smaller than the larger companies. The problem for the airlines is a flying experience that causes people to want to drive for short trips and to avoid long trips if they can. It is not by accident that some of the most consistently profitable airlines, such as Singapore internationally and Southwest domestically, consistently rank high in customer satisfaction. As research by Claes Fornell, founder of the American Customer Satisfaction Index,demonstrates, customer satisfaction drives profits—and shareholder return.

Maybe the preoccupation with size is because so many of the stock analysts and airline industry pundits are male. But in airlines, as in most industries, size does not matter.  Mergers just increase market concentration, raise prices, and make customers worse off.

(This post was originally published in BloombergBusinessweek on February 13, 2013)

Standard and Poor’s offers an object lesson in what not to do.

The Case Against S&P

This week, the U.S. Justice Department sued S&P, a unit of McGraw-Hill, for $5 billion–five times what S&P earned in 2011. The case against the company? Allegedly fudging its ratings of pools of subprime mortgages to make these ultimately toxic securities appear better than they were. The presumed motive is a familiar one to the 2008 financial meltdown: S&P got paid for providing ratings on securities, and apparently was afraid that if it did not give the bundles of risky assets high marks for safety, the issuers–large banks and other financial institutions–would take their business to a more compliant and helpful ratings source, thereby costing S&P money.

In announcing the suit, the government released numerous incriminating emails and other documents that make the case that, yes, S&P operated just like many businesses chasing revenues and profits at all costs. As a result, S&P created a culture of profits first–and ethical behavior a distant second.

Haven’t We Seen This Before?
Unfortunately, S&P’s response to the suit has been all too typical: Deny everything and blame the government for also failing to foresee the subprime mortgage disaster. (The careful reader will note that the government’s ability to understand the depth of the junk being packaged as gold was hindered by the ratings agencies’ own actions to rate garbage as safe).

In the recently released book Masters of Disaster, two experienced public relations executives, Christopher Lehane and Mark Fabiani, and an Oscar-winning filmmaker Bill Guttentag, outline the 10 commandments for companies facing an inevitable public relations catastrophe–something that virtually every company is going to encounter (think Apple with the problems with its maps and supply chain, Walmart with the fires in suppliers’ factories and the fact that many of its employees are paid so poorly they are on public assistance). S&P has violated many of these recommendations, including the admonition to fully disclose everything it knows at the outset, don’t accuse your accuser, and most importantly, don’t do things to keep the story in the news.

In this instance, S&P, by denying culpability, is just begging the news media to focus even more on the juicy details of its ethical lapses apparent in the already-released and as yet unreleased emails and presentations. S&P has presumably decided that it can negotiate a better settlement by denying blame than by coming clean.

By denying blame for the undeniable, S&P’s response will further damage its reputation. And its actions just set it up for more problems down the road. What companies do when they screw up sends a message not only to the public but also to the authorities. Most importantly, companies’ responses to such crises send signals to their employees about their true values. In this instance, S&P has sent a pretty clear message: We put financial costs and profits ahead of admitting blame and telling the truth. Of course, that’s precisely the attitude that got S&P into trouble in the first place.

S&P should have known about the problems in the mortgage markets because they were transparently evident to anyone who actually bothered to look. That’s the most important lesson in Michael Lewis’s best-selling book, The Big Short. People who made a fortune shorting the highly-rated mortgage securities couldn’t believe the ratings when they actually read the prospectuses and looked into what was in the mortgage pools. That’s the real lesson from the financial meltdown–numerous people, in banks and in the ratings agencies, were not only venal, many people simply did not do the job they were paid to do.

But the worst lesson of all? Few, if any, have suffered any real consequences.

(This post was originally published on Inc.com on February 6, 2013)

• Bank of America, whose aspiration is to become “the world’s most admired company,” says it’s committed to helping customers and clients at every stage of their financial lives–well, maybe not every, as this is a company paying huge financial settlements because of its abuse of the mortgage origination and foreclosure processes.
• BP’s core values place safety as No. 1–this for a company with employees killed in a Texas refinery explosion and a poor occupational safety and health record even before the Gulf oil spill. Under “What We Stand For,” BP states, “We care deeply about how we deliver energy to the world. Above everything, that starts with safety and excellence in operations.”
• United Airlines, the company that consistently ranks low in on-time performance and toward the bottom of the American Customer Satisfaction Index’s rankings of airlines, aspires to be “recognized as the airline of choice,” in an industry where unfettered consolidation means at U.S. hub airports, there is ever less choice.

Of course, there are values-driven companies that genuinely take those values seriously–such as DaVita, the kidney dialysis equipment maker that opens its quarterly conference calls discussing not its earnings but patient outcomes; Patagonia, the clothing company that has somehow resisted the temptation to make its products in factories that burn up and employ slave and child labor; and many others. But for the vast majority of companies public and private, mission statements are cheap decorations to put on the walls and public relations gambits to make outsiders and customers feel better.

Why the disconnect between words and deeds? Probably many reasons. One is the excessive focus on short-term, often financial, performance measures. Companies trying to meet growth or profit goals face pressures to cut corners. Sometimes they violate labor laws by calling permanent employees contractors to avoid social security and unemployment taxes; sometimes they sacrifice customer well-being by shipping products that aren’t ready for prime time; and sometimes they shade accounting rules to book revenue in advance of approved and signed contracts, move revenue across quarters, or inflate the supposed prospect pipeline. Companies focusing too much on the short term don’t ensure their suppliers aren’t going to embarrass them and do layoffs at the first sign of financial stringency, losing employee commitment as a result. Building a values-based, ethically-behaving company requires taking a longer-term view of the business and focusing on business processes, not just financial end results.

Companies incur costs when they say one thing and do another. Such behavior induces cynicism among customers and employees, in the process destroying economically important loyalty. And the words-deeds gap erodes trust, and trust is fundamental in building well-functioning entities, be they businesses or political systems.

Companies that want to get serious about aligning values with everyday behavior can do something about it. A few starter principles:

1. Start measuring for ethics and values.

You can’t achieve anything if you can’t assess how well you are doing. So the first step is to develop a set of measurable performance indicators. For safety, the measure could be the number of people killed or injured per year or number of work days lost to accidents, something that Accelor Mital Steel reports. Becoming the airline of choice means flying on time, not losing bags, and not being deluged with customer complaints. How well your suppliers pay, their accident rates, and whether you buy using criteria other than low price might be indicators of how seriously a company values human sustainability.

2. Publicly share the results.

Not only figure out some measures of your adherence to values–maybe by doing surveys of customers and employees and their beliefs about how well the company is doing–but publish the results for the world to see. That permits internal and external constituencies to hold you accountable. Are the numbers getting better or worse? Is there evidence that serious decisions about promotions and resource allocations get made to address notable deficiencies?

3. Make ethics performance part of employee performance.

Evaluate everyone by their promotion and adherence to these standards. DaVita takes employee development seriously, and has fired senior executives when they failed to give nurses, and not just MBAs, opportunities to attend internal leadership programs. Southwest Airlines will terminate employees who behave rudely to their customers and teammates. Hewlett-Packard used to make employee survey results about leader behavior part of the performance evaluation process, when HP still practiced the HP Way.

It’s actually not that difficult to close the values-behavior gap. The day-to-day measures that companies use to guide what they do and how they evaluate employees need to incorporate, in very concrete, specific fashion, the values they espouse. Unless and until that happens, profit and loss, something that is always measured, will remain the only focus of attention. As the quality movement taught us, if you want something (like quality or values adherence), measure it. What’s not measured will almost certainly be ignored.

(This post was originally published on Inc.com on January 29, 2013)

Maybe.

These proposed buyouts could be merely instances of several personal biases in action. One such bias is escalating commitment to a failing course of action, so that leaders don’t have to admit that they made mistakes or that they are not as competent and heroic as they would like to believe. Another is the illusion of control, demonstrated by social psychologist Ellen Langer, among others. This illusion that people are efficacious is why they are willing to bet more money on dice if they get to roll them. Then there is the above-average effect, which causes people to overestimate their capabilities and skills—something that would surely beset CEOs, who are, after all, more talented than others. This would cause CEOs—present and former—to believe that if they could just get more control over the enterprise, everything will get better.

Both Dell (DELL) and Best Buy (BBY) have wonderful stories. Dell, founded in Michael Dell’s dorm room, transformed how personal computers and then laptops were manufactured and priced. Best Buy, with its emphasis on the customer service experience, changed how electronics got sold. But in both instances, some fundamental industry dynamics have changed. Not only does Dell now face competitive pressure from Lenovo in PCs and Visio and ViewSonic in televisions and monitors, but also, more importantly, the core of Dell’s business is disappearing as the PC and laptop markets shrink.

Zia Yusuf is CEO of Streetline, a 50+ employee startup selling sensors and analyzing parking data for cities and private garages. He recently told me that there was not one PC in his entire company—lots of cloud-based server capacity to do the data collection and analysis, for sure, but no traditional PCs or laptops sitting on desks. PCs and laptop are getting replaced by iPads and devices running Google’s operating system, while Amazon and others offer computing resources in the cloud for data storage and processing-intensive analysis. In electronics retailing, Amazon and other online retailers have devastated Best Buy’s business. Neither of these trends shows signs of abating.

In Dell’s case, some analysts suggest that once it’s private, Dell can migrate to a software and services model. That is much easier said than done, as Hewlett-Packard (HPQ) has learned. Even the presumed exemplar of such a transformation, IBM (IBM), still earns a surprisingly high proportion of its profit from a mainframe business that has been revived by the growth of big data and the disappearance of most of the company’s mainframe competition. Furthermore, a private Dell will likely have to service a sizable debt load, presumably hobbling any efforts to make significant acquisitions or major investments in R&D to accelerate its move into software and services.

Which raises the question: If these are dying enterprises, why would private equity investors be interested in the transactions? The answer, of course, is fees and the possibility for the investors and other insiders, such as senior executives, to make money even if the companies eventually fail. The story of Simmons, the mattress manufacturer, is instructive. Thomas Lee Partners took lots of cash out and made a great return even as the company went bankrupt. At Station Casinos, which also went bankrupt after it went private just before the economy tanked, company insiders took out hundreds of millions of dollars as the company failed, causing creditors to sue.

Going private creates lots of money—for lawyers, investment bankers, and other parties who benefit from the fees generated. Whether these transactions will ultimately salvage either Dell or Best Buy is much less certain.

(This post was originally published in BloombergBusinessweek on January 16, 2013)