on the make

tales from the past, and thoughts on state capacity

continuing to make notes in the direction of trying not to embarrass myself at a conference of much cleverer people …

The case study in my mind is of something called “Debt Free Direct” from the 00s.  Basically, a smart and entrepreneurial solicitor from Manchester called Andrew Redmond noticed that he was doing a lot of “Individual Voluntary Arrangements” (a form of personal bankruptcy, talking loosely, under which a UK retail client didn’t have to go through the actual bankruptcy process if the lenders agreed to take a writedown on debts which were obviously uncollectable).  He also noticed that the banks and subprime credit card lenders tended to be quite hospitable to IVAs, because they were much cheaper to execute than spending a couple of years of wasted collections effort followed by a full-fat trip to the High Court.

Consequently, Redmond and a few colleagues set up a company to industrialise the marketing of IVAs.  It was a huge advertiser on daytime TV. (I have fond memories of a meeting that I and a friend had with a hedge fund manager, where we were trying to explain that bad debts for UK subprime lenders were about to rocket.  We just dragged him out to the reception area, where Sky News was on a silenced TV all day, and sat there until a DFD ad came on – and then another one – and then one of its competitors …).

Debt Free Direct had an IPO, and was a very popular stock to own among bank analysts – it wasn’t strictly in our coverage universe so there weren’t so many compliance problems, but it was very definitely on our radar screen because it was, for a short while, a pretty material driver of bad debt costs for the whole industry.  We were also, for the most part, able to get out reasonably near the top, largely because we were all talking to the bank CEOs and were able to get a sense of when they were beginning to take it seriously.

And this was the thing; the guy who first told me about DFD, in the early stages, was already aware that it was a share to own for a good time, not a long time.  It was very similar to something called “Claims Direct”, which had been around in the 1990s, and which provided the service of parcelling up insurance claims into a form which looked attractive for insurers to pay off quickly and cheaply.

The problem with both these operations is that they were operating in a niche that was small and regarded largely positively while it was a niche, but which became a threat when it was industrialised.  When IVAs were a small thing, mainly used by people who had really really got way over their head and had no chance of paying anything back, it made sense for the banks to mainly wave them through on the nod, and save the costs of checking them.  When they started becoming a material percentage of the entire loan book, eventually the UK banking sector started to realise that they needed to check some of them out in order to make sure that they weren’t just being used as an easy way out for borrowers who could have made at least some payments but didn’t want to (or who had just been attracted by the advertising which promised an easy and more or less cost-free way to get rid of your credit card debt; who wouldn’t like that!).

And of course, doing the paperwork on anything more than a tiny fraction of IVAs destroyed the overall economics (particularly since, as the sector took off, a huge proportion of the debt management sector’s revenues were spent on advertising and lead generation).  So this nice little earner was, more or less gracefully, wound up.

What interests me is that this is a real case study in information, scale and the industrialisation of decision making – I might have put it in the book if I could have found a location to do so.  Something was outside the management information set until it started to scale up, and then it created enough of an alarm signal that the banks had to reorganise their information gathering to find out what was causing the problem; then they had to take action and change their operating procedures.

My topic of interest here is the possibility that profit maximisation in the professional services sector is a major problem for state capacity in the Anglosphere countries, and I think Debt Free Direct was a perfect example from outside the public sector of the way in which someone clever can sometimes find nuggets or profitability (or even a motherlode) in a regulatory or legal system. (I like to imagine Redmond shouting “Eureka” or “there’s gold in them thar hills” as he realised that the IVA could be turned into a product and mass-marketed).  I think that, for some reason and in some way, what’s missing in the public sector (and particularly in the planning system) is the capacity to detect when this has happened, or to translate awareness into action.  So when little bits of legal process turn into earners, they either don’t know or can’t change. I find myself coming back to some of the things I thought about Mariana Mazzucato’s book about consultancy.