THE GOOD PART ABOUT BAD NEWS:

SOME RANDOM THOUGHTS ABOUT THE ECONOMY FROM AN INVESTOR RELATIONS PERSPECTIVE

I spent ten years, beginning in 1981, heading the corporate communications efforts of three publicly owned businesses.  In each instance, my highest priority was investor relations.  In 1991, after leaving the third company, NVR, the large homebuilding company where I was Vice President, I started my own investor relations consultancy as a one-person business.  For about the next ten years, until co-founding Qorvis in late 2000, I stayed focused almost exclusively on investor relations.  That amounts to a total of about 20 years concentrating on investor relations, during which I worked with scores of companies, all of which were public or going public.  During that time, I got an up-close-and-personal view of the investment community, and the way I look at the world was changed as a result.  Much of what I learned rushes back into my thoughts as I watch and read about the current financial crisis.  Here are some random thoughts:

JUST WAIT UNTIL NEXT YEAR.

There is a really unique feeling only an IR person can relate to.  It’s that feeling you get when you wake up on the morning that you know your stock is going to get killed because you have to issue very bad news – and there is hardly anything worse than issuing disappointing earnings.

The IR person feels the heartbeat of a stock more intensely than anyone else.  That’s not to say that the stock isn’t a priority concern of others, especially the CEO, but the IR person thinks about it constantly.  It is the focus of their life.  You speak to the investors and the analysts on a frequent and sometimes lengthy basis.  You know what they think.  You know their expectations.  You know what will make them sellers and what will make them buyers.  And you do that in a very real-time world.  Issue a release.  Look as it crosses a screen and becomes public news.  Watch the reaction.

So you know what will happen when the news hits.  You may be off by some increment, but you know when it is going to get killed.

There is also a unique feeling the IR person has when they go to bed the night of the day of bad news.  It isn’t as overwhelming as what you felt in the morning – it’s more like a sigh of relief:  “Well, I get to compare against this 365 days from now.”

The economic news has been so bad since the October market meltdown that the statistics next year have to show an improvement.  There’s some good news there somewhere.  You might have to look real close.

ITS ALL ABOUT EXPECTATIONS

A basic rule that IR people live with is:  “Investors can take good news; they can take bad news; they can’t take surprises.”

Reporting a quarter that compares favorably against the same quarter in the prior year is positive, but if those results are under expectations, the benefit of reporting good period-over-period results is more than wiped out.  Thus, a general rule of investor relations is: “Create expectations so that you can at least meet them, and preferably beat them.”  I’d use that rule if I could set expectations for the national economy.  I’d set expectations as low as possible now and by so doing set the stage for good news by beating those expectations in the future.  It looks to me as if the Obama people understand this rule and are doing their best to keep expectations down.

But setting expectations isn’t as simple as it looks.  Set expectations too low and you have the chance of creating a self-fulfilling prophecy; set them too high and you put yourself in the position of issuing disappointing results in the future.

So, looking forward, the actual numbers that are released will be less significant than the actual numbers relative to the expected numbers.

EXPECTATIONS MUST EXIST WITHIN THE CONTEXT OF A VISION OF THE FUTURE

I’ve written previously about how investors are driven less by the present as they are by the future (if you follow the link, scroll down to the section that is headed: “An Investor Relations Pitch That Failed Taught Me About How To Create Ideas That Can Really Exist”).  Facts and past performance are important and I would never denigrate that importance.  However, people are turned on by visions of the future:  “The Story.”

Thinking about the nation’s economic situation makes me realize that the news and analytical coverage that dominates the nation’s consciousness is all about what has happened and what is happening right now.  Although President-elect Obama has defined some important priorities and a broad approach, he has not yet painted a very clear picture of what the future will look like.  In fact, that picture could be exciting:  a new national infrastructure … new healthcare system … closer to energy independence … a more viable Middle Class, etc.

The sooner we start envisioning a more encouraging future, the sooner we can see start building the more upbeat view of the future that will, in turn, translate into an increase in the confidence necessary to get the economy growing again.

Perhaps Obama will take the occasion of his Inaugural speech to focus less on topical events and much more on his vision for the future.  He could take the opportunity to paint a bold, opportunistic and empowering vision of what the nation can become.  That vision could then become the “story” of the Obama Administration so that all individual achievements can be cast in the context of how the achievement, regardless of how little it might seem today, moves us closer to the ultimate vision.  But to do that, you need the clear vision in the first place.

 THERE IS ONE ESSENTIAL INGREDIENT FOR BUYING-INTO THE FUTURE VISION:

CREDIBILITY

As vital as it is, a vision for the future isn’t enough.  It has to be a vision in which people can believe.  However, what if the economic situation has come on so steeply that we cannot yet believe in anything other than some wishful thinking that it won’t take much longer to find a bottom?  What sort of vision can you create with any degree of credibility at all if that were the case?

The irony is that in the case when things are so uncertain that you can’t even get your bearings, the vision that is bold and far off is often more credible than the less exciting vision that would be realized sooner.  That is because people expect a long series of modest achievements for the bold vision to come true while they expect to see less frequent but more significant achievements sooner to believe that the nearer-term vision will come true.  It’s relatively easy to report numerous small achievements and explain how they move the story forward; it’s relatively risky to place spotlights on less frequent but more significant events that have greater impact, especially when neither their timing nor consequences are highly predictable.

THE TREND IS YOUR FRIEND

Another maxim of the investment community is that things move in trends.  If you believe that (as I do), then you will also believe that the trend of the past will continue into the future.  The trend will continue until the trend flattens out.  Once it flattens out, it will continue to flatten out until the trend changes direction again.  Pretty obvious stuff.  One major problem: when will a trend change?

It is clear to see when a trend changes.  Plot it on a graph.  You can usually see it.  But inflection points become known for sure only when you are looking at the past.  When the inflection point hasn’t yet happened you can only guess when they will come.

That means if you want to get in early on the wave of a new trend, if you act on the basis of what you see when looking into the past, you are likely to act with greater certainty than if you are betting on some leading indicators of the future.  So, the best case scenario is to be able to read the trends accurately as soon as they have occurred and follow the trend from its very early stages.  If you do that, the trend will truly be your friend.

Right now, I think there are two disparate trends in our nation.  Economically, the vast majority of people believe things are very bad and going to get even worse.  On the other hand, politically, the vast majority of people (about two-thirds of the nation) express very strong confidence in President-Elect Obama.  I think it’s going to be difficult for both these trends to continue in their current directions for long.  One of them will have to hit some inflection point.  Either people are going to start getting more confident about the economy and maintain or even increase their support of Obama, or Obama will lose support and views about the economy will become even more depressed.  Which trend will change when?  We can make guesses now, but we’ll know for certain only when we look back.

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THE FOUR VITAL COMPONENTS
OF THE ORGANIC MESSAGE:
An Introductory Guide

In my post “The Organic Message,” I discussed my view that messages can attain a life of their own and that the more they achieve that status, the more powerful they become.  Those messages that achieve a state of “existence” can be considered to have become an “organic message.”  I concluded that post by defining what I believe to be the four factors that are essential for a message to become organic: it must have frequency, relevancy, credibility, and exist within a context.  In this post, I take a closer look at each of these factors.  In an upcoming post, I will analyze the Obama and McCain campaigns from the perspective of these four factors and draw conclusions that can be applied in the forthcoming fight for control of messages in the new economic and political environment.

FIRST OF ALL, THE MESSAGE HAS TO BE COMMUNICATED FREQUENTLY.
BUT THE DEFINITION OF “FREQUENTLY” HAS TO BE RETHOUGHT.

“Reach and frequency” have been standard concerns for communications campaigns for decades.  The logic is simple:  the more a message is communicated the more effective it will be.  Unfortunately, that logic is over-simplistic and wrong.

There are many ways to measure the number of times a message is communicated to its targets.  But whatever measurement system is used, the total numbers are deceiving because they judge how many times a message is delivered – but that becomes less relevant in a world where people are hit by messages constantly from all directions.  The true number of “frequency” to measure is the number of times a message has actually been received.

Gross frequency numbers are not unlike gross sales on a P&L – they are misleading because something (pass-through expenses in the case of the P&L, for example) has to be deducted.  Both objective research and subjective opinions can (and should) be used to determine what and how much should be discounted from whether a message has the frequency needed to become “organic.”  In doing so, the following questions must be considered:

• How compellingly is the message presented?  People are being hit more and more with all sorts of messages wherever they turn.  For a message to be received, it must cut through that clutter – if it doesn’t, does the effort to communicate the message even matter?  Messages compete against other messages in terms of grabbing attention.  For a message to become organic, it must stand out so that it can be received.

• How intuitive is the message itself?  If the message isn’t understood at an immediate and intuitive level, then it isn’t going to get through to the target.  It is important that the packaging be memorable, but if the packaging is remembered and the core message isn’t, the message is not going to become organic.  That is to say, if someone cites an ad because it is funny, or a promotional stunt because it grabbed so much publicity that it becomes widely talked about, or a web page that has great flash, but cannot reiterate those ideas or feelings that were the reasons for the communication effort in the first place, the message may have been delivered but it wasn’t received.  The message needs to break through the packaging and break free of the distribution channel.  To do that, the message itself must be intuitive and immediately understood.

• How constantly does the message get in front of the target?  As I argued in previous posts in this blog, a message can become ubiquitous.  I’ve also written, specifically in “The Death of the Internet,” that when peripherals or components become incorporated into something (the way the caller ID box has been incorporated into telephones and transistors have been incorporated into just about everything) they can become so ubiquitous that for all practical purposes they become invisible and “die.”  That is the case for things, but it is not the case for ideas (messages and stories).  When an idea becomes ubiquitous it can become a “myth” and thereby pick up the components of a true existence.  New communications capabilities allow a message to be communicated through numerous distribution channels so that it can get basically ubiquitous for the people targeted for the message.

However, there is a risk of losing control of the message when different distribution channels are used because in most instances different teams are created for each distribution channel (e.g., an ad team, a grass roots team, a web team, etc.).  Different teams equal different silos, and different silos mean lack of collegiality and coordination.  That isn’t always the case, but the exceptions are aberrations.  The way to combat that risk is by starting with a seamlessly integrated campaign approach from the start.  That way, when measuring how frequently a message reaches an audience, there would be no need to discount for lack of consistency due to the fact that the message is being communicated differently (even if only modestly) from channel to channel.

Starting with a totally integrated approach also allows for another benefit:  there is no need to avoid any distribution channel out of fear of losing coordination.  In the world of information overload, for a message to become organic it needs to surround the audience, and that means using all relevant distribution channels.  It would be a mistake to avoid using any distribution channel for fear of losing control of the message.  It makes more sense to develop or acquire the ability to use the channel.

JUST AS “FREQUENCY” NEEDS TO BE REDEFINED, SO DOES “RELEVANCY.”

There has been an explosion in the number of messages hitting people in all their environments at all times.  For example, unless you got a printed version of this article for some strange reason, you got to this point by being on the Internet.  The chances are that you were hit with several messages on the way here.  Maybe a banner ad.  Maybe some ads at a search engine you used.  If you used a search engine, you also got hit by messages from the listings themselves (some of which were on the first page of results due to deliberate search engine maximization efforts).  Chances are pretty good you also have gotten some alerts about news or stocks or sporting events that interest you.  And maybe some IMs from friends, business contacts or spammers.  Is the TV on while you are reading this?  Maybe the radio.  Somebody may even be speaking to you or trying to get your attention right now.  Whether for a nanosecond when you looked for a way to close or delete a banner ad or other alert or for longer if it actually grabbed your attention, numerous messages have been attacking you.

The only way for someone to cope with so many messages competing for their attention is to go through a prioritization process – very quickly and usually without thinking about it.  Certainly a great presentation helps elevate the priority, as does the clarity of the message, as I mentioned in my first point above.  But people also prioritize by virtue of relevancy.  Imagine that you are a collector of baseball cards.  Here comes a message about a sale on baseball cards.  Here’s a better message because it’s about cards for the old Brooklyn Dodgers – that‘s my team.  This one is even better – it’s about a sale on cards of players on the 1955 World Series team.  Four messages hit you, one of which was more relevant that the other three.  That’s the message that actually got through to you.  That’s the message that has the chance of becoming “organic” with you.

Admittedly, the example about baseball cards is pretty mundane.  But people go through the same process when hit by messages about which car they should buy, which new healthcare plan they should support, or which candidate should get their vote.

Thus, although relevancy has always been important, it is even more important today (and even increasingly so in the future) for two reasons: 1) more messages are fighting for attention so the message doesn’t have a good chance of getting through to the target unless it appears to be relevant; and 2) the ability actually exists to target audiences and personalize messages for a very high degree of relevancy – so that ability should be exploited.

THERE IS CREDIBILITY.  AND THEN THERE IS “HYPER-CREDIBILITY.”

Regardless of how well a message is packaged and how frequently and clearly it is presented to a highly relevant audience, if the message isn’t credible it’s meaningless.

That statement is so obvious that it is very rare for an enterprise or a person to put their credibility at risk.  And even when they do, the risk is considered so great that the effort is hidden or covered-up if discovered.

But over the course of my career in communications I’ve discovered that credibility can be extended from the past and present into the future and thereby help create a self-fulfilling prophecy.  In making this point in the past, I’ve referred to 1968, at the Mexico Olympics, when Dick Fosbury made history not only by winning the gold medal for the high jump, but for creating a whole new way of doing the jump, which has become known as “The Fosbury Flop.”  You can see a clip (little more than one minute) by clicking this link.   What interests me is not so much the radical change in jumping style that Fosbury created (which has become the standard among elite high jumpers), but what he did before he jumped.  What the video to which I linked above shows only a hint of was his preparation at the starting line (see the clenched fist and the way Fosbury is seen rocking back and forth slowly on his feet).  In fact, he stood there for a full four minutes before starting his run.  He did not start to run until he completely rehearsed every nuance of the jump in his own mind.

Of course, the visualization of the jump by itself would not be enough for Fosbury to win a gold medal.  But the combination of his skills and practice plus his visualization of the jump before the actual event of the jump could make the visualization become reality.  In this instance, the credibility that has been projected into the future translated into the future reality.  I believe the same thing can happen with ideas.

In my first post about The Organic Message, in the section titled “AN INVESTOR RELATIONS PITCH THAT FAILED TAUGHT ME ABOUT HOW TO CREATE IDEAS THAT CAN REALLY EXIST,” I described how a meeting with an investment analyst led me to understand how Genentech used credibility to present themselves to him and other investors as a smart investment.  They painted a picture of their future (not unlike Fosbury visualized his jump), and then they described that picture with such credibility that it gained “existence” — and then the viability of the existence of that idea “pulled” the current reality in the direction of the idea/vision, just as the visualization of clearing the high jump bar helped Fosbury win the gold medal.

When credibility is so strong that it can be leveraged to the degree that it enables and accelerates the realization of a vision, I consider that to be more than credible.  I consider it “hyper-credible.”  And “hyper-credibility” – as difficult as it may be to acquire – is absolutely necessary for a message to become “organic.”  This begs for a more complete explanation, and I will provide that in an upcoming post.

TO BECOME “ORGANIC,” A MESSAGE MUST EXIST WITHIN THE CONTEXT OF A STORY.

Consider the properties of a story.  There are some characters and events with which you are already somewhat familiar (a past).  Something is happening now (the present).  But what intrigues you and keeps you from walking away from the story is the prospect of what is going to happen in the future.  The TV show “American Idol” is the perfect example.  Each season thus far, the show has established a life of its own.  It isn’t a single event.  It has a beginning, middle and most of all it has an end that is so compelling that once you get into the story you’re going to stay in the story to see how it unfolds.

I really came to understand the importance of “the story” when I was focused on investor relations (a period of about 20 years).  In fact, investors very often sum up a company in terms of its “story.”  The earnings and releases that have been issued constitute the past.  This quarter’s earnings and the achievement of events that are expected to happen at the current time (for example, a new product release) constitute the present.  The vision is the future.  That’s the story.  That’s what investors buy.

Once I gained that understanding, I learned that I could add life to the story in direct relation to how much I related episodic events to the story.  Consider, for example, the crafting of a fairly mundane release for the announcement of a new VP for HR for a software company.  Here’s the episodic version:

ABC Software Inc. announced that John Smith has been named its new VP for Human Resources.  Prior to joining ABC, Smith was Director of HR at XYZ Corp.  He graduated from this school etc. etc.

Here’s the story crafted in the context of a story:

ABC Chairman Tom Jones said today that the company was advancing its goal to attract the best database software engineers by naming John Smith VP for Human Resources.  Jones said that database engineers are highly recruited and that ABC wants to maintain its reputation for being a great place to work.  He said Smith was recruited from XYZ Corp. because of his success there in increasing employee morale that translated into a significant increase in efficiency etc. etc.

That’s a pretty simplistic example and rather obvious.  However, when it comes to announcing or discussing events that are more complex than the announcement of a new VP for HR, what should be obvious often becomes overlooked.  Consider earnings releases and the conference calls associated with them.  There is no question that the numbers are important – but their importance is not simply in terms of the actual numbers, but how those numbers relate to the prospects for when and to what degree the future that is anticipated will be realized.  That’s why earnings are discounted when inflated by a one-time non-operating beneficial event that has no relationship to future results.  What is true with earnings news is true of all events – they do not exist and cannot be readily understood in episodic terms, as isolated events.  They should be communicated in the context of how they relate to the realization of the future vision.  How they move the story forward.

The more episodes that are communicated in the context of the story, the more intriguing the story becomes.  The more intriguing the story, the more the person who is exposed to it becomes concerned about it and follows it.  As that happens the story becomes more palpable – it becomes real.  It acquires its own existence.  It becomes organic.

In an upcoming post, I will relate these four components to the success of the Obama campaign for President.  Obama won the election, but I do not believe the campaign is over.  I believe he has an intrinsic understanding of the organic message and will continue his campaign throughout his Presidency – unlike anything we have ever seen before. Remember: the rally on election night in Grant Park was far from impromptu.  It was a part of the ongoing campaign.  If you want an alert about when that is posted, send an email to dporetz@qorvis.com, or use the email link above.

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THE “ORGANIC” MESSAGE:

UNDERSTANDING THE CONCEPT

In my last post (“The Message Is The Medium”), I suggested that it is possible to employ a wide variety of distribution channels to communicate messages so potently in terms of packaging, targeting and frequency that the messages become virtually ubiquitous to the people receiving them. I consider such messages to be “organic.”  In this first in a series of posts, I suggest a way to understand what that is all about and what I think is necessary for making a message “organic.”  I expect to devote more posts to this concept, including my thoughts on how the Obama campaign for President is a great case history.  It showed how various distribution channels were used to communicate an extraordinarily controlled and simple message.  It is a precursor to what is emerging as a new cultural phenomenon: a never-ending political campaign where the goal is not so much to get votes on election day as to gain support when and in the fashion needed to defend and promote special interests in the new environment of economic and political change.

TO UNDERSTAND WHAT I MEAN BY AN “ORGANIC MESSAGE,” LOOK AT A COFFEE CUP.

As I write this, as usual, I have a cup of coffee within easy reach.  There is no question about whether this coffee cup exists – of course it exists.  Pick it up; use it to sip coffee; there is no doubt as to its existence.  That cup was made by a corporation.  The corporation also exists; there is no question about that either.  But in fact I can’t prove its existence.  I can’t hold the corporation as I can hold its products.  I can observe the corporation’s headquarters, but that is just the building, not the corporation.  So how does it exist?  It exists as an idea.

The American Philosopher George Santayana, whom I studied in college, would explain that the coffee cup’s existence is open to an empirical test of truth or falsity, and it therefore has a “scientific” existence.  On the other hand, the existence of a corporation is not open to an empirical test of truth or falsity.  It is an idea.  It has what Santayana called a “poetic” existence – not open to a test of truth or falsity, but it exists nevertheless.  Poetic existences rely on a leap of faith on the part of the individual(s) who believe in it.

Early in my career, I concluded that, in the final analysis, communications campaigns are all about creating ideas: the idea of a corporation, the idea of a political philosophy, the idea of needing to buy a flat screen television, the idea of buying fast food because I can get it fast and cheap and it meets my expectations.

So, I began to ask a core question: How can you create an idea so strong that the existence of that idea motivates people to think or act consistent with specific goals?  How can you make that idea actually come alive – make it “organic”?

AN INVESTOR RELATIONS PITCH THAT FAILED TAUGHT ME ABOUT HOW TO CREATE IDEAS THAT CAN REALLY EXIST.

In 1981, I joined Flow General Corporation to head its corporate communications and especially its investor relations program.  It was an NYSE multinational company headquartered in McLean, VA, involved in technology research for the Federal government (mostly the Department of Defense) and what was initially defined as “biomedicine” but was repositioned to “biotech” when the company won the first contract awarded by the NIH to produce human interferon.  At the time, interferon was not only considered a cure for cancer, but it was considered by many (especially the irrationally exuberant investors of the time) to be “the” cure for “all” cancers.  Needless to say, for some period of time, Flow General was a hot stock.

After a long effort, I finally persuaded a highly respected analyst from Hambrecht & Quist to visit our company.  This analyst was very bullish on Genentech, which at the time had no revenues and was reporting major losses as it was in the early stages of producing its then hoped-for first product: human growth hormone.  By contrast, Flow General had an international presence, was the global leader in cell cultures and related products, and generated significant revenues and a profit (before things started falling apart for the company for a wide variety of reasons, ultimately ending with the company being sold-off piece-by-piece).

The analyst traveled to the Washington area not simply to meet with me, but for other meetings.  I was a courtesy stop along the way.  Our meeting was at my office late one day.  The hum that usually exists in an office setting had abated, and as he sat down, his body language made clear that I wasn’t going to have a lot of time to make my points.  So I went right into it:

“Why would you invest in Genentech, which has no revenues, no product, and no sales and marketing capability, and not buy Flow General?  After all, we have an international presence, big line of products, well-known brand, no need to raise capital, we’re involved with a significant R&D project, and we have a much lower enterprise valuation.”  Pow!  I gave him my best shot.

His answer wasn’t about Flow General but about Genentech: “I’ll pay $50.00 for a $200.00 stock any day,” he said.  He said that Genentech Management outlined their vision early in their history.  They identified their benchmarks, and what the results would ultimately be if they hit those benchmarks.  The projected results were manifested in a P&L that would be realized if they produced their products, if they got the share of the market they projected, if they sold it at the price they projected, and if they incurred no more than the expenses they projected.  The P&L showed that revenues would start being generated years out, and a black bottom line would be even further off.  “All I need to do is determine the likelihood of them hitting this P&L, then apply some time cost of money factors, and come up with what I am willing to pay today.  Every time I meet with Management they review where they are on the schedule of hitting their benchmarks, they re-establish credibility with me that they will in fact achieve their goals, and I maintain my view that if they do that the share price will go to $200.00.  At $50.00, it’s a buy.”

It dawned on me that he was less concerned with the company’s current situation and more concerned with the way the current situation related to the prospective future.  But today was real.  The future was an idea.  A vision.  It was a story he was willing to invest in because he believed it would be real.  The story – nothing more than an idea – existed.  And not only did that story drive the analyst to support the stock, but the story drove the growth of the corporation itself.

SO THEN THE QUESTION BECAME:  WHAT ARE THE COMPONENTS OF THE STORY THAT ARE CRUCIAL TO MAKE THE STORY TRULY EXIST – TO MAKE IT “ORGANIC”?

Over the course of my career, I have identified that to “exist” a story has to have four critical components:

1)    It has to confront the audience (one or millions) frequently and with a powerful presentation through a variety of distribution channels;
2)    It has to be relevant and relate to the audience;
3)    It has to exist within a context; and
4)    It has to be credible.

The “more” the story has of each of these four factors, the stronger the story’s “existence” and the more powerful its impact. .In my next post, I will discuss these four factors in more detail.  Use the appropriate link to subscribe to an alert when it is posted.

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