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Archive for the ‘Risk Management’ Category

We who analyze political risk across countries usually look first at big events: terrorism, civil and international war, political repression, uprising, etc. On this, the two extremes of the spectrum are very easy to identify. The stable democracies score high, like the United States or Sweden or Botswana. The other side, such as DR Congo, Somalia, or Pakistan, scores low.

But how do you look into political risk within those relatively stable countries where there is no overt conflict?

You need to get deeper into regulatory risk (the risk that regulations will change), the nitty-gritty of politics (the risk that political disagreements will affect predictable and stable economic environment), regional risk (the risk of political change within certain regions), and wildcard situations (rare but highly consequential events).

In the United States, these factors are showing some movement, as election politics confronts budget politics.

From households to the federal government, the US consistently overspends its budget. The Republicans take the contradictory fiscal position of keeping taxes low but spending gargantuan amounts on overseas wars. Democrats stay reluctant to envision cuts in entitlements and general pork.

As the 2012 election season gathers steam, Republicans and Democrats are sticking to their grounds. Republicans, empowered by the Tea Party spirit, want steep spending cuts without raising taxes. Democrats want higher taxes along with some cuts.

Meanwhile American public debt grows by $40,000 a second.

Many Americans who chant “we are #1” live in a state of denial. As one writer put it, they “think of themselves as rugged individualists in no need of state help, but they take the money anyway in health care and pensions and all the other areas of American life where the federal government spends its cash.”

Unable to find a solution, Congress just keeps on raising that ceiling. In the last ten years, Congress has raised the US debt limit ten times. The public debt has just surpassed the previous limit of 14.29 trillion, and is in dire need of a higher ceiling.

In short, the most powerful country in the world regularly uses extraordinary measures to keep the government functioning.

Both US federal governments and state governments have shut down before. This politics of debt poses an unpredictable financial risk to thousands of large and small companies that do business with the government in almost all sectors imaginable, from healthcare to finance to defense to education to housing and more.

The wildcard situation is a default on US debt obligations. Moodys, the credit rating agency, says the risk of default is low, but not “de minimis.” Expect interest rates to rise anyway.

The short of this story is that the underlying problem is not as economic as it is political. The wrangle among US lawmakers on how to tackle debt raises the risk of regulatory changes as well. And that injects uncertainty into investment decisions: whether one is thinking of buying a home, or deciding to “privatize” one’s retirement pot, or considering setting up a large factory.

The deadline is August 2. I think there’s a 99 percent likelihood that a compromise will be reached, but probably just at the nick of time. Let’s see what happens.

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In the past I’ve touched on the risk of urban unrest (e.g., here). Over the last two years I’ve seen that risk increasing around the world, even though some central banks asserted that the world is on an economic recovery and that the worst of the dangers have passed. That assertion, to me, felt like a sort of ostrich syndrome, by-product of a type of thinking that focuses most energy on economic growth and marginalizes the importance of politics.

Tunisia, Algeria, and today, Egypt are now examples of what I’ve been forecasting: urban political rebellions fueled by issues neglected by the economic status quo.

Tunisia’s Jasmine Revolution was sparked by a young man, Mohamed Bouazizi. He was unable to find a job in Tunisia’s stratified economy, in which a small elite governed with an iron fist, pursuing the philosophy that the government does not owe all that much economically to poorer citizens. He took to selling fruits and vegetables, and even in that, found himself having to pay bribes to corrupt officials. Enough was enough. He doused himself in gasoline and set himself alight. He also set alight a wave of rebellion–the Jasmine Revolution–that overthrew, within a month, a government that had ruled for more than 23 years.

In streets across Algeria, protests against high food prices, corruption, and unemployment have been gaining strength. The government has calculated that in order to survive it needs to accelerate a large public spending program to reduce popular grievances. It remains to be seen whether this suffices. The IMF has warned that to sustain this, Algeria’s economy would need to grow at least 6.5 percent a year.

In Egypt, economic conditions and Mubarak’s decades of sharp political repression have combined into street rebellions. It’s going on as I write: young protesters throwing stones and setting trucks ablaze, and riot police lobbing tear gas and charging the crowds with batons.

What was once a forecasted risk across the region is turning into reality.

One root of this, obviously, is the existence of repressive governments. The other two roots of the anger are the pursuit of conservative economics and the effects of Western foreign policy.

Neoclassical growth-focused economic policy has always discounted the political risks of globalization. In more places than ever before, national economic policy agendas are influenced primarily by a small segment of the financial community and its interests. In the US, Wall Street’s interest to maximize stockholder value has defined its general stance in favor of a small hands-off government. In conversations I’ve had with adherents of neoclassicalism, I’ve often been surprised to see how fanatically this interest is defended as uncompromisable, sacrificed or de-prioritized only at the peril of bringing down the economy.

In most developing countries, the capital market is not as thoroughly organized, nor able to exert such a continuous level of top-grade lobbying power. But the underlying philosophy recognizes growth as the core value. In this philosophy, globalization replaces development. The role of government is to create the conditions under which internal and external exchanges can take place fluently. It is an interest that serves first and foremost the investors and only then the broader public, if it trickles down at all. (Unless you believe in the grand myth that what’s good for investors in invariably good for the populace.)

The problem is not economic growth per se. Growth certainly is needed. The problem is setting Growth up on a pedestal, such that other national priorities are subsumed under it. And this is a world-scale issue. Never has trickle-down theory been so widely accepted within governments across the world. It is much more entrenched now than it was when Ronald Reagan and Margaret Thatcher pursued monetarism as a goal for Western economies. They had to face more vigorous intellectual and policy opposition than what monetarists face today. Neoclassical economics has become established by now not only in the US, but in emerging markets too as an accepted belief that no longer needs defense. (My book, India’s Open-Economy Policy, demonstrated how this ethic or value got entrenched in India in the last decade and a half.)

Promoting growth as value #1 has resulted in a severe neglect of food, healthcare, education, and social stability as direct policy arenas. Governments have taken a backseat in all, believing increasingly that the markets should take care of these. Surprisingly, the mortgage-securities-led recession did not dampen this sentiment. Government’s role here is restricted to performing a bail-out, and not any wider. Government role in food, healthcare, and education have come under fire as instances of big government, whether you consider the Tea Party rant in the US, or public employment in Algeria, or food and fuel subsidies in Jordan.

The political ramifications are stark. The pace of change in Tunisia, for example, has been breathtakingly rapid. As one stunned newspaper editor in Tunis remarked: “Its like night and day, black and white. The changes of the last week have been so huge and rapid, we think we are dreaming.”

America has chosen the right side with a pro-reform and pro-liberty stance in the region. Two aspects of the wider risk picture, however, remains the same. First, citing its security and energy interests, the US has historically suppored most of the Arab repressive regimes that are now in peril. And second, the US has, in the process, lost credibility on the Arab street. According to a 2010 Brookings Institute poll, only 16 percent of the Arab population is hopeful about America’s Middle East policy. In the past, Arab citizens used to dislike US policy but like Americans as a people. The trend has converged dangerously in recent years. A majority now sees both US policy and Americans unfavorably. It’s this majority that’s on the streets now, revolting.

So, we know that monolithic US-backed Arab states face greater political risk. But so does the United States. And mitigation of this particular risk will require a fundamental shift in US foreign policy. Will US policymakers overlook the profound ramifications here, as some Arab tyrants did, to serve narrower interests? Let’s hope not.

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If you are looking at political risk in America ten years down the road, what variables would concern you the most? I’d propose a combination of fiscal and poverty uncertainties, and an underlying demographic certainty. This post is about the two uncertainties; I’ll talk about demographics in the next one.

Fiscal uncertainty

The most recent fiscal years recorded the two highest budget deficits in the US since World War II. The Congressional Budget Office (CBO) estimates that on current trends the federal debt will rise from 62% to 87% of GDP by 2020, and all government debt (federal + state + local) will be 110% [1]. This, according to IMF, is among the worst fiscal trends in the advanced industrial countries.

The uncertainty is about what will end up being done to reduce debt. Though America has been able to borrow easily from abroad, that faucet is getting tighter. President Obama’s Simpson-Bowles commission is coming up with proposals, targeting entitlements (social security, Medicare, etc.), which make up 60% of government spending. Retirement age will be increased, Medicare benefits will decrease, along with a host of other initiatives.

The proposal to reduce government debt prioritizes spending cuts over tax increase. Congress just decided to extend Bush-era tax cuts, which adds to the fiscal uncertainty no matter how one looks at it. 70 percent of the debt reduction is to be achieved through spending cuts. But my forecast is that cuts in spending will largely bypasses defense and security, the largest component of discretionary spending [2]. Although the Simpson-Bowles plan calls defense cuts, including closing one-third of overseas bases, Republicans want to prioritize non-defense discretionary spending, which, according to The Economist, “would entail savage cuts to federal services without cutting the deficit much” [3].

Income uncertainty

Now here’s the wider context in which the “savage cuts” are planned. According to the 2010 census results, median American households have become poorer over the last decade. Between 1999 and 2009, national real median household income has fallen from $54,058 to $50,221. It has decreased in every state except five in which income is derived largely from natural resources, such as Alaska and Wyoming. In places like Michigan, median income has fallen by a drastic 21 percent [4].

As of November 2010, unemployment rate was 9.8%, quite high [5]. Many argue that the effects of the stimulus package are wearing off, which was behind the Fed’s decision two weeks ago to inject another $600 billion into the system. But the proportion of the employed population that has taken limits on pay, such as furloughs, pay cuts, etc., is the highest it has ever been. The latest addition is President Obama’s 2-year pay freeze for federal government workers. This freeze, by the way, excludes defense.

In the next ten years, will real household income recover significantly from this trough? That part is uncertain. In New York City, income has bounced back. In Q1, 2010, average weekly wages there have increased almost twelve times the national rate [6]. The main reason is that the government’s bail out nicely got Wall Street out of the mess it had created in the first place. But Main Street languishes.

A scenario grid

If we put these two axes together, as shown below, we have a crude 4-scenario matrix. Obviously, this is ideal-type—but it helps us visualize political risks.

A Rough Scenario Grid, 2020

The X-axis is about the fiscal uncertainty, specifically, the proportion of non-defense-related budget cuts in overall government austerity measures. The higher the proportion (shown on the right hand side), the greater the negative impact on welfare programs. The left quadrants depict the opposite: greater share of defense and security-related spending in overall budget cuts. The balance is uncertain because it will depend on Republican vs Democratic tussles in the coming years. Nonetheless, both welfare and security-related cuts will directly affect a large portion of the population. As economists Sam Bowles and Arjun Jayadev estimate, in post-9/11 America, 1 in 4 Americans in the labor force are direct or indirect parts of the security industry [7].

The Y-axis is about poverty, specifically the extent to which median households are able to recover from their downward trend in income. The bottom quadrants depict continuity of stagnation or an actual decrease in real income. The top quadrants depict a rosier picture, where the economic stimuli have worked, private sector begins to grow and employ more people, the government as a consequence gets greater income, and in general, all is well economically.

The top left quadrant, “Liberal Peace” is a situation in which real incomes have risen again. Because of higher tax receipts and political decisions, the social safety net has remained largely intact. However, cuts in defense have forced America to become somewhat isolationist, especially compared to the interventionist foreign policies of the 1990s and 2000s. In international relations, US has adopted the approach of “Live and Let Live.”

The bottom right quadrant is “Confrontation.” Median income has stagnated, but social services have been scaled back significantly. A greater proportion of people are floating, and desperate. In addition, large spending on defense and security continues, and America is continually embroiled in foreign interventions. The domestic security industry is also booming. In my mind, this is the politically riskiest combination.

So, which one, roughly speaking, are we heading toward? What other big variables might come into play? And what happens if the any of the other quadrants materializes?

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Note: [2] Discretionary spending is spending that is not statutory, i.e., it needs to be proposed and approved every year. The other references are linked directly to the sources online.

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Many have written over the years about the political risk arising from cultural values. Back in 1992, Benjamin Barber, in his popular book Jihad vs McWorld, visualized violent local politics (“jihad”) as a reaction to the cultural uniformity induced by globalization. Samuel Huntington took the idea to a widely-discredited extreme, when he argued that continental-scale cultural clashes will be the biggest source of political risk in the future.

Such broad culture-talk generates weak arguments because it takes politics out of the equation. Islamophobia is one instance. The conservative paranoia about the so-called “ground zero mosque” uses crass cultural imagery to not only deny constitutionally guaranteed religious freedoms but also portray the act of building a community center as the “triumph” of a foreign culture. The real issue, however, is not culture, but politics: election-season politics, foreign policy politics, and political risk in provoking far right ideologues.

Similarly, Westernophobia is a trick that the Chinese government has been using to deny basic human rights to Chinese citizens. This came to the fore with the award of the 2010 Nobel Peace Prize to Liu Xiaobo. China’s hostile reaction to that award is based on the premise that human rights are not universal, but culturally-defined, and represents Westernization. Here too, the real problem is not culture, but politics: Human rights and political freedom pose great political risk to the regime in power.

In globalization circles, broad culture-talk, i.e., East = X, West = Y, has been a useful ploy to mask the political sources of risk. Uninquisitive minds readily accept that Western Judeo-Christianic values are superior, are spread through globalization, and provoke primitive reactions in the form of “jihad” in the East because either “they envy us” or “they haven’t seen the light”.

Such talk perpetuates many historical inaccuracies. In a recent article in The Sunday Times, historian William Dalrymple points out some of them:

  • The “earliest known experiment in formal inter-religious dialogue” was not in the West, but in India, led by the Emperor Akbar of the Muslim Mughal Empire.
  • Akbar upheld freedom of religion at a time (16th century) when “in London, Jesuits were being hung, drawn and quartered outside Tyburn, in Spain and Portugal the Inquisition was torturing anyone who defied the dogmas of the Catholic church, and in Rome Giordano Bruno was being burnt at the stake in Campo de’Fiori.”
  • “Judaism and Christianity are every bit as much eastern religions as Islam or Buddhism. So much that we today value – universities, paper, the book, printing – were transmitted from East to West via the Islamic world, in most cases entering western Europe in the Middle Ages via Islamic Spain.”
  • The first ruler “to emphasise the importance of the equality of his subjects” was the Buddhist Indian Emperor Ashoka. This was in the third century BC.
  • The huge upturn in violent conflict in the last hundred years was not in the East, but rooted in the West: the World Wars, the ideologies of Marxism-Leninism, Fascism, Nazism.
  • Genocide began with “the worst excesses of western colonialism.”
  • “The European slave trade forcibly abducted 15m Africans and killed as many more.”

The list goes on. The point is, it is not only crude but historically false to portray the West broadly as a freedom-loving culture that is using globalization to spread superior values, and the East as reactionary, backward, developing, and emerging, with hiccups, into enlightenment. And it’s even more false to then predict a giant collision between the two.

Political risk does not come from broad cultural clashes, but from politics, which is about power. As analysts of political risk, we should be aware of cultural trends, but we should ensure that we assess the significance such trends by asking: what does this mean for the competition for power?

We should not assume that risk to Western investment in “emerging” markets is automatic, or endemic, or sourced in cultural assumptions such as, “they don’t understand the value of investment,” or “they’re backward and don’t get what free market means.”  There is no automatic jihad against McWorld. Risk arises because of the power politics that accompany such investment.

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Why should we care about economic development in some poor country thousands of miles away? Usually, we choose from three reasons:

  1. Third World development serves American economic interest. This vein of thinking represents the classic liberal argument for globalization: a rising tide lifts us all. Its essence is captured in the following phrase prevalent in the business world: emerging markets. In other words, first and foremost, developing countries are markets, destinations for goods and services from the United States and other industrialized economies.
  2. We have a moral responsibility. Peter Singer made this argument famously in a 1972 article. This responsibility comes from the fact that we have the power to reduce harm, and not using that power is immoral. Singer shows the immorality of the British government’s choice to spend more money to develop the supersonic Concorde jet than to help people suffering from famine. Another moral argument, by Thomas Pogge, is that we are “causally deeply involved in their [i.e., the poorer parts of the world] misery” — through colonialism, through lopsided use of common natural resources, and through their exclusion from major decisions about global economic governance.
  3. Our security is at stake. There are two variants of this argument. One is the bold assertion, made explicit in the 2002 US National Security Strategy, that poverty provides an enabling context for terrorism. This assumed link fuels US interest to spread political and economic liberalism around the world. The second variant involves the human security approach. The argument that poverty is a main source of human insecurity. Therefore the security of the world cannot be established only by making states secure; everyday humans must be made secure in their lives.

The first two provided the classic rubric of development since the Second World War, from the Marshall Plan to the bi- and multilateral foreign aid programs. The rhetoric during the current round of global development talks, i.e., the discussion of the MDGs during the most recent UN General Assembly meetings, increasingly involves the third logic.

MDGs must be met, we are told, because of the political risks of poverty. Jeffrey Sachs, for instance, relates the urgency to fund (calling it an “investment in peace”) and implement the MDGs to a set of vivid political risks:

… increasing disarray in the drylands of Africa, the explosive violence in the horn of Africa, the militarisation of Yemen, the ongoing bloodshed in Central Asia, the mass migration and obvious crises that are showing up all over the world [that] are going to cause cascading calamities

The notion of “reduce poverty for peace” provided the context of Dr. Muhammad Yunus, the founder of Grameen Bank in Bangladesh, winning the 2006 Nobel Peace Prize. In his Nobel Prize lecture, he said:

Half of the world population lives on two dollars a day. Over one billion people live on less than a dollar a day. This is no formula for peace … terrorism cannot be won over by military action … I believe that putting resources into improving the lives of the poor people is a better strategy than spending it on guns.

You see a similar logic in a micro-scale, too. The Economist recently highlighted what it feels is one of the biggest political risks of not doing enough about Pakistan’s floods: “Washed-up paupers may provide hands for the jihadists bombing its cities.”

And this is what New York Times columnist Nicholas Kristof argues the UN should do more: market poverty reduction as the path to reducing security risks.

[T]he most effective way to market antipoverty work in coming years will be by rebranding it, in part, as a security issue. Rich country budgets are so strained that it’s unrealistic to think that governments will approve much new money — or endorse the excellent suggestion of a financial transactions tax to pay for global health programs — just to ease suffering … But hundreds of billions of dollars will be spent fighting terrorism and bolstering fragile countries like Afghanistan, Yemen and Pakistan. We should note that schools have a better record of fighting terrorism than missiles do and that wobbly governments can be buttressed not just with helicopter gunships but also with school lunch programs (at 25 cents per kid per day). International security is where the money is, but fighting poverty is where the success is.

As a student of globalization and political risk, I agree with the marketing strategy. But with two crucial footnotes: let’s not forget the moral part entirely, for to forget that is to wipe out four centuries of troubling history in North-South relations. And, let’s also not forget the political (rather than developmental) conflicts that continue to engender political violence. Terrorism, after all, is not a monopoly of the least developed countries.

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After the Jabulani experiment (see my previous post), FIFA has further demonstrated examples of how to mismanage political and public relations risks.

FIFA’s recent PR battering came from a set of refereeing mistakes made in some crucial games of World Cup 2010. In the first round, USA was disallowed a legitimate game-winning goal in a match with Slovenia. Brazil’s Fabiano handled the ball illegally in scoring against Ivory Coast.

In the second round knockout games, a clearly legitimate strike by England’s Frank Lampard was disallowed. This goal, by which England would have tied Germany 2-2, would have completely changed the game. In the next match, the referee allowed an illegal offside goal by Argentina’s Carlos Tevez against Mexico. England and Mexico ended up losing badly.

Referee mistakes happen; it’s human. Unfairness happens;  it’s life. But most high-profile sports use technology to minimize errors and ensure the games are as fair as possible. FIFA’s stance, however, has been adamantly against using technology to assist referee decisions. This is inexplicable and outdated.

FIFA’s reaction to the recent events had five aspects. Let’s look at these, for these are things you should not do if you’re serious about managing political and public relations risks.

FIFA’s Five Reactions

1. Ostrich syndrome. Right after the horrendous England and Mexico incidents, FIFA buried its head in the sand and said, “FIFA will not make any comments on decisions of the referee on the field of play.” So, first impression of the public: FIFA just doesn’t care (as long as the money keeps rolling in).

2. Blindfold and gag rule. FIFA’s spokesman Nicolas Maingot later came out to admit that a mistake had been made. From FIFA’s perspective, the mistake was to show on the stadium’s screen the video replay of Tevez’s illegal goal. FIFA said it will be careful to further censor instant replay of match moments. Wow! Impression of the public: FIFA is an autocracy; you should only see, hear, and feel what FIFA wants you to see, hear, and feel.

3. Revisionism. Then FIFA resorted to revisionist writing to cover up what happened. FIFA’s official website reported the Lampard incident as follows: “Meetings between these two sides [i.e., England and Germany] often provide talking points and this one’s came 60 seconds later when Lampard’s shot from the edge of the box struck the underside of the crossbar and bounced down, with the referee ruling the ball had not crossed the goalline.” Really? It just bounced down, and it was merely a “talking point”? It was so blatant that even Germany’s Angela Merkel apologized to the British Prime Minister right afterwards. Similarly, on Tevez’s offside goal, FIFA’s website reported, “Messi was quick-witted enough to return the ball towards goal, where the Manchester City striker [Tevez] was waiting to head home.” With another sleazy sleight of hand, FIFA made it sound as though was a natural, legitimate goal. Public’s impression: FIFA officially doesn’t give a damn about truth.

4. Sticking to guns. As the storm raged further, FIFA kept referring to its decision in March to not introduce any referee-assist technologies. FIFA’s president Sepp Blatter had said then, “No matter which technology is applied, at the end of the day a decision will have to be taken by a human being. This being the case, why remove the responsibility from the referee to give it to someone else?” At a press conference after the England and Mexico incidents, FIFA’s spokesman said, “we obviously will not open up any debate [on the issue].” Public’s impression: FIFA leadership belongs to the nineteenth century.

5. Swallowing words — but not enough. In the last election, Mr. Blatter struggled to get elected, securing just 66 of 207 votes. With his outmoded stubbornness, he has clearly lost the confidence of more big countries now. He will not win the next election, and that will be good for world football. Still, he made a last-ditch effort to rescue his politics by eventually calling up the football federations of England and Mexico and apologizing for what had happened. And then, he said, “it would be a nonsense not to reopen the file of technology,” but restricted FIFA to considering only goal-line technology. FIFA is still unable to put forward a sound reason why it is unable to conduct an open and public discussion on technology. Public’s impression: FIFA is incapable of learning fully.

At the end of the day, as a popular soccer blog put it, “the primary question remains – is it corruption at work or ineptitude compounded by embarrassment?”

What should FIFA do?

It’s clear, isn’t it? FIFA should have come clean after the two games, admitted the referee mistakes instead of trying to cover them up and blaming the public for watching the mistake on a giant screen, and become open to more ideas for incorporating technology.

From a risk management perspective, it should have begun long ago. When every other major international sport embraced technology to assist human decision, Sepp Blatter continued to insist that the “human aspect” of the game must be preserved. One got the sense that in Blatter’s mind, robots are taking over the field.

Tennis uses hawk-eye and a system of player challenges. Olympic races use photo finish technology. NFL uses a television review system. Basketball also uses review to some extent. Cricket uses hawk-eye and a third official referral system. So why not the world’s most popular sport?

FIFA said it will disrupt the flow of the game. But the game already stops at every whistle the referee blows. FIFA claimed that the human mistakes are part of the game, and ultimately, even with the inclusion of technology, humans will have to make the decision. That’s flatly silly. The goal is not to replace humans with AI, but use technology to assist humans. The referees already wear headsets and communicate with each other. That’s technology. Why can’t they refer a controversial decision someone who has a clearer view using TV replay?

Some say that it will increase the cost of administering games. That’s also silly. Football is the world’s largest sport; it makes more money than any other sport by far. If a smaller sport like cricket can afford it, football surely can.

The one crucial lesson FIFA should take from its poor record at risk management it to be more open to ideas going forward. Instead, it is showing a characteristic obstinacy by restricting the discussion to goal-line technology only. It should evaluate arguments about a referral system. If a referee deems an event controversial or unclear, there is no reason why he should not be able to refer it to another official for instant review. The play will stop anyway, and it works well in other sports. And, from FIFA’s perspective, it should give the organization a little window to make more money by selling ad rights.

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The start to the world’s biggest sporting event, the FIFA World Cup 2010, is a lesson in poor risk management.

No, it’s not the political risks of South Africa: The country has managed the event spectacularly. The flop is an over-engineered ball, the Jabulani.

The ball flew over the goalie’s nest…

In every match that I have watched, the vast majority of free-kicks have sailed over the goal. Most corner kicks and other set pieces have overshot their targets. Many long passes have bounced over the heads of the recipients.

Those shots that make it to the goal are harder to predict and grasp. Many top goalies, including Italy’s Gianluigi Buffon, Spain’s Iker Casillas, Brazil’s Julio Cesar, Australia’s Mark Schwarzer, and England’s David James, have sharply criticized the ball.

As I see it, the strategies of FIFA, football’s international governing body, and Adidas, creator of the official ball, might have been overtaken by a marketing obsession that was not grounded in proper risk analysis.

The lure of reward

Adidas wanted to create a ball that’s fast. FIFA wanted to increase pace in an already fast-paced game, a game without the type of “time-out” interruptions you see in typical American sports.

Adidas claims the ball is the roundest and speediest yet. The speed and flight would translate into more goals. More goals = more viewer excitement, especially in the world’s biggest underdeveloped football market, the United States. The hope is that millions of soccer fans, fueled by goals galore in the World Cup, will shell out $150 to buy this sophisticated ball, generating a nice chunk of cash for Adidas and corresponding royalties for FIFA.

The neglected risks

1. Altitude. Adidas blames the ball’s strange movement to altitude. It’s surprising that Adidas marketers and designers did not take this adequately into account. Most places in the world, and especially South Africa, require balls that would behave predictably in different playing conditions. People play football on grass and sand and dirt and streets, and in different altitudes, not inside a lab.

2. Lab-idealism. Which brings me to the second point. Adidas claims that the ball reacts the exact same way each time a robot kicks it. But on the field, human players kick it, and the ball behaves to the unpredictable twitches and curls of each individual foot in ways that surprise the players. The ball’s “Grip N’ groove” technology makes its movement closer to “true flight.” Well, Adidas, this is a football, something you kick around, not launch into space from NASA’s Kennedy Center.

3. Strike Rate. Adidas and FIFA knew the ball would be difficult for goalkeepers to handle, especially in the air, resulting in more goals. But did they count the risk of strikers not being able to predict the ball’s movement?No wonder then, that Brazil’s main striker Fabiano called the ball “supernatural,” before adding, “it’s very bad.” The chart above  shows the reality: scoring is at a historic low.

4. Aesthetics. The aesthetics of the “beautiful game” is important. It’s not just that set plays were overshot. Some of the goals ascribed–fairly or unfairly–to the ball’s unpredictability were downright ugly to watch. Even the Slovenian striker who scored a goal against Algeria said the goal was helped by a ball “really difficult to control.”

5. Goodwill. People are questioning if Adidas is really working for the good of the game. Why fix something that already works very well? Adidas’s strategy and glitzy ads are proving a bit static against the torrent of criticism that the ball is generating. Players have called the ball “a disaster” and even “the worst ball ever.” People are talking about boycotting Adidas products. Adidas has hinted that mainly teams sponsored by rival companies are criticizing the ball. But we fans are watching the World Cup, aren’t we? And the ball’s strange movement is clear. In the days of networked consumers, bad word travels real fast.

6. Revenues. Will all these affect the bottom-line? All else equal, yes. If professional football players are unable to predict how the ball will behave, why would ordinary people buy this expensive object to replace their trusted leather footballs? However, Adidas’s Jabulani sales have been good in the US, but it’d be interesting to watch Adidas’s share price here as the competition progresses.

The need for risk analysis

This fiasco, from both a product and public relations standpoint, could have been avoided if Adidas and FIFA had properly conducted risk analysis as part of their lofty marketing plans, and gave such analysis importance. They would have known then that the risks of spoiling the quality of the world’s greatest spectator event by introducing an untested, unpredictable product is unjustifiable, even from the bottom-line perspective.

The World Cup is not the stage for these experiments. Yes, the Bundesliga and MLS used the ball, but most leagues in the world did not. As Italy’s goalkeeper Buffon said, “The World Cup brings together the best players in the world and to those players you must provide something decent. The new ball is not decent.”

Football is the world’s most popular sport partly because the game is beautifully simple. All you really need is a ball. The whole game revolves around this round thing. But Adidas and FIFA may have taken their eyes off it.

Is Adidas willing to risk a quality flop at the World Cup in order to maximize short-term revenues? Well, in a competitive market, one’s mistake is another’s opportunity. So don’t be surprised if Nike or Puma or Reebok comes up with a glitzy ad of their own that makes fun of an over-engineered ball playable only by Wall-E.

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