The Musings Of An Opinionated Sod [Help Me Grow!]

What Business Has Learnt From The Mafia.

In the past, I’ve written quite abit about how certain ‘undesirable industries’ could teach the bluechip mob a thing or two about profitability, growth and consumers and so I thought I’d highlight [with huge thanks to Nick @ MSN Money] how the Mafia run their powerful and [whether we like it or not] successful business.

We may not like what they do … or what they stand for … but interms of how they run their major corporation, they sort-of have to be admired.

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The Mafia isn’t just one of the most remarkably successful criminal organisations in the world, it is a remarkably successful business outfit too.

For a century, the authorities in Sicily, Italy and the U.S. have tried to stamp it out, with little success. While most of the trades it operates in are either totally illegal or a little shady, it has used some very effective conventional business practices to make them thrive.

For a start, the Mafia understands economics. It knows, as do all criminal gangs, that it is almost impossible for the law to get between a willing buyer and a willing seller. That is true from ten-year-olds trading half-smoked cigarette butts in the playground, right up to international drug smuggling and vice.

Arrests or seizures are an overhead, they merely put the price up. Illegality for crime gangs helps them by cutting down competition and keeping margins high.

Cash Is King

Whether you trade with Del Boy or the Godfather, cash is king. They’ll take anything, so long as it goes by the name of readies, greenbacks, mozuma, crinkle, or folding stuff. Try any cheque-and-guarantee card nonsense and that ‘good as new‘ Bulgarian VCR will not be yours. It’s partly about tax and money laundering, but it is also about cash flow.

Cash flow is one of the most neglected aspects of business. Poor cash flow sinks 20 firms for every one torpedoed by weak profitability, as companies like Jarvis and Minorplanet Systems have discovered. Tomorrow’s great biotech discovery is often delayed by today’s excessive cash burn.

Likewise the technology boom showed that however much the Internet was going to change our lives, to profit from it you need products that were going to generate returns soon, before those big loans fall due. The Mafia would never had fallen for the idea of technology jam tomorrow. For them a high tech investment is two East European computer hackers and a second-hand PC.

Basic Industries, Visible Profit

In Italy, the Mafia controls an estimated third of the waste disposal business, and between 1994 and 2003 reaped £18.7bn of income from it, according to a recent conference of prosecutors in Rome.

The choice of industry isn’t a coincidence. Waste disposal was a key Mafia asset in the U.S. state of New Jersey for many years too. In both countries it has strong cash flow, easy enforcement (“You don’t pay today, we tip the rubbish on your garden”) and the chance to launder through its books some of the gains on totally illicit activities elsewhere.

Basic industries such as haulage, quarrying, construction and waste disposal are often Mafia targets for the same reasons that other investors are attracted to them. They are easy to understand, have a low level of capital consumption and generate lots of cash. When managed effectively, they churn out big dividends for investors.

Loan Sharking

One other consistently profitable industry enjoyed by the mob is loan sharking. With huge rates of interest and ‘imaginative’ enforcement methods, money just piles up. However, the Mafia doesn’t have that market to itself. A number of doorstep lenders in the U.K, owned by firms such as Cattles Plc and Provident Financial, also lend money to those whose income is so scanty and credit rating so low that they wouldn’t qualify for loans from other lenders.

They too charge enormous rates of interest, sometimes 75% or more a year, though they would undoubtedly be miffed if you called them loan sharks. The firms argue that they provide a service no-one else would, and that the charges are high to cover the many defaults.

That isn’t the whole truth, however.

So-called ‘sub-prime’ lending remains a highly profitable business. Many clients are encouraged to take on loans that they cannot afford to service, and end up much worse off than they were before. Unlike the Mafia these doorstep lenders don’t break the legs of defaulters, but they do sometimes take their cars or furniture.

Protection Money

Up and down Italy, shopkeepers, restaurateurs and other businessmen have to pay monthly protection money or face having their businesses damaged. If that sounds unique to criminal gangs, think again.

If your company supplies a supermarket, you will be expected to fund the special offers (buy one, get one free or 50% extra free) that supermarkets decide to make. Frequently, demands to fund promotions are not just couched in terms of free produce, but are for cash, sometimes thousands of pounds per product line.

Then there are ‘overriding discounts’, which are cuts in contract prices paid as soon as volumes reach certain thresholds.

In other words, the more you sell, the less you get paid. However, if sales fall short of expectations, supermarkets usually expect compensation too. Head they win, tails you lose. Refuse to pay, and you lose your contract. For most suppliers loss of such huge volume is too damaging a prospect to consider. They pay up.

Omerta

Omerta, the Sicilian oath of silence is taken very seriously. Among the Mafiosi honour demanded that you never squeal or snitch to the authorities – whatever the reason. Those that do, like the late Tommaso Buscetta, the former Mafia boss who spilt the secrets of the Sicilian gangs, are marked out for death.

It might sound like a long way from any business practice. Yet the suppliers to supermarkets, despite seething about the terms of business extracted from them, are too terrified to complain. However one did. Yorkshire-based mushroom packer Greyfriars lost its contract with Tesco for refusing to pay ‘listing fees‘ allegedly demanded by the retailer for selling Greyfriars’s products.

Bravely, Greyfriars wrote to the Office of Fair Trading saying that Tesco practices were in breach of a voluntary code put in place a year to stop suppliers being squeezed. Tesco denies that its practices are in breach of the code, and accuses Greyfriars of sour grapes because it lost the contract. Certainly, the firm is unlikely to get big new supermarket contracts easily.

High Level Contacts

All businesses like to lobby politicians for changes to rules or regulations that they don’t like. Some just donate cash to political parties hoping that in government they will get the message and not do anything to upset their paymasters.

Businessmen like Lord Sainsbury and Lord Haskins of Northern Foods, have made successful attempts to marry business and political careers without creating any obvious conflict of interest. Perhaps most successful of all is Dick Cheney, U.S. vice president, who used to head oil services group Halliburton. That is the same company which won the lion’s share of U.S. government contracts in Iraq, much of it without going through competitive tendering processes.

The Mafia would have loved to be so brazen. However, its connections tend to be utterly secret. Former Italian prime minister Gulio Andreotti, 85, was last year acquitted of charges that he helped the mob. However, the ruling left untouched an appeal court ruling that the seven times PM had up until 1980 “… a genuine, lasting and friendly disposition towards Mafiosi”.

Market-Rigging

Market-rigging, like bribery, is always illegal. When executives play at being the New York Gambino and Genovese clans and hold secret meetings to fix prices and divvy up markets, they are running high risks.

While there still seems to be price fixing in Europe in obscure chemicals, judging by EU raids on units of Shell, Bayer and Exxon Mobil in 2002, the really big stuff was in the U.S.

Animal feed supplier, Archer Daniels Midland, settled out of court for $400m in a civil case that alleged it rigged the market for high fructose corn syrup. This is an additive found as a cheap sweetener in everything from Coca-Cola to baked beans.

ADM has been here before. The company was fined $100m in an earlier Federal anti-trust action over price-fixing in the market for food additive citric acid and animal feed supplement lysine.

Though three executives suspended jail sentences in 1999, the company was given immunity from any other criminal charges. That is why the fructose law suit, which arose from the Federal case, was a civil action.

So there you have it … for all the evil that the Mafia may perform, their business practices are not so different from those [occasionally] used by some of biggest and most respectable companies in the World.

Given the plethora of management books out in the marketplace today, I am surprised some clever dick hasn’t launched one inspired by Mafia Methodologies … though in terms of ruthlessness, they still are probably softer than some of the top execs at blue chip companies, ha!

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