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Showing posts with label Joe J. Wallace. Show all posts
Showing posts with label Joe J. Wallace. Show all posts

Tuesday, December 07, 2010

LIVING OUTSIDE THE BOX: Applying the Medici Effect Locally

Living Outside The Box with Joe J. Wallace


I was privileged this week to attend a seminar on creativity at USI, the subject of which was "The Medici Effect", a term used by author and speaker Frans Johansson who invited by USI to conduct this seminar to present a deliberate way of seeking innovative solutions to problems. This seminar was in no way about the predictable progress made by making minor incremental adjustments to a proven entity; this was about the intentional juxtaposition of leading edge thinkers for the purpose of creating breakthroughs and transformations.

The name "The Medici Effect" comes from the Medici family of Florence, Italy who intentionally brought leading edge thinkers of the world to Florence to establish it as a center of thought and culture to rival that of Rome. Some of the notable people who spent time in Florence with Medici patrons were Michelangelo, Galileo, and Donatello. The family Medici brought the works of Plato from Constantinople to Florence and established the Platonic Academy along with the largest library in Europe at that time. The Medici's literally nurtured the greatest thinkers of their age for the glory of family. The results were so transformational on a worldwide basis that the Medici's are now often referred to as "the Godfather's of the Renaissance".

As I have an interest in solving problems on a local scale my thoughts while hearing about all sorts of ways that cross disciplined groups have created breakthrough solutions in undreamed of ways, my mind drifted to some very local problems. In particular, I was pondering the question of first, how can the Evansville region preserve the wealth under our ground in the form of abundant deposits of coal, and secondly how can we repair our dysfunctional sewer system in a less expensive yet sustainable way. Make no mistake, if both of these solutions come from an Evansville region company, the wealth and lifestyle of this region will be expanded greatly. If these solutions come from elsewhere or not at all it will be more fowl air and less prosperity for this place that we call home.

Conservative societies suffer much more from an affliction that is typically called associative barriers. An associative barrier is an ingrained belief that repetitive experience is valued over thought and people can be categorized. We are all guilty to some extent of seeking the comfort that associative barriers give us. It is natural for the human brain to seek the path of least resistance. That path of least resistance is what causes us to call a plumber when the drain is clogged or a doctor when our arteries are clogged. These skills are trained and predictable and serve us well in most cases where a proven solution already exists.

What do we do when our economy is clogged? What do we do when the EPA tells us to repair our sewer system and the existing solutions require us to spend hundreds of millions of dollars that we do not have? What do we do when pending legislation has the potential to turn the coal beneath our surface unusable and essentially worthless? I would respectfully suggest that calling an economist, a civil engineering firm, or an organic chemist is not the right answer.

The solutions to these types of problems require transformational yet practical solutions. This means thought followed by more thought and then followed by action. The "thinkers" that will eventually come up with these breakthroughs are likely to come from out of the blue without the debilitating associative barriers that traditionalists typically have. Mr. Johansson spoke of an architect whose team studied how termites built a mound that stayed constantly at 87 degrees in a hostile climate to get the inspiration to design a building in the same way. The result is a building in Africa that is 90% more efficient that previous buildings. That is the transformational power of tossing associative barriers to the curb and expanding the mind through opening up to the creative power of divergent thought.

People with low associative barriers, connect ideas or concepts that have very little basis in past experience. Such ideas are often met with resistance and statements such as, "If this is such a good idea, someone else would have thought of it." But that is precisely what someone else would never have done, because the connection between the two concepts is not obvious and was not taught in their skills based training.

So, Evansville has two big problems both of which are in dire need of "outside of the box" solutions. As over 800 cities in America have the problems associated with Combined Sewer Systems. These 800 cities have all or will all be mandated by the EPA under the threat of fines to implement solutions to these problems. This is A HALF A TRILLION DOLLAR PROBLEM, with a guaranteed customer base.

The current estimate of the number of tons of coal in the United States by the National Academy of Sciences is 1,700 billion tons. In the future there WILL BE some legislation that will greatly devalue if not obsolete the value of this coal. Roughly 50 billion of those tons of coal are in the Evansville region. According to the US Energy Information Administration, Illinois basin coal is currently selling for about $48 per ton. That would make the coal reserves right here at today's prices have a value of $2,400,000,000,000 (2.4 Trillion).

So, what happens to the $2.4 Trillion of this natural wealth if a breakthrough alternative energy technology makes it worthless? I would submit that this natural wealth will have the same value as confederate money will when an energy breakthrough happens. The way to preserve this wealth for our region is to INVENT OR INNOVATE our way to a solution that does something with our coal that renders it useful and clean forever. Our coal reserves are this regions source of both jobs and wealth. It is our Fort Knox. If we do not do something about it our gold will be turning to dust.

In a panel discussion with the heads of Vectren, the Coalition for Economic Development, and two other leaders of the region the following question was asked. "What is the best example of collaborative innovation that is taking place in the Evansville region?" That question was met with a period of absolute silence. That silence is disturbing. We have plenty of problems, yet a hand-picked group who should be in the middle of seeking solutions went completely mute in the face of where the solutions were being worked on locally.

During prosperous times, it is easier to write checks than it is to use our minds to break barriers and seek solutions. Cash is not and has never been a substitute for innovative thought. In Florence, the Medici family stepped up and invested their wealth in bringing world class creative thinkers of all disciplines to their city and launched the Renaissance. Evansville, Indiana can and should have such a think tank of innovation mentality. If we can afford to spend $200 Million monuments to entertainment and to seriously consider spending $18 Million for little league baseball fields we can certainly afford to bring leading edge thinkers here to live. It is also possible that many good thinkers are already here and have an awareness of the problems that we are in need of solutions for. Creating an environment where creative people come to this place to solve just these two problems has the potential to generate $3 Trillion of wealth.


For more information, please visit Joe's TNNWC Bio.


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Tuesday, October 26, 2010

LIVING OUTSIDE THE BOX: Recognizing the Positive Impact of the RICH

Living Outside The Box with Joe J. Wallace


The economic polarization between the so called “rich” and “poor” in America is reaching fever pitch. Even my educated and gainfully employed associates in some circles are railing against people of wealth as though they are all thieves and usury creatures. I have been astonished at the depth of envy that some publications have expressed on this situation. A letter to an editor that was the manifesto of a true communist with a heart full of envy inspired me to reflect on the positive impact that wealthy people have had upon me personally. The spirit of progress is not served by damning anyone, the rich included.

The economic witch hunt that characterizes the thoughts and actions of many of our fellow citizens must end. Our very survival as a free society may depend on the American spirit of acceptance. Many of the huddled masses yearning to be free of yesterday have funded the educational institutions, the humanitarian agencies, and the commercial successes that have kept America at the forefront of the world economy. May we never take up pitchforks to drive the innovators and successful business people from our borders. May we never support legislation that makes the United States of America hostile to the entrepreneurial spirit that made this country the land of opportunity that we all have come to know.

Let me preface my comments by disclosing that I am a descendant of the Cherokee nation, of immigrants, of William Wallace of Scotland, and am a direct descendant of Benjamin Harrison making me a cousin of 7 signers of the Declaration of Independence including Washington, Jefferson, and Madison. Jefferson's lifestyle pretty much gives me relatives of every color and creed on earth. I am an American.

What have the rich done for me? In the beginning of the 20th century Evansville, Indiana Mayor Benjamin Bosse walked door to door collecting funds to supplement funds from the RICH to bring a college to Evansville that is now the University of Evansville. UE is here because of the philanthropic efforts of the RICH. I was able to attend UE largely on the strength of scholarships that were made possible by RICH corporations like Alcoa. Funding my BS with facilities and scholarships is what the RICH did for me.

I attended graduate school at Stanford University; a college was founded with the private donations of Jane Lathrop Stanford to memorialize her son Leland Stanford Jr. who passed away at a young age. My diploma bears his name. My class included Leslie Leland, the founder of Stanford's great niece. We both were on scholarships along with classmate Condoleeza Rice. The Stanford family’s wealth came from the railroad business. Some would call them robber barons, but I call them benefactors. Stanford is something else the RICH did for me.

I have never been hired by, had a business funded by, seen a factory built by, or seen an endowment established by anything but a RICH person. How many of the nation’s 20M unemployed are seeking employment from the RICH. All of them are.

The economy may crash due to government and business malfeasance, property values may plummet as they did in Moscow in 1917, our currency may be devalued to the point of needing a bucket full of money to buy bread as it did in Germany, but I will be fine. Why? I will be fine because the RICH through their philanthropy established educational systems that I was able to attend. As long as I maintain my health and keep my skills intact, I will survive to thrive another day.

I thank all of the American ancestry both RICH and POOR for establishing a country to make it possible for a teacher's kid from Kentucky to live the life that I have. The RICH did not do anything for me that they have not also done for each and every one of the Envy Police who are calling for confiscation of assets and a return to 90% tax rates. Are we as a nation willing to sacrifice the RICH on the altar of socialism out of jealousy and spite? I was not born to any more privilege than Chuck was. The difference in us is that I recognize generosity of the RICH along with the toil of the poor. The poor have toiled in America for the protections and rights that our founders had the wisdom to bestow upon us all. The poor have toiled in America so that they or their posterity can aspire to and have a better life.

Every American generation has produced rags to riches examples that have attracted the best and brightest from every country on earth. When the envy of the masses destroys this nation’s attractiveness as a place to live, then and only then will the United States of America join the evil oppressive empires that the Envy Police have imagined in the history books of failed nations. You see, it was not the RICH that destroyed Rome, it was the entitlement mentality of both the RICH and POOR of Rome that Edward Gibbon documented in “The Decline and Fall of the Roman Empire”.

I feel entitled to nothing and I envy no-one. That is the American way, as least it once was.


For more information, please visit Joe's TNNWC Bio.



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Tuesday, September 14, 2010

LIVING OUTSIDE THE BOX: The Rust Belt Dilemma - When Valuations and Costs are Miles Apart

Living Outside The Box with Joe J. Wallace


We all have encountered a time in life when there is something that we desire that just isn’t worth the cost associated with acquiring that object of our affection. It may be a toy for a child, an automotive accessory for a young driver, that perfect pair of shoes, or an overpriced bauble of success for a captain of industry. The choice of whether to knowingly and deliberately overpay for what one desires in all of these cases has personal consequences but fortunately these consequences are only personal.

In decisions where taxpayer’s money is involved the consequences are distributed over the population at large, yet the decisions always seem to be made by the few or the one. Such a decision is facing the City of Evansville, Indiana. It was accurately predicted months ago that the Executive Inn would have to be torn down and that the financing for the project would not be secured.

Last week, The City of Evansville came face to face with what I will refer to as the Rust Belt Dilemma, when Browning Investments of Indianapolis announced that they will be returning a downtown hotel previously slated for replacement to the City of Evansville. The reasons given were cost overruns due to some structural issues with the building and the fact that they have not been able to secure financing for the project after exhausting their options over many months.

Upon hearing this I did what I always do when curiosity gets the best of me and dug out some books from graduate school and did a little research on the internet. Given the conditions that David Dunn articulated to the Evansville Courier Press for a 250 room hotel, with rooms that rent for $120 per night, and an average occupancy of 60%, I used these initial conditions and assumed a 3% growth rate for the next 10 years. These assumptions lead to a value for the proposed hotel in the range of $18M to $22M with the variation coming from the efficiency range assumptions of the overall operation.

Browning is on record from its 2008 announcement that a three star hotel of this size will cost around $35M to complete and that the recently disclosed problems will add several million dollars to the price tag. It is safe to conclude that undertaking this task will require a budget of at least $40M to complete.

A dilemma is a problem offering at least two solutions or possibilities, of which none is practically acceptable. One in this position has been traditionally described in America as being “between a rock and a hard place". Here is the Rust Belt Dilemma that is being played out in Evansville:

  • The Centre is Currently Losing Convention and Entertainment Revenue

  • When the Arena is Built, Both will continue to Suffer Financially with no Convention Hotel

  • Taxes from the Hotel are Committed to Pay off the Arena Bonds

  • The Taxpayers were Promised a Three Star Hotel Financed Privately

  • The Convention Hotel will Cost $40M+

  • The Convention Hotel on Completion will have a Value of $20M +/- 10%


    • What Are We Going to Do???

First, given the value vs. cost proposition it is highly unlikely that there is going to be a white knight with deep pockets come to the rescue and take on a project that has a high probability of many years of losses and an instant $20M negative hit to the company balance sheet. For the same reason that a solid business like Browning could not find a way to make this happen, other for-profit entities will be quite bearish when deliberating on such an investment.

Secondly, if it is determined that Evansville must have a hotel right now, then the City of Evansville and Vanderburgh County, that owns the Centre are going to have to consider finding some way to arrange for financing for the Convention Hotel. This could come in the form of a bond issue to cover the construction with a leaseback agreement with an operator, a combination loan and grant to a developer, or a combination of other creative financing alternatives. The bottom line is that the City of Evansville probably can find a way to do this. The $40M question then becomes, is it prudent for the City of Evansville to pay $40M for something that has a value of $20M? As odd as it may seem, the answer is maybe. The aggregate economic benefit to the Arena, the Centre, and other Downtown tax generating businesses may just justify this.

The third option is to wait and see if the Arena delivers on the economic impacts that were so highly touted in the meetings that lead to the decision to build it. It is quite reasonable given the hyperbole surrounding the $128M Arena that it will have a $20M positive impact on the investment potential for a Convention Hotel. If that is the case, in a couple of years a private entity will eagerly embark upon this project.

I did a few more iterations on my valuation routine and here is what is needed to make a 250 room hotel achieve a value of $40M. The Convention Hotel will need to command between $250 and $300 per night and achieve an 80% - 90% occupancy rate. If the Arena can create commercial success that allows the rack rate to double and the occupancy to increase by 50% over the current assumptions, private investors will find this project attractive. That is no small requirement as Evansville has never been considered to be a market for $300 rooms.

Could the Rust Belt Dilemma have been avoided? No, but it could have been known before any shovel struck the ground for the Arena or any wrecking ball hit the old hotel. The value calculations did not just appear. The value resulting from the assumptions that have been published has not changed in the last two years. There have been rumors of structural problems with the Executive Inn for many years. A test to have assessed that could have been done. It may have been done. The construction cost has also not changed dramatically. I must conclude that the Rust Belt Dilemma was unavoidable.

What is baffling though is why the analysis and the structural testing were not done three years ago when the planning process was begun. They could have been. If they had been, there may very well be a Convention Hotel under construction right now ready for a fall 2011 opening along with the Arena. A little more planning and testing could have avoided the anxieties of the last week along with any ire that the citizens of Evansville may feel if another bond issue is undertaken.

Evansville has created another classic paradox. Situations like this where the right hand does not know what the left hand is doing are known as Condorcet's paradox or a paradox of voting. This is where a group of separately rational individuals or project managers may have preferences that are irrational in the aggregate.

Right now, the old hotel has got to come down. The prospect of having this rotting reminder standing there is just not an option. The people of Evansville and Vanderburgh County will have nearly $200M invested in the Centre and the new Arena. Both are showcase facilities and deserve to have something of class adjacent to them even if it is just a memorial garden or a park for the time being.

This quandary is facing cities all across the Midwest. The recent real estate contraction has served to exacerbate the gap between building costs and value. As governments migrate into the world of real estate development with entertainment venues, they need desperately to get a grip on the entire project as private capital does not fill gaps created by governments unintended consequences like the Rust Belt Dilemma.

Notes for the Curious: I have included two websites below that are good tutorials on valuation methods and the equations used to reach valuations. For those who are curious and mathematically inclined valuation is a good skill to have as the same principles apply to parking garages, rental properties, and lease based capital equipment. Enjoy!!

http://www.hvs.com/Bookstore/HotelValuationTechniques.pdf

http://www.entrepreneur.com/tradejournals/article/120350582.html


For more information, please visit Joe's TNNWC Bio.



Membership is FREE!The NATIONAL NETWORKER™The BLUE TUESDAY Report™The NATIONAL NEWSPICKER™LEFT, RIGHT and CENTER™Financing, Credit and Risk ManagementEmerging Enterprises Venture Capital Program™Merchant Payment Processing SolutionsNews Releases, Publicity and Public RelationsBUZZWORKS™ - Branding and Social Media DominationMarket Research, Surveys and PollsAssessment ToolsBLOGWORKS™ - Expand Your Search Engine Presence, Positioning and CredibilityAdvertise with Us!Selected Service ProvidersInternational Connections Service - Go GlobalIntelligence and Information OperationsInstant Mobile Communications, Applications and Training
Visit Our WEBSITE for more!http://www.TheNationalNetworker.com
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The Emergence of The Relationship Economy
The Emergence of the Relationship Economy features TNNWC Founder, Adam J. Kovitz as a contributing author and contains some of his early work on The Laws of Relationship Capital. The book is available in hardcopy and e-book formats. With a forward written by Doc Searls (of Cluetrain Manifesto fame), it is considered a "must read" for anyone responsible for the strategic direction of their business. If you would like to purchase your own copy, please click the image above.

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