<Enron 2001: An Inside View

Description: To many executives in the energy industry, Enron is a name that generates strong emotions. The very mention of the company in energy circles throughout the world creates reactions ranging from paralyzing fear to envy. For many of these firms and individuals, Enron is an entity to be both feared and emulated.

This report focuses on the Enron’s growth from inauspicious gas pipeline company to
aggressive global market maker and look ahead, to the Enron of tomorrow.

This report was the first and only competitive analysis report about Enron Corporation. It was written during the summer of 2001 before Enron went down. It is the genesis of Peter Fusaro’s New York Times best seller What Went Wrong at Enron but has much greater depth and insights into Enron.

Contents: Executive Summary

Introduction
Enron Corporate Culture
Enron, Market Maker and Deal Broker
Enron’s International Initiatives
EnronOnline
Enron Deal Structures
Recommendations and Conclusions

1 Enron Background
1.1 Introduction
1.2 The 1980s
1.3 The 1990s
1.4 Transformation in progress
1.5 Lay and Skilling – a powerful double-act
1.6 The departure of Skilling
1.7 Conclusions

2 Enron Corporate Culture
2.1 Introduction
2.2 Overall organization structure
2.3 Origination group structure
2.4 Hiring process
2.5 Review process and bonus structure
2.6 Salary structure
2.7 Conclusions

3 Enron, Market Maker and Deal Broker
3.1 Introduction
3.2 Two tools: mark to market and fair value
3.3 Structured financing and returns
3.4 Optionality
3.5 Deal approval
3.6 Conclusions

4 Enron’s International Initiatives
4.1 Introduction
4.2 International efforts
4.3 Conclusions

5 EnronOnline
5.1 Introduction
5.2 Turning ideas into gold
5.3 Market maker
5.4 EnronOnline – the Epitome of Enron
5.5 Conclusions

6 Deal Structuring at Enron
6.1 Introduction
6.2 Structured commerical transactions
6.3 Being a market maker
6.4 Enron’s market influence
6.5 Maximizing market viability
6.6 Structured financial transactions
6.7 Secrets to negotiating with Enron
6.8 Venture captial and investments
6.9 Conclusions

7 Recommendations and Conclusions
7.1 Introduction
7.2 Enron gets results
7.4 Benefits of unique culture
7.5 Drawbacks of Enron’s culture
7.6 Is the Enron model right for your organization?

Sample From the conclusion of the report, the following is written: Enron is a unique company. There are parts of the organization, most notably its entrepreneurial culture and financial performance, that executives and managers of energy and commodity firms across the globe admire and would seek to replicate. There are other aspects of the business, such as its ruthless corporate culture, that are not held in such high esteem. Even though some debate the overall merits of the organization, few can question the success the firm has achieved in recent years. Enron is essentially an imperfect knowledge-based learning organization. The company is highly aggressive and can move markets and develop opportunities. It has increasingly moved into new commodity markets that are very immature and illiquid and where initial profits can be significant. The question is how far can this commoditization process progress? The company, in its current incarnation, has practically become the energy ‘dotcom’ as it attempts its metamorphosis into a wholesale trading virtual entity with few assets. Enron gets results Over the past seven years, Enron’s annual revenues have grown from $8,984 million in 1994 to $100,789 million in the year 2000. This represents a 1,121.9 per cent growth in revenues during for the period. While Enron has significantly, its dramatic increase in revenues during the year 2000 can be attributed to substantial gains in its Wholesale Energy Services division that includes its EnronOnline business. While Enron’s financial performance has been first rate, to many, these results have been overshadowed by the "unappealing" aspects of its organization and culture, specifically, its lack of humanity towards employees. Since Enron views its employees as tools to generate profits, the firm has little patience for individuals who don’t contribute sufficiently to earnings. This rather extreme performance-based culture has produced both benefits and distinctive drawbacks. Benefits of unique culture The Enron model is unique because it institutionalizes qualities and characteristics required to produce extraordinary results. The firm’s endless pursuit of the ‘next big deal’ has created a culture that puts considerable value on learning. Its employees do not limit their efforts to replicating the same deals done by other firms. Instead, Enron’s staff is constantly looking for new markets and opportunities that facilitate above average market returns and ensure their employment. Enron’s actions have created an en
.vironment where successful risk taking is highly rewarded, while individuals who take risks and follow business paths that prove to be unsuccessful receive lower than average bonuses or may find themselves without a job. There are numerous examples of Enron taking risks on a corporate level in an attempt to be innovative and earn significant returns. In recent years the firm has "stumbled" in several attempts to commoditize businesses. Examples include: - water; - bandwidth; - oil; - retail electricity; - LNG; - cement. In each, Enron made a significant financial investment and aggressively entered the market with people and resources. In these instances, Enron was premature in its attempt to make a market for a specific commodity or market that did not have sufficient interest or trader participation to provide the liquidity necessary to create a successful market. While Enron posted losses in each of these areas, the firm’s ability to "cut its losses" early has allowed the company
to quickly redirect resources into other, more profitable, areas. However, Enron has also had many positive effects on the energy industry. The company has successfully brought financial risk management and innovation to a conservative and formerly commodity-based industry. In effect, Enron has forced energy companies to rethink the markets they participate in, as well creating more liquid commodity markets. If imitation is the greatest form of flattery, Enron must be satisfied that many companies, such as Dynegy, Williams and Aquila, are now attempting to emulate the Enron model. Another obvious benefit is that Enron has followed the "McKinsey approach" of seeding its alumni with other firms with which it deals. Whether this a strategic plan, or just coincidental in nature, many ex-Enron employees find employment with other energy trading companies throughout North America taking with them the market making skills they acquired at Enron. Enron alumni have made both AEP and Southern
Company (now Mirant) highly skilled energy trading companies. While Enron does lose trained personnel, this is easily compensated by the creation of greater trading liquidity. Enron would rather own a smaller part of a larger market than dominate an illiquid market over time. Drawbacks of Enron’s culture Enron’s culture creates a form of corporate paranoia and desperation amongst its employees directly or indirectly involved with deal origination. Each employee knows that their level of total compensation, and perhaps their job, will be in jeopardy during their annual PRC meeting. With little or no job security, each originator desperately attempts to close a deal, or possibly two, that will add to Enron’s corporate coffers. To make matters worse, if this individual works in a poorly performing group, the odds against making successful deals become even greater. In an effort to better their odds, individuals in poorly performing origination groups will spend a considerable amount
of time and energy attempting to transfer into better performing groups. This creates a mercenary and selfish attitude within the firm. This highly results oriented and politicized environment has created significant employee turnover within Enron. The end result is that only 20 per cent of the organization has more than five years experience with the organization. While some may say this is a good thing since only high quality producers are retained within the corporate ranks, this constant employee turnover can be destructive to overall employee morale and the sustained operation of the firm in the long-run. An often-voiced opinion is that Enron’s Achilles heel is the way in which it treats its staff. Other energy trading companies such as Morgan Stanley have kept a very capable core energy-trading group intact over the years and added superior talent when market conditions warranted. This approach to maintaining and cultivating in-house talent in a more supportive environment has
the potential to produce the same trading goals as Enron’s "cutthroat" corporate culture. Another issue is that Enron’s business decision-making processes are firmly entrenched with upper management. The recent loss of several senior executives may have an adverse impact on the depth of Enron’s management, creating a situation where deal approval is left to less qualified individuals. Is the Enron model right for your organization? Enron is a complex organization, one that cannot be viewed as either "good" or "bad". Enron’s culture is a direct result of the decisions made by the firm’s management who strive to be innovative, create greater profits and enhance shareholder value. Enron’s management has deliberately chosen to implement a corporate culture that creates an aggressive and nimble firm, a firm capable of changing its strategic direction in pursuit of the next new market or mega deal. From this examination of Enron, it is clear that the firm has many advantages in terms of
its operation and performance, and a few very large negatives pertaining to its structure and corporate culture. While rival firms might be intrigued with Enron’s relative success in recent years, they might not what to adopt the Enron model on a wholesale basis since it would totally change their organization and scope of operation. Such firms could, however, adopt the best features of the Enron model, specifically, the features that promote and empower employees to behave as entrepreurial opportunists. In order to succeed in an increasingly competitive environment created by deregulation on a global basis, energy companies must make their employees think like enfranchised entrepreneurs and not as salaried workers. Entrepreneurs are known for creativity and a sense of urgency in everything they do. These are qualities that workers in successful firms should possess. Employees who think of themselves as "salaried" workers tend to have a false sense of security and believe they are
automatically entitled various forms of compensation. As such, they tend to be less innovative.

they all ended up in the loony bin

1. Julia Says:
   March 29th, 2010 at 5:05 pm

   they all ended up in the loony bin
   References :