Volume X, Number 2                                                                                                                     June, 2008


A newsletter for clients and friends of Chenault Systems

Copyright © 2008 Chenault Systems, Inc.  All rights reserved.


The Ant, the Grasshopper, and the Subprime Securities

By Bill Walker

An ant laboriously tunneled into MIT and carried around calculus books of 100 times her own body weight, earning an IT degree and an MBA. Then she secured a business loan and worked on her startup corporation 16 hours a day, 24/7, all summer long. Her company made software that cured cancer, wiped out computer viruses, and walked your dog, all for $39.95 with free updates.

A grasshopper was blown into Florida State by a hurricane, and majored in UV Absorption and Socializingology, drinking and singing with the other grasshoppers. Eventually he was dragged off the beach and forcibly graduated with a degree in Orthoptera Studies. He spent the summer at a cushy job in an air-conditioned office in a large bank and spent every evening singing in karaoke bars. Once a week he would take a pile of nonperforming mortgages, chop them up into tranches, and mark half of the tranches "AAA" while chirping cheerily. Then he would sell them to the other insects at high prices.

The ant was putting together the 401(k) options for her ant employees’ retirement accounts when she noticed the grasshopper’s subprime offerings hiding among real bonds in bond funds, banks, brokerages, and as prizes in cereal boxes. The ant carefully avoided buying any subprime debt, "AAA" or not. The ant and her employees put all their savings into bonds and stocks from companies that made good products that other insects really wanted.

When winter came, the subprime tranches that the grasshopper had sold all withered away and turned to dust, even the ones he had marked "AAA." The grasshopper’s bank, the banks that had bought securities from them, and the Carlyle Group’s hedge fund all had empty larders… actually more than empty, because they owed more than they had.

So the Federal Reserve printed up hundreds of billions of dollars and Treasury bonds and gave them to the grasshopper in exchange for the dried-up dust of the subprime securities, because the grasshopper’s bank was "too big to fail." The grasshopper was also allowed to borrow from the Fed at a special cheap rate that no one else could get, "to give him liquidity." The grasshopper went on to his next scheme, which was to securitize tranches of nonperforming time-payment agreements for large-screen TVs (these were called "subprimetime securities"). The grasshopper became wealthier and wealthier, and his offshore corporate shells lived happily ever after in the Cayman Islands.

The ant and all her employees went bankrupt because their customers couldn’t afford to buy software or CAM machines when gasoline cost ten dollars a gallon. The ant couldn’t get a loan to start another company because of the credit crunch created by the grasshopper. The ant retirement accounts were so reduced in value from inflation that they could never retire, and the ants spent their last years working as the grasshopper’s servants with no medical insurance.

The grasshopper looked down from his office tower at the scurrying ants carrying heavy burdens far below. Then the grasshopper knew:

"It is best to be the one who prints the money, not the one who works."

March 22, 2008

Bill Walker [send him mail] works in HIV and gene therapy research in Rochester, Minnesota.

Copyright © 2008

The Make vs. Buy Decision

Chenault Systems is often called in by organizations to enhance a particular software system bought off-the-shelf.  Many times, after objective examination, we determine the system, although a good tool, is not right for the process.

We are independent from all software products and vendors.  While our staff members may be certified in certain software products, we are not aligned with anyone.  Independence and lack of alignment allow us to be objective.  This objectivity is what makes Chenault Systems unique from most other firms.

Physicians within the medical profession have the same philosophy.  Doctors are completely independent (or should be) of drug companies and medical equipment companies, regardless of specialization.  Management consultants are really business doctors; and, as a management consulting firm, Chenault Systems specializes in information technology.  Our clients rely on our independence to cure their systems and organizational problems in an objective manner, much like how a patient relies on the physician.

Over the years, we have encountered many situations where management was persuaded by skilled sales people to purchase a software package to streamline and automate a process.  Typically, the in-house information technology group and a few high level managers evaluated the product, comparing the features and benefits to other systems, and no one consulted the end users, the true experts of the process.  The typical result:  A round peg is forced into a square hole, forcing people to change the process to match the product instead of the other way around.

This scenario occurs for everything from small asset management systems, costing a few thousand dollars, to the very large ERP systems, costing millions of dollars.  In many cases, contracting an outside firm to custom build a system would have been less expensive than purchasing from a software vendor.  A less expensive custom-built system is possible because today’s products allow relatively rapid application development, which dramatically reduces development cost, and at the same time allows the client to maintain process control and ownership.

When looking for a software solution to your current business problem, you need to carefully examine your options before deciding what will best meet your needs.  Both options bring several considerations. The following are some of the questions before deciding on a solution:

For an off-the-shelf product:

·                     Does it meet 80% of your essential requirements?

·                     Is the product easy to use?

·                     If the product is complex, would your staff use the product as it is intended?

·                     Would you be paying for a lot of features that you don’t really need?

·                     Does the cost of the product, including extra features you don’t need or won’t use plus training, provide you with the returns you need in order to justify the expense?

·                     In order for your staff to use the product effectively and efficiently, is additional training a necessity?

·                     Do you know the cost of training and support before you buy the product?

·                     Is the cost of training or support reasonable and within your budget?

·                     Are you required to pay additional licensing fees?

·                     When you buy off-the-shelf software you are frequently subject to licensing fees. The initial purchase price for a product often limits your right of use to a limited number of current users. You have to pay extra if you want the product to be accessible to more users.

For a custom solution:

In addition to the above questions, you also need to consider the following points:

·                     Your up-front investment cost could be higher than for an off-the-shelf package, so you need to factor in your long-term return on investment to determine the cost benefit of a custom solution.

·                     The time frame by which you require your application must be carefully determined. Sufficient lead-time is required in order to ensure that the product will be ready on time, whereas an off-the-shelf package can usually be picked up whenever needed.

·                     Sometimes a custom application can be integrated into an off-the-shelf product. An example of this is when you want to add a feature to an off-the-shelf product that it doesn’t currently have or that is very expensive to acquire as a ready-made solution. The latter situation would more likely apply to very large and expensive off-the-shelf products.

·                     Because custom software is designed to meet your specific needs, it will do exactly what you want it to.

·                     With a custom application you pay only for the features you need and have asked for.

·                     A well-designed custom application should be easy to use and intuitive.

·                     The cost of and amount of training required should be known up-front before you commit to the project. Additional support can often be negotiated on an as needed basis.

·                     You need to identify how much your problem is costing you if left unresolved.

·                     There are normally no licensing fees with custom solutions. Once you have paid for the product, you can usually make as many copies as you need.

Quote Worth Noting

“It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better.  The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.” -- Teddy Roosevelt