Careers in Business Economicsbusiness.baylor.edu/Steve_Green/busecon.pdf · Careers in Business...

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Careers in Business Economics A Publication of the National Association for Business Economics 1233 20 th Street NW #505 Washington DC 20036 P: 202-463-6223 F: 202-463-6239 [email protected] http://www.nabe.com

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Careers in Business Economics

A Publication of the National Association for Business Economics

1233 20th Street NW #505 Washington DC 20036

P: 202-463-6223 F: 202-463-6239 [email protected]

http://www.nabe.com

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Copyright 1997-2001 The National Association for Business Economics

This document can be freely distributed or reproduced, in whole, with credit given to NABE and with this notice

included.

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The Profession of Business Economics The everyday activities of business economists are a mystery to many people. Perhaps the main reason is that business economics as a profession was largely unknown until the depression-ridden 1930s, when economists assumed important positions in the federal government. As an academic discipline, economics goes back more than two centuries. Business began to employ economists in increasing numbers after World War II. Since then, the profession has grown rapidly. Currently, business economists are at work in manufacturing, mining, transportation, communications, banking, insurance, retailing, investment, and other types of enterprise, as well as in government agencies, trade associations and consulting organizations. The role of business economists varies with the size of the firm. Some large corporations have an economics department with several economists on staff, while other firms have economists who function partly in the profession and partly in corporate planning, finance or market research. Businesses not large enough to employ full-time economists often use the services of economic consultants. Even firms with full time economists frequently turn to consultants to augment their own capabilities. The growth of business economics has stemmed from management's increasing awareness that applied economic analysis can provide assistance in planning and problem solving. The business cycle, government policies and international upheavals can have major impacts on companies. Business economists are able to analyze and interpret these developments in terms of their probable impact on consumer demand, prices, costs, competitive pressures, financial conditions and other matters. Such analyses and interpretations are vital to the successful operation of business firms. In addition to analyzing the external environment, economists are also knowledgeable about the basic principles of the behavior of business enterprises. They are thus able to help a firm achieve a more sophisticated understanding of its own activities. In any type of business firm, trained business economists are:

• shrewd observers of what goes on both inside and outside the firm; • enlightened analysts who can formulate and test promising ideas in an objective way;

and • persuasive communicators to management and others on behalf of the firm.

All three of these roles are essential in the business world. The following articles all appeared in Business Economics, the journal of the National Association for Business Economics (NABE). They were written by NABE members to highlight the work they do for their companies. In addition, “Five I’s for Business Economists” by Lawrence Small, President and COO of Fannie Mae, provides an overview of how economists can be more productive within their companies. After these articles come information on educational requirements, salaries, and information on NABE. For more information about careers for people who use economics in their work, see NABE’s web site at www.nabe.com, or contact them at National Association for Business Economics 1233 20th Street NW #505 Washington DC 20036 P: 202-463-6223 F: 202-463-6239

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44 Business Economics

If you as a trained business economistwish to have a significant impact on yourorganization, you must: (1) focus on yourinternal constituents; (2) build a relevantinformation resource; (3) be insightful re-garding your analytical work; (4) be aneffective interpreter of economic events andtrends for your colleagues; and (5) be iden-tified as someone who can contribute to yourorganization’s innovation process.

I N MANY ORGANIZATIONS , the Economics Department is regarded as an ivory tower; a staff

function on the periphery of the organization, populatedby intelligent, highly educated, articulate people who areoften interesting to listen to but fundamentally not a partof the mainstream operation of the enterprise wherethey work. And while Economics Departments aboundin the corporate world, they are rarely regarded assenior-level, critical functions deserving of key spots inthe top management structure.

In my view, that is unfortunate, because manytrained economists possess extremely useful skills thatcan provide real value to business organizations. Buttrained economists rarely have a significant impact onthe organizations where they work if they are part of anenterprise’s Economics Department. Almost always,the economists who have a real influence on institutionalstrategy are those who have left the Economics Depart-ment and gone on to other jobs. And plenty of econo-mists have done just that. What can be done to changethe common perception of Economics Departments,

what can be done to heighten their importance andenhance their abilities to contribute to top leveldecisionmaking?

USERS VIEWS OF ECONOMIC INPUT

My views, admittedly strong ones, on this topic, arebased on thirty-five years of experience in the corporateworld. I have served on the boards of directors of fiveNew York Stock Exchange companies. As a bankingand financial services person, I have been appointed tomany investment, budget, finance and planning commit-tees, not only of those boards but of the dozen or sononprofit boards on which I have served as well. All ofthese committees have been the recipients of hundredsof presentations by economists, and I have been privy tothe hundreds of conversations that have been held aboutthose presentations and, naturally, the economists whogave them, after the presenter left the room.

What has always troubled me is that, more oftenthan not, the behind-the-back comments about the veryobviously intelligent, thoughtful, higher educated econo-mists making those presentations are generally light-hearted, but mildly sarcastic, somewhat cynical barbssuggesting that what one has just heard should be takenwith a grain of salt, is available from any number ofsuppliers of the same commodity, is “nice to know butnot something we can or would act on” and other suchobliquely (and sometimes, not so obliquely) criticalstatements. When you hear that kind of thing over andover for so many years, you have to say to yourself, “Ifthis type of report is treated by its audience in such acavalier way, why do they bother to continue to requestit? Is it just some form of entertainment, an interludeprovided to lighten things up or to fill space?”

Unfortunately, I don’t believe I have the perfectanswer to that question. However, I think what’s goingon is that people believe it’s appropriate to seek interpre-tation of economic events, and they think it’s appropri-ate to try to figure out what influence those events mighthave on the future. They also respect the fact that, tocarry out the task of interpreting economic events and

Five I’s for Business Economists

By Lawrence M. Small*

* Lawrence M. Small is President and Chief Operating Officerof Fannie Mae, Washington, DC. This paper was presentedat the 40th Annual Meeting of NABE, October 4-7, 1998,Washington, DC.

Copyright 1999, National Association for Business Economics

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January 1999 45

trends, you really have to have the appropriate brainpower, education and experience. On the other hand,they do not seem, in most cases, willing to attributeenough credibility to economists who do not have hands-on business experience so that they react in a trulyserious way to what economists say.

Obviously, that is not always true. There are anynumber of economists whose words are taken to be veryrelevant. But the number of meetings I have attendedin my life where that was not the case has been quitesignificant. Consequently, I believe that business econo-mists should be very serious about the serious questionof whether they are being taken seriously. And if theydiscover they are not, and they are not doing what theyare doing just for the occasional quote they get in thelocal paper, they should be asking themselves why notand, to the extent they can figure that out, they shouldthen decide what to do about it.

WHY HAVE AN ECONOMICS DEPARTMENT?

To start that process, the first question that has to beasked is, “Why would any enterprise choose to have anEconomics Department?” The answer to that shouldbe, “Because it provides them with something they wantthat they otherwise wouldn’t be able to get, at least notfor what having their own department costs them!”

With that as a basic premise, it would seem sensiblefor every Economics Department to be so obviouslyadding value to the enterprise that no one would evenconsider thinking of it as “overhead” or simply “nice tohave.” That, of course, means that the department hasto be providing the enterprise with information andanalysis that it not only needs to run the business but alsois either impossible or too expensive to get elsewhere.

And therein lies what I believe is a principal short-coming of quite a number of Economics Departments,at least in the world I know best, that of larger corpora-tions. They simply do not add significant business valueto their institutions. While they may have an indicator ortwo that they track that is something no one else tracks,the fact is what most Economics Departments turn outis quite similar to what is easily available in the media.

It is certainly true that information that is readilyavailable, but nonetheless attractively presented, or awell-written newsletter for a given institution’s custom-ers, employees, suppliers and other constituencies hasvalue. The issue is whether it has sufficient value. Theissue is whether Economics Departments, by focusingso heavily on the “media” aspect of their work, reinforcethe impression of economists as people who carry out aPR function.

If, indeed, economists are seen as carrying out a PRfunction, then it is quite natural for them to be viewed justthe way most people in large scale enterprises view theirPR people: specialists the modern world forces them tohave but not real members of the group of key people

who really have a hand in shaping the key strategies ofthe enterprise.

There is no question you can make a decent livingcarrying out a communications function, you can makea decent living as an articulate interpreter of economicevents and trends for employees and customers, andyou can be a respected contributor to the speechwritingprocess for the CEO. While there’s no question there’svalue in doing all of that, I believe there are ways tomake the jobs in the Economics Department much moreinfluential, much more powerful and most importantly,much more personally satisfying than they are.

If you agree with that and are attracted by theprospect of becoming a significant participant in thestrategy development and execution activities of yourenterprise, then, for sure, your Economics Departmentmust demonstrate many times over that it is making acontribution to the corporation that simply is not—andcannot—be made by anyone else.

THE FIVE �I� STRATEGY

To make that contribution, that unique contribution,my belief is that successful business Economics Depart-ments have what I call a “Five ‘I’ Strategy:”

1. Inside influence2. Information3. Insight4. Interpretation5. Involvement in Innovation

Inside Influence

If economists are going to be real “players” in theinstitutions where they work, they have to focus on theirkey internal constituencies to develop inside influence.The customer newsletters are great. The dinner speechesare personally gratifying. The conferences are terrificfor networking. But none of them puts you in acorporation’s inner circle. To get in the inner circle, youhave to hang out with the members of the inner circle,and to do that, you clearly have to be able to be an activeparticipant in that particular world, a participant withrelevant ideas and information. If you spend the bulk ofyour time focused outside of the inner circle, yourprobability of getting to be a member of it is not going tobe very high. Even though your calendar is filled withpublication deadlines, speaking engagements and indus-try conferences, if you want to have more to say aboutan institution’s trajectory, spend more time on internalmatters than external ones.

You might respond to that by saying, “I agree withyou. I would like to be more of a key player in myinstitution, but how do I suddenly start spending lots oftime with the people who call the shots, particularly ifthey don’t take the economics function that seriously inthe first place?”

That is where the other four “I’s” come in.

Copyright 1999, National Association for Business Economics

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46 Business Economics

Information

The next one is information. Many businesseconomists seem to traffic in information that is widelyshared and pretty readily available. And much of whatthey talk about has a very significant overlap with whatother economists talk about. Consequently, one hearsthe “it’s a commodity” statement quite often. And theway to make a commodity-based business successful isto surround the commodity with enough in the way ofnon-commodity products and services to make the totaloffering unique.

For example, I am on the board of the ChubbCorporation, which is a major supplier of homeowner’sinsurance. Now, homeowner’s insurance is prettymuch of a commodity. But Chubb has an extraordinarymarket share with affluent families who are more thanwilling to pay more for Chubb’s homeowner’s insuranceprotection than that of other companies. Why? Be-cause the service is so good. Because the policy is soclearly written. Because the material for the home-owner is so attractively packaged. Because the respon-siveness of the claims management process is so ter-rific. I could go on and on. The point is the company hasturned a commodity into a specialty product, even a sortof status symbol where customers like telling others that“I have all my insurance with Chubb.” And Chubb hasachieved that by pinpoint bombing, by precisely target-ing their particular product to a very specific marketsegment, by figuring out just what their particular targetmarket wants and needs and giving it to them.

Successful Economics Departments create thatsame type of imagery for the information they developand supply. They convince their constituents that theiranalysis, their data bases, their indicators, their trendlines, their graphics and their tables constitute the abso-lutely best window on the world of their particularinstitution’s activities. They completely sell their inter-nal constituents the idea that no one else, absolutely noone else, anywhere, has a better, more comprehensiveset of facts and figures about what is going on in theirenterprise’s business arena than they do. No one elseis better informed. No one else has better information.

Insight

After information comes insight. It isn’t enoughsimply to have the best information; you have to beviewed as an individual who is uniquely insightful whenit comes to figuring out what the information means foryour enterprise. That, of course, makes it mandatorythat you not only develop superb analytical skills in orderto produce the right answers, but you also work veryhard in making sure you get really good at asking theright questions.

I recall, for example, one case when I was a bankerworking with one of the country’s largest fast foodcompanies. I remember the CEO of the company telling

me how their corporate economist had done a studyanalyzing the performance of their various restaurantunits versus the key, relevant economic indicators forthe immediate markets they served. The idea was to seewhether their stores were doing as well, better or worsethan the economies in which they were located. In oneparticular case, that of a central city store with tremen-dous volume, the economist indicated he felt that therestaurant was the “best in the chain” and that themanagement of that particular region should be con-gratulated because they were growing the store’s busi-ness at a much faster rate than the surrounding economy.

The CEO told the economist that he was really quitesurprised to hear the economist’s conclusion, becausehe had actually been thinking about firing the manage-ment of that particular region. It appears that what they,and, it goes without saying, the economist, had missedwas that real estate prices in that market had risen muchfaster than any of the economic trends of the fast foodbusiness. Consequently, it was patently obvious that thesmart thing to do with the property was sell it (and notkeep running it as a fast food restaurant), because thepresent value of the restaurant’s future fast food earn-ings was nowhere near what the market value of theland had become.

Suffice it to say the problem here was that theregional management and the economist simply werenot insightful enough when looking at the economicindicators of the area in which that restaurant waslocated to arrive at what was a pretty obvious conclu-sion, at least for someone with an entrepreneurial mind.

In today’s world, in many large corporations asignificant number of executives who are responsiblefor reasonably sizable business units are simply not thatsophisticated when it comes to reading economic trendsand grasping what those trends mean for an institution’sfuture. And even if they do have the intellectual andeducational wherewithal to do so, there is always theissue of experience and familiarity with the businessthey are managing, not to speak of the time needed towade through all the necessary data.

If you look at the Fortune 500, they all havethousands of executives running the various compo-nents of their portfolios of products, geographies andmarkets. At any given moment, you can be sure 10 to15 percent of those executives have been in their jobsfor fewer than twelve months due simply to turnover andcorporate reorganizations. Therefore, almost alwaysthere’s a sizable percentage of corporate business unitsbeing led by people who simply aren’t that knowledge-able about the economic subtleties of the products,customer relationships or regional markets for whichthey’re responsible. That being the case, people whoare really insightful when it comes to analyze theeconomic drivers of a company’s business should neverbe viewed as commodities or corporate overhead.

Copyright 1999, National Association for Business Economics

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January 1999 47

Interpretation

The fourth “I” stands for interpretation, i.e., thecommunication skills needed to translate the value ofunique economic information resources and insight intomeaningful conclusions for executives who are runningan institution’s affairs.

I was chatting the other day with the retired ViceChairman of one of the largest businesses in the UnitedStates. He told me that, during the course of his forty-year career, his company had only one corporate econo-mist who was deemed to have made a really significantcontribution to their company. I asked why that was soand he said, “He was a terrific teacher. He alwaysknew how to get our attention. He was able to takecomplicated information and make it understandable.He never sounded pedantic. He never spoke in eco-nomic jargon. He always talked to us in our language.And over time, he took the entire management team to awhole new level of understanding about the indicators weneeded to be watching, how they were interrelated andwhat the key drivers of our business success really were.”

Now, that is a description of someone who hasbecome really influential in an institution’s top manage-ment team! The point is, to become an internallyinfluential force in an institution’s management, younot only have to get close to the members of the seniormanagement team, you not only have to develop what isperceived as unique, virtually proprietary, highly spe-cialized information resources, you not only must beseen as being particularly insightful when it comes toanalyzing the events and trends reflected by the infor-mation with which you’re dealing, but you also mustlearn how to become a superb interpreter of theconclusions you have drawn so that your colleagues willclearly, unequivocally, understand what you’re trying tocommunicate.

Involvement in Innovation

But, that’s still not enough. If you really want to bepart of your institution’s leadership, you have to showyou can play a role in the enterprise’s creative process.You have to demonstrate an involvement in innova-tion, the capacity to make a contribution to the develop-ment of business-building ideas. Although it’s notalways the case, the correlation between the creation ofincreased revenue streams and significant career ad-vancement is generally very, very high. Revenue is thelifeblood of all businesses and those individuals whoshow they are obsessed with building revenue momen-tum and gifted at creating new approaches to growingthe business are inevitably viewed as highly valuedcorporate assets.

Interestingly, people in sales, marketing and produc-tion do not have a lock on playing the principal roles inthe drama of innovation. There are numerous caseswhere accountants, lawyers, information technologists,

public relations people and even internal auditors haveemerged from their particular islands of specialization tomake vital contributions to efforts that have contributedto substantive institutional growth. While I know theirhave to be cases where people from Economics Depart-ments have acted in a similar fashion, let’s just say thatthey are not widely known.

And I think the reason you do not often hear of theEconomics Department playing a role in a company’sinnovation process is simply that the people in thosedepartments do not think they are supposed to. Itcertainly is not that they are unable to. The issue is notwhether trained economists can have a major impact onthe organizations in which they work. They can and do.The issue is whether the Economics Department canbecome a really influential force in an enterprise’smanagement.

EXAMPLES OF SUCCESSFUL ECONOMISTS

Let me demonstrate by citing examples of econo-mists who play a vital role in influencing a company. AtFannie Mae, some of our most influential executives aretrained economists.

David Berson, someone well known to all of you, isin frequent contact with our CEO and clearly someonewho has had an influence on his thinking. He plays a realrole in setting performance targets for the company, notto mention his participation in a wide range of strategyissues covering regional expansion, regulatory policymatters and product development.

Jayne Shontell has bachelor’s and master’s degreesin economics from Georgetown and at one time was theChief Economist for our principal competitor, FreddieMac. Jayne has been a major force in the innovation ofmajor developments related to the securitization ofmortgages. She has held a wide variety of positions atFannie Mae and is currently our Senior Vice Presidentfor Investor Relations. Given that the market capitali-zation of Fannie Mae is around $65 billion, she is in oneof our most important jobs.

Tom Lawler has bachelor’s and master’s degreesin economics from the University of Virginia, came to usfourteen years ago as an economist, and since the late1980s has been one of the truly pivotal figures in buildingup and running our $370 billion mortgage portfolio, thepart of our business that generates two-thirds of ourearnings.

Tom reports to Tim Howard, who has bachelor‘sand master’s degrees in economics from UCLA, workedas an economist at Wells Fargo and Chase EconometricAssociates, and came to Fannie Mae to become ourChief Economist in 1982. Today, he’s our ExecutiveVice President and Chief Financial Officer. Tim hasbeen one of the really key contributors to Fannie Mae’sspectacular growth in the latter half of the 1980s and inthe 1990s and is today one of the most important figures

Copyright 1999, National Association for Business Economics

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48 Business Economics

in top management. He has been a major force inshaping the huge, truly unique, secondary mortgagemarket in the United States.

I have no need to be convinced that economictraining can be a valuable asset or that economists cancarry out a wide variety of corporate roles. And thesecolleagues of mine prove just that. They have been atthe heart of innovation in the housing finance business.They can take credit for generating billions of dollars ofrevenue. And my experience of more than twenty-seven years at Citicorp was the same. A number ofreally key executives, truly creative contributors to thebuilding of our business, were trained as economists.

ROLE OF ECONOMICS

Can economics, a staff function, play a truly influ-ential role in an enterprise’s management?

I believe the answer is, it can. I am impressed by therigorous training economists have to undergo. I amimpressed by the intelligence of people who are at-tracted by the economics profession. I am impressed bythe ability of many economists to communicate effec-tively. And I am impressed by the versatility of manyeconomists, their willingness to deal with a wide variety ofissues, and their enthusiasm at taking on new challenges.

The raw material is all there, and there is not a thingwrong with it. What is really required is leadership.What is required is for the corporate economist to say,“I want what I’m doing here to be more influential thanit has been—a lot more influential—and I recognize Iam going to have to make some changes if that’s going

to take place. I am simply going to have to reorient whatmy department is doing and how it does it.”

That is where the “Five ‘I’ Strategy” comes in:

1. Focus on those key internal constituents.2. Build a uniquely relevant information resource.3. Never stop worrying about whether you’re being insight-

ful enough regarding your analytical work. Make sureyou’re not only looking at the numbers from just aneconomics point of view. Ask the questions people whoseek to build businesses would ask.

4. Discipline yourself to become an extraordinarily effectiveinterpreter of economic events and trends for your col-leagues. Become fanatical about avoiding academic jar-gon and zealously work to speak to business people intheir own language.

5. Do everything you can to become identified as someonewho can contribute to an institution’s process of innova-tion, someone who is identified as being involved ininnovation. Go where the money is. Get aggressive aboutapplying your creativity to the task of making money forthe company by finding ways to build the business.

I truly believe there is an opportunity out there.There is an opportunity to do more to shape the future.There is an opportunity to really have an influence.

You do not have to grasp it. If you are happy withthe way things are, why do anything to disrupt the statusquo? But for those of you who want more, who arefrustrated by the image I have described, for those ofyou who like being corporate economists but would liketo have more clout, not to speak of more pay, give the“Five ‘I’ Strategy” a try.

Copyright 1999, National Association for Business Economics

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7July 1998

The huge changes taking place in AT&Tin response to a tougher competitive market-place mirror those taking place in many U.S.corporations across a broad range of indus-tries. Cost reduction is receiving greaterattention. Corporate center staff functionsare increasingly being downsized and reorga-nized to obtain a tighter alignment with theoperational and strategic needs of the busi-ness. Organizational changes are emphasiz-ing a greater focus on customers. Newemployee work models are emerging that areless hierarchical and that facilitate greaterflexibility and quicker response times. Foreconomic analysts, that new environment hasled to an increased emphasis on adding value– providing advice that has direct operationalor strategic implications. In so doing, it haschanged what work is done and, increas-ingly, how that work is done.

C OMPETITION IN THE U.S. ECONOMY is getting tougher in many ways. Consumers are

becoming increasingly savvy with the help of newinformation sources. They are increasingly lookingfor best prices. Consumer expectations about cus-tomer service are rising. Quality is becoming moreimportant as a precondition of being successful in themarketplace and maintaining a strong brand image.

Producers are responding by improving productand service features to gain competitive advantage.They are reducing cycle times for new products andreducing competitive market response times. Newproducers are entering from abroad as the economy

globalizes. Producers are entering and exiting mar-kets. And in some industries like telecommunications,government is reducing the regulations that circum-scribe producers’ actions and allowing in new players.

AT&T CHANGES

The changing competitive environment has lead tosubstantial changes in the way AT&T operates and isorganized. For example, several rounds of cost cuttinghave taken place in recent years, particularly focusedin the corporate center functions and support staff. In1993, corporate center functions were required to fundthemselves by contracting their services with theoperating units, except for certain corporate requiredactivities such as taxes. This process spawned a focuson benchmarking.

Contracting was aimed at getting tighter alignmentbetween corporate center functions and the operationaland strategic needs of the business, and reducingcorporate center costs. Contracting resulted in theappointment of some corporate center function repre-sentatives in the operating units and, in some cases, thetransfer of functions to the operating units.

In 1996, AT&T was split into four units in part toprovide greater focus on customers. The four unitswere AT&T (telecom services); Lucent Technologies(telecom equipment); NCR (computer services andequipment); and AT&T Capital Corp. (credit andleasing). Subsequently, the finance organization initi-ated a three-year, 10 percent a year, cost reductionprogram to get to best quartile cost performance. Thecentral economics organization is part of Finance.

A change also has been made to a less hierarchicalwork model. Reporting arrangements have beenflattened, employees closest to the customer and toissues have greater empowerment, and supervisors areseen more as coaches and supporters (e.g., engaging inless directing, reviewing and rewriting of analyses andreports).

These changes in AT&T have substantially reshapedthe central economics function and the activities of themany other economic analysts across the corporation.

Making a Difference at AT&T: Transition to a NewProfessional Model

By C. Mark Dadd*

* C. Mark Dadd is Financial Vice President and Chief Economist,AT&T Corp., Basking Ridge, NJ. He also is a Fellow and a pastpresident of NABE.

Copyright 1998, National Association for Business Economics

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8 Business Economics

WHAT: KEY ACTIVITIES AND FUNCTIONS

Economic analysts are found across the corpora-tion, in the central economics organization, in corpo-rate center divisions and in the operating units.

The Central Economics Organization

The small central economics organization (theEconomic Analysis Section) provides macroeconomicand microeconomic analyses and forecasts for corpo-rate center divisions, the operating units, and seniormanagement. The size of the organization fell fromnine before the split of AT&T in 1996 to five currently.

The key elements of that work are providing: (1)U.S. economic analysis and forecasts; (2) industry andregional analyses and forecasts; (3) financial marketanalysis, including interest rate forecasts; (4) analysisof international developments, including foreign ex-change rates; (5) U.S. public policy analysis (tax andregulatory); and (6) advice for senior management.The work of the corporate center economics organiza-tion in 1990 was described in a Business Economicsarticle by a former Chief Economist, Ken Militzer,now retired.1

The forecasts are of the key macroeconomic driv-ers of operating unit financials. For example, theforecasts of GDP and of consumer expenditures onservices are used as inputs by the product analysts inthe units as the drivers for their product demandmodels. The forecasts for the U.S. economy, interestrates and foreign exchange rates are critical inputassumptions for the preparation of budgets, plans andbusiness case analyses. The largest users of the workare the Planning and Strategy organizations, Treasury,Government Affairs, and the product analysis andforecasting organizations in the operating units.

The focus of the work has been, and remains, onthe business implications of economic developmentsand forecasts. Economic forecasts can be readilypurchased from reputable external vendors much morecheaply than doing them internally, and we do notbelieve that it is adding value to try to forecast theeconomy more accurately than those vendors, at leastin the current environment and in the telecom servicesindustry.

Considerable effort has been expended in recentyears to ensure that best practices are being used in thecentral economics organization. For example, a de-tailed benchmarking analysis of the central economicsorganizations in thirty-two nonfinancial U.S. corpora-tions was conducted in 1990. The results of that surveywere published in Business Economics.2

Changes Since 1996

When AT&T split up in 1996, three corporate

center economists went to Lucent – the telecom equip-ment industry analyst, the international analyst and ajunior economist. The remaining five stayed at AT&T.

These developments caused the Economic Analy-sis Section again to change the emphasis of its work.The international economics activity in AT&T, whichwas heavily focused on telecom equipment sales abroad,declined sharply after the company split up. More-over, the telecom services industry is less sensitive tothe ups and downs of the business cycle than is thetelecom equipment industry, decreasing the need forbusiness cycle and macroeconomic analysis. In addi-tion, the new industries like wireless and the Internetare in the take-off stage of development and so are lessimpacted by business cycle developments. Thesechanges have resulted in the analysts focusing more onindustry and microeconomic issues.

Subsequently, the sale of the Universal CardServices credit card operations in early 1998 substan-tially reduced the need for financial market analysisand forecasting.

Organization Alignment

In 1997, the Chief Economist was given responsi-bilities in the finance organization for competitive andindustry analysis, competitive cost benchmarking, andthe estimation of future AT&T costs for use in businesscases (about 45 people). This caused a further blurringof the work of the central economics organizationeconomists as they got drawn into some of thesebroader activities and of the identity of the centraleconomics organization. It also gave rise to synergies,benefiting both the central economics organization andthe competitive and industry analysis organization.

Economic Analysts in Other AT&TOrganizations

AT&T employs many economic analysts in otherorganizations, not reporting to the Chief Economist. Afew are in Government Affairs providing regulatoryand related analyses, and many are in the units analyz-ing product demand. There is no precise estimate ofthe total numbers of people at AT&T who wouldidentify themselves as economic analysts, but thenumber could easily be around 100. In addition, thereare a large number of other trained economists atAT&T who use economics in their analytical work.

The work of these economic analysts in the corpo-ration also has changed. The analysts in GovernmentAffairs have been focusing on analysis of the costs oflong-distance telecom companies entering local mar-kets under the terms of the Telecommunications Act of1996. The product modelers in the units have beenrefocusing their work away from longer-term demandforecasts that are used in planning towards helping withthe analysis of new product offers in the marketplace.1 See footnotes at end of text.

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We expect the trend to a smaller central economicsactivity and to most economic analysts working in theoperating units to continue, given the reduced impor-tance of the business cycle and other macroeconomicdevelopments to AT&T since the company was splitup. That is the same trend that NABE has seen in theprofession as a whole, i.e., the move from the so-called“traditional” business economist in a central econom-ics organization to the “nontraditional” analyst who isusing economics in a functional division or operatingunit.

HOW: THE INTERNAL CONSULTING MODEL

The critical success factor for any economic ana-lyst in the corporation is to operate as if an internalconsultant, whether or not financed directly by internalclients.

Successful consulting first requires understandingthe needs of the customer. So it is necessary to buildclose relationships with division and operating unitcustomers in order to understand their needs and toensure the analyst has a seat at the table. Theoverarching requirement of internal customers in theoperating units is that the economic analyst contributeto the bottom line of the corporation.

Unit customers look particularly for their analyti-cal organizations to see issues in a strategic frame-work, to have a balanced perspective, to exercisesound judgment, to adopt a shared ownership withthem for problems, and to be proactive. Those unitcustomers also expect the analysis itself to be compel-ling and timely (quick turn around).

Communication

Emphasize communication. The ability to writeclear, concise and compelling analyses is one of themost critical skills for a successful economic analyst.Client time, particularly senior management time, isscarce. The AT&T central economics organizationspecializes in punchy one-page summaries of longeranalyses that are particularly appealing to senior man-agers. It is also important for an analytical organiza-tion to have a brand identity, e.g., the name of theorganization should be placed on every piece of workprovided, not just the analyst’s name. In addition,work in the AT&T’s central economics organization isreferred to as “analysis,” not “research,” becauseanalysis to us implies business implications, whereas

research does not. Excellent communication is becom-ing even more important as corporations becomeleaner and there are fewer management layers betweenanalysts and the operational unit leaders.

Comparative Advantages of the EconomicAnalyst

The key skills of the economic analyst compared toother business analysts is the ability to link industry/market developments to the overall economy, i.e., tosee the forest as well as the trees. The economic analystoften has a comparative advantage in the analysis ofproduct and financial markets, strategy, deregulationand government policy. The broad training of econo-mists provides a flexibility that allows them to turntheir hand to a broad range of analytical problems – acritical attribute in a company experiencing a redirec-tion of industry interests.

Contracting for economic analytical services withinternal divisions and operating units may be a viableoption based on our experience. We found operatingunits and divisions very happy to finance us from 1993until 1997, after which that form of financing wasprohibited in AT&T. Internal economics organiza-tions have a competitive advantage over externalconsulting organizations because of their knowledge ofthe company and the industry.

CONCLUSION

Implications, implications, implications are thethree most important aspects of being a successfulcorporate economic analyst.

The customer is king. Know your internal custom-ers’ needs.

Excellent communication is critical and, poten-tially, a key differentiator.

Exercise your comparative advantage as an eco-nomic analyst.

Be proactive in responding to the changes thatcorporations are experiencing – change before yourmanagement requires you to.

FOOTNOTES

1. Militzer, Ken, “The Business Economist at Work:The Chief Economist at AT&T,” Business Economics,January 1990.

2 . Hoover, Dennis, “Business Economists: Not JustForecasters,” Business Economics, July 1992.

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The most important lesson we have learnedto maintain our effectiveness is to keep devel-oping customers throughout the company.We focus on issues relevant to the company orour industry by building credibility for ourwork (not necessarily by providing the mostaccurate or precise forecasts, though accu-racy is not to be shunned, but through simple,understandable, and story-backed presenta-tions), and by maintaining our neutrality onintracompany issues and our business per-spective on extracompany issues. As a result,people throughout the company tend to thinkof us as useful contributors to relevant projects,and demand for our services remains solid.

F OR THE PAST five to ten years, decisionmakingat Chrysler has become more and more decentral-

ized. This change has coincided with a fundamentalreorganization of the company’s vehicle-making pro-cess. The old way of bringing new vehicles to marketrelied on individual functions, such as design, engi-neering, procurement and supply, suppliers, and manu-facturing, to perform their individual tasks. Eachfunction handed the results of its work to the nextfunction in essentially a sequential process that wastime-consuming, costly, and prone to errors. As aresult, the quality of the vehicles brought to market waslow, with an average of more than five defects pervehicle.

The current method, adapted from Japanese manu-facturers and since imitated by others, is to assemblerepresentatives from each of the key functions intoplatform teams. (A platform is a basic chassis from

which several vehicles may be made.) Team membersfrom the different functions work simultaneously andcommunicate frequently to assure, for instance, thatthe shape of a particular body part will accommodateadjacent components. In addition, a manufacturingrepresentative may suggest that a minor change in thedesign of a component will facilitate more error-freeassembly, or a supplier may suggest that a change willnot only increase the reliability of a component but alsosave cost. Under the old, chimney-style way ofproducing vehicles, most of these suggestions wouldhave virtually no chance of being adopted. Withplatform teams, most of them become reality. Theresult is a reduction of the time it takes to bring a newvehicle to market from about five years to less than halfthat in many instances. Commensurate savings areachieved in costs, and defects average about one pervehicle currently.

These changes have, fortuitously, enhanced theimpact that the economics function has ondecisionmaking at Chrysler by pushing decisionmakingdown to the lowest appropriate level. Although nosystem is perfect, the effect on the economics functionhas been to increase the demand for economic analysisthroughout the company.

WHAT WE DO

Forecasts

The economics function provides many services tovarious parts of the corporation. We provide the usualarray of economic forecasts and analysis for econo-mies throughout the world, with an emphasis on theUnited States. More importantly, we also have theresponsibility for forecasting sales of new vehicles forthe countries in which we do business. More than 90percent of Chrysler’s sales occurs in North America,although that percentage continues to drop as weexpand more rapidly overseas than domestically. Asa result, our forecasts of the North American marketare more detailed and are made more frequently(monthly) than are our forecasts of overseas markets(twice a year or more often if needed). The short-term

Making a Difference at Chrysler

By W. V. Bussmann*

* W. V. Bussmann is Corporate Economist, Chrysler Corpora-tion, Auburn Hills, MI.

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(two-year) forecasts are the starting point for thescheduling of production at plants, and the longer-term(five- and ten-year) forecasts form the basis of theproduct and business plans. Because our forecasts ofthe industry include a breakdown to seventeen seg-ments and include estimates of the country of origin ofsales, we are forced to understand the details of themarket in ways similar to those who work in sales andmarketing, product planning, design, and pricing.

Analysis

We also undertake in-depth analyses of varioustopics of importance, either to the industry or toChrysler. For example, in the past few years we havestudied the affordability of new vehicles, including theeffects of changes in real incomes and the distributionof incomes. We also keep track of the manufacturingcapacity of vehicles, both in total and by type ofvehicle, as well as estimates of elasticities of demandand the determinants of residual (used-vehicle) values.

Other

Finally, we are part of a team that hedges ourexposure to foreign currencies; we are members of theInvestment Strategy Group, which manages asset allo-cations for the pension fund; and we participate in theanalysis of public policy issues, mostly regulatory andenvironmental.

HOW WE DO IT

Economists at automobile companies are fortunatein that part of their job has already been done for them.No one has to convince anyone who works for an autocompany of the importance of or linkages of thecompany to the overall market for new vehicles. Thissituation is in marked contrast to that of most compa-nies for which explicit market data, i.e., data for salesof virtually the same products from competing compa-nies, are not available. For instance, what is themarket for consumer credit reports? What about themarket for industrial fasteners? Yes, executives in thefastener industry know that they sell to, say, the autoindustry, the machine tool industry, the medical equip-ment industry, and the industrial equipment industry.But suppose some of their customers’ industries areexpanding and others are contracting. How are they toestimate the effects on their own business? Economistscan make a distinct and valuable contribution tocompanies with vaguely measured customer marketsthrough judicious use of their statistical training. This,perhaps, is the subject of another article.

However, market forecasts of auto sales are avail-able from outside vendors, and other functions withinthe company are also capable of providing forecasts.Why is the economics function at Chrysler responsiblefor this task?

One important reason is that we have worked veryhard over the years at playing the role of honest broker.Market forecasts from the sales and marketing functionmight be perceived as containing either a sandbag biasso that their volume targets are easier to achieve or aninflation bias that would make their share targets moreattainable. (These would presumably occur at differ-ent times, depending on which target was more bindingat the time.) Forecasts from the platform teams or fromthe product planning function might be thought toreflect a desire to justify new product programs orhigher program spending, while forecasts from thefinance function might be viewed merely as justifyingspending reductions. Exchange rate forecasts orforecasts of inflation from the procurement and supplyfunction would be similarly tainted.

Economists are human beings, of course, subjectto the same biases as other people. However, theeconomics function should have no business purpose inshading a forecast one way or the other. If a company’seconomics function is perceived as allowing politicalor other influences to affect its forecasts or analyses,then its effectiveness to the company is likely to bediminished. This is not to say that in all discussionswith other employees or executives, we economists donot make our views known. However, we take greatpains to make it clear that our judgments on matters thataffect the company are free from such biases.

Communication

One way of doing this is to make forecasts convinc-ing by backing them up with clear, simple stories. Themost accurate forecast is worthless unless it is under-stood and believed and thus can be acted upon. Simple,clearly articulated, nontheoretical (i.e., lacking tech-nical jargon) reasons or thought processes that underliea forecast are what give the forecast life and meaningto other executives who are not economists.

An implication of the need to make a forecastconvincing is to keep explanations nontechnical and tothe point. I cannot remember the last time I utteredsuch terms as “rational expectations,” “monetarist,”“Keynesian,” “general equilibrium,” “stochastic,” or“heteroscedastic” unless prompted or for effect, usu-ally with technical folks outside the company. Ofcourse, even the most convincing forecasts, if wrongtoo often, will soon cease to be convincing. Butcredibility is enhanced if the users of forecasts canunderstand the reasoning behind them. Ideally, the fore-casts become theirs in the sense that they take ownershipof them by acting upon them from a belief that they are themost logical and useful forecasts available.

One way of keeping messages simple and under-standable is to use well-executed graphs or charts,often with a line or two of explanation on each toillustrate points. The key phrase is “well-executed.”

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Charts that have too many lines or bars or that are notclearly labeled or titled or that have too many numbers,lines, or columns on them or that try to make more thenone point per chart may confuse more than clarify. Myown brilliant failures in communication have stemmedmore from violating the “kiss” (keep it simple, stupid)principle than from anything else. Top executives, inmy experience, are easily as smart as any of us. Giventhe time and inclination, they could readily understandany concept we cared to throw at them. But they havemany other uses of their time. We do ourselves a favorby forcing our explanations and language to meet theirneeds rather than unrealistically expecting them toadapt to our frame of reference.

Customer Development

Communication with top executives is important tothe success of an economics function within a com-pany. However, communication with many othersthroughout the company is at least as important, if notmore so. All members of the economics department atChrysler have worked hard to build relationshipsthroughout the company. This work ranges fromproviding the appropriate data in response to oftenvague requests to offering to help with projects inwhich it was not at first clear that we had something tocontribute. Again, we are fortunate in not having toconvince anyone of the importance of understandingour well-defined industry or the economy at large.Consequently, we respond to virtually every request todiscuss with or present to groups that are interested inour work. Such groups range from the staffs of lineofficers to town halls of entire departments; from cardealers to summer interns; from factory workers,through a monthly broadcast over the internal TVnetwork, to platform teams. Our interactions alsoinclude many informal meetings with ad hoc teams inwhich economic counsel in needed.

One reason that we are invited to such functions isthat our reputation for unbiased analysis pervades thecompany. In addition, people generally understandthat we have a strong desire to communicate on theirterms and for their purposes. In addition, we try toavoid dogmatism in the sense of avoiding the attitudeor the perception of having the attitude that if aparticular group does not make the most economicallyrational decision, then they are simple troglodytes.

This last point also has public policy implications.We are, of course, members of the economics profes-sion. But we are also employees of our companies.Sometimes, these two roles come into conflict. Aseconomists, we are responsible for providing ourcompanies with the best economic analysis and apply-ing it in the most useful ways. As employees, weshould try to serve the best interests of the company.

For example, general equilibrium models predi-cate efficient labor markets so that the economy isalways at full employment. How should an economistrespond to the request for analysis of the effects ofcompanies from another country persistently sellingtheir competing goods in this country at below “cost,”while at the same time restricting U.S. companies fromexporting to that country? Simply saying that the othercountry hurts its citizens by denying them the benefitsof free trade and that employment in the United Stateswill be unaffected because markets will adjust is notsatisfying. Similar responses to many such questionswould soon earn us the reputation of “too theoretical”or, worse, “irrelevant.”

On the other hand (ah, finally, the beloved phrase),not pointing out those economic conclusions would beto deny our roles as professionals. However, pointingout also that while markets adjust, they often adjustslowly, so that the adjustment may impose great cost onimperfectly mobile workers or prematurely obsoleteimmovable capital remains true not only to our profes-sional training but also to the realities of business.There are, of course, many other economic, political,and negotiating-type issues with this highly chargedand politicized example. I use it as an example only toillustrate that purely theoretical economic answers toreal-world issues are likely to be insufficient to makefull use of economists’ talents in many companies.

Macro vs. Micro

This last, macroeconomic, issue illustrates anotherdifficulty faced by many company economists. Re-stricting or focusing one’s scope on macroeconomicissues is fraught with difficulty. But if the economistcan demonstrate that the fortunes (sales, assets, profits)of the company or part of the company have beenclosely associated with particular measures of indus-trial production or interest rates or retail sales (recallthe consumer credit reports business) or some otherbroader measures of economic activity, then the execu-tive is much more likely to believe in the relevance ofmacroeconomics to the company. Or suppose that theeconomist can provide an estimate of the magnitude ofprice decrease necessary to reduce inventories to aparticular level? In that example, it is not the econo-mist who will be asking for future meetings.

The vast majority of issues that executives at alllevels of companies care about are those that have adirect impact on the business. These are predomi-nantly microeconomic issues dealing with prices,markets, competition, and technology. Generally, wehave found that top executives are more willing tolisten to macro discussions if they first believe that aneconomist contributes to the microeconomic well be-ing of the firm.

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The economics function at Weyerhaeusercombines marketing and economic research,with 95 percent of the time spent on industry-specific issues. Nearly 80 percent of thedepartment’s budget is charged back to thecompany’s diverse businesses. Consequently,customer focus and responsiveness are cru-cial to success. The role of the group is toprovide insights into industry conditions andlonger-term trends. The group is looked uponas an objective source of information on alikely set of industry events, with much em-phasis on effective communication, espe-cially graphic communications. This ap-proach has changed materially in the pastdecade; emphasis used to be more on macroforecasting with a staff about double thepresent size.

T HE FUNCTION I manage at Weyerhaeuser iscalled the Marketing and Economic Research

group or M&ER. The group has been operational atthe company for nearly thirty years. The composition,size and emphasis of the group have changed dramati-cally during that period. At one point the group wasmade up of forty people, about equally split betweeneconomists and market researchers. At that point intime, the group had three economists completelyfocused on macroeconomic or demographic issues.We also subscribed to about every major macroeco-nomic service. The budget for the department wascarried at the corporate level within the corporateplanning area.

Today, the function is composed of only fourteen

people. About half of the group is economists ormarket research professionals, while the other halfprovide technical support (such as graphics and database management). The group spends nearly 95percent of its time engaged in industry-specific issues(microeconomics or market research). There is no fulltime macro economist and we do not subscribe to anyU.S. macro service. The only service we buy outsideconcerns international developments. Occasionally anoutside service is engaged when there is a particulardecision that needs additional specialized help.

The other major change is budget support. Nearly80 percent of the department’s budget is charged backto the businesses. The only budget carried at thecorporate level is to cover those activities that are trulydone for the senior management or for the board ofdirectors. Individuals from the group will occasionallybe asked to devote four to six months to a specialproject that is sponsored by senior management.

The move to charge the businesses for the group’sservice predates my tenure as manager. M&ER wasthe first staff group in the company to do this. Initiallythe move to charge the business for the group’s timewas a tactic to broaden the support the group. This waythe group would not be completely eliminated in one ofthose routine cyclic events that happen in corporations,i.e., cut overhead when earnings decline. Althoughthe tactic has not made the group immune from budgetcuts, the charge back kept us alive in the late 1980s. Inone of the more serious overhead reviews in 1989, asenior manager did move to eliminate all his budgetsupport. This undercut our ability to continue support-ing his entire division. Rather than have that happen,the businesses increased their budget support.

The biggest benefit of the charge-back system hasbeen in how our group operates. Rather than just beingoriented to the needs of the Top Dog, we feel the needto be responsive to the entire organization. Customerfocus and responsiveness are crucial elements of ourgroup’s value system.

We meet with each of our major clients every yearto review what the group has accomplished and what

Making a Difference at Weyerhaeuser

By Lynn O. Michaelis*

* Lynn O. Michaelis is Director of Marketing and EconomicResearch at Weyerhaeuser Company, Tacoma, WA. He also isa Fellow and a past president of NABE.

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the priorities for the next year should be. A customersatisfaction survey is conducted every year, askinghow we did on both routine support services and anyspecial projects. If a concern is raised, I get in touchwith the client to discuss the reason for the concern andwhat actions they suggest be taken to correct theproblem. Fortunately, this does not happen fre-quently.

THE MISSION AND VALUES OF THEDEPARTMENT

During the past ten years, the group has reshapedits mission and product offerings. As noted earlier,macroeconomics is not a major event any more. Wehave come to accept that no one can forecast the futurewith perfect precision. We don’t even try to see if wecan get a GDP forecast that is 0.3 percent moreaccurate than consensus. A small difference in GDPgrowth would not affect a business decision. Besides,as will be seen in the examples below, our biggestimpact has been on those decisions that require longer-term trend input. Our role is to provide insights aboutthe industry conditions that will allow the company’sbusiness management to make the best decisions pos-sible. Rather than forecast, the role is more orientedto helping the business think about the future withassumptions, facts and data.

Achieving that mission is not easy. The businessmanagement has to believe that the insights providedare worth acting on. Building credibility with themanagement team is essential. To do this, each analystin the group develops a client relationship with one ortwo businesses. The analyst then specializes in thatbusiness or industry. For instance, one of the areamanagers has a Ph.D. in forest economics. Hespecializes in timber management, timber values andother raw material issues in the United States and theworld.

Another major task is to be viewed by the businessand the senior management teams as a completelyobjective source on a likely set of events for theindustry. Our analysis is never compromised tosupport a major capital project that the business be-lieves it needs. This will be illustrated in an examplebelow. Unlike an outside consultant on the industrywho might meet a client’s desired needs, as responsiblecorporate managers we have the same goal as thebusiness management: generate good returns on theshareholders’ investments.

Finally, we must constantly be finding better waysto develop those insights, to think about the future orto communicate effectively to insure the correct ac-tions are taken. Failure to communicate the workeffectively means nothing is done. Even worse, thewrong thing is done in spite of what analysis suggests.One of the reasons graphics support is such a big part

of the group’s activity is communication. Graphicdisplay of history or relationships is the most effectiveway to build understanding and conviction. For somereason, R bar squared or a Durbin-Watson statistic justdon’t cut it.

Thus, the values of our group are very simple. Webelieve that objective and rigorous analysis is essentialto a sound business decision process. When ouranalysis leads to a point of view about the future, weinsist on finding ways to be heard by the businessleaders. It is also important to make clear how wearrived at a point of view, what the assumptions wereand where the primary risks are.

TRACKING YOUR IMPACT

The constant pressure to justify our budget (insome cases defending why staff even exists in a lineorganization) has forced me to keep track of thoseinstances where we clearly made a difference. It iseasier to track the impact on the special projects thanit is on our routine work. Part of the budget with eachbusiness is to cover routine quarterly or annual reviewsto support the normal planning process. The businessagrees on a retainer to cover these activities. Anyoutside consulting services for data or other industryinformation are imbedded in this “core” budget.

These quarterly or annual industry review sessionsare very proactive. A base case view of the generaleconomy, the demand side for the major markets anda probable supply situation is developed along with aprice outlook for key variables. Each business teamhas a chance to review and add additional input on keyassumptions or industry developments. The sessionsare meant to encourage dialogue on pricing strategies,inventory targets, investment priorities or competitoractivities. For instance, a special inventory model wasdeveloped for the Pulp and Fine Paper Businesses toevaluate the potential price risk at any point in time.They have found it useful for both pricing strategiesand downtime planning.

These review sessions are particularly important tothe M&ER analysts as well. First, they can find outwhat the business is concerned about. Second, theyusually learn something as well. Input from the salesand production people keeps us current on how theindustry is changing and where to look for the next“surprise.”

The place where we have made our biggest contri-bution is in the area of special studies. We usuallyinitiate these when we feel there is a major new trendemerging. In some cases a senior executive who feelsuncomfortable with the business view has triggeredthem. Special projects allow us to use economic theoryto assess what might happen if historic relationshipsdon’t hold. Economic training allows us to see thingswhen history is not the only guide to the future.

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A few examples will illustrate several ways inwhich M&ER has made a difference. As you will see,most of our big impact efforts had nothing to do witha great forecast of GDP or with having built a greateconometric model. In almost every case, the impactwas made because of the economic framework that wasused and how effectively the results of the analysiswere communicated to the business group.

EXAMPLE #1: THE INFEASIBLE SOLUTION

In the 1990-91 period, it became very clear to usthat the federal government was in effect going toeliminate the harvest of timber from public lands in thewestern states in order to protect the Spotted Owl andto respond to environmentalist pressures. We began toaddress the issue by asking how high lumber priceswould have to go to clear the impending shortage.After that we had to determine which products orproducing geographies would benefit from the rise inprices. Because there had never been such a draconiancut in public timbers supply, an historic situation wasnot available to build a model.

To answer the first question on price, a literaturesearch was conducted. What is the price elasticity ofcommodity products? What other industries hadexperienced large supply shocks and how high didprices go? Most studies put the long-term priceelasticity for commodities around 0.2 percent. Thecombined effect of the supply restriction and growth intrend demand would create about a 10 percent gapbetween potential demand and likely supply in the year1994. (The situation was called the “Infeasible Solu-tion,” because there did not appear to be enough timberto produce the lumber required to support the nexthousing recovery in 1993-94.) We concluded thatlumber prices would have to go up at least 50 percentfrom 1980 levels to clear the market.

We then built a linear programming model of thelumber and plywood industries to simulate shadowprices to estimate likely regional margins and supplyresponses. Mill margins had to remain negative in theWestern United States to force closure. Mill marginsin the Southern United States and Canada were ex-pected to (and did) explode. Finally, we concluded thetimber values would rise sharply in both the West andthe South, because timber was the constraining factor.

Our communication task was not easy. Withhindsight, this task might appear to be easy. Butremember this industry had been depressed for twelveyears. Lumber prices in the mid-1980s had reachedlevels in real terms that were close to the levels of the1930s. A jump of 50 percent in prices seemed unlikely,as much as they wanted to believe us. After twelvemonth of reviews with several levels of management,they started to believe us. One decision was reachedto purchase over $100 million worth of southern timber

for conversion over the 1993-94 period. The southernlumber business earned a 40 percent return on thatinvestment. On several occasions they have given uscredit for helping to make that happen.

EXAMPLE #2: EXCESS DE-INK PULP CAPACITY

In 1994, the paper industry (everyone, not justWeyerhaeuser) had convinced themselves that – unlessthey could increase the content of a paper sheet to about20 percent recycled fiber, they would not be inbusiness after 1997. This triggered a project at one ofour complexes to install what is called a de-ink di-gester. The cost was $70-100 million. The initialinvestment analysis concluded that the project wouldearn the company a 17 percent return on investment(ROI).

In several settings, we had raised serious objec-tions to the assumptions being used by the project team.M&ER were asked by the senior management team totake an independent look at the assumptions used in thefinancials. A team was pulled together, includingpeople from our R&D organization, our recyclingbusiness and the paper business. It was important toestablish not where the industry had been, but whereit was likely to be in 1997 and beyond. Because theentire industry had the same future belief about theneed for recycled content, a bunch of digesters werebeing built. Our first effort was to evaluate whetherthere was enough raw materials to feed all the newdigesters. The team concluded that the price of the rawmaterial (office waste) for feeding these digesterswould skyrocket. Also, because so much capacity wascoming on, it was essential to believe that people,especially those that just want commodity paper grades,would pay a premium for that recycled paper content.

In the final decision meeting with the new seniorvice president of our Pulp, Paper and PackagingDivision, the key bet was made very clear. To get a 17percent ROI you had to believe that you could get a 3percent higher price for paper with 25 percent recycledfiber content when compared to paper made with 100percent wood fiber. He concluded we couldn’t andkilled the project. As it turned out, the industry has notgone to 25 percent content, because very few custom-ers (not even the government with mandates) wanted topay the premium for recycled content. Those who didinvest in the de-ink digesters were very sorry they had.Today, a de-ink line will sell for 40 percent of theinvestment cost.

EXAMPLE #3: ADDING THE SCENARIOAPPROACH TO THE TOOL KIT

Recently the group has encouraged the use ofScenario Approach – another way to think about thefuture and develop strategy accordingly. The spaceallocated for this article does not allow me to describe

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the process in detail. What we mean by the ScenarioApproach is a very time and analytically intensiveprocess that can take up to six months to complete. Itis not the high, low and middle trajectory scenarios.Recently, we convinced our Western Timberland andWestern Lumber businesses to adopt the approach toassess our future strategy options relative to Japan.

The Japan market is crucial to our western woodproducts business. The outlook is extremely uncer-tain, however, based on the changing market demandsand the demographic trends in Japan. By forcing themanagement team to immerse themselves in the out-look process, they became committed to constructingseveral strategic responses to some different futureplausible states. If we had given them a forecast of oneof the scenarios developed, they would have dismissedit as impossible. After spending the time, the businesscame to see how tough the market might become.

As a result of this process, our management hadalready developed several strategic responses to atough market in Japan. They were able to act quicklylast year when the market collapsed. On several occa-sions, they have complimented us for initiating the effort.

A REALITY CHECK

Clearly, I chose a few examples that put thegroup’s role in the best possible light. There have beentimes where our analysis proved correct, but thebusiness had chosen to ignore it. Similarly, there havebeen a few times when our analysis led to the wrongdecision. Fortunately, there have not been many, andusually the key assumptions supporting the analyticframework proved to be wrong. Also, by introducinginnovative approaches to thinking about the future,such as the scenario approach, we have defused thenotion that we know the future.

Outlooks are conditional. They depend on as-sumptions and relationships. The economy is con-stantly changing, and a relationship modeled for the1980s may not work in the late 1990s. Our keydecisionmakers respect the honesty and objectivity webring to the discussion about the future. They also havecome to accept that an honest “I don’t know” is betterthat a poorly founded answer.

STILL AT RISK

Like any staff organization in a manufacturing

business, our group is always under scrutiny. Not onlydo we hear, “What have you done for us lately,” butwe have to fight the simplistic way some managers liketo make decisions. There are those managers that havelittle patience for hearing why we arrived at a certainoutlook. “Just give me the numbers,” is still heard.

Also, changes in key management, especiallythose hired outside the company, can create challengesbecause they might opt to cut our budget before theyeven get to know what we contribute. “I did not havethis function at company X, so why do I need themhere. Besides, aren’t economists just those muddled-headed folks that can’t agree on anything?” Thisactually happened. Fortunately, there were severalpeople in his organization that had worked with us foryears and valued our input. Our budget was kept afloatby working closely with those people to maintain abudget and contact with that business. Recently, thatmanager left the company and the new vice presidentwas one of those supporters during the dark days ofbeing outcasts.

CONCLUDING COMMENTS

There are a number of other instances where ourgroup has made a difference. However, one of thetrickier tasks is making sure people remember whenyou made a difference. If you live by forecasts alone,the task is very difficult. I learned early was that onemissed forecast can cancel ten right ones. Peopleremember when you are wrong, but for some reasonhave a hard time recalling when you are right. Thereare subtle – and they had better be subtle – ways toremind people of the times you helped make a betterdecision.

Subtlety is crucial. Business managers are paid tomake the decisions. Our role is to play an integral partof the decision process. When staff groups start to actlike they are the primary reason for a certain outcome,then their future could also be in doubt. Because of ourclose working relationship with the business manage-ment team, they are usually our best spokesmen onwhere we have made a difference. It is because of thatrelationship and our impact on their decisions that thegroup exists today. Economics and economic trainingare a crucial part of strategy development and projectreturn assessment, but it is not always easy demonstrat-ing that fact.

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The economics group in Caterpillar oper-ates in a decentralized organization whereacceptance of its services is discretionary.Success depends on the satisfaction of theirinternal (or external) clients who pay for theirservices, and the payments must cover thecosts of providing them. Services providedinclude assistance in constructing forecastsof regional sales and customer sales by indus-try. In addition, forecasts are made of infla-tion rates, exchange rates, interest rates andcommodity prices and also special studies areprepared for specific needs. Underlying thisapproach is a statement of vision, mission andvalues that provides the direction and cohe-siveness for a growing group in a decentral-ized environment.

M AKING A DIFFERENCE has made all the difference to the Economics group at Caterpil-

lar Inc. By helping our clients make decisions, we haveenjoyed a steady increase in demand for our servicessince 1990, and all indications are that demand willcontinue to grow as the company grows. While thereare many reasons for our success, this article willconcentrate on two that are related: customer focus anda decentralized consulting structure.

Like many economics departments, the size of thegroup has fluctuated through the past four decades.The group began in the mid-1950s and reached a peakin the 1970s. The 1980-82 recession hit Caterpillarhard and the group was reduced to near its present size.We have three economists (soon to be four) and twoeconomic analysts in Peoria and another economistlocated in Geneva. Responsibilities for economic out-looks, sales forecasts, special studies and consulting

are divided geographically, which matches the organi-zation of the marketing units.

As a group we had always had a keen interest insatisfying our internal customers, but this was raised toa new level by the company-wide decentralization in1991. At this time the company abandoned its central-ized functional concept (e.g. manufacturing, schedul-ing, pricing, etc.) in favor of decentralized, autono-mous business units. Product business units (likeexcavators) were made responsible for designing andmanufacturing product. Marketing business units (likea North American marketing group) were responsiblefor selling the product purchased from the productgroups through our independent dealer system. Andseveral service business units were responsible forproviding the remaining centralized services to theproduct or marketing units.

The Economics group is part of the CorporateServices Division, which provides services like ac-counting, treasury, tax, and information. Some ofthese services like tax or accounting are provided freeof charge to all business units, because participation inthe corporate system is mandatory. Others like eco-nomics are discretionary, which means that clients canrefuse the service we offer and instead purchase it onthe outside or forego it all together. So in 1991 webegan selling our services to our internal clients. (Wealso are free to sell our services externally.)

CUSTOMER FOCUS

Our mandate was to provide desired services for afee – and break even. If clients did not want ourservices or were not willing to pay our asking price,then we were responsible for cutting costs, includingdownsizing the group if necessary. On the other hand,if we could sell more services then we could add staff.A free market in economics services came into beingas we began negotiating services and fees with ourclients.

The process has worked very well and has guaran-teed that we make a difference for our clients. After all,if we don’t add value, they won’t use us. We had severaladvantages from the beginning that helped us succeed:

Making a Difference At Caterpillar

By David Vance*

* David Vance is Chief Economist and Manager of the BusinessIntelligence Group, Caterpillar Inc., Peoria, IL.

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1. We had a history of satisfying our clients – even thoughthey weren’t required to pay in the past. We hadexcellent relations with the marketing groups, especiallyour North American marketing group (about one-half ofCaterpillar sales are in the United States). So, theseclients were favorably predisposed to continue ourservice.

2. Our costs were very competitive, which was a goodthing. We are charged for everything we use (rent, officeservices, duplicating, etc.), we cover the full compensa-tion costs of our employees, and we pay for any insideor outside consultants we use. We found we could coverour costs and still charge less than an outside economicconsultant.

3. Because we knew our business better than anyone else,we could deliver more value than an outside consultant.Our clients knew from experience that consultants re-quire a “ramp up” period during which they are paid tolearn our business. By using us, they avoid the ramp upperiod and work with people they already know andtrust.

As a result of these advantages, we kept ourexisting client base and picked up quite a few newclients. The mechanics of the prices also contribute toits success by ensuring three things: relevance, scopeand communication. Each of these has made us a betterprovider of service, enhanced the value delivered, andimproved employee and customer satisfaction. Forongoing services, we meet with clients regularly todiscuss the deliverables, identify emerging needs,check satisfaction and discuss fees. For projects, wefirst meet to understand the need and to scope out thework. Then we draft a proposal discussing the need,the deliverables, timing and fees. In either case, theclients knows what they are getting, when, and howmuch it will cost.

Because they are driven by the market to scruti-nize costs, they only engage our services if they believewe will make a difference. Bottom line, will the valueadded by our work be worth the cost of the effort? Ifnot, don’t hire us to do the work! This immediacyguarantees relevance and efficiency but also employeesatisfaction. How often have we all worked hard on aproject only to have the final results placed in a binderon a shelf – with no action taken? We don’t do this anymore. Nobody can afford it. The work we do now haspassed the internal market test of value – our results areworth at least the project cost to someone who needs tomake a decision. And that makes the work exciting andsatisfying!

Growth in a Free Market

This setup also has allowed us to grow. We areadding another economist this year, and we have vastlyexpanded the use of outside consulting services as well.Growth has been even more dramatic in our BusinessIntelligence Group, which encompasses Marketing

Research, Information Systems, Forecast Coordina-tion and Trade Association work as well as Economics.The size of this group has almost doubled since thedecentralization. Such growth would have been diffi-cult under the old regime, because it would have beenhard to convince our executive office that demand forour services really had expanded this much. Even ifour clients confirmed their demand, the executiveswould still have to make a judgment about whetheradding full-time positions in our group was the bestway to meet this demand and whether the new positionswere worth the cost.

Under our current system, the “free market”works relatively unfettered (so far anyway). We pre-pare a business plan each year based on meeting clientneeds through agreed-upon fees that covers our antici-pated costs. For the past several years, each plan hasincluded new positions, and each year we have gottenapproval to add new positions. The executive officebasically defers to our clients. If our clients want us toprovide the services and they (our clients) can still meettheir profit targets while paying for these additionalservices, then our plan is approved. (For this reason,service centers go last in the business plan approvalprocess.)

Of course, decentralized opportunity also meansdecentralized responsibility. The focus is on the bot-tom line, in our case at least breaking even. In ourcurrent competitive environment, we are not able toraise the prices we charge our internal clients (they arenot bashful about this), so we manage costs carefullyand continuously improve productivity. Every year wehave to find enough productivity improvement (or coststhat can be reduced) to pay the merit increases ouremployees expect and to pay for higher overhead charges.

We also need to manage revenues and costs throughthe business cycle. Caterpillar is committed to remain-ing profitable during the next recession (we lost $622million in 1991 and 1992), and as a group we must beprepared to break even as existing clients reduce theirwork with us. In the event of a downturn, we would ofcourse first try to find new clients to keep our workloadsteady. We have developed marketing brochures, andwe would use these to launch a concerted campaign tofind new internal customers. We also would targetexternal customers, whom we so far have not had timeto pursue. We have also increased our use of bothconsultants and flexible work arrangements, whichprovide some opportunity to reduce costs. All thatsaid, though, meeting targets in a downturn is alwaysharder than it sounds, and we will be grateful forseveral more good years to “get ready.”

DECENTRALIZED CONSULTINGSo, what kinds of services do we provide that

clients are happy to purchase? Primarily, we help our

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clients forecast sales. This usually takes the form ofindustry demand where industry equals Caterpillarplus all our competitors. We start with an economicoutlook for each region of the world, focusing on thesectors important to our business like construction andmining. Then we decide what this implies for industrydemand: up (how much), down (how much), or flat.Finally, we communicate the essentials of the eco-nomic outlook and the industry forecast. Basically, wetell a story. It needs to be internally consistent, it needsto make sense, and it needs to be clear. In short, we addvalue by distilling the economic news, analyzing itfrom our perspective and communicating its meaningto Caterpillar.

It wasn’t always so. Once, in the days wheninformation was scarce, clients would have paid us togather economic information and share it with them. Ingeneral, this is no longer the case because informationis absolutely abundant. Clients get it in newspapers,magazines and on the Internet. Banks and investmenthouses distribute more data, economic outlooks andspecial analyses than you can hope to read – frequentlyand for free. So now there is a wealth of informationat little cost. Our clients won’t pay us to duplicate this.Our clients also won’t pay for us to maintain macromodels, and they shouldn’t. That is not our specialty.

Instead, we read as much as we can, do our ownanalysis, and decide for ourselves what we believe theeconomic outlook will be for a region. Often thismeans deciding which of the many views already outthere we believe to be correct. Occasionally, it meanstaking a stand apart from the consensus. Next, wedetermine the implications of the economic outlook onthe industry. Here we focus on construction, mining,forestry, agriculture and petroleum – sectors critical toour business. And we conclude with a forecast ofindustry demand that serves as the starting point for ourcompany shipment forecast. We present the economicoutlook (focusing on indicators key to our business)and the industry forecast in both verbal presentationsand written reports. Equally important, we share ourthoughts on upside opportunities and downside risks,often through the use of scenarios (especially for long-term forecasts). We maintain all the outlooks andsummaries real time on our intranet web site so ourclients can access the most current forecast at any time.

We also forecast inflation rates, exchange ratesand interest rates as well as commodity prices. Wework closely with our clients to use this information toadvantage in structuring purchasing agreements, mak-ing hedging or investment decisions and placing/retiring debt. And we perform special studies andconduct project work – all in response to particularclient needs. The bottom line in all this is that weprovide more than numbers – we provide guidance,understanding and most importantly we provide an-

swers to their specific questions.An example of meeting specific client needs arose

several years ago when our North American marketinggroup was having difficulty gaining “buy in” for theirbusiness plan sales forecast. There are seventeendistrict office in the United States and Canada thatwork closely with our independent dealers to sellproduct to the end users. With the move to a decentral-ized company, the goal was to have the districts “own”their forecasts and be responsible for meeting them. Infact, their incentive pay would be based on it. So, thedistricts sent in their forecasts, and these were aggre-gated to U.S. and Canada levels.

But there was a problem. Based on our economicoutlooks and industry modeling at the U.S. and Cana-dian levels, the view from Peoria was different than theview from the districts. Because the top level view wassupported by our work, the marketing organizationoverrode the district input and submitted a businessplan forecast based on our input. Then the districtforecasts were adjusted to add to Peoria’s total and thedistricts were held accountable for achieving Peoria’splan. You can imagine how this went over in thedistricts. They were now responsible for achieving aforecast that wasn’t “theirs.” A typical comment was,“Next year, don’t ask us to provide a forecast since youaren’t going to use it anyway. And don’t talk to us aboutempowerment.”

In response to this problem, we developed districtlevel sales forecasts that we shared with them severalmonths before their forecasts were due in Peoria. Wetold them what the important economic drivers werefor their own district and shared with them both thehistory and forecast for these explanatory variables.And we encouraged them to run these forecasts forhousing starts and other variables by local experts inbanks and universities to see if we had agreement. Insome cases, we found local experts not only hadsignificantly different forecasts but that theirs mademore sense, so we reran the sales model using theirforecasts.

We have used this approach now for several years.The districts generally have submitted forecasts closeto our recommendations, so the roll up has come inright where we though it should. Consequently, therehave been only minor adjustments to their forecasts,and the process runs much more smoothly. As a resultof forecasting at a lower level, we not only got “buy in”but better understanding, which has lead to betterforecasts.

THE OTHER ELEMENTS FOR SUCCESS

So, the decentralized structure is in place, and weare successfully providing value-added services to ourpaying clients. What else is there? Especially for agrowing group or a group with turnover, I would add

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a Statement of Vision, Mission and Values. Justhaving the group discuss and agree on these will proveto be very positive, but the benefit will be moreapparent down the road. In a decentralized environ-ment everyone needs to be more independent – able torespond to customer needs and problems, deal withinternal and external consultants, and create opportu-nities. This independence or empowerment can be avery powerful force and lead to high levels of em-ployee and client satisfaction – as long as it is channeledappropriately. That is where the vision, mission andvalues come in. They provide the framework, thecomfort zone, the boundaries.

The vision is what you would like to be, if not now,then someday. Our vision for Business Intelligence is:“Be the best client-driven provider of Business Intelli-gence.” This gives people an idea of where we aregoing. Next is the mission or purpose, which is moredown to earth and immediate: “Provide our clientswith the business intelligence required to make betterdecisions.” This pays the bills day in, day out. Last, butcertainly not least, are our values. The hardest partabout deciding on core values is keeping the list short.So you need to force yourself to choose those that aremost appropriate for your particular group. We settledon these seven after much discussion, and they haveworked well:

Treat people with Respect, Honesty and DignityBe Open-mindedIntegritySupport one another personally and professionallyLearn, Adapt, Develop, GrowExcellenceClient focused

From experience, we have found that a valuesorientation can really make a difference if you take thevalues to heart and try to live them on a daily basis.Taken together, the vision, mission and values providethe direction and cohesiveness needed for a growinggroup in a decentralized environment. And, becausecustomer focus is one of the core values, this approachreinforces the client-based, service orientation criticalto our success.

This brings us back to the beginning. Customerfocus and a decentralized structure have allowed us toreally “make a difference” at Caterpillar since 1991.We have prospered in this environment by helping ourclients make better decisions. This in turn has led to agreater demand for our services and a real sense ofsatisfaction among members of the group who knowtheir work is truly appreciated. After all, the clients notonly say they like our work but are willing to hire usto do more. And by maintaining our customer focus,we plan to continue making a difference.

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The guiding principle for the businesseconomist is to focus on the profit creationprocess. To determine whether the economistis adding to profitability, logging requestsand their results, surveys, benchmarks andcontinuing education are important. Moresuccessful applications are economic fore-casts, company-specific models, productivitymeasures and analysis, conducting internaltraining programs, country risk analysis,customer relations support, and price andcost support. Building relationships can beaccomplished through verbal and writtencommunications, team participation and elec-tronic information sharing. Suggestions forsuccess of a business economist are honesty,helpfulness, humor, and humility withouthubris.

AS I SIT HERE trying to determine factors that help business economics functions succeed, I

have to admit that I do not know any typical businesseconomics functions. Neither benchmarking exercisesnor extensive informal networking has ever turned upanother function that quite matches my current one.Perhaps no typical function exists. The application ofeconomics is probably too dependent upon a company’sculture and upon the specific skills and training of itseconomic practitioner. What may be a path to distinc-tion at one company could well be a path to extinctionat another.

The principles, performance assessment methods,applications, and characteristics discussed below haveworked for me in my almost twenty years as a business

economist. I spent most of those years in a variety ofeconomics functions at Air Products and Chemicals,Inc., an industrial gas and intermediate chemicalproducer. My current title is corporate economist, andI report to the vice president of corporate planning.The company sells its products in more than thirtycountries on every major continent. Key industrialgases cannot be transported over long distances, so wemaintain plants in almost all the countries in which weoperate. Some of our products are sold, and inputspurchased, under long-term contracts. The nature ofour business shapes much of what I do on a daily basis,so keep these characteristics in mind as you read thefollowing.

GUIDING PRINCIPLES

Profit drives business in capitalist economies, sobusiness economists more than any other economistsneed to focus on the profit creation process. The keyto any success my career has had rests on that verysimple principle. Every task the economics functionundertakes must provide some demonstrable valueadded to the company.

The great thing about economics is that it can addvalue in many ways. Most economists (myself in-cluded) like to analyze challenging and complex prob-lems that tax our skills and knowledge. A goodbusiness economist, however, must avoid the tempta-tion to concentrate on challenging and interestingproblems that do not impact the company’s bottomline. Sometimes the greatest contributions a businesseconomist can make come from a very mundaneapplication of a very simple economic principle orstatistic. While an academic economist might not findsome of the work I do all that challenging or interest-ing, I get a lot of satisfaction from making a contribu-tion to the company’s profitability.

Repeating myself in simple terms, because I thinkit bears repeating: if an economics-related task adds tothe company’s bottom line, I do it. If asked to do workthat does not increase profitability, I minimize myeffort or do not do it.

Making a Difference at Air Products & Chemicals

By Duncan H. Meldrum*

* Duncan H. Meldrum is Corporate Economist, Air Products &Chemicals, Inc., Allentown, PA.

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ASSESSMENT METHODSThe economics groups I worked in when I left my

line job in the Navy in 1978 did many activities typicalof economics functions of the day. This work includedmacroeconometric modeling used in forecasting andpolicy analysis, public relations, massive documentpreparation, etc. The groups operated in relativeisolation from the rest of their organizations andreceived relatively limited feedback.

As technology changed and businesses began toquestion the value of economics functions, it becamepretty obvious the old style economics function couldnot last. With limited feedback, we had very littleability to determine if we were adding anything to thecompany’s profitability. To get better feedback, I putin place a number of mechanisms I still use today.

Log. My old Navy habit of keeping logs gave mewhat I consider my most valuable assessment tool.Since the mid 1980s, I have logged every request forpresentations, analysis or assistance I have received. Ilog them by category (macro, industry, data, interna-tional, modeling), requester’s department, and includea terse synopsis (one line) of the request and responsegiven by the economics group. I note how economicsadded value. I also note “failures” where we could nothelp, gave bad advice, or otherwise missed an oppor-tunity to improve the bottom line. The log has helpeddetermine work loads, analytical emphasis, trainingneeds, etc. It also helps demonstrate where, when andby how much economics has made a difference incompany performance.

Surveys. I infrequently survey users of economicwork within the company to make sure we continue toprovide appropriate and timely information. Surveystend to become burdensome if repeated too often, so Iprovide information request forms with widely distrib-uted forecast summary documents as a form of infor-mal survey. I also provide evaluation forms after everytraining course I give.

Benchmarks. Upon taking over the economicsfunction in 1989, I benchmarked as many economicsfunctions as I could using personal contacts and theBusiness Economics “Business Economist at Work”columns. I also devoured Walter Hoadley’s book,Looking Behind the Crystal Ball, which I considermust reading for anyone practicing business econom-ics. Periodic benchmarking identifies potential appli-cations, and helps determine existing applications thatare replaceable by outside services. It also keepsmanagement informed about how my economics func-tion compares to others.

Continuing Education. In order to continue to addvalue to a corporation, I believe business economistsmust continue to stay on top of the advances in theacademic side of our profession. I earned my Ph.D.part time from 1983 to 1992. The length of the process

let me experience some of the changes that are goingon in the academic side of our field. I found ways toapply course work in rational expectations, economet-rics, international economics and, most recently, themany new advances in growth theory. Post-doctoratecourses in country risk analysis and the NABE econo-metrics training program led to internal applications.I also rely on the National Bureau of EconomicResearch Working Papers to stay abreast of the latesttheory developments that may be important to mycompany.

APPLICATIONS

As I noted above, our economics function used toprovide a lot of information now widely and inexpen-sively available from consulting firms, business publi-cations and the Internet. As economics informationbecame increasingly available, our economics func-tion began to stop duplicating information readilyavailable from outside sources. We focused instead onthe application of economic principles to specificcompany problems. The applications described belowremain among the more successful still done at mycompany:

Economic Forecasts. Yes, we still provide macroand micro economic forecasts. The forecasts providethe external backdrop for a three-year budget and ten-year strategic plan for forty-eight countries. The goalis to provide a consistent and reasonable economicoutlook for measures important to company perfor-mance, not a “perfect” forecast of the world economy.I adjust a forecast from one of the major economicsconsulting firms by results from small supply-sidegrowth models that focus on sectors important to thecompany’s products. The adjustments tend to beminimal; I do not waste a lot of time on areas that havelittle bearing on company performance. The valueadded to the company comes from two sources: con-sistency in cross-business area comparisons of budgetsand plans (information cost savings), and company-specific market and inflation forecasts that reduceinformation gathering needs for individual group plan-ners (economies of scale).

Company-specific Models. The economic fore-casts feed a few company-specific models that tiecompany profits to the economy through demand andsupply equations. The models give senior managers anunderstanding of the impact of the economy on ex-pected performance exclusive of any specific actionswe take. The model effort has been successful becauseit provides a perspective senior management otherwisedoes not receive. I present the model as an informa-tional tool, not as a forecast and not as a competitiveoutlook to the “official” group forecasts. The valueadded comes from providing an independent view ofperformance that helps identify budget inconsisten-

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cies, challenges arising from the external environmentthat might otherwise have been overlooked, and arelatively easy way to assess “what if” economicscenarios.

Productivity Measurement and Analysis. In myexperience, the typical business person tends to thinkof productivity in a single dimension (labor productiv-ity is usually the most common single-dimension).Economics provides all-encompassing ways to mea-sure productivity of combined inputs (multifactorproductivity as measured by the BLS, for example) thatmore accurately assess an organization’s true produc-tivity. My economics function has provided guidancein the development of meaningful productivity mea-sures, developed productivity measurements of othercompanies, and obtained measures of industries orsectors to which the company compares itself. Becausea poorly designed productivity measurement can leadto unprofitable behavior (a “headcount” measure couldlead to substituting unmeasured but more expensiveoutside services for employees, for example), thevalue added of an economics approach to productivitycan be enormous.

Index and Data Measurement Training. Theconversion of the National Income Accounts to chainedFisher-ideal indexes caused a major reevaluation ofmany indexing schemes inside my company. Theeconomics function taught index methods to financialand business area people, then acted as an internalconsultant in the development of numerous internalindexing systems. I do not know many academiceconomists who consider index creation that importantor interesting (were you taught the nuances of Paasche,Laspeyres or Fisher-ideal index methods in any mathecon class?). Accurate internal measurements directlycomparable to external measures of the economy,however, can improve company performance moni-toring and decisionmaking. Internal systems thatconsistently measure concepts across the company alsolet managers accurately make cross-business compari-sons of, for example, volume changes through time orproductivity.

Country Risk Analysis. While a number of externalcountry risk systems exist, the company’s internationalinvestments have certain characteristics that requiredifferent emphasis on traditional risk factors. Inaddition, the time horizon for most risk systems is notlong enough for our strategic planning needs. Wecreated our own system based loosely on a traditionalcountry risk analysis, then added some fuzzy-logiccomponents of the system to incorporate longer term,nonquantitative factors specific to our businesses.

Customer Relations Support. We assist salesefforts by providing analysis of customer markets forselected major company clients. This effort helps withcapacity expansion decisions, marketing efforts and

pricing decisions. As companies work to become evercloser to both customers and suppliers, economics canprovide a platform for discussing shared objectives andviews.

Escalation Clause Training. Economics supportsescalation clauses in a large number of selling andpurchasing contracts through the provision of data.This effort provides an excellent vehicle to discusspricing trends with the middle management of thecompany. I also teach an internal training course thatdescribes government price index systems, index meth-odologies, and their application to contracting.

Price and Cost Support. Over the years, econom-ics has built a number of price data systems used bypurchasers, contract managers, and marketers. Thesedata systems allow purchasers to estimate suppliercosts using government price indexes, contract manag-ers to escalate long term contract prices easily inaccordance with established clauses, and the salesforce to justify price increases. Economics gives thecompany a central point for data acquisition anddistribution, providing economies of scale as well asexpertise in data application to all business functionalareas. This is a true nuts and bolts application thatrequires extensive knowledge of both government datasystems and company functions. There is not muchvisibility in this function but value added can beextremely significant because the correct applicationof data brings benefits on both the sales and cost sideof the income statement.

MAKING AN IMPACT

These applications all grew out of contacts be-tween the economists and individuals throughout thecompany. Economists must build extensive relationshipsto make a broad impact. Below I have listed a few of thekey routes I have found for building relationships:

Presentations. While lots of “free” informationexists, not many business people have the time or skills tointerpret easily an economic event’s meaning for thecompany. Economics teaches us to think of multiplerelationships in a constantly shifting world. Well-pre-pared presentations that simplify and interpret that world’simpact on the bottom line provide excellent vehicles forbuilding relationships. I try to average three to fourpresentations a month to small internal audiences.

Written Communications. As did many economicsfunctions, we used to produce a widely distributed, 100plus page document two or three times a year to presentour forecast of the world economy. The documentwent into great detail regarding the development of theforecast and the assumptions behind the numbers in itstables and graphs. Groups used the document as areference in both the budget and strategic plan devel-opment. Our surveys determined very few people readit from cover to cover. Most turned to the page they

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needed and pulled off a number. Today, the documenthas been replaced by brief (two- to three-page summaries)written reports and spreadsheets of data electronicallydistributed to targeted individuals. The report contains arequest for additional information that lets us meetdetailed needs directly and helps foster individual contactbetween economics and the rest of the company.

Team Participation. Teams present excellent waysto enhance relationships and bring economics thinkingto a broader audience. I participate on strategicplanning, marketing and financial analysis teams on aregular basis.

Electronic Information Sharing Methods. Theeconomics function aggressively uses new technologyto disseminate data, analysis and forecasts. I stillbelieve that electronic communication must enhance,not replace, face to face communication.

CHARACTERISTICS OF THE SUCCESSFULBUSINESS ECONOMIST

I think economics can add a lot of value in acorporation, but I have to admit the gradual decline inthe number of economics functions suggests manybusiness people do not agree with me. To close out mythoughts, I would like to suggest “Four Minus One H”characteristics I think an economist should cultivate inorder to succeed at a company.

Honesty. First, with yourself: know your strengthsand use them; know your weaknesses and be willing towork on them. Do not be afraid to say you do not knowwhen you do not know the answer to a question (butkeep yourself learning so you do not have to say it toooften). Acknowledge mistakes and forecast errors.Take positions based on principles, not based oninternal politics. Many business types already think ofeconomics as a “waffling” field, so you must cultivatea reputation for honesty.

Helpfulness. Try to respond to anyone who asksfor help, keeping in mind how important the requestmay be for profitability. Find ways to make economicsuseful. Get out into the company through presenta-tions, teams, written communications.

Humor. Keep a sense of humor about your field,yourself, and your function. It took me a while torealize that the rest of the company did not takeeconomics as seriously as I did. I eventually came tothe conclusion that the economist is not much morethan a court jester; entertaining for the monarch’scourt, but not always taken that seriously. The jester’svalue comes from the ability to speak the truth in publicthat others in the royal court cannot whisper. A senseof humor lets the jester keep his or her head. It alsomakes the job a lot more fun.

Humility minus Hubris. Economists who alwayshave to be right, who always are serious about theirfield and who exaggerate their importance to thecompany typically do not last long in the businessworld. Industrial companies especially can easily vieweconomics as an expendable staff function of minorimportance. A sense of humility helps me keep fromgetting too full of myself. While many of my audiencesmay not have a lot of formal economics training,experience and business intuition tend to produce anexcellent feel for the economy. In my experience,many senior managers interpret the economy muchbetter than highly trained economists.

Finally, I acknowledge many of these characteris-tics do not fit every successful business economist Iknow. One characteristic that does is a focus on thebottom line. Most good business people will value thefunction appropriately if it helps them improve thecompany’s results. If enough companies find econom-ics improving profitability, we may even start improv-ing the perception of the field.

Copyright 1998, National Association for Business Economics

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As with many professions, the practical func-tions performed daily by the financial mar-kets economist have little to do with thetheory taught in graduate school. And yetthose daily functions, duties, and responsi-

bilities can best be summed up in a phrase borrowed froman earlier stage of schooling: reading, writing, and a wholelot of arithmetic.

Our nation’s universities rarely teach practical “reallife” economics. Schools are so determined to impress uponeconomists-in-training the importance of Giffen Good para-doxes and the latest debate between Smithian free-marketand Keynesian philosophies that these trees tend to obscurethe forest of daily practice. While a firm foundation in the-ory is indispensable, the fledgling economist comes onlypartly prepared to Wall Street. In the absence of a mentor,new economists must navigate on their own some deep andtreacherous waters: from gaining a complete understandingof the National Income and Product Accounts, to the calcu-lation of major economic statistics such as CPI, to deci-phering the cryptic Fed-speak that accompanies a shift inFederal Reserve policy.

One reason for the dearth of “real-world” economicscourses is that each career path requires its own path-spe-cific approach. No single title applies to those who ply theirtrade on the Street. Some of the more familiar roles played

Business Economics • July 1999 65

The BusinessEconomist at Work:Argus ResearchCorporation

While formal academic training as an economist isindispensable, it only partly prepares for work as a finan-cial markets economist. My job as a Wall Street econo-mist at Argus Research includes creating and maintain-ing a database of economic statistics as well as a numberof macroeconomic models. From this database springsthe firm's forecast of all the major economic indicatorsreleased each trading day, as well as a longer-term viewof economic trends. I also generate extensive commentaryon current and future economic conditions for the firmand its clients.

Richard A. Yamarone is SeniorEconomist, Argus ResearchCorporation, New York, NY.

By Richard A. Yamarone

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by economists on Wall Street are macroforecaster, statisti-cian, econometrician, and international economist. Perhapsthe most widely accepted is financial markets economist.

Job of a Wall Street EconomistThe term “financial economist” is a bit of a misnomer;

it conjures images of Fisher Black and Myron Scholeslaboring over their option-pricing models. A better termfor what I do might be Wall Street economist.

Some background in the ways of Wall Street is a mustfor this position. Practical work experience in at least tworelated but distinct areas is a requirement at ArgusResearch. First-hand experience trading in the stock orbond markets, for example, provides a useful backdropwhen considering the forces that affect those markets.Individuals who have “ridden” a position overnight arebest situated to write about thoseeconomic events that affect posi-tions in foreign exchange, fixedincome or equities. Looking at theeconomy from the perspective of atrader provides insights deniedthe pure academic.

Argus regards this “insider’s”viewpoint as a great generator ofideas for new and timely market-related commentary. Years ago, working as a trader ofmoney-market instruments and interest-rate derivativesecurities, I saw first-hand how the credit marketsresponded to releases of the Federal Reserve's BeigeBook. As a trading floor economist for an Australian bank,I created a mock Beige Book that detailed the goings onin each of the Fed’s twelve districts—two weeks before theofficial book was released. I eventually performed thesame function regarding the Fed’s Blue and Green Books.These books were reviewed during policy meetings, win-ning kudos from senior management.

Yet an economist can’t permit earlier experiences toobscure the needs of current clients. Products and com-mentary must always be considered with respect to theclient’s needs. When writing for a daily trading audience,I focused more on yield spreads and Federal Reserveactivity. Argus subscribers come to us for equity-relatedadvice, and my focus is on more industry-specific matters,e.g., the effect of rising oil prices on transportation issues.

ReadingThe Argus approach to economic analysis parallels

that of Fed Chairman Alan Greenspan—gather all rele-vant information on the economy, industry, financial mar-kets and international developments, toss in a few aca-demic “white papers,” and form an opinion on the direc-tion of the economy, interest rates and monetary policy.Unfortunately, the major difference between the Fedchairman and the Argus economics team is that the Fedhas an arsenal of research and economic professionals.Sometimes dozens of economists are employed in the cre-ation of one economic measure.

It is most efficient to get the reading out of the wayduring the morning commute. Clearly if you drive to workthis isn’t such a great idea. But listening to a financialnews station on the radio, such as Bloomberg Business

Radio here in New York, could pro-vide an alternative way of thinkingabout a problem or a solution.

Most of the topics that are cho-sen for the morning commentaryare derived prior to 6:30 a.m., whatI refer to as the information hour.By the first hour of work (6:00 a.m.to 7:00 a.m.) I have been able todigest the top ten economically rel-

evant stories from a dozen newspapers and daily closingcommentaries from overseas sources. E-mail and earlymorning telephone conversations provide insight for thefirst and foremost question of the day: What will the topstory be that affects the U.S. financial markets? Theanswer is usually provided by our sources in Australia,Tokyo, Singapore or London.

What to read? Obviously each economist has favorites.But I have found that the most market-moving commentaryand most talked-about stories on trading floors have comefrom (in the order of market-moving history) The FinancialTimes, The Washington Post, The Wall Street Journal andThe New York Times. Others papers read on a daily basis forcontent include The South China Morning Post, TheChicago Sun Times and The Journal of Commerce.

The Journal of Commerce provides the most compre-hensive collection of daily commodity, industrial and eco-nomic data available in any newspaper. Arguably, thispaper contains more in-depth coverage of commodity

66 Business Economics • July 1999

Products and commentary must

always be consideredwith respect to the

client’s needs.

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prices like metals, chemicals andenergy than any other availablepublication. The commentary ontrade and shipping issues is sec-ond to none. If you are starting upan economic database, it would bein your best interest to start with asubscription to the JOC.

Barron’s, a newsweekly, is per-haps the most timely of all week-lies with respect to coverage ofeconomic activity, markets and economic and financialdata. It is a “must read” for any serious market pundit. Itchallenges daily publications on issues with respect totimeliness.

Magazines complete the package, providing econom-ic data, relevant market and economic coverage and, inmost instances, a unique global perspective. Must readsinclude: The Economist, the Far East Economic Review,International Economy and Business Week.

Daily and weekly reading is done for many reasons.First and foremost, information drives the financial mar-kets, as markets need information on which to trade. Andthe primary source for that information can be found inthe papers. A day without the release of any significanteconomic data is a dead day. Watch the markets for thisphenomenon.

This is the key to providing a good economic service:Know your client’s needs. Know what they need to knowbefore the rest of the market—then provide it to them assoon as possible. Frequently, dealers come in on Fridaymornings to see that the benchmark thirty-year Treasurybond has moved considerably. More times than not, themove can be traced to a story appearing on the BusinessWeek website that was released at 6:00 p.m. on Thursdayevening (a day before the magazine hits the newsstands). Ifyou can provide this type of quick investigative research,word will get out, and prospective clients will flock to yoursales department.

Reading the speeches of Federal Reserve and Treasuryofficials, regional “beige books” and the Humphrey-Hawkins testimony of Fed Chairman Alan Greenspan pro-vide the foundation for the weekly Fed Watch column andhelp form the Argus opinion/forecast of the direction offuture monetary policy.

Before I conclude the readingsection, I should provide my defini-tion of “reading.” With some dozennewspapers served up each day,reading each publication cover tocover would consume about eighthours of valuable time. What I real-ly do is skim each paper (by head-line), looking for only those articlesthat could and would influence theeconomy in a significant manner.

Usually, very little can be found in the Entertainment,Home and Metropolitan sections. The Nation, Politics andBusiness sections are generally the most beneficialsources for such information.

WritingReading helps with writing. Timely and relevant topics

for commentary can be taken from a brief comment heard onthe radio or written in an overseas newspaper. The market-dictating economic story—found during the informationhour described above—will lead-off the morning publica-tion called the Argus Market Watch. This report always con-sists of a graphical depiction of the day’s most relevant topicor trend, supported by a concise (150-word) presentation.

At Argus Research, the senior economist is responsiblefor writing the cover page of the Weekly Staff Report—aresponsibility of the senior economist for more than sixty-fiveyears. Traditionally, topics include anything and everythingrelated to the economy and financial markets. Recent titlesinclude: “Outlook Bleak for Agricultural Credit Conditions,”“Uncle Sam Money Manager,” and “Agitata Da Due Venti.”These columns range anywhere from a minimum of 750 wordsto a maximum of 3,000 words.

Other written responsibilities in the Weekly Staff Report arecolumns entitled: “Fed Watch,” “Economic Observations,”“The Monthly Economic Calendar,” and “U.S. Macro-eco-nomic Data.” These generally take up only a handful of thethirty-two-page weekly report.

A biweekly publication entitled Economy at a Glance isa four-page report containing a series of charts and graphssupporting the associated commentary. The last page con-tains our forecasts of the forthcoming weeks’ economic sta-tistics in calendar form.

Monthly commentary includes the Economic and

Business Economics • July 1999 67

Know your client’s needs.Know what they need toknow before the rest of

the market—then provide it to them as

soon as possible.

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Interest Rate Viewpoint, which is a written estimation of theU.S. macroeconomy and the interest-rate forecast, support-ed with charts and tables of germane statistics and indica-tors. This report discusses the Argus investment policy andits relationship to economic political and market develop-ments.

Monthly commentary must also be written for theArgus Monthly Conference Call. Generally this containsone part forecasts, one part international outlook, one partfixed-income commentary and a final miscellaneous eco-nomic topic.

A Whole Lot of ArithmeticSaturday is Forecasting Day. All major macroeconom-

ic variables are forecast with simple models (mostly mul-tiple linear regressions) for the monthly economic statis-tics. Typically, they include: industrial production, housingstarts, consumer spending and consumer prices. Many ofthese monthly indicators are used in the evaluation of thebroader macroeconomic view. After the numbers arecrunched, the commentary obtained by each of the Argusindustry analysts is employed (respective to the indicator),and the final figures are subjectively tweaked with respectto the analyst’s remarks and observations.

Approximately eight times a year, the Argus macro-econometric model is loaded up and estimated. Thedetailed results are presented initially to our subscribers,while the broader components are released to the press atleast two weeks after our clients have had ample time todigest the figures.

In this calculation of GDP and its components, inputfrom sources other than Argus analysts and their respec-tive industry heads are utilized. For example, the FederalReserve’s Beige Book and minutes from recent FOMCmeetings are immensely informative. In other cases, con-tact with state officials about labor market conditions andeconomic growth in their respective states provide insightto turning points in the direction of overall economic activ-ity. Input from notes obtained by way of my readings arefrequently used.

During early March, New York State experiencedsome major snow storms, so that Governor Pataki declareda state of emergency in seventeen counties. Having writ-ten this down in my notebook, I was able to shave off someactivity in my forecast of some March data.

Every day, the Argus Commodity Price Index isupdated and charted. By personally inputting each of thedata each morning, I have been able to notice the trendsand influences that some of the commodities have experi-enced, both individually and cumulatively, as an indica-tor of overall commodity price activity.

Finally, the quarterly interest-rate forecasts are pro-duced for fed funds, the three-month Treasury bill, thetwo-year, three-year, five-year and ten-year Treasury noteand the benchmark thirty-year Treasury bond. The rangefor each maturity along the yield curve is provided, as wellas an “average” yield for each quarter.

The Internet, an Economist’s Secret ResearchDepartment

The role of the financial markets economist is bothenhanced and complicated by Internet technology.Research that would have taken weeks can now be con-ducted in a matter of seconds. Data are plentiful and avail-able on every industry. Virtually every company, state andcentral bank has a web site containing the most importanttool for the economist, i.e., information. The nation’sproviders of economic data, the Bureau of Labor Statistics,the Department of Commerce and the Federal Reserve, allhave web sites containing the most recent economic data. Idedicate about two (early morning) hours daily to the gath-ering of economic reports, data, information and researchreleased by these agencies. Any of the Fed’s thirteen websites provides more economic information and data thanany economic start-up could demand. Academic researchpapers provide an excellent foundation for future commen-tary and economic model development. An excellent sourcefor this information is the home pages of university depart-ments of economics. U. S. economics departments on theInternet can be found at http://price.bus.okstate.edu/econdept.html. At last count, 320 schools were representedon this site. Staff reports, working papers and discussion

68 Business Economics • July 1999

The role of the financial markets economist is both

enhanced and complicated byInternet technology.

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papers from web sites generally account for the bulk ofevening and weekend readings.

Journal articles from think tanks also provide insightfor upcoming commentaries, speeches or forecast meth-ods. Preferred sources include the Brookings Institute, theAmerican Economic Institute, Challenge, and the NABE’sown Business Economics. All are excellent places to findtopics for economic commentary. Even those workingpapers deemed too technical for the junior economist cangenerate new ideas. Papers on inventory cycles, thewealth effect and the Asian financial crisis are just a fewof the thousands of areas that can help provide support foran argument in a commentary, update a module in thefirm’s model or generate new ideas for future projects andspeeches.

We recently found a working paper found on GrangerCausality that added color to our research and commentaryon whether increases in wages, as measured by averagehourly earnings, equate to increases in the general pricelevel. Even if a paper merely prompts a thought, it mayassist you in future research.

Other respected and much-frequented sites forresearch include the Bank for International Settlements(with links to fifty-five central banks from around theworld), the U.S. Treasury Department, the Department ofCommerce and the Bureau of Labor Statistics. Much of theday’s time is dedicated to searching these sites for material,papers and data.

Industry Analyst InputOne of best aspects of working at an independent equi-

ty research firm is the ability to speak with industryexperts. I frequently discuss emerging trends in areas asdiverse as building materials, merchandising, and bank-ing. Analysts provide not just the hard numbers but insightinto the consequences that their “covered” firms face whenglobal economies slow or accelerate. When companiesexperience problems—bottlenecks, weather-relatedissues, shipping disruptions—the industry analyst canquantify the degree to which these developments hinder orpromote activity not only in the industry, but in the econo-my as a whole. Again, this helps the economist with macro-economic forecasts. At Argus Research, analysts use theforum of a weekly Tuesday meeting (now in its sixty-fifthyear) to discuss existing and pending developments.

This provides the economist with much greater insightand a wider perspective regarding future economic activ-ity than similar trading floor economists or many bank-ing/financial economists may receive. I actually believethat the Federal Reserve doesn’t get a perspective asimmediate and profound as this.

By necessity, some relationships are “tighter” thanothers. From a macroeconomic perspective, the insightsfrom the basic materials or retail analyst will play a moreintegral role in shaping economic forecasts than inputfrom, say, the pharmaceutical analyst. In the macroeco-nomic picture, some inputs carry greater weight in overalleconomic activity. Conversely, consumer and producerprice forecasts are deeply dependent on input from con-sumer nondurable analysts.

Another great benefit of having all of these analystsaround is the availability of trade journals. Nothing ismore attractive to a macroeconomist than some trade jour-nals lying around the office, chock-full of data. Some ofthe more informative journals include: Oil & Gas Investor,Chemical Market Reporter, Automotive News, Railway Ageand Beverage World. A truly devoted macroeconomisttakes to these journals as a sixteen-year old boy would toa Playboy magazine.

Database ManagementIn addition to having to forecast all of the major

macroeconomic variables, database maintenance is anessential part of the job. How credible can the forecasts beif they are based on outdated and unrevised data? A greatportion of the day is spent updating this database. At lastcount it comprises 6,500 series, including some lesser-known but important economic statistics. Some of themore obscure data include railroad car loadings, oil rigcounts and shipping and port activity.

Again, trade journals contribute extensively to the data-

Business Economics • July 1999 69

In addition to having to forecast all of the major

macroeconomic variables,database maintenance is an

essential part of the job.

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base. Some of the more recognized data-providing journalsinclude: Railway Age, Modern Plastics, Engineering News-Record, Pulp & Paper and Automotive News.

Furthermore, the models are frequently revised withrespect to new information obtained either by reading orthrough some of the industry contacts. As web sites arediscovered and new data become available, the data areincorporated into our models. A recent example is havingstumbled upon sites containing pallet production data. Wehave since incorporated that into some of our shippingand export components of the Argus macromodel.

Media and Press One of the more essential duties of the Wall Street

economist is the marketing and promotion of the firm’swares. How can the firm attract more clients without theknowledge of the existence of the firm’s business? Theeconomist of a firm has the ability to present the firm andits opinions for public attention.

When the media calls, it is in the best interest of theeconomist to respond in an informative manner. At Argus,all analysts and economists are encouraged to makeappearances on the major Business Networks likeCNNfN, CNBC and Bloomberg Television when timeaffords it.

Stealing from Joel Prakken’s comments in this columnin January 1999, “Never turn down a national TV spot.”The exposure that a national television spot creates isremarkable. After appearing on CNNfN, my office is inun-dated with phone calls, some from prospective clients.

Newspapers and newswire comments are just asimportant, because it is this path that permits the generalpublic to read about your forecasts and your interpretationof different economic releases.

SuggestionsFinally, some helpful hints. These may not be secrets

to fellow economists, but to those of you that are just get-ting started or are thinking of making your way into WallStreet as an economist, they should prove beneficial.

Read everything! The greatest tool an economist canhave is information. Generally, the information comes inthe form of economic news reports, and not everyone canhave the newswires running through their home. So, readthe newspapers and use the Internet. Every newspaper

contains something of importance to the macroeconomy;you just have to look for it.

This is where the economist’s second greatest toolcomes in handy—a pair of scissors. Literally cut theimportant information from the newspaper or magazineand paste it into a notebook or file. Then, when you arecalled for a presentation by clients, schools or financegroups, you have some reference materials available.

Carry a notebook with you at all times. Ideas come atthe most unexpected times and should be jotted down.When economists are required to write weekly columns onthe economy, it can be boring for readers to read abouteconomic data releases. In fact, I shy away from writingabout releases in our Weekly Staff Report. It isn’t alwayseconomic data that finds its way into this book and subse-quently into my writings. Generally anything that disruptsor furthers economic activity to a substantial degree findsits way into this book.

Folders in my office range from the truly obscureIndia & the Bomb, the Big Mac Index, and Cigarette Taxto the more common Social Security and UndergroundEconomy.

Build that Rolodex. Make contacts in many differentfields. Don’t limit your contact sheets to just traders ofbonds, futures or equities. Find heads of industry, FederalReserve Bank officials, senior economists in state andlocal municipalities. I have found that academics are won-derful sources for insight to international developmentsand alternative ways to look at economic conditions anddevelopments. ■

70 Business Economics • July 1999

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Business Economics • October 1999 59Business Economicst at Work

Organizations have simple goals, and theworld is complex. For every action there issome sort of reaction (borrowing a bit ofphysics). And thus the need for the “organi-zational” economist, a person who “inter-

prets” the complex world to the organization and who helpsanticipate the world’s reaction to organizational changesand helps to plan those strategies. The National Federationof Independent Business (NFIB) is an organization withover 600,000 member firms. It represents the interests ofsmall business in Washington and in fifty state capitals.NFIB was founded in 1943 to provide a stronger voice forsmall business in a political world where “big business”exercised a strong voice that often did not recognize the dif-ferences between them and the smaller firms that constitutethe small business community. According to the SmallBusiness Administration, more than 90 percent of allemployers in the United States have fewer than twentyemployees, and 98 percent have fewer than 500. Thesefirms, taken together, would constitute the third largesteconomy in the world, after those of the entire United Statesand Japan.

Research StaffNFIB is in an unusual position—it generates its own

unique data, using the membership as a source of informa-

The Business Economist at Work:The NationalFederation ofIndependent Business

The economics staff of NICB has several major functions.It helps the organization identify and articulate itsstrategic goals and objectives in the framework of its mis-sion to improve the economic and regulatory environmentfor small business and entrepreneurship. It explains tothe political arm of the organization the implications forour members of bills that arise in Congress or in statelegislatures, and helps our representatives make the casefor legislation that NFIB would like to support, includ-ing presentations to Congress, academic meetings, gov-ernment agencies, and the media. The economic staffcollects, maintains, and analyzes the NFIB data base,consisting of thousands of interviews with U.S. employerseach year dating back to 1973. As well it designs andexecutes special studies to support NFIB’s agenda, e.g.,studies of the impact of bank deregulation or the Clintonhealth care initiative.

William C. Dunkelberg is ChiefEconomist, The NationalFederation of IndependentBusiness, Washington, DC. Healso is a past president and aFellow of NABE as well as anassociate editor of this journal.

By William C. Dunkelberg

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60 Business Economics • October 1999 Business Economicst at Work

tion. It has, since 1973, built its owntime series data through the use ofquarterly (now monthly) surveys of itsmember firms. About one of everyeight employers in the United Statesis a member. In addition, NFIB hasundertaken a number of specializedissue-focused studies, including studies of the impact of theenergy shortage, banking deregulation, and health insur-ance regulation (US News credits NFIB with the failure ofthe Clinton health care initiative, a challenge that engagedthe economics staff from strategic planning, e.g., whatshould our position be, to data collection, education, testi-mony, press coverage and the preparation of a monograph).

NFIB does not maintain a large staff of economists.Indeed, there is only one (me), who works closely with aresearch-oriented political scientist with strong Washing-ton, DC, experience and an assistant or two. When special-ized studies are needed, we “make a deal” with the bestavailable specialist in the field, providing data in exchangefor an “objectively” written monograph. Our collaborationwith Mike Boskin years ago on Social Security is an exam-ple of this partnering process. This allows NFIB to have allof academia as its staff and to provide academics and otherresearch organizations with a rich set of data on a segmentof the U.S. economy that was neglected by government datacollection initiatives for decades.

Skills Required The skill requirements for the position are probably

typical of those for most senior economist jobs. First are thecommunication skills. Both oral and written skills areessential. Analytical skills are also important and closelytied to presentation skills. You have to learn what is impor-tant to show and how to show it to your audience. Complexanalytical programs may provide insights, but even thesemust be presented in creative, clever and simple ways.Taking advantage of NABE’s many skill seminars is a mustfor developing your communication, presentation and ana-lytical skills. NFIB has a particular need for skills in thearea of survey research that are not typical of most senioreconomist jobs. However, the use of “survey data” is grow-ing in many of the functional areas in which business eco-nomics is practiced, including market research and strate-gic planning.

Perhaps the most importantskill to develop is effective commu-nication. Take every opportunityyou have to improve your presenta-tion skills. You need these to sellyourself and your ideas. There areinternal battles over budgets to win,

clients to entertain and inform, Congres-sional committeesto convince, the press to inform, and your internal clients toserve. I have done “one-minute” editorials for years forradio. That’s good practice—can you convey an importantidea in just sixty seconds? It’s a good skill to develop. Ihave over the years watched the presentation of testimonybefore Congressional committees and am struck with howineffective these have been. When the testimony starts, thehead of the witness drops as he begins reading testimony.There is no “eye” contact; all the committee can see is anemerging bald spot. Naturally, committee members stop lis-tening and start talking to each other or to staff. Time runsout half way through the “dramatic reading,” and the pre-senter has not even made the important points. When youare giving a speech or testimony, be crisp, have your basicpoints in mind and look your audience in the eye as youhammer your points home. This way, you can manage theencounter and better ensure that your message gets across.

Traditional analytical skills are important for everyonepracticing business economics. Even if you don’t do dataanalysis yourself, you need to be able to recognize bad workwhen you see it! This is becoming increasingly true forinterpreting “poll data.” Too many “analysts” just run somedata and produce a chart. You need to be aware of the defi-ciencies of the data or the collection methods used to gen-erate it, the revision process, issues of “real” vs. “nominal,”etc. For most of your “clients” (internal, press, Congress),your empirical work will be modest in complexity, but whenneeded, you had better be able to explain “regression” invery simple terms and be able to use the sophisticated ana-lytical techniques available and the insights these method-ologies provide.

NFIB generates its own data using survey methodology.This is not often done by organizations and companies, butmore so today that ever before due to the newer interview-ing technologies that are available. When generating time-series data, you can’t change the question midstream with-out compromising the meaningfulness of the data, so “get-

Perhaps the most important skill is effective communication.

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Business Economics • October 1999 61Business Economicst at Work

ting it right” the first time is important. In 1973, when wefirst designed the NFIB questionnaire, who would havethought to ask about price cuts or leasing of capital equip-ment? There are a number of issues related to scientificsampling, response rates, and the representativeness of theNFIB membership list that must be resolved in the data col-lection process. Question and questionnaire design are bothart and science and present many challenges as we respondto the desires of our internal clients for information. If youdo this work periodically, get professional help!

The Work To Be DoneNFIB has surveyed its members continuously since

1973, creating a meaningful and valuable data base usedby private economists, academics, government agenciesand the press. Each month, we mail up to 8,000 interviewsto NFIB members on the first day of the month. This is fol-lowed with a second mailing ten days later. Overall, this hashistorically produced a response rate of about 30 percent,although this performance has faded of late. As the ques-tionnaires are returned, they are coded into a data file (oneday we will use scanners). At the end of the month, basicSPSS cross-tabs are run on the data, and the response ischecked for bias by comparing the information in the sam-ple frame to the characteristics of the sample. Because wemail to members, we have information about the sampleframe and can determine whether or not the respondentsare different from the frame, e.g., was there a “bias” in theresponse with respect to important firm characteristics. Bycomparing the industry, employment, sales, region, etc. dis-tributions from the sample to those from the total member-ship, we can identify potential problems resulting fromresponse bias and, when necessary, correct them by weight-ing the sample.

Once the sample is clean, a series of cross-tabulationsare run to collect the basic data for the time series database, which includes data on hiring, changes in prices, cap-ital spending, expectations for future spending, hiring andprice changes etc. These data are entered into spreadsheetsthat serve as input to more complex analytical programs aswell as the graphics programs. The raw numbers areplugged into models used to predict GDP growth, CPI infla-tion, employment growth, capital spending, inventoryinvestment, etc. These models are not structural models ofthe economy but simply convert the NFIB data into predic-

tions of the behavior of important economic aggregates thatare followed by the press and policymakers (the FederalReserve is always first to receive the data). The NFIB meas-ures provide an excellent framework for monitoring the cur-rent performance of the economy but cannot be used instructural models of the economy that are used to producelong-term forecasts, because forecasting expectations andplans five years out is not feasible.

Once the basic data are ready, the reports are writtenand released to clients as soon as they are done and to thepress on the fifteenth of each month. By this time, of course,we are half way through the survey for the next month, soonly fifteen days remain until the process starts again.

Technology is changing the way we process the month-ly NFIB studies. By the end of the year, we hope to be ableto process returned questionnaires each day and access thedata on any given day in response to requests for early read-ings on the data before important policy meetings and pre-sentations or in response to important economic events.Recalling the October 1987 stock market crash, we wereable to divide our sample into interviews done before thecrash and afterward, because interviews come in every dayof the month. Based on that analysis, we quickly predictedthat there were no serious adverse impacts of the crash onthe “real” economy and no need to fear a 1929-type eco-nomic disaster. Indeed, we discovered that the record stockmarket decline had virtually no impact at all on spendingand hiring plans and surprisingly little impact on businessowner sentiment. As the technology for processing data andcommunicating improves, we will be able to undertakemore analyses of this type.

Part of our job is to produce “academic” articles thatcan be published in traditional research journals. This doesrequire that we are “up to speed” on the latest stuff. We areexpected to make presentations to academic conferencesand publish our research work, another job requirementthat is a bit different from those of most senior economists.

The NFIB measures provide anexcellent framework for monitor-ing the current performance of theeconomy.

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62 Business Economics • October 1999 Business Economicst at Work

But this task is made easier by the availability of uniquedata sets and our ability actually to design the data collec-tion to fit the theoretical models we work with. Mostresearchers must work with the data that someone else col-lected for some other purpose. It is a rare opportunity to beable to design data collection based on the theoretical con-structs that the researcher wishes to work with.

Whenever you are asked to collect some data, there isan “implicit” model of economic behavior behind therequest. Using your training to discover and amplify themodel will improve your data collection and the quality ofthe analysis and presentation that you ultimately will haveto make. Don’t miss opportunities to enrich any data col-lection effort by looking for ways to widen the potential foranalysis, often with the addition of just one question to aquestionnaire. When you are collecting a large number ofbasic descriptive variables in a survey, adding one more“dependent variable” with just one question can magnifythe analytical leverage of your data collection effort. We usethis approach to build multiple uses into every survey wedo. We have produced an excellent guide to questionnaireconstruction for internal use at NFIB, which we will behappy to make available.

As the Next Survey is Underway…With the data safely stored away in a spreadsheet, all

forecasts updated and the monthly report distributed, weswitch to “news watching.” With a corner on the data thatcovers nearly half the U.S. economy, we have much to sayin anticipation of and in response to the release of impor-tant economic indicators. We often disagree with the num-bers and very often are vindicated by the revisions. Becausewe are talking each month to the firms that are engaged inthe behavior covered by the releases (prices, jobs, capitalspending, inventories, etc.), our numbers turn out to be veryreliable and are never subject to revision. Throughout themonth, we prepare press releases in anticipation of govern-ment releases and respond to the numbers at release time.Our goal, of course, is to increase the public awareness ofNFIB and to contribute some insight to the public discus-sion of the numbers, which are often a bit misleading andinaccurate before they are finally revised.

The thirty-day cycle keeps us busy and compels us tokeep on top of current economic events. Keeping up withthe many requests for data from our various clients is a

major task unto itself. And the briefings for the staff and theplanning for next year’s special projects must be worked in.We clearly have another battle on the minimum wage,health care and “death taxes” to prepare for. And we needto identify our proactive agenda and design studies thatprovide data to support those positions. Because our “polit-ical arm” has discovered the “power of the poll,” there is acontinual need to control the number of items we mail toour 600,000 plus members, a tough coordination problemwith fifty state directors to work with.

The successful execution of our duties most oftenmakes use of basic economic logic and models (the princi-ples of economics seem to have eluded many policymakersin Washington as well as our company managers) and thecareful use of simple statistics and presentations. Beingable to “step back and see the big picture” is critical to thesuccess of anyone practicing business economics, becausemost employees in an organization (yours or the governmentor some other) have a very narrow focus and miss the impor-tant nature of “feedback” in an economic system (the firmor the economy). Opportunities are also available to helpmanagement on such issues as incentives and the implica-tions of new accounting schemes and measurements forcompany performance (remember, accounting systems pro-duce numbers that people try to maximize or minimize).NFIB is continually looking for ways to improve organiza-tional performance and structure. Be on the lookout to pro-vide some helpful commentary to management when theopportunity arises. It’s part of the job description for a suc-cessful practitioner of business economics. Economicsgives you a unique and useful perspective on the econo-my—it’s our competitive advantage in the workplace if welearn how to use it. ■

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53October 1998

Thomson is a leading provider of real-time economic, technical and fundamentalanalysis of fixed-income securities and for-eign exchange markets to clients globally viavarious screen services. As a financial mar-kets economist, most analyses are made withinminutes of news scrolling across newswires,and more lengthy reports are completed withinthirty minutes of release. The company alsoprovides the results of weekly polls of econo-mists to provide a consensus for the next twoweeks of economic data. The focus of workis short term and on the short end of fixed-income securities markets. Services are solddirectly to clients, so that the compensationfor this line position depends on quick andsuccessful interpretation and marketing ofinformation.

F ACE IT: Economics is not a profession known tomost high-school students. Like many of my

generation, when I was kid I dreamed of becoming adoctor, preferably one who would work in as excitingand action-packed environment as the MASH unit Isaw on TV each week. I dutifully took the science andmath courses required for a pre-med concentrationwhen I first hit college, and then it hit me. While Iloved MASH, I hated the natural sciences, found three-hour labs woefully boring, and got faint at the sight ofblood. Luckily, after I picked myself up off the floor,it wasn’t long before I realized an intense attraction formarkets. Which is how and why I became a financialmarket economist.

Since I joined Thomson Financial nine years ago,I’ve been lucky enough to join my craving for the

excitement and immediacy of a MASH unit with whathas become an intellectual as well as visceral attractionto the financial markets. Thomson Global Markets isa leading provider of optional services that offer real-time economic, technical and fundamental analysis ofthe fixed-income and foreign exchange markets toclients globally over the Telerate, Bloomberg, Bridgeand Reuters networks. As Chief Economist located inour Boston office, I spend my day providing real-timeeconomic analysis that supports traders, salesmen andinvestors in these markets. This work entails a full rangeof macroeconomic analysis, from covering Greenspan’sHumphrey-Hawkins testimony or the employment reportto writing a daily comment that sheds light on a little-known or underappreciated trend in the economy toforecasting interest and exchange rates.

MASH surgeons performed what they called“meatball surgery” at the front, i.e., their aim was tostabilize incoming wounded, often for transfer to anarmy hospital for considered care. Sometimes thosewounded were not seriously ill; their wounds weretreated at the MASH facility and the soldiers returneddirectly back to their units. It seemed that all too often,however, the surgeons had no alternative but toattempt complicated surgery in the less-than-idealconditions of the mobile unit. You may remember theepisode when Charles, a surgeon from Mass GeneralHospital, took his first turn in the operating room. Hewas appalled.

�MEATBALL� ECONOMICS

At Thomson, I practice “meatball” economics. Atmy job, I provide real-time analysis for clients to reactsensibly to incoming economic and political news. Thekey word in that sentence is “react.” This is not thestuff dissertations are made of! My initial analysismust be completed within minutes of the news scroll-ing across the newswires. My “full” analysis of themonthly employment report is finished within thirtyminutes of its release.

Often, the economic news is not critical, so thelittle time and effort I expend to cover the event is all

The Business Economist at Work:Thomson Financial Services

By Nancy J. Kimelman*

* Nancy J. Kimelman is Chief Economist, Thomson FinancialServices, Boston, MA

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54 Business Economics

anyone needs to go on with their day. But sometimeseconomics circumstances conspire to make it seemlike the world–or at least a great deal of cash–hangs onmy quick analysis. Especially in recessions, bearmarkets, and times of political unrest, the need forfast, accurate analysis can be overwhelming.

Many academic economists, I suspect, would beappalled if they saw me in action. They needn’t be, forthe economics I practice is good, sound economicseven if it’s far removed from the economic analysisthat has benefited from intensive research, economet-ric testing and peer review.

Consensus Building

Thomson provides a critical service to the marketwith the economist survey we conduct every Friday.About thirty economists in the financial communityare polled for their estimates of the next two weeks’numbers. We tabulate the results and post them to ourscreen services, which are available on Telerate,Bloomberg and Bridge. We also make the surveyresults available to the press. The Wall Street Journaland Barron’s carry the results of our U.S. survey eachweek. In fact, the three global editions of The WallStreet Journal report consensus figures from theThomson surveys conducted in the United States,Europe and Asia.

Efficient markets price in information as it be-comes available, so my job on the screens is to analyzethe “new” news that hits the Street. My write-up ofeconomic data releases will make short shrift of theknown trends in the data, therefore, and focus either onnew trends that may be in the works or on deviationsfrom existing trends. I think this is one of the reasonswhy Wall Street economists like myself often soundalarmist; we forget to state the obvious.

Short-term Focus

Not only does the analysis we provide have a veryshort fuse, it often focuses on the short end of themarket. Chairman Greenspan, and Volcker beforehim, have done a lot to bury the fine art of Fedwatching. Nevertheless, participants in the marketsalways want to know if a piece of news will alter theFed’s thinking or bring it closer to a rate adjustment.The globalization of the financial markets has addedanother twist to our work. Now the markets also wantto know if the news will affect the likelihood of foreignexchange intervention here in the United States or bya foreign central bank.

Macroeconomists working in the 1970s and 1980stypically passed new information through their quar-terly econometric models to estimate the impact onGDP growth, interest and exchange rates, the federalbudget and Fed policy. There’s no time for that sort ofthing anymore, and I’m not sure the process had better

results than the quick back-of-the-envelope forecastadjustments that economists like myself perform now.A lot of what was made explicit in those economicmodels has been internalized by financial marketeconomists. And a lot of that has been adopted bytraders, salesmen and investors themselves. The levelof sophistication of those we serve has increasedprobably ten-fold in the past ten years. I have to believethe easy access to economic analysis over screens isone reason why that is so.

Biographies of Important Economic Figures

This was not a subject I learned much about in gradschool. While most economists idolize the economistswho have made a brilliant contribution to the scienceof economics, players in the financial markets idolizethose who practice economics brilliantly. Ask a traderwhich economist she holds in highest regard, and theanswer is as likely to be Treasury Secretary RobertRubin, an ex-trader, as it is Alan Greenspan, a card-carrying economist.

Because economic policy has played such animportant role in the business cycle, for better or forworse, comments of high-ranking government offi-cials are considered at least as important as fresheconomic data. Thomson’s economic calendars havebeen amended with the addition of an events calendarlisting who is speaking, when, where, and why. Ispend a good chunk of my day watching the newswiresout of the corner of my eye, on the alert for remarksmade by senior Treasury and Fed officials. It mayseem a waste of my time, but this is exactly the servicemy firm provides. Thomson’s clients get my seasonedpoint of view of minor and major events, withinminutes. If I weren’t watching the news, my ability torespond quickly would be compromised.

STAFF VS. LINE POSITION

When I accepted the job at Thomson nine yearsago, I passed up an opportunity to be the chiefeconomist for a large regional bank. Although theimmediacy of the work would have been less, in manyrespects the job would have been similarly focused.But there was one big difference between Thomson andthe bank. At a bank, an economist is in a staff position.One supports trading activities, one sits on an asset/liability committee or the investment committee, oneprovides forecasts for the planning group–all impor-tant jobs, but none brings money into the bank on itsown. At Thomson, the services to which I contributeare sold directly to clients who pay Thomson a monthlysubscription fee to access our screens. I am theproduct, in other words. My salary depends on sales,which depend in large part on how well I and mycolleagues analyze and write.

Being in a line position makes me an entrepreneur

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as well as an economist. I created the screen-basedThomson Global Market’s Fundamental Service nineyears ago and have since designed, and redesigned,Economics 24:00, a global economics service. Thecreation of these products entailed the full spectrum ofproduct development, from market research to proto-type development to overseeing marketing and salesefforts. Thomson Global Markets has a very aggres-sive sales force, but generally members of our salesteam are experienced in sales, not the financial mar-kets. Therefore, I participate in the sales process in avariety of ways. Sometimes I’m passing along leads,sometimes I’m out visiting potential clients to facilitate

closing a deal. I travel often to supplement the elec-tronic connection I have with clients. Even though mytime is leveraged, allowing me to service thousands ofclients quickly, each client has my phone number ande-mail address. After all, I have a bottom line to worryabout.

Two things attracted me to Thomson nine yearsago and has kept me here ever since: the opportunityto play the role of MASH economist for the financialmarkets and my dual role as economist and entrepre-neur. It’s a stressful life, but I thrive on the stressbrought on by the need to assimilate quickly newinformation or the challenge to close another sale.

ABRAMSON AWARDS

On the recommendation of the Editorial Board of Business Economics, the Board of Directorsof the National Association of Business Economists has given the following awards for articlespublished in Business Economics in the four issues ending with the July 1998 issue:

The A. G. Abramson Award for the best feature article:

Van Doorn Ooms, “Economic Growth, Budgetary Balance and 1997 Fiscal Policy,” October 1997

A. G. Abramson plaques for outstanding feature articles:

Donald Anderson, “European Monetary Union in a Globalized World Economy:The Beginning of the End for Europe,” January 1998

Guy D. Billoud, “Implications for International Business of European Economicand Monetary Unification,” January 1998

Roger Chen, “An Analysis of China’s Economic Development Policies and Prospects,” July 1998

Richard D. Rippe, “The Impacts of a Balanced Budget on Financial Markets,” October 1997

J. Fred Weston, Piotr S. Jawien and E. James Levitas, “Restructuring andIts Implications for Business Economics,” January 1998

Copyright 1998, National Association for Business Economics

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49January 1999

Heading a successful economic consult-ing firm requires a disciplined allocation of abusy seventy-hour workweek. The first part ofthe day is spent reading the newspapers andresponded to any overnight e-mail. Thesecond task is the analysis of new economicdata and sending this analysis to clients.Then comes responding to press inquiries,using a system to select which ones and inwhat order. The remainder of the time isspent primarily on client servicing and run-ning the business. Travel is confined to fouror five days in the middle of the month.Speaking engagements are carefully limited.Time to reflect on the quality and originalityof our work as well as new product develop-ment must be done late in the day or overweekends.

I N 1982 I resigned my position as senior economist at IBM to travel to Saint Louis and become, along

with Chris Varvares, a founding partner and VicePresident of the consulting firm of Laurence Meyer &Associates, specializing in macroeconomic forecast-ing and policy analysis. My original contribution tothis venture was that I built what was to become knownas the Washington University Macro Model. Andwhat a labor of love that was! Sixteen years later, whenLarry Meyer left to become a Federal Reserve Gover-nor, the name of the firm changed to MacroeconomicAdvisers, and I became Chairman of the company.

When I left IBM my peers thought I was foolish to

take such an unabashed risk. They have all long sincebeen downsized out of their jobs. But back then, Iwasn’t thinking much about either the risk or, notwith-standing our subsequent success, the reward of mydecision. I was interested in pursuing my intellectualinterests with people that I liked and respected, andsimply trusted that somehow I could make a livingdoing it. In the beginning, there wasn’t really abusiness, so I had all the time I wanted for that pursuit.Now I don’t, and I miss it.

When I compare my fortunate state today to howthings were in 1983, the one thing that strikes me asmost different is the near-overwhelming task of gettingso many different kinds of things done is a day that,alas, is still limited to just twenty-four hours. So, whileI doubt my experiences are much different than manyof yours, I’ve decided to tell you a little bit about howI decide to spend my professional time. And eventhough I knew it to be true beforehand, after finishingthis piece I was nevertheless struck by how little timeI have left these days to do what I love most — justbeing an economist.

TIME FOR SELF-EDIFICATION

My typical day at work begins when I slip out ofthe house a little after 6:00 a.m. while my family stillsleeps. This early in the morning my drive to worktakes all of four minutes if I hit the lights just right, sixminutes otherwise. The trip home in the evening isonly slightly longer. This is one real advantage ofliving and working in Saint Louis. The brief drivelengthens my effective five-day workweek by fifteenhours, compared to friends and clients I know workingin the large coastal cities but living in the suburbs. Italso lowers the psychological barrier to coming in onweekends, which lengthens my workweek anotherfifteen hours. Some years back my partners and Iagreed that a fifty-hour workweek should be our norm,but in fact seventy hours is more typical. This issomething to consider for any reader thinking aboutstarting an economic consulting business. Now I can’thelp what I do because I’m addicted to it. I believe,

The Business Economist at Work: MacroeconomicAdvisers LLC

By Joel L. Prakken*

*Joel L. Prakken is Chairman of Macroeonomic Advisers LLC,St. Louis, MO. He also is President of NABE for 1998-99.

Copyright 1999, National Association for Business Economics

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50 Business Economics

however, that my level of time commitment is aprerequisite of success in this competitive business.My kind of harried professional life, which alsomightily taxes my personal one, is definitely not foreveryone.

Anyway, on the way to work I stop at my favoritecoffee shop, then head for the office where I scoop upfrom the doorstep copies of The New York Times, TheWall Street Journal and the local Saint Louis PostDispatch. Usually by 6:30 a.m. I’m spreading thepapers out on our conference table, sipping coffee, andmaking the first big decision of the day: what to read.This may sound silly, but in fact it epitomizes myconstant predicament of how best to spend a veryscarce commodity—my time.

It would be nice to take an hour to read the papers,but I simply can’t afford to. So, over the years I’vestopped reading the Journal in detail. If I’m doing myjob well, I already know most of the macroeconomicnews that’s relevant for me, and have already dis-cussed it with someone—a colleague or client—moreknowledgeable about it than the Journal’s reporters.Decision: skip those stories. I used to read theJournal’s guest editorials, but they are predictableenough that usually a glance at the headline and bylinetells me what I really need to know. If the author issomeone I know and/or respect already, I might readit, otherwise I skip it while making a mental note tobounce the topic off someone else during the day.

My total time spent on The Wall Street Journalusually comes to about five minutes. Some days I scanthe news summaries on the front page in a minute andam done. The local paper I don’t even open, since Ilong ago surrendered the delight of reading the sportspages. No, what I choose to read in that first peacefulpart of the day is the noneconomic news in The NewYork Times. I think of this luxury as an exercise in self-edification and as the responsibility of an informedcitizen in a democracy. Usually by 7:00 a.m. I’ve readthe papers, moved to my office, and checked andresponded to any new e-mail. On the East Coast, ourclients are filtering into their offices, having alreadyspent an hour or more getting there. I’m ready forthem.

TIME FOR THE PRESS

The first order of every day is to analyze any newmacroeconomic data released that morning, usually at8:30 a.m. eastern time. What were the numbers?Were they different than we expected? If so, why, andhow do they change our view of where the economy isheading? We pull the data electronically, rearrangethem into a palatable form, attach a brief writtenanalysis, and distribute all that electronically to ourclients. Time is critical, but inevitably in the middle ofthis push, the phone starts ringing. Sometimes it’s a

client who can’t wait for our analysis to come off thefax machine, but just as often it’s a reporter wanting thevery same information.

Now we used to be flattered by attention from thepress, but over the years we’ve come to appreciate thatdealing with the media is a business decision. As firstLaurence Meyer & Associates and then Macroeco-nomic Advisers became better known, we get morecalls from the press. In addition, the media’s appetitehas assumed voracious dimensions with the advent oftwenty-four-hour electronic business coverage. If Ichose to, I could spend most of most days talking toreporters.

Issues relating to the media are complex andcontradictory. Obviously, the right kind of publicityis good for the firm, but we don’t want clients who arepaying for our analysis to see it first or in detail in theelectronic press. So, as a general rule, I don’t talk toreporters for the wire services until after our dailyanalysis has been delivered—if they’re still interested.Print reporters don’t mind being called back later,because they aren’t in the same mad rush for a real-timestory. But for that very reason, print reporters talklonger and, unlike the wire service reporters—who, ifthey talk to me, almost always quote me and mentionthe firm—sometimes don’t use our material.

Based on my experience with individual reporters,I’ve developed a system for deciding which ones to callback and in what order. First, I take the knowntendency of the reporter to mention the firm or myname in his or her report, divide that by the number ofminutes I think the conversation is likely to take, andmultiply that times my concept of that newspapers’business readership. The higher a reporter’s score onthis scale, the more willing I am to talk with him or heron a regular basis. It’s a good system that keeps mesane. Oh, and one final rule: never turn down anational TV spot.

TIME FOR CLIENTS

If all goes smoothly, the response to our daily datais over and done by late morning, and the press hasbeen satisfied. It would be nice if that left the rest ofa twelve-hour day to “blue sky” about the economy orto pursue developmental work on the models we use togenerate our forecasts every month. However, itseldom happens that way. One reason is clients calland, unlike when reporters call, there isn’t the optionof putting them off until later: clients always comefirst. You can’t blame them for calling; after all, it isone of the things they pay us for. And indeed, this isa part of my day that, for the most part, I really enjoy.Why? First of all, I like our clients. They’re greatpeople working hard to get their jobs done well. If wecan help them, it is personally satisfying. Second,every client knows something I don’t, so during these

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daily discourses I always learn something useful (thisis why I don’t have to read The Wall Street Journalanymore!) that later helps me help someone else.These conversations are important to building a webthat first collects and then connects our clients into ahappy family of subscribers. However, important andrewarding as they are, these calls come in sporadicallyand often at what seems like the worst possible time.This makes it next to impossible to develop any kind ofrhythm during the day, or to spend protracted periodsconcentrating on a single task or project. It makes theday feel schizophrenic.

TIME TO RUN THE BUSINESS

And then there’s the business to run. Yes, we havean Office Manager, a Director of Business Develop-ment, outside accountants, lawyers, and even invest-ment advisers to help manage our pension fund. Butin a shop our size, the complete divorce of businessmanagement and economic analysis is just not pos-sible.

Recently, for example, we approached the end ofa five-year lease and needed more space. During theterm of the lease, rents shot up in the Saint Louis area.Our choices were to move upstairs to bigger offices inthe same building, which we liked, or shop the deal toother buildings. Either way, we wanted to make thebest arrangement for ourselves, and this requiredgetting buildings in competition with each other for theprivilege of having Macroeconomic Advisers as atenant. We spent a lot of time looking at alternativespaces in different kinds of buildings in different partsof town and reviewing architectural plans of somespaces we especially liked. Then there were bids toreview and final terms to negotiate, a process madeinteresting by our forecast that the economy will slownext year even and as some new buildings come on linein our neighborhood. We calculated present dis-counted values of the various proposals, all the whiletrying to factor in the nonpecuniary aspects of eachlocation for the employees of the firm. It amazed mehow much time all that took, and how disruptive it wasto the continuity of my thinking about the economy. Inorder not to short-change our clients, it meant makingup the time sometime else—usually late at night.

TIME FOR TRAVEL

At cocktail parties I’m always asked, “Do youhave to travel very much?” My answer is always prettymuch the same. I have to be in the office at the end andbeginning of every month, because that’s when weprepare our forecast and write our monthly report. Ido travel maybe four or five days in the middle of eachmonth, to meet with existing clients and to visitprospective ones. These trips, most of which are to theNortheast Corridor or the West Coast, just come with

the territory, and I like them. Clients always are gladto see me. Prospective clients usually are impressedwith our products, and that’s a rush. Furthermore, afour-hour flight to the West Coast is the best opportu-nity for an uninterrupted work session I ever get,especially if TWA has sent me some of those first-classupgrade certificates!

TIME FOR OUTSIDE APPEARANCES

What I really have gotten more cautious about,however, is speaking engagements. In the beginning,it seemed that the need to win exposure for the firmdictated the acceptance of almost any invitation tospeak. Furthermore, I used to fall for the line thatevery organization tendering an invitation uses, i.e.,that the audience is chock full of prospective clients. Ithink I can count on one hand the number of times I’vemade a speech to an outside group and subsequentlyhad someone in attendance subscribe to one of ourservices as a result. In most instances, the audience’sneed for economic information is too casual to requirea service like ours, aimed as it is at professionaleconomists.

But I never want to flub a speech, so I prepare foreach one assiduously. Then there’s the time out of theoffice that sometimes can be several days. It gets to becostly and disruptive. So, a few years back I jacked upmy appearance fee sharply, make no exceptions, andonly take on appearances that get the firm maximumexposure while allowing me to conduct other businessaffairs at the same time. This was one of the bestdecisions I ever made. I do make fewer talks but notfewer fees and, most importantly, I get lots more doneat home with the time I saved.

TIME FOR SERIOUS THINKING

At Macroeconomic Advisers we produce daily,weekly, monthly and quarterly hard copy and organizequarterly meetings on the economic outlook and publicpolicy. Somehow or another these always get done.The constant challenge, however, is to find time to dothe deeper thinking required to maintain the quality andoriginality of all those pieces we churn out, as well asto keep improving our econometric models and soft-ware that we and our clients use to generate forecasts.

Often towards the end of the day things quiet downa little around the office, especially after the East Coastgoes home. Still, with clients on the West Coast whomight call, I feel remiss heading home myself muchearlier than 7:00 p.m.. The hours from 4:30 p.m. to6:30.p.m. are ones that I sometimes can use to reflecton the economic outlook, plug away at some newdevelopment in our econometric model, or talk withsomeone about that topic I saw on the editorial page ofthe Journal early in the morning.

More often than not, however, such work occurs

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on weekends. Our monthly forecast almost alwaystakes shape over a weekend, because the GDP datausually are reported on a Friday, and our clients expectus to be done by Monday. There’s no other time to doit, but this tacit arrangement works well. The relativeand uninterrupted calm afforded by the weekend is theperfect time to get caught up on recent developments,build the new data bank, and run simulations with the

model to understand the econometrically identifiableforces at work on the economy. Weekends also are theonly time to get much done on fundamental productdevelopment, and most of that occurs under prettyintense pressure every spring as we approach ourAnnual Model Conference at which we unveil newwork on the our econometric model and the softwarethat simulates it.

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66 Business Economics

Many authors of this column have dis-cussed how they have redefined the role of theeconomist to make it less of an overheadposition and more of a value-added functionthat provides benefit to their organizations.They have redefined the role of the economistso that the economist acts in the role ofinternal consultant to many different parts ofthe organization. But this is not a new phe-nomenon. Economists for consulting organi-zations like KPMG Economic ConsultingServices have been doing this for many years,albeit at arms length, with the organizationsand clients we serve. This article providesfour case studies of how economists haveused their specialized skills to provide con-crete benefits to the organizations that weserve.

MANY OF THE ARTICLES that have appeared in this space have been written by corporate

economists, who have redefined the role of the econo-mist in their organizations so that the economist acts inthe role of internal consultant to many different partsof the organization. This new perspective of the roleof the economist as consultant is bound to have positivebenefits for the economics profession as well as for ourclients. But this is not a new phenomenon. Economistsfor consulting organizations like KPMG EconomicConsulting Services (ECS) have been doing this formany years, albeit at arms-length. In the process, wehave been constantly appraised of the value that wehave added as reflected in our clients� willingness to

pay for our services and by the additional engagementswe secure from repeat clients. These signals deter-mine how we focus our services and invest ourresources.

We do not typically perform work for othereconomists. I previously worked for a firm thatspecialized in doing just that � selling economicconsulting services to other organizations� econo-mists. Surprisingly, this was an easier job than sellingeconomics expertise to those unschooled as econo-mists. You did not always have to make your analysisrelevant to the organization you were serving. Thiswas viewed as the job of the economists for whom theanalyses were developed. The fact that the analysis ordata came from a model seemed justification enoughfor corporate economists to purchase these services.Frequently, these analyses sat on bookshelves, collect-ing dust, waiting to be used.

It was not that these analyses were poorly done ornot relevant. On the contrary, they were developed byvery knowledgeable, dedicated people. But they wereprepared primarily for the wrong audience, i.e., othereconomists and not the decisionmakers within theorganization. We depended on economists withinthese organizations to make these analyses relevant totheir organizations. This was not the prescription fora successful consulting strategy. It generally con-flicted with the problems that most companies began toface in the information age. It was not that they neededmore information to make decisions; rather, they weredeluged with information and faced the problem ofdistilling the important information from the enormousamount of data that poured into the firm. It wasuncertain how to utilize that information to impact thecorporate bottom line.

Turning, however, to the present and the future, letme share a few examples of the kind of work that wedo at KPMG. These examples show how economistscan use their skills to provide concrete benefits to allorganizations.

The Business Economist at Work:KPMG Peat Marwick LLP

By Jon D. Silverman*

*Jon D. Silverman is Manager, KPMG Peat Marwick LLPEconomic Consulting Services, Washington, DC.

Copyright 1997, the National Association of Business Economists

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July 1997 67

WHO WE ARE

KPMG�s Economic Consulting Services Group ismade up of 120 professionals. Approximately 25percent of these have Ph.D. degrees, primarily ineconomics and fewer in statistics and operations re-search. Approximately 40 percent have M.B.A.degrees, with the majority of these having a focus infinance. We have a direct presence in KPMG officesin thirteen U.S. cities and in London and Amsterdam.We also have a more global presence due to the fact thatKPMG has offices worldwide. Our practice focusesmainly on U.S.-based clients or the U.S. subsidiariesof foreign corporations.

WHAT WE DO

The services we provide cover a fairly wide area.The group started out in the late 1980s by providingeconomic analysis for transfer pricing issues. Assist-ing companies in complying with section 482 of theU.S. tax code regarding the transfer of tangible andintangible property is a natural area for economists toapply their skills, because the work requires a thoroughunderstanding of markets. The group quickly began tobranch into other areas as a means of diversifying thebusiness and because of the special talents and focus ofthe personnel. The group has some very advancedskills in quantitative methods, especially economet-rics, statistics and operations research. These skillshave served as the foundation for practice areas ineconomic litigation, economic risk management, eco-nomic impact analysis, utility economics, securitieslitigation, economic value management (EVM) andpharmacoeconomics. We have developed an outstand-ing economic litigation services practice that differen-tiates us from other firms doing litigation work basedon the quantitative and applied computer skills of ourstaff.

Let me describe some of the specific project workthat we have done and explain why companies havefound this work to be especially valuable. In allengagements that we enter, it is useful for us to keepin sharp focus the elements of our work that providevalue. Sometimes, as trained economists, we takesome basic things for granted that are highly valued byour clients. I think that some of these elements areembodied in the cases that are described below, and thatis why they have been particularly successful engage-ments from the client�s and our own perspective.

CASE I. RISK MODELING

In this engagement, we developed a model to helpa credit insurance company price its insurance prod-ucts. This model is used every day by the company�s

sales agents in the field and back at the home office bythe company�s underwriters to develop price quotesfor its insurance products. The company for whom wedeveloped this model is in the credit insurance busi-ness. Credit insurance is a form of insurance thatsafeguards a business in case its customers do not fulfilltheir obligations to pay for their purchases that havebeen made on trade credit. The purchase of creditinsurance is widely used as a risk management tool inEurope but less so in the United States.

The company for which we performed this workwas seeking a means of pricing its policies in order tomanage its losses and maximize its premium income,subject to the risk it was willing to accept. To do this,the company needed to understand how its customersare affected by downswings in economic activity andhow the macro economy affects the industries to whichit provided coverage. The pricing model we developedtakes into account the different sensitivity of eachindustry to the general economy. It also takes intoaccount the company�s own historical experiences ineach of the industries in which it does business. Itssales agents can use the model in the field to developprice quotes quickly by entering potential customers�receivables into a spreadsheet. The software providednot just a premium price but allowed the customer toselect coverage tailored to its own risk managementneeds. For example, if a customer wanted to retain therisk associated with some particular debtors it held inits receivables portfolio, these debtors could be easilyeliminated from the policy. Agents could also enteralternative deductibles and coinsurance terms, so thatthe customer could tailor the policy on the spot to theirparticular requirements.

The comprehensive model itself was developed asa Monte Carlo simulation model using a sophisticatedeconometrics and simulation package called Gauss.Because it was not feasible to turn anything thiscomputationally intensive over to the field agents, weworked out some simple approximating theoreticaldistributions to estimate the empirical distributions thatare derived from the Monte Carlo model. The largemodel is still used by the company�s underwriters forlarge deals, but for smaller deals, which outnumber thelarge deals by far, the approximation tool is used.

The estimation procedures that we developed al-lowed us to provide a tool that could be used in thefield. It was this extra step that added substantial value,because this allowed us to bring the results of ourmodeling efforts down to the operational level of thefield agents. Although the sales representatives do notnecessarily understand how their spreadsheet tooldevelops the loss distributions for their customers, theytrust that it develops premium estimates that will behonored by the underwriters back at the home office.The use of this system significantly reduces the sales

Copyright 1997, the National Association of Business Economists

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68 Business Economics

cycle. Previously, it took much longer to provide pricequotes, and the agents had little opportunity for nego-tiating with the customers. Now they can easily bringup a menu of choices of premium and coverage fortheir clients to select, expanding the value of theircredit insurance product.

On a larger scale, we have also assisted thecompany in negotiating the reinsurance rates that itmust pay to its reinsurance partners for assuming someof the risk that exists in the company�s overall portfolioof receivables for all its customers. This work hasinvolved applying our loss modeling methodology tothe entire portfolio of approximately 250,000 receiv-ables that the company insures at any one moment intime. By providing the company with estimates ofexpected loss to the portfolio and on the entire distri-bution of losses, it has been able to negotiate success-fully reinsurance rates with its reinsurers that arefavorable to all parties.

We are now in the process of applying similarsimulation modeling techniques to the estimation oflosses for portfolios of mortgages. These models assistus in the development of pricing tools that can be usedto price mortgage reinsurance premium prices formortgage insurance companies and commercial banksseeking to enter the reinsurance business.

CASE II. TELECOMMUNICATIONS DEMAND,PRICE, AND COST MODELING

In this engagement, a telecommunications com-pany had an urgent need to refine a business plan thatwould assist it in persuading its lenders and investmentbankers to provide it with additional debt and equityfinancing. The lenders required some concrete evi-dence that the assumptions and the financial projec-tions the company was using were realistic. Inaddition, the lenders wanted to understand how sensi-tive the company projections might be to certainassumptions imbedded in the business plan.

We helped the company integrate its existinginformation and market research assets into a spread-sheet modeling system that its bankers could use toperform sensitivity analysis on the company�s businessplan. This involved an extensive effort of coordinatingseveral ongoing modeling efforts that were designed toassess the company�s expected costs of doing businessin many different regions and in developing estimatesof the demand for its services by people travelingaround the globe. The company had been conductinga number of simultaneous market research and busi-ness surveys to assess the market for its communica-tions services. It was receiving large amounts of dataon an individual country, industry, and customersegment basis for the size of the potential market ineach country and in the expected growth in these

markets. It was also collecting survey data on the pricesensitivity of different customer groups to the entryfees and variable fees for its services, potential custom-ers� travel patterns, and their expected usage of com-munications services.

This was a rather novel situation for an economist.In most cases, we spend much of our time trying tocreate reliable data sets from a variety of unrelatedsources. In this case, rather than having too little datato work with, the company had lots of information butneeded a way to put it all together and ensure that itsbusiness plan was built upon the solid foundationprovided by its extensive investment in market re-search and data collection. Our job was to tie togetherliterally hundreds of thousands of data records togetherinto a model that reflected all the complexities of theirbusiness. Because they required that we capture manydimensions on market segments, countries, servicesand time, we had to be extremely creative in how weimplemented a system that could capture the complex-ity of their business in the confines of the Excelspreadsheet program.

We met regularly with many different parts of thecompany, the company�s lenders and the lenders� own�due diligence� consulting teams to explain the meth-odologies that we were using to make revenue projec-tions for the company�s services. Most importantly,we took our demand projections that were made on acountry-by-country basis and the company�s cost pro-jections and developed a full set of financial statements(balance sheet, cash flow and income statements) foreach of the company�s entities. This allowed us to seethe impacts of changes in assumptions down to theprofit and loss level, which is ultimately what drivesthe lenders� decisions. Our ability to integrate quicklytheir large mass of data into a tool that could be usedby many parts of the organization as well as by theirlenders and investment bankers was instrumental inmaking this a successful engagement.

Although conceived as a model that was intendedfor the single purpose of assisting the company with thedevelopment of its business plan and as a means ofeducating its lenders, the model has subsequently takenon a life of its own within the company. It has becomean important tool for the marketing, finance andstrategic planning departments, who have come to seethis model as a tool for producing financial forecastsand for analyzing strategic issues, such as competitivepricing, market entry and capacity planning.

CASE III. MODELING ASBESTOS LIABILITY

In this engagement, we developed a model topredict asbestos liability for a large manufacturingcompany. As part of the negotiations for a large class-action law suit involving several hundred thousand

Copyright 1997, the National Association of Business Economists

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July 1997 69

current and future asbestos-related injury claimants,ECS economists developed a microsimulation modelto predict the incidence of asbestos-related disease.The purpose of the model was to ascertain whether thefinancial structure of the negotiated class action settle-ment was consistent with expected current and futureliabilities faced by the company. In addition, theresearch was used to help establish a trust fund,administered by the company to offset future claims.

The asbestos model simulates the life cycle of work-ers in selected occupations and industries that werepotentially exposed to asbestos. The model captures:

1. The existing scientific literature on the dose/responserelationship between the length and intensity of exposureto asbestos and the incidence of asbestos-related disease.

2. The industry, occupational, and demographic profiles ofthe exposed population.

3. A dynamic aging process that tracks the exposed popu-lation and their incidence of disease over time.

4. The pattern of historical claims by type of injury and thepropensity to file claims against the company.

The model also includes a sophisticated cash flowmodule that allows the settlement attorneys and fundmanagers to conduct sensitivity analysis on the viabil-ity of the fund to changes in assumptions about theincidence and distribution of disease, the average valueof claims, and changes in settlement costs. In addition,specialized facets of the class settlement agreement,such as splitting the fund into different investmenttranches and controlling the timing and values of pay-outs, ensure future claimants that sufficient funds willbe available to pay off claims that have yet to be filed.

The model served as an integral part of theevidence presented at the fairness hearings that oc-curred during the court�s review of the proposedsettlement.

CASE IV. INVENTORY SHRINKAGE FOR TAXLITIGATION

This engagement required that we develop statis-tical models of inventory shrinkage to defend a con-sumer retail chain against IRS attempts to imposemillions of dollars of income adjustments against thecompany. For tax purposes, inventory shrinkagerefers to the difference in the book and actual value ofinventory as determined by a physical inventory count.Because shrinkage is a significant cost of doing busi-ness for retailers, shrinkage estimates can have sub-stantial tax impacts. In this case, the IRS questionedthe sales-based accrual method that the company was

using to estimate shrinkage during the period betweenthe last physical inventory and the end of the tax year.

To provide an independent assessment of theaccuracy of the company�s approach to inventoryshrinkage and compare it to the IRS method, ECSeconomists and statisticians collected sales and inven-tory data from each of the company�s retail outlets.These data were used to reconstruct the inventorycycles of each of the outlets over the period 1984-92.For each of the company�s four business chains, wesimulated each inventory cycle and calculated shrink-age adjustments based upon the company�s sales ac-crual method and the method required by the IRS.Statistical correlation between sales and shrinkage wasalso estimated. Statistical tests revealed a very strongcorrelation between sales and shrinkage. This infor-mation was used in conjunction with estimates derivedfrom the retailer�s sales-based accrual method ofcomputing shrinkage and compared to shrinkage esti-mates generated using the IRS method.

This analysis confirmed the accuracy of the retailer�smethodology by demonstrating the statistical probabil-ity of shrinkage occurrence in each period and thecompany�s methodology as more accurate than thatemployed by the IRS. By demonstrating that thecompany�s method was actually superior to the IRSmethod, and presenting this evidence in tax court, ourwork was instrumental in convincing the presidingjudge to rule in favor of the company.

CONCLUSIONS

We have learned some important lessons fromthese engagements. The first is that we as economistshave extremely valuable skills that are not easilysubstitutable. We work best in situations where weinteract with other disciplines that seem to appreciateus more than we sometimes appreciate ourselves. Inour case, we have found that we work well in the areasof tax, litigation, and risk management. Our quantita-tive abilities, analytical powers and knowledge abouthow markets function can be applied almost every-where. Our clients appreciate the value of our skills asevidenced by their willingness to continue purchasingour services. Most importantly, in each and everyengagement, we must imagine ourselves in the positionof our clients and ask the question, �Do these servicesserve to reduce my costs, improve profits, or allow meto comply in the best manner with regulatory require-ments?� If the answer is not immediately yes, then weas consulting economists ought to rethink our propos-als or refine our deliverables.

Copyright 1997, the National Association of Business Economists

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6

Economicsin the

Workplace

The application of economics in a business setting couldn’t be more exciting and invigorating. The role ofthe economics group is closely aligned with the Company’sconsumer business groups. These consumer businessgroups have a geographic and product mix at their core.Our agenda stretches in new ways every year to anticipateemerging demand on the automotive business. Central toour mission is the development of vehicle stock and salesmodels that allow us to generate 10-year forecasts to support business and product planning for all markets.

The economists’ comparative advantage is that we areable to examine structural changes in underlying demandfor automotive products and services in the Company’smajor markets. For example, improved data sources inthe U.S. and Europe have allowed our team to improvemodels of trend vehicle sales. Examples of these data areestimates of vehicle stocks by country. These models provide a better underpinning for product program decisions that extend out 5 to 10 years.

Another area of research is the development of vehiclestock models for emerging markets. Since these marketsare expected to grow at a faster rate than the U.S. andEurope, it is critical for us to assess how fast these marketsare able to grow. This provides useful input for our inter-nal customers’ assessment regarding geographic andproduct focus over the business planning horizon. Usinga multi-market database including per capita income,transportation infrastructure, population, and vehicledata, this modeling effort was able to identify key thresh-olds for changes in the growth of the vehicle stock at dif-ferent stages of economic development.

This approach to economics in the workplace is some-what different from economists who practice in the finan-cial services industry. In the latter, there is likely greateremphasis on short-term, indeed, daily movements in keyvariables and implications of these changes for portfolioand other valuation metrics. In contrast, a consumer com-pany like Ford needs to assess long-run dynamics that arekey ingredients to product investments. To be sure, ourindustry expertise is also used to provide an early signal

on near-term changes in the auto industry environment,and that requires sound analysis of consumer fundamen-tals.

Our interest in a key macroeconomic issue is very keen: IfU.S. productivity growth can be sustained at a higher rate,then what does this imply in terms of the growth in spend-ing for more and better features in a vehicle?

Finally, we are always searching for ways to use technologyin order to enhance our customer service for the day-to-dayinformation demands. Our internal website has given ustremendous scope to do just that. All of our forecasts, publi-cations, and research studies are posted on a routine basis.Our customers from St. Louis to Bangkok can access ourproducts and receive updates instantly.

It’s an environment chocked full of learning and growth.We stay fresh with training, keep connected with our cus-tomers, and enjoy the enterprise!

Business and Economists...Mutual Benefits Abound

KEY POINTS

• Connecting with the business is critical

• In terms of scope, our comparative advantage is to undertake research onunderlying demand for automotive products and services in the Company’smajor markets

• Using technology efficiently to assist internal customers with day-to-day queries about the external environment is crucial

Ellen Hughes-Cromwick, SeniorEconomist at Ford MotorCompany describes what makesindustry an exciting place to befor economists.

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Education Required for Business Economics To work in the field of business economics, an individual should obtain a sound undergraduate education that includes training in economics and a number of related subjects. These include finance, cost and financial accounting, business administration, statistics, mathematics, and English. It is essential to be familiar and comfortable with the computer. A good college or university will be able to provide undergraduate training, but for advancement and long term success as a business economist, it is advantageous to pursue graduate study in economics and related subjects taught in graduate schools of business administration or in graduate departments of economics at the major universities. If a person is able to finance full time graduate study and willing to postpone entry into the business world for a few years, he or she can go to graduate school directly from college. On the other hand, if an individual prefers not to delay work in the business world, he or she may be able to obtain a full time job as a junior business economist after completing undergraduate study, and carry on graduate work on a part time basis. Because business economists are most often generalists rather than specialists, they should have a broad, rather than a narrow, education in economics and business administration. Given their broad foundation, an employer will have an easier time in teaching the particulars of the firm and industry. Generally speaking, business economist should be familiar with as many of the major field of economics and business administration as possible. A recommended course of study for a master’s degree in business economics would include the following courses: Microeconomic Theory (6 hours) Macroeconomic Theory (6 hours) Statistics/Econometrics (3-6 hours) Business Cycle Analysis/Forecasting (3-6 hours) History of Economic Thought/Economic History (3 hours) Monetary Policy (3 hours) Fiscal Policy (3 hours) International Economics (3-6 hours) Tax and Regulatory Issues (3 hours) Accounting (3-6 hours) Finance (3 hours) Marketing (3 hours) Organizational Behavior/Human Resource Management/Operations Management (6 hours) This is a demanding curriculum based on surveys of business economists who were asked to list courses they have found valuable, wish they had taken, and/or look for in the people they hire. In addition, aspiring business economics should look for ways to develop verbal and written communications skills, either through course work or constant practice. Not all business economists need to specialize in statistical and mathematical techniques. Much of the quantitative work (like forecasting) is now done by consulting firms (employing many economists). In fact, for the majority of business economists, the ability to write clear, correct, and readable English is a more important asset than a highly technical knowledge of statistics and mathematics. Nevertheless, all business economists should have at least some knowledge of quantitative techniques. In addition to the core subjects of economics and business administration, the business economics student would be well advised to include courses in history, political science,

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psychology, and sociology, all of which help to understand society in broad terms. These courses can be taken as part of the undergraduate degree. Like most of the professions--particularly those that require graduate study--business economics requires the mental ability and other skills normally associated with students who rank in the upper 25 percent of their high school class, and the upper 50 percent of their college class. It usually happens that students who like certain subjects in high school, college or graduate school will be interested in a career that requires them. To state this principle another way, the process of choosing courses is really a self selection process by which students discover what subjects they like and in which they can do well. Applying this principle to a career in business economics, we can say that a student who likes and does well in courses in economics and business administration is very likely to enjoy the work of a business economist. It may be, of course, that a student likes the world of business but finds it difficult to relate classroom studies to business activities. In instances of this kind, begin working in business and pursue studies on a part time basis. If you have business experience in your background, you will find that academic course work becomes more interesting and relevant. Other Skills and Personality Traits Besides a formal education, successful business economists should know how to communicate. Results are normally presented to others in the business firm, but economists must also communicate with people outside the firm--such as customers, legislators, stockholders, and the general public. Thus, business economists must know how to make the results of their work understandable to a wide range of people. Some persons are well versed in economic and business principles, but many are not. This important communications function requires and ability to write and speak clearly, effectively, and concisely. Business economists must know how to phrase complicated economic concepts in standard language and how to use visual aids such as charts and graphs for presenting concepts, principles, and conclusions. Effective business economists must be easy to talk with and easily understood. Business economists, like others in business, often work under pressure and must reach conclusions without as much research and analysis as they were taught in academia. Thus, the ability to handle many tasks at one time, meet deadlines, and supplement research with judgment and intuition are essential. In short, business economists must know how to analyze economic problems and communicate with others inside and outside the firm.

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Salaries of Business Economists As a group, business economists receive excellent salaries. A survey conducted by the National Association for Business Economics (NABE) in 2000 found that business economists had an average (median) base salary of $85,000 per year. Nearly 43 percent of the respondents reported salaries between $50,000 and $100,000, with 38 percent reporting base salaries at $100,000 or more. NABE also found that more than half of those business economists responding to the survey received additional compensation from their primary employment; the median amount reported was $17,500. Even with three recessions and corporate downsizing in the late 1980s/early 1990s, the median base salary and additional compensation from primary employment of economists has doubled since 1980. The 2000 survey also indicated that the largest employers of business economists were firms engaged in consulting, government (including central banks), and financial institutions and insurance. Economists in the securities and investments sector were the most highly paid with a median base salary of $107,500 and additional compensation from primary employment of $50,000. Economists in manufacturing followed with a median salary of $103,000, with additional compensation of $33,750. Economists in consulting followed with a median base salary of $99,999 and additional compensation of $19,000. The lowest salaries were recorded among economists in government and academia (with corresponding median base salaries of $74,500 and $70,000) Education plays a significant role in explaining salaries. The greater the schooling, the higher the income: the median base salary of a Ph.D. economist was $91,000 per year while economists with masters degrees earned an average $80,000 per year. Experience also plays a large role in wages. The median base salary of economists who had up to four years of experience was $60,000 in 2000, while those economists with 5-9 years experience earned a median salary of $70,000; and those with 10-14 years experience earned $81,650 per year. New economists with a master’s degree were most sought after in 2000. The median starting salary was $44,995. Those with a bachelor’s degree in economics could start at $34,998, while new Ph.D.'s were able to command a starting salary of $59,988. Economists could reap further rewards. Many business economist move to managerial positions where they can employ their unique skills to evaluate the work of others and translate their findings into practical business policy.

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The Future of the Business Economics Profession More and more firms are becoming aware of the contribution that business economists can make in day-to-day decisions. One reason for this greater awareness is that a growing proportion of middle and top management has a master’s degree in business or similar training that equips management to understand and utilize the professional work of economists. Another reason is the growing complexity of domestic and international economics. Business economists are increasingly asked to work with other specialists in business--investment bankers, lawyers, accountants, treasurers, engineers, and others--to assist in solving problems. This trend, too, indicates an expanding role for business economists. Finally, the career of business economics is increasingly recognized as one of the routes to top management. In recent years, business economists have become presidents or senior officers of banks, insurance companies, trade associations, investment houses and industrial companies. Although not all business economists are capable or even desirous of advancing to a top management position, it is clear that economics is a business function of central importance and thus can be a pathway to the top. Indeed, economics is the second most likely undergraduate major (after engineering) that today's CEOs have. Interestingly, two NABE past presidents are currently presidents of federal reserve banks, one is president of a very large national bank and another, Alan Greenspan, heads the Board of Governors of the Federal Reserve System. If you have inclinations toward government policy positions, never fear. Recently, among the top seven industrialized countries, the key central bank governor is an economist in Great Britain, Germany, Italy and the U.S. In France and Italy, the Finance Minister also holds an economics degree. Looking at twelve developing countries, all but one of the central bank governors holds an economics degree. Among the finance ministers, all but three hold economics degrees. Clearly, economics is a useful background for government policy.

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NABE Mission Statement Our mission is to provide leadership in the understanding and use of economics.

How Do I Benefit from NABE Membership? Enjoy networking opportunities with colleagues in the field of economics as well as opportunities to meet world-class experts in new fields. Attend frequent meetings and seminars on relevant and timely topics. Be up-to-date on important economic issues. Continually improve with unique opportunities to hear the industry's top leaders.

What's Included With My Membership? Periodically:

• Business Economics- NABE's prestigious quarterly journal

• NABE News- NABE's informational bi-monthly newsletter

• NABE Outlook - A quarterly macroeconomic survey.

• Industry Conditions- A quarterly industry survey

• Salary Survey - Compare your salary to others using this bienniel survey

• IdeaLink- An informative e-newsletter sent every two weeks

• Continuing education courses

• Access to policy-makers, economic experts and scholars, and top-ranking officials

• Instant economic statistical information via the members-only section of Nabe.com

Every Year:

• Cutting-edge information at NABE's fall meeting and spring policy conference

• Opportunities to network by joining industry-specific roundtables

• NABE Membership Directory - a Who's Who in Business Economics

Plus:

• Answers to economic problems and issues

• Consultant's Registry - building your resources

• Positions Wanted - posting your resume to be seen by top employers in the field

• Employment Opportunities - current job listing

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• Special discounts on economic-related products and services And much, much more.

How Much are Membership Dues?

NABE Electronic Membership: Get all NABE publications via e-mail and on the "Member Only" section of the NABE Web site plus one FREE Roundtable

One Year Two Years- save 10 percent!

$125 Individual Member $225 Individual Member

$80 Retiree Member $144 Retiree Member

$50 Student Member n/a

NABE Non-electronic membership: Have Business Economics mailed to you and get access to all NABE publications via e-mail and on the "Member Only" section of the NABE Web site plus join one Roundtable for FREE!

$150 Individual Member $270 Individual

$170 International Member (outside the US) $306 Individual

$150 Retiree Member $270 Retiree

$125 Student Member n/a

All membership dues levels are current as of fall 2001. Please check www.nabe.com for current dues.

Who Can Join NABE? Any person with an interest in business economics is eligible for membership including:

• Business leaders

• Corporate economists

• Statisticians

• Financial economists

• Consultants

• Product researchers

• Load forecasters

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• Corporate strategists

• Sector analysts

• International specialists

• Pricing and cost analysts

• Government officials

• Educators

• Students

In addition to individual memberships, NABE offers Corporate and Group Affiliate memberships. These membership categories provide business firms, government agencies, academic institutions, non-profits and other organizations the opportunity to join NABE and to join NABE and receive discounts on membership and meeting fees, access to industry leaders, recognition, publicity, and more.

To Join NABE, or to find out more, please go to

http://www.nabe.com