Lemon Contracts and Negotiation?

By now those who live in the Greater Toronto Region have heard about the "lemon" hybrid Toronto Transit Commission (TTC) Buses. There is much talk amongst the TTC commissioners about the fact that these buses do not meet expectations.

Batteries that should be lasting five years are surviving only about 18 months, which affects service because those buses have to come off the road for repairs, he said.

The hybrids have also failed to live up to projected fuel savings because the technology is most beneficial in stop-and-go downtown traffic and there are a limited number of such routes, Ross said. Many TTC routes operate in less busy residential neighbourhoods.

It was hoped the hybrid buses would save 20 to 30 per cent on fuel but they are achieving only about a 10 per cent saving, he said. (From the Toronto Star: October 18, 2008)

Now understand, I don't have any insight into the contracts that were signed and agreed upon, but I have negotiated multi-million dollar deals for equipment and you don't just take the marketing hype as gospel! You ask the provider to guarantee that the equipment will be as "promised". This can be achieved through various standard approaches, but at the end of the day, it comes down to "put your money where your mouth is". If you say the batteries will last for 5 years, then guess what? When they don't -- the provider will absorb the cost of any retrofit, as well as any requirement to put other temporary buses on the routes for the period of time this takes (and by the way...the provider is on the hook for finding these temporary buses).

And what is this about the fuel consumption? Where is the due diligence that should be done by the city -- this is like looking at a car that says it gets 26 km to the litre -- and then in small print it says but city driving is only 12 km to the litre.

As a consumer, I read the fine print. As a procurement professional, I not only read the fine print, but I ensure that due diligence is done on the "promises" and then contractually bind the provider -- if they indicate this amount of fuel will be saved by using their buses then questions need to be asked how this number will be validated, what the experience has been in similar cities, during peak times. And more.

Obviously, none of these was done, and the politicos raced to get the payout from the Federal Government -- which provided financing for these hybrids.

Once again, it shows there is no such thing as a free lunch! The money given by the Federal Government will now be a small drop in the bucket compared with the issues that the TTC is facing to deal with the "lemons".

Why is the Wall Street meltdown a surprise?

Everywhere the pundits are quoting Gordon Gekko from the 1987 movie "Wall Street". "Greed is good" he expounds -- and now everyone laments that we have allowed Wall Street to become a reflection of Gekko's philosophy.

The reality is that this is much deeper than just the traders on Wall Street. In fact what this is about is the entire way that the success of a corporation is measured. Look at the Fortune listing of companies -- it is by revenue...not in order of profit...but by revenue. Oh, profit is of course mentioned in due course, but it is this lusting after the Holy Grail of revenue that makes the numbers be massaged and the mis-truths told.

When corporate CEOs and their disciples are measured and rewarded on revenue growth and the analysts can make or break a company by their recommendations based on the latest quarterly report -- is it really a surprise that some shenanigans are in play?

For years I have been a proponent of focusing on the profit picture -- not at the expense of revenue -- but when making a decision -- it shouldn't just be "full speed ahead". There should be some reflection on whether a deal actually meets the standards which will ensure the growth of the company for the future. Yet, "alas poor Yorick, I knew him well", is the head of a corporation who wishes hailed as a saviour in the short-term, so he/she can reap the rewards and move on as a messiah to their next position...while leaving destruction in their wake.

Many years ago, I saw this in action in a firm where I was employed. The devastating effects from his reign resulted in this blue chip firm never recovering.

The problem is how the entire markets measure success. Perhaps it is time to go redefine its meaning and go down the right path for the future.