Bitcoin - currency, commodity, asset class, or tulip?

As a former International Equity trader with such firms as Goldman Sachs, Credit Suisse and Morgan Stanley, I am often asked my opinion of Bitcoin. I hesitate because a complete answer is complex, nuanced, probabilistic, something that, with our instant media, people are loosing patience listening to. Perhaps this brief analysis will be helpful.

To answer the question of what Bitcoin should be worth, one must first answer the question what is Bitcoin. As it exists virtually, within a trusted and, hopefully, secure distributed database, we have nothing to compare it to. It is easy to jump to a conclusion that it is "like" the US dollar, or gold, or oil, or Yen. But this quick type of judgement misses some important points. Let's examine each possibility.

A currency, such as the US dollar is something that market participants, at least the buyer and the seller agree has a value and can be exchanged for something else such as a good or service. The receiver must be confident that they will be able to turn around and use that currency to exchange for another good or service. If you have a dollar today you are confident it will buy you a beer this weekend so you don't demand your wages at the end of every day so that you can rush out and buy something on the way home.

A fiat currency, such as the US dollar has the backing, in this case, of the United States government which has the responsibility of keeping the value of the dollar stable against prices and, therefore, against other currencies. Ultimately, the value of the dollar is upheld by the stability of the United States.

Day to day value changes would make it difficult to transact. If the dollar were to fluctuate throughout the day it would reduce its value for trade if, say for example, a gallon of gasoline cost four dollars in the morning but only cost three dollars in the afternoon. 

The US Treasury and another entity, the Federal Reserve, have many tools at their disposal to dampen short term market fluctuations. These tools include restricting and expanding the money supply, performing open market operations to buy or sell bills, notes or bonds. They include repurchase agreements, repos or reverse repos, to smooth out multi day volatility as well as provide funding to financial entities. They set parameters under which banks can lend and terms under which investors can margin securities. This is all very complex. I will gloss over the details here but, suffice it to say, these tools have been developed over many years, booms, busts, wars and crisis with many, sometimes painful, lessons learned along the way.

Longer term, the value of the dollar is influenced by the amount of government spending relative to taxes, the growth rates of the US economy and that of the rest of the world. The Fed can also affect interest rates which influences currency flows in and out of the country and corporate capital structures which affect capital investment. Again, complex stuff with many moving pieces. The point is, there is somebody minding the store.

Dollars earn an interest rate. If I put them into the financial system they earn a return. This return has, over the long term, hundreds of years, exceeded the loss of buying power caused by inflation. Put a dollar in the bank today and fifty years from now it will buy more than what it could purchase today. Bitcoin does not earn an interest rate.

So, can Bitcoin be considered a currency? It can be transferred, buyers and sellers can agree on a value versus a good or service. But, are day to day price swings a problem. You will have to decide for yourself but it has caused firms who once accepted Bitcoin to stop taking it. Transferring Bitcoin can also pose a problem. You can't write a Bitcoin check, pull a Bitcoin out of your wallet or use a Bitcoin credit or debit card. Transactions have to be settled on the blockchain which takes hours. Transaction costs are uncertain and fluctuate wildly. This is due to the computer processing necessary and the willingness of Bitcoin miners to subsidize transaction processing for the promise of mining new Bitcoins. The cost to process a transaction is market driven and changes throughout the day. There are plans to buffer the writing to the blockchain to lower transaction costs but there is no universally accepted method for handling smaller or frequent transactions. This issue even caused Bitcoin to spit in two last year creating Bitcoin Core and Bitcoin Cash. These two Bitcoins are now transactionally incompatible so their relative values are not fixed. You must sell one and buy the other at the market price to bridge the widening gap. On the supply side the number of Bitcoins are fixed at a limit that has not yet been reached. When the level is reached the cost of processing transactions may skyrocket without Bitcoin miners subsiding transaction costs. We will have to wait and see what happens but I don't see how this aspect ends well. At least Bitcoin doesn't have to worry about Congress spending into a deficit year after year. But, with a fixed number of Bitcoins there will be a built in deflation as the economy grows. Think about that one.

Can Bitcoin be considered a commodity? Commodities have a use other than holding it. For Bitcoin to be considered a commodity it would be unique in that it does not have a use. Oil is used for energy, wheat is used for food. Their value, like that of everything is governed by supply and demand. Most commodities have a cost of production and a value for use. Higher prices drive supplies to be increased, lower prices increases demand. If the price of oil goes up people by more efficient cars or put up solar panels. If the price of wheat goes up, people switch to corn or soybeans. Of course some commodities can rot and all must be stored and shipped. A somewhat special commodity is gold. Gold is used for jewelry and in the manufacture of electronics and other products. Gold can also be rented out to earn an interest rate. It can also be easily transported and used for barter. No blockchain is required but the buyer must be convinced of its purity and weight. The supply of gold is unlimited but the cost of mining or extracting it is high, relative to its value and there is no disruptive technology on the horizon that will greatly affect this balance.

Is Bitcoin an asset class? This concept is embodied in the idea of investing in Bitcoin. I hear all the time someone says they are invested in Bitcoin. Bitcoin is numbers in a distributed database with nobody responsible for backing it up. I don't know how to address this idea as, in my view, an asset must be something that can be expressed as a value such as a currency or a commodity. I have to leave this to the reader.

Is Bitcoin a tulip? I know, that's a flip comment. But, I would like to express my opinion to close and couldn't think of a better title for this section. In my view Bitcoin will have a lot of challenges if it is going to catch on as a viable currency. First, it is difficult to transfer. Writing to the blockchain takes time and computing power. Someone has to pay for that. The, almost, free ride provided by bitcoin miners will decline and come to an end. The total world energy use devoted to Bitcoin is staggering and unsustainable. If Bitcoin use is to increase computing power must increase. I don't see how such a huge expenditure can be covered by a currency that was billed as being the cheapest to transact. MasterCard, Visa and American Express provide very inexpensive transaction services. I have trouble seeing how Bitcoin can compete with that. Third, there is nobody behind Bitcoin. There no one actively providing stability, monitoring and enforcing against fraud and manipulation. On this last point I have noticed market action that to me is active price manipulation. I cannot prove it as I do not have the data as it's locked up in private and opaque changes but I recognize suspicious price action when I see it. If a government entity somehow gets the ability to look into it, I would bet you a dollar they will find price manipulation. Bitcoin exchanges are opaque which conceals trading abuses and it also protects criminals. The anonymity and the presence active players including North Korea and Chinese nationals looking to get their money out tells you something. Silk Road and ransomware payment demands for Bitcoin are signs.

In my view Bitcoin does not have the elements to become the new world currency. It is too difficult and increasingly expensive to transact, subject to price fluctuations and manipulation and is a safe haven for criminals. At some point enforcement agencies will crack it open, if only to collect taxes. I believe the value of Bitcoin is zero and to zero it will one day go. I just can't tell you when.

What is an Agile Organization, how does one become one

Making an Organization Agile

Click on the above link for the handout PowerPoint slides to a presentation I made to the Project Management Institute Chapter Meeting in March, 2016.

I have been coaching organizations on their Agile development methods for some time. It frequently occurs to me that managers in many firms are under the impression they are Agile Organizations because they have organized their software developers into Scrum teams. In this lecture I explore the questions of what is Agility and discuss various Agile development methods such as Scrum, XP, Kanban, Lean, Lean and discuss how they fit into larger organizational initiatives or frameworks such as Six Sigma, Lean, Design Thinking and Lean Startup. If you like what you see, please send me an invitation to connect with me on LinkedIn. I am available for consulting engagements.

Richard Ellis, PMP PRM CSM SSGB APRM PMI-ACP

Below is a static text version of my talk. The most recently revised version in PPT format will always be available here or at the link above.

What is agility - Transforming to an Organization Agile in the Digital Age

1. 1. Transitioning to be an Agile Organization in the Digital Age Musings by Richard Ellis PMP PRM PMI-ACP CSM SSGB
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3. 2. What is Agility • An Agile Organization is one that can quickly identify and validate customer needs and deliver them to the market quickly. • Agile Development is the ability to discover new products or features for existing products that are valuable to a customer (that they will pay for) and deliver them to the market quickly. • Agile Processes are processes that can quickly adapt to changing customer needs. • Agility applies to Projects, Iterative Development and Processes.
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5. 3. What is a Project and what is a Process • Projects – Have never done this before. • A Project has been defined as a set of interrelated tasks to be executed over a fixed period and within certain cost and other limitations. In other words, a sequence of activities that have a beginning and an end. Projects create change. Projects are where innovation takes place. • Processes – Do the same thing repeatedly. • An Process or Operation creates value by repeating work that a customer(s) wants in a predictable way. • Processes can be experimented, tested, optimized, refined and institutionalized. Properly designed processes are more efficient, predictable and effective than one off project work streams. Processes resist change.
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7. 4. What is Digital • Digital Transformation refers to the application of new technology to create new Digital processes that replicate complex existing processes that may have many discreet process steps. The new streamlined processes focuses on the customer while at the same time dramatically reducing cost. • Digital also enables new entrants to Disrupt mature businesses with innovative delivery models that serve customer need far better and at lower cost than the market’s existing model.
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9. 5. Why is Agility important • Agility allows organizations to quickly respond to changes in the market. • Agility is a key factor for success in any Digital Transformation. The new (last five years) capabilities of Digital open the door to many sales, service and delivery functions to be transformed, delighting the customer at dramatically reduced cost. • Disruption requires Agility. Without the ability to adaptively refine plans, projects will always miss the needs of the customer by the time they hit the market. You are moving into uncharted territory, nobody has the answers, you must find out as you go along. If you wait for the results of your last projects you will miss opportunities by the time you are able to regroup. • All businesses have at least some elements that are ripe for Digital Disruption. If your business does not do it, someone else will. And they will take your most profitable market segments with them. • The best one to Digitally Disrupt your business is YOU. You know more about your clients, market and product than any startup. Take advantage of it or else.
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11. 6. Agile Project Development brings Process efficiency to Projects • Agile iterative and continuous delivery project methodologies bring the efficiencies of repeatable processes to Projects. • By creating a repeatable process for delivering value, project development can benefit from the efficiencies and predictability of production processes. • Teams have the opportunity to increase their velocity (productivity), reduce waste (Lean) and defects (Six Sigma) by improving their development cycle with each iteration.
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13. 7. Definitions of Agility • Business Dictionary 1 - The capability of a company to rapidly change or adapt in response to changes in the market. A high degree of organizational agility can help a company to react successfully to the emergence of new competitors, the development of new industry-changing technologies, or sudden shifts in overall market conditions. • Read more: HR Zone 2 - Business agility refers to distinct qualities that allow organizations to respond rapidly to changes in the internal and external environment without losing momentum vision. Adaptability, flexibility and balance are three qualities essential to long-term business agility. • CIO Magazine 3 – Business agility is the quality that allows an enterprise to embrace market and operational changes as a matter of routine. • Directing the Agile Organisation 4 - (Business Agility is the) “ability of a business system to rapidly respond to change”
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15. 8. The Origin of Agility • The concepts of Agile and Lean come from the Toyota production system initially developed by Taiichi Ohno c. 1948 to 1975 based on Henry Ford’s earlier work starting in 1906. • Over time, the concepts of reducing waste, focus on the customer, reducing variability and continuous improvement have evolved into the management frameworks we see in use today. • Principles of Lean thinking appear in most project management and process design techniques now practiced by companies and Management Consulting firms worldwide.
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17. 9. Agile, Lean, 6Sigma • Agile – increase feedback. The tighter the feedback loops the faster the organization can adapt to changing customer requirements and address poor quality. • Lean – reduce latency. Muda, Mura and Muri • Meetup #LeanNYC - Continuously improving how you deliver correct, high quality products/service to customers when they need them. This is accomplished primarily by eliminating waste. • 6Sigma – reduce variability. Variation increases defects which reduces customer satisfaction. The cost of poor quality is far higher than the cost of controlling processes. While 6Sigma is based on Lean principles, it adds the idea of using a structured data-driven approach using statistical tools to eliminate defects.
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19. 10. Organization frameworks to create and produce goods and services • Those that design processes and manage projects utilize what are called methodologies or frameworks. These are collections of tools and roadmaps that are used to create structure and guide actions of team members. • Elements within methodologies are not mutually exclusive. It is quite common for tools to be borrowed from other methodologies to suit a particular initiative or evolve, over time, into a new methodology. • In project management these include such frameworks as Scrum, XP, Crystal, DSDM, Lean, Lean Startup, Kanban, RUP, RAD, FDD Spiral and long standing or traditional approaches of PMBOK (waterfall) and Prince2. • In process design we have Six Sigma or 6Sigma, Lean, ITIL, DevOps and an assortment of proprietary methodologies such as CMMI and ISO.
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21. 11. Agile development Methodologies • One of the most popular project management methodologies is Scrum. In fact, for many, Scrum is synonymous with Agile. • While Scrum is an Agile methodology, simply transitioning a development team to the Scrum process does not make one Agile. The rules of Scrum are very simple. Real improvements begin to appear when the team is left alone to self organize without outside constraints, or impediments. • To realize the true value of Scrum and Agile there needs to be a shift in culture and management style above the development team level. The organization needs to align its organizational structures and adjust its Key Performance Indicators (KPIs) to promote Agility as a value. Only by measuring Agility and aligning internal incentives will it be able to develop Agile capabilities. With an Agile development team in place, this becomes the capability to quickly identify the changing needs of the customer and communicate that knowledge to the team via a properly prioritized and relevant product backlog.
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23. 12. Scrum facilitates Agility • Scrum facilitates organizational Agility. It does this by shortening the change order cycle to a week or two but, more importantly, it lowers the cost of changes to ZERO. Change orders and revised project plans are not required with Scrum. With this ability, as customer feedback points toward a better solution, the product or service can be improved incrementally quickly and at low cost. • Disruptive delivery modes can be developed and deployed quickly using Scrum. Scrum speeds your ability to deploy change. • Scrum does not inform the organization about what the customer needs, may need or might be persuaded to need. This is the role of those outside of the Scrum team including management, sales, marketing, product development, etc. These needs are communicated to the Scrum team through the Product Owner.
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25. 13. The difference between Agile Project Management and an Agile Organization • There are many firms who proclaim, and in fact, believe, they are Agile because their software development has transitioned to Scrum teams. Scrum is a popular framework because when implemented properly it allows teams to quickly create customer value; but only if requirements that the customer perceives has value are accurately known. An Agile development process dramatically improves development but it does not make an organization Agile. • An organization can only become truly Agile when Agile principles and tools are employed across entire value chains from customer identification to delivery to that customer. The organizational culture must promote, through its values, the ability to react quickly to changes in customer needs and be in a position to deliver those needs to the market.
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27. 14. Scrum - What it is and How it Works • Scrum is based on the principle that people work better when teams are allowed to self organize and do their work as they see fit. The team is left alone to do their work without interruptions. Interruptions create multi tasking. Multi tasking feels productive but it is not. It is very seductive. In reality you are getting a little bit done many different things. However, if you add up totality of what you have accomplished, it is almost always far less than if you had simply stuck to one thing until completion before moving on to the next task. • Development is done by the Scrum Team which generally consists of five to seven members who perform the work. Good teams are constructed so that all of the tasks to complete the work are present on the team. This means refactoring, documentation, QA, usability and performance testing is done by the team. Work is considered complete only when it is deployed to production, integrated to a release or delivered to the customer. • The Scrum Master facilitates the team’s work and has two primary responsibilities. First they manage the meetings (also called ceremonies) and facilitate the production of documents (also called artifacts). Second, and more importantly, the Scrum Master removes impediments that hinder the team from doing their work. These include interruptions of team members (multi-tasking) by management or diversions by other stakeholders such as Dev-Ops or QA. The Scrum Master also works with the Product Owner to insure the team always has work available.
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29. 15. Scrum – How it Works continued • The Product Owner is management’s representative to the Scrum team. The Product Owner provides the development team with a list of products that customers want. This list is called the product backlog. The development team assists the Product Owner in preparing and maintaining the backlog which is called Grooming. Ideally the Product Backlog is maintained as a prioritized list of User Stories that are ready for execution. User Stories are actionable work that has a testable output and can be completed in a time boxed development period called the Sprint. The Product Owner is responsible for ensuring User Stories are relevant, in priority order and truly represent the needs of the customer. • To help the Product Owner create and maintain the Product Backlog, the team breaks down large features, often called Epics or Themes into User Stories. The team then estimates the effort required to execute each User Story using a metric called Story Points.
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31. 16. Scrum – How it Works continued • The Sprint is an iterative production cycle with a fixed duration, typically two weeks. For each sprint the team selects work from the backlog to be executed during the sprint for release to the customer. Only User Stories that have been completed and accepted by the Product Owner count in evaluating the team’s productivity. The team is careful to select how many user stories to take on for a given sprint. • Development teams hone their collaborative work dynamic so over time they dramatically increase their productivity or, in the words of Scrum, their Velocity. Velocity is a measurement of completed Story Points per sprint. While Story Points often sound like Work Hours, there is a difference. Hours always take 60 minutes. Story Points may start out taking one hour but as the team matures they deliver User Stories in less time. Typically teams increase their velocity 2x to 5x within three to five sprints. • The Product Owner uses customer feedback on delivered products to help them select and prioritize user stories for future sprints. This helps deliver greater value to the customer sooner than many other project management methodologies.
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33. 17. Difficulties when implementing Scrum • Scrum is famously simple and elegant in concept but is notoriously difficult to do well. Here are some of the things that happen when companies transition to Scrum from a Waterfall or less formal methodology. • Teams work on two sprints at a time. Sometimes QA is treated as a separate function. Team members fix bugs from the prior sprint while working on the current sprint. Too much work in process along with high team utilization rates are the biggest threats to efficiency. • As teams get larger collaboration decreases. Recently I was asked to be the scrum master for a team at a large financial institution. The team looked like this. There were 19 team members in New York, led by a lead developer who had an assistant developer. There were further members in India. Because of the size, only the two leads in New York and the one in India were allowed to participate in the daily Scrum. • Product owners do not understand what the team is building. The link between identified customer value and products to be delivered gets broken. The value chain is no longer continuous or able to form a correcting / iterative cycle. • Management assigns the PO because they don’t want to “waste” their time being the interface themselves. Like the game of telephone, something is lost with every communication. • Team does not grasp time goals of project.
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35. 18. Scrum difficulties continued • When a team lives one sprint at a time they don’t have the perspective of the entire project and how the major pieces must fit together. • Not enough time to do sufficient sprints to create a truly usable project. Being told Agility will allow teams to do more in less time, Product Owners and Management overestimate the results of work that has yet to be performed. • Development team member turnover. • Institutional memory disappears in a transactional employee organization. Hiring consultants by the hour seems like a great economy but you loose a lot when the project ends and you kick your team members to the curb. • Product owner turnover. • Management places other work demands on team members. • Project Leadership (Scrum Master or Project Manager) turnover. • Management looses interest.
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37. 19. What is DevOps and where does it fit • Companies who implement Scrum development teams as a first step on their path to Agility often find their improved teams turn out way more product than the organization can handle. The organization can feel like its drinking from a fire hose. • DevOps, short for Development-Operations is a movement to strengthen the collaboration and coordination between the Development teams who create software and the Operations teams of IT who deploy software into their environment and manage the organizations production IT systems. • Software developed using Waterfall based development was usually sent to IT Operations in large discreet chunks. IT then had the luxury of time to deploy it and integrate it into their operations.
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39. 20. The origin of Kanban • Kanban means “card you can see” in Japanese. It is a series of visual signals to trigger and regulate (smooth the flow) of actions. • First used in the Toyota production, colored cards are used to move goods from one area of production to another and to indicate which materials were running low, triggering a Just In Time (JIT) replacement order. • The JIT inventory restocking model was the original purpose of Kanban cards. • Kanban also helps regulate flow and fosters gradual improvement. These are Lean principles. • The most recognizable feature of Kanban is the Kanban Board.
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41. 21. Using Kanban Boards to help Scrum iterations flow more smoothly • Kanban boards helps Scrum users by visually displaying work in process making it easier to limit bottle necks an eliminating the problem of starting too many user stories to complete in the current sprint. • Developers take user stories, usually represented by a sticky note, from the product backlog column on the left and move it from column to column to the right as milestones are met. • There are strict limits on how many sticky notes can be in any one column at a time. Backups at any one step, such as QA, are quickly seen and prevented.
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43. 22. Principles of the new Kanban c.2005 • Visualize work – By depicting processes and work flows as columns and rows, a quick glance by anyone will show progress and bottlenecks. Sticky notes for each task move across the board from left to right. Anyone can contribute and easily see backlogs, work in process (WIP) and product about to be released to the customer. • Limit Work in Process – By limiting the amount of work at each step in the process, the time it takes to travel through the process is reduced, primarily by reducing “task switching” which takes the human mind a long time to fully effect. Multi-tasking is a fraud. It feels like you are getting a lot done as you are touching so many things when in actuality you are spending much of your time mentally changing tasks. • Smooth Flow – A steady flow eliminates bottle necks (wasted time and resources) and reduces crunch times when mistakes happen as people and processes are stretched beyond capacity. • Continuous Improvement – Metrics generated as each work unit meets a progress step (column on a Kanban Board) allow analysis of the system to monitor current performance and identify points of future problems. Optimizing the first three principles increase capacity and reduce opportunities for process failures.
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45. 23. The new Kanban – Another Fork in the Road – Kanban without Scrum • Kanban without Scrum further enhances Lean flow by eliminating the time boxes that neatly separate iterations. Products are delivered continuously on an as completed basis. • Without Scrum sprints there are no regularly scheduled customer demonstrations, customer acceptance, sprint planning or retrospective meetings. These meetings are held as necessary and as convenient. This eliminates fixed schedules which often lead to meetings that have too small or too great of an agenda. Here again, flow is enhanced.
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47. 24. The concept of a Value Chain • Wikipedia - A value chain is a set of activities that a firm, operating in a specific industry, performs in order to deliver a valuable product or service for the market. • Katherine Arline1 - A value chain is the full range of activities – including design, production, marketing and distribution – businesses go through to bring a product or service from conception to delivery. For companies that produce goods, the value chain starts with the raw materials used to make their products, and consists of everything that is added to it before it is sold to customers. • Michael E Porter2 -Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discreet activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation.
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49. 25. What is Lean and Lean Startup • Lean is the practice of continuously improving how you deliver correct, high quality products/service to customers when they need them. This is accomplished primarily by eliminating waste. • Lean Startup preserves precious capital and resources by testing customer requirements to avoid the waste of producing something that is not valued by the market.
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51. 26. Lean Startup embraces the entire Value Chain • Lean Startup views the value chain as the complete process of identifying the customer, creating and validating a product, producing it and actually selling it to a paying customer. Free samples don’t count. • Lean Startup seeks to conserve resources by encouraging quick failures in as small a way as possible. Created for startups it is equally applicable to large agile organizations as multiple Lean Startup processes can co-exist in an Agile organization. • Lean Startup is based on the idea that you need to accurately identify customer demand in order to deliver real value quickly. To do this you need to identify the smallest product that a customer is willing to pay for. This is known as the Minimum Viable Product (MVP). The MVP is then delivered as quickly as possible in order to judge its value and provide feedback to be able to improve, decide to produce or scrap the product.
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53. 27. Lean Startup- The tested MVP • Lean Startup extends the traditional concept of the value chain to include MVP identification and validation. You can’t have an efficiently profitable value chain without knowing (testing) the product’s value to the customer. The customer must be willing to pay for the MVP in some way for it to be valuable. • The identification of a minimum viable product (MVP) is only the first step. The MVP must be tested with the customer to determine if there is real potential value for the product. Surveys or focus groups are often employed to validate that the customer really wants the proposed product and is willing to pay for it. Sometimes vapor ware, mock-ups and wire-frames are used. • If it is not possible to test the MVP before committing to creating and deliver the product, production is done in as small a scale as possible. Failures are best when they are fast and cheap. Startups do not want to bet the farm on an idea that has not been validated. • If the customer does not validate the MVP, it is replaced with another one which is then tested until a viable MVP is found. This is called a Pivot.
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55. 28. Lean Startup- deliver then measure the true value of the MVP • Deliver the product to measure the market’s actual receptiveness. This is called “validated learning”. This feedback completes the Build-Measure-Learn BML cycle used in Lean Startup. • The purpose of Lean Startup is to create value that a customer is willing to pay for. Measurements of output and delivery to specifications are meaningless. • Measurements of success and failure are made using Innovation Accounting which helps entrepreneurs measure progress, set milestones and prioritize work. It also measures how much value is created for the input.
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57. 29. Integrating Agile Development to the Customer by using Design Thinking • To be truly Agile, customer satisfaction and customer needs, both known and unexplored must be the central driver of processes, process change and projects within an organization. Sadly, this is rarely the case in heavily silo-ed companies. IT most often listens to the voice of management not the voice of the customer. • A movement to bridge this gap called Design Thinking is helping companies improving customer journeys as customers cross silo-ed functions. Design Thinking uses many of the Lean Startup tools, integrating them into a framework that turns customer responsiveness into a competitive advantage. • Customer-centric design creates a customer experience by weaving together touch points from many different functions within an organization. No single internal stakeholder has a view into all of the components necessary for a seamless and profitable customer journey. Dedicated cross functional teams influence many internal groups to bring about the transformational mindset changes that are required to create a true competitive advantage. • Customer Persona is often used to simulate customer journeys through a customer journey map. Monte Carlo simulations can be run to identify bottlenecks and customer frustration points. The customer journey path tree can be optimized to improve flow and throughput.
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59. 30. “Scaling” frameworks to expand Agile Project Management • Agile Scaling extends Agile Development from the team level up to the program level. • In large organizations, agile project management practitioners are often challenged to integrate their initiatives with others going in their organization. Multiple scrum teams work on the same or different products, often • noticed their products often do not meet actual customer requirements or • In large organizations multiple development teams experience difficulty coordinating their production. Product Owners often serve multiple customers represented by siloed management groups. • To be more effective, project leaders have increasingly turned to Lean Startup and Kanban as we have seen. • Another approach is Agile Scale frameworks
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61. 31. Agile Scaling Organizations • Agile Scaling frameworks are recent and are quickly evolving into a mature discipline. If your firm runs multiple scrum teams, a plan for scaling will help coordinate development across silos and be more responsive to management. • Several authors and organizations have developed their own scaling framework. Each one has its adherents. A good approach may be to pick one of these frameworks and stick with that one. Your choice should depend on which of these organizations you feel comfortable with for coaching and training. • Scaled Agile Framework (SAFe) created by Dean Leffingwell http://scaledagileframework.com/author/deanleffingwell/ • http://ScaledAgile.com • Integrated into Rally Software • Agile Scaling Model (ASM) - Agile Alliance http://agilealliance.org
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63. 32. Agile Scaling Organizations 2 • IBM Agility at Scale - Scott W Ambler – IBM Rational • Large Scale Scrum (LeSS) created by Craig Larman https://www.scrumalliance.org/community/spotlight/craig- larman/june-2015/less-agile-or-less-agile • Promoted by the Scrum Alliance • Disciplined Agile Delivery (DAD) created by Scott Ambler http://www.ambysoft.com/scottAmbler.html • http://www.disciplinedagiledelivery.com/introduction-to-dad/
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65. 33. Making an Organization Agile • Richard (Dick) Ellis, PMP PRM CSM PMI-ACP SSGB • http://www.linkedin.com/in/richardellis86 • richardellis86@gmail.com

Reversion to the Mean, why the post WWII age of prosperity isn’t coming to an end

Investors often speak of a concept called “reversion to the mean”. Simply stated it is the theory that says prices, investment returns and physical systems eventually return to their long run average. Mathematicians and physicists can go on and on as to why it’s true and how it works. While most of us understand this as a simple concept and acknowledge its validity, we often fail to apply it when forming our views of the future.

There is a natural tendency to see current trends as going on somehow forever. If this were true we all would have starved in a famine, died in a war, the oceans would have boiled away, or frozen solid. We are here because systems are self-correcting.

We collectively saw housing prices as always rising. A popular justification at the time is the idea that there is a finite amount of land and populations will always increase. Maybe, but not at the pace we were experiencing before the housing crash. According to Robert Shiller citing 400 years of housing price data, it is arguable whether this is even true.

We know prices going up forever isn’t possible yet it’s a difficult concept to shake.

People have an innate belief in the Second Law of Thermo Dynamics, which loosely states, things always get worse. The law is valid but it only applies to a closed system where external inputs are not permitted. It works when we set something in a glass-sealed vessel and not let light or heat get inside. A nice experiment but not something that can explain the world. Yet, when we look at the trend of something we have this law in mind even thought we are only looking at one dimension of a system. External inputs always intrude to bring things back into line. Sometimes we are that external force. Houses fall apart over time and left to their own devices will. But, we paint the house and mow the lawn. Not to put too fine a point on it, the second law is not a guide for living.

Still, we see downward, or upward trends as taking on a life of their own. We see global warming,; we all die and the oceans boil away like Venus. We see oil supplies running out; we will all freeze to death, in the dark. We see Communism; it takes over the world. We see gridlock in Washington; we see the end of democratic civilization.

There is a commonly held belief that politics somehow used to be a gentile sport, often romanticizing the Lincoln – Douglass debates. The real story is in times of stress politics become polarized with nasty exchanges, backstabbing and subterfuge. And then when times are good political differences narrow and polite discourse returns. Deals get done. The 1980’s were like that.

Looking at the current polarized political climate, our economy is struggling, the middle class is shrinking and troubles in the Middle East seem unresolvable. Given this, people have very different ideas on what policies will bring prosperity and security. Some feel the Government should spend a lot more money to invest in our future. Others feel we have already over committed Government resources and have mortgaged our future to our children who won’t be able to pay off our debt. So spend more or spend less, not so easy to compromise on.

I submit the gridlock in Washington is due to a difference in opinion rather than an unstoppable decline of civilization. Given the genuine diversity of opinion of what to do, no wonder there is gridlock in Congress and between Congress and our President. I hate to say it but I feel they are behaving rationally.

As far as the vitriol and rudeness being exhibited by our elected leaders today, it’s also cyclical. In good times people are polite as their differences are small. When times get tough views can differ widely. Those of us who are old enough can remember a more cooperative time in Washington when legislation was bipartisan and members of Congress were polite. Those times will return. I just don’t know how or when, but they will.

At the time of our nations founding there were considerable arguments, often heated or underhanded. The idea of what this new nation would look like was unclear and there were genuine different points of view. Ultimately it was the concept of equality and joint destiny put fourth by the Iroquois Indians that contributed strongly to the ideals.

President John Adams suggested that all (of Alexander) Hamilton’s overheated ambitions and impulses might be attributed to “a super-abundance of secretions which he could not find whores enough to draw off!”. He also called his own Vice President Thomas Jefferson "a mean-spirited, low-lived fellow, the son of a half-breed Indian squaw, sired by a Virginia mulatto father." James Callender, a writer secretly funded by Thomas Jefferson wrote that John Adams was a rageful, lying, warmongering fellow; a “repulsive pedant” and “gross hypocrite” who “behaved neither like a man nor like a woman but instead possessed a hideous hermaphroditical character.”

Polite politics will return. The Chinese will not eat our lunch in the same way the Japanese failed to. The middle class will grow again as skills match opportunities. The world will become safer as it has year after year for a century, despite what the headlines say. I don’t know how, just call it faith in reversion to the mean.

Now that the Mortgage origination settlements are winding down, Mortgage Servicers and MSR owners become the next target of enforcement and legal action

Mortgage Servicers are finally attracting enforcement and legal attention for what they did after they underwrote and securitized mortgages. Until recently regulators have focused on the origination of faulty mortgages for regulatory action. Now they are starting to go after improper mortgage servicing after the loan closed. Banks may be in for a bumpy ride.

The new player in the regulatory landscape is the Consumer Finance Protection Bureau (CFPB) created by the Dodd-Frank Act. On July 21, 2011 administration and enforcement for the Fair Debt Collection Practices Act (FDCPA), the Real Estate Settlement Procedures Act (RESPA) also known as Regulation X and the Truth In Lending Act (TILA) also known as Regulation Z were transferred to the CFPB. On January 10, 2014 a major revision and extension of RESPA rules will take effect. Here is a link to CFPB issued PDFs and Videos describing all of the new rules they are responsible for and ready to enforce.

The CFPB is a powerful new enforcer immune to the influences of Congress and its Lobbyists

The major banks use a servicing platform to generate invoices, allocate vendor charges, receive and allocate payments, pay vendors and assess penalty fees. These platforms were designed during a time when the vast majority of people were able to pay their mortgages. The underlying technology is old and cannot radially be modified to become more flexible to incorporate complex rule structures. As long as default rates stay at their normal low level, this is not a problem.  The housing boom and large numbers of improperly underwritten mortgages that borrowers soon couldn’t make payments on quickly stressed bank servicing operations.

Previously, the very few borrowers that couldn’t pay their mortgages had their file manually reviewed and calculated by specialists in Bankruptcy and default servicing. Court imposed payment plans were examined so each payment could be allocated properly. As the volume of default servicing was low, it was not a problem keeping this as a manual process.

Unfortunately, these legacy platforms are fundamentally incapable of correctly servicing loans where the homeowner is in Bankruptcy and with recent platform ad-ins only marginally better when there is a simple default.

When the crisis hit, the servicers relied on their servicing platforms to correctly allocate payments to principal, interest, escrow and fees for borrowers who were in and out of bankruptcy at various points. As it is, the laws governing payment treatments change depending on the bankruptcy status of the homeowner. These legacy servicing platforms cannot apply these laws to the court level detail which is necessary. Some Bankruptcy Districts are pay all, some just pay Court determined amount inside of the Bankruptcy plan, some treat escrow separately. In short, the legacy servicing platforms have no idea. One misapplied payment and the servicer is out of compliance with the Bankruptcy Court. And so the snowball of errors begin.

The major banks violated bankruptcy law when they collected money they were not entitled to. Every bank who filed an inaccurate proof of claim is criminally liable. There are moves within agencies to go after these servicers and the fines contemplated are huge.

Here's just one example from the library of 30 causes of harm to homeowners in Bankruptcy which can be found here. It's called the 21 day rule and is harm #5 in the library template. When a borrower is in Chapter 13 Bankruptcy, the court requires 21 days notice if a payment is to be increased. The reason does not matter, it can be an interest rate reset, an increase in escrow, forced placed insurance, an inspection fee, anything.

If notice is not given, the servicer is not entitled to that increase and will not then or in the future be entitled to the increase. Under FDCPA there is also a $1,000 per month fine, plus legal fees, for collecting or attempting to collect money where the Bankruptcy Court was not electronically notified by a 21 day rule filing.

Several of the SIFI banks did not file any 21 day rule notices for YEARS. This is a fact and is electronically discoverable on the the Federal Bankruptcy Court website.

The widely known National Mortgage Settlement of 2013 was preceded consent decree originally signed by five of the largest mortgage originators Wells Fargo, Citibank, Bank of America, JP Morgan Chase and Ally Financial. These decrees from the OCC and the Federal Reserve ordered the banks to hire outside auditors referred to as the Independent Consultants (IC). The ICs were to uncover inappropriate charges collected from homeowners and return the money to the borrowers. These consultants spent a year and hundreds of millions of dollars to demonstrate to the OCC that the banks had done little wrong.

How is this possible? The focus of the IC inquiries was Robo Signing. As it turns out, the engagement contracts between the banks and the ICs that were approved by the OCC specifically excluded bankruptcy process legal errors and many of the arcane but sizable causes of harm to homeowners that occurred during the default phase of a mortgage. It was argued the servicing platforms were automated therefore incapable of error. So, the manual review of mortgage files found few problems. An industry list of 30 servicing errors that harm borrowers was not reviewed or remediated.

Before this nonsensical conclusion could be written into neatly bound spiral binders, the OCC shut the IC work down. The OCC declared victory and announced that harmed homeowners would receive a compensation amount determined by formula depending upon their classification. Homeowner compensation for the harm caused beyond Robo Signing has not yet been addressed. This has yet to play out in the courts and CFPB enforcement. I'm told here I have the sequence of events and the players slightly mangled. I will update this section shortly.

In the last year the major banks have been shrinking their mortgage operations by selling off mortgage servicing rights MSR of home loans to specialty servicers. These servicers which include Nationstar Mortgage Holdings, Ocwen Financial, Walter Investment Management, and others. Under the new Basel III capital requirements, banks will see a capital charge for owning servicing rights as MSRs as an asset will no longer be considered Tier I Capital. Servicers are not governed by Basel III so they will not have a capital charge for holding MSRs. The old adage holds true, assets always flow to the entity with the lowest capital charge.

MSRs are a hot commodity. For operating a call center and payment facility a servicer can earn a nice annuity. In a zero interest rate environment the returns are good and long term. Unfortunately, analysts of MSRs have not taken into account the Operational Risk of managing a regulated asset with potential embedded legal liabilities. Some MSRs purchased from the large banks have payment amounts that are in violation of the 21 day rule. How many I will leave up to the reader to investigate.

MSR servicers acquiring rights from an originating bank are now responsible to bill the correct amount under the 21 day rule for every invoice going forward. This is true even if the error of missing the 21 day notice occurred two years ago before they owned the servicing rights. How is a servicer to know? MSR purchase due diligence should include an audit of all loans where the homeowner had been in Bankruptcy at any point during the life of the loan. Then, check for electronic 21 day rule filings for all payment changes. If any are missing, return the MSR to the seller.

The 21 day rule is just one of the 30 areas of harm in the library. Each must be checked in order to ensure a buyer has an MSR free of embedded Operational Risk.  The value of the MSR portfolio can be severely compromised very quickly with just a few distressed loans that were improperly serviced buy the seller. If a buyer doesn't discover these problems during the put back window, it's the buyers' problem.  Caveat Emptor

Richard Ellis PMP PRM CSM PMI-ACP

Attention buyers of Mortgage Servicing Rights MSR from banks reducing their residential mortgage operations.

E-bRM has developed an automated program to evaluate the accuracy of loan status claims made by sellers of Mortgaging Servicing Rights MSR by banks to other banks, hedge funds, private equity. We find hidden value in these purchases by uncovering servicing defects, allowing the buyers to have their purchase price adjusted.

E-bRM Mortgage Servicing Rights MSR valuation consulting

Richard Ellis PMP PRM CSM PMI-ACP

Mortgage Servicers to pay back overcharged homeowners and those who lost their homes to foreclosure

Obscuris vera involvens or "truth is enveloped by obscurity". Have you ever been late with a mortgage payment then seen fees pile up like cars in a rear end collision from that single event? This accounting is illegal but this is how Mortgage Servicers' systems record payments and assess fees. Most people paid the multiple fees then made sure it never happened again. Others, not so lucky, lost their home through foreclosure.

Legacy Mortgage Servicing system on autopilot, unable to change its path

To straighten out a file, a bank employee or consultant must manually piece together every transaction, sort them into a time line so he or she can then figure out what should have happened when before correcting any errors. If that person doesn't perform this task perfectly, they may inadvertently harm a borrower with possible legal liability to their employer. Additionally, this work is time consuming, there are not enough experienced auditors to reconstruct and correct the files of millions of homeowners and former homeowners who have been at the loosing end of the banks' legacy systems.

Last year the largest mortgage servicers signed consent agreements with the Office of the Comptroller of the Currency OCC or the Federal Reserve FRB or both. In it they promised to sample files, identify systemic errors and pay back homeowners for overcharges and improper foreclosures.

To do this work the servicers engaged Independent Consultants IC. The ICs' work is on going and they are due to issue their final reports to the OCC and the FRB soon. In addition to the above, they were charged to identify inaccurate borrower files and calculate remediation to borrowers. Their decision on remediation must be accurate as their word is final, over riding the bank's own results. Borrowers will demand fairness, either individually or, more likely, through class action court challenges.

Institutional Investors such as Mortgage Backed Securities MBS holders are also covered by the consent agreements. The ICs are required by the OCC and the FRB to calculate bank and third party overcharges and fees that were deducted from foreclosure proceeds that are sent to the Institutional Investors. One IC however, Promontory Financial Group, has publicly stated calculating remediation payments to Institutional Investors is not part of the IC mandate. We will see.

To achieve the level of accuracy necessary to insure every borrower file is properly reconstructed and computed requires a level of repeatability and auditability that no human can achieve. Even if there were enough workers, no auditor can know all of the application rules, itself a complex moving target.

Independent Consultant striving to fairly treat every borrower

In short, automation is needed. Automation can extract the necessary data from various sources, reconstruct payments, charges and events into a time line. This output can be given to the auditors for their analysis. Or, automation can take the next step. Automation can apply contract rules, Federal, State and Local laws, court judgments, institutional investor agreements, Fannie Mae and Freddie Mac rules. Such things as SCRA compliance, Bankruptcy Court payment application schedules, mortgage modification assurance, and legally or contractually permitted charges can be applied and tested.

Unfortunately, mortgage servicers, borrower rights and creditor rights law firms, and GSEs have had no automated way to sort out errors in their processing systems, until now. Our data extraction, normalization and file reconstruction services have solved these and other problems. E-bRM has a comprehensive collection of analytic templates and software as a service applications for most mortgage servicing bottlenecks. Let us prove it. Click on the link below to see a presentation of some of the mortgage servicing issues we can help solve.

E-bRM Mortgage Servicing Data retrieval and normalization service.

Richard Ellis, PMP PRM

LinkedIn Profile of Richard Ellis

Information on PMP certification

Insight into PRM designation

Governance, Risk and Compliance - GRC

“It's not the things you are afraid of that will kill you” - Mark Twain.

I have fielded a number of calls this week from recruiters looking for someone to implement a GRC process for some company. Before I can ask about firm's board governance towards risk management and accountability, the questions turn to SQL, Java and, well you get the idea. If a firm does not set its overall risk tolerance, understand its risk profile and empower managers who take risk to manage the risk, software isn't going to improve anything.

Whether one calls it GRC, Governance, Risk and Compliance, ERM, Enterprise Risk Management, ERP, Enterprise Risk Planning, or OR, Operational Risk, understanding and managing the sources of risk created within an enterprise is a human endeavor requiring judgment. This first requires a strong tone from the top and board engagement. Management must be empowered and incentivized to continuously focus on direct and indirect sources of risk. They need to be able to articulate it to the board and proactively mitigate unproductive and unnecessary risk. Risk taken on to further value creation must be evaluated, balanced with other priorities and monitored. This requires motivation, expertise and persistence.

Risk Management systems are useful but limited to its internal algorithms and the the data it can analyze. Computers are great for alerting people to quantitative risk metrics but not so good at identifying or evaluating qualitative risk discussions. It is these unstructured risks that have the greatest likelihood of destroying an enterprise's value. Often events that have never happened before or last occurred before the collective memory of the programmers are the ones we really care about.

Quantitative Metrics are appropriate for managing many types of risk such as credit risk, market risk and weather. Unfortunately, rare events, the identification of bubbles, binary events, and any discussion that follows the words “assuming a normal distribution” can not be properly quantified. It's human nature to tend to ignore that which can not be neatly defined or measured.

Qualitative risk discussions and evaluations are at least an equal partner with quantitative tools. Quantitative methods work well with describable probability distributions such as stock prices, interest rates or hurricane prediction. Companies often embrace quantitative measurements of risk for a number of reasons.

First they can be seductively simple. Isn't it nice if management can be presented with one or a few numbers that will tell them how much risk they are taking on to produce the performance measurements listed in the same report?

Second, employing even state of the art quantitative tools can be handed off to a committee, subordinates or a contractor. Meaningful qualitative analysis requires extensive and continuing input from management and the board. Outside contractors sell comprehensive risk management tools that primarily collect and evaluate quantitative risks. If this is what they sell, the reasoning goes, this must be what we need.

Third, the government employs quantitative measurements almost exclusively. This is not because regulators don't understand holistic risk practices and the value of qualitative tools. Rather, compliance is a legal and administrative process. In order to enforce a rule on anyone, it must be written, consistent, testable and audit-able. Unstructured risk discussions and evaluations do not easily fit within the regulatory structure. I think the best efforts to mandate qualitative risk reporting are the requirements for form 10K which includes 3.1.2 Item 1A – Risk Factors and 3.1.8 Item 7 – Management's Discussion and Analysis. While very useful to investors, these reports can be vague, irrelevant or difficult to compare across organizations. There is simply too much leeway in their preparation and a lack of timely updates on what should be included going forward.

Governance, Risk and Compliance begins with Governance. It requires the right tone from the top, engaged (incentivized) management and a cultural shift to risk being understood as a necessary but controllable input to value creation. Without this one is left with being legally compliant but not risk intelligent.

Richard Ellis, PMP PRM

www.E-bRM.com

www.linkedin.com/in/richardellis86