The Agency Problem – Part 1

A case that may both demonstrate the reason for budget overruns and the general lack of controls within the IOF is the story when Brian Porteous, the President at the time, decided (apparently single handedly) to spend money over the anyhow loss making IOF budget on the SportAccord convention in 2013.

Brian decided to ignore the 2013 budget that was approved in July 2012, just 6 months before. A budget that he himself proposed as Vice President at the time of budget preparation.

The Council members, according to the Council minutes, did not blink, as in many other cases when the President made interesting decisions. The member federations had no meaningful mechanism to react.

As a result of the extra €14,100 spent on the SportAccord Convention the budgeted loss  of €52,400 for 2013 has become a loss of €66,600.  There was still some reserves left to spend.

IOF Budget 2013

Before we get into details of this story, I think that it would be useful to introduce some theoretical background.

The Agency Problem

The core issue around the IOF is what business literature calls the Agency Problem. This is an unavoidable feature of large organisations where owners  (shareholders, or in our case 70 member federations) entrust an agent (CEO/President, Board/Council) to run the organization on their behalf.  Unavoidably, the two parties will have different interest and the agent will run the organization in a way that is not optimal for the owners. Conflict of interests and moral hazards are frequent problems. The lost value to the owners is called the Agency Cost.

Continue reading “The Agency Problem – Part 1”

Ten Years of Underperformance – Update

Over the past month I was too busy to deal with much more entertaining things than documenting the mismanagement and slow motion crash of the IOF. But now I have some time to continue with this gruesome task.

The Council had a meeting on 13-14 October. The published minutes (#186 here) provide additional information and data on the Council attitude to IOF finances.

The Council minute looks like a good old Soviet party communique: all good news, as long as you do not scratch the surface. It reinforces the feeling that the IOF leadership considers finances as their little internal business members should not get involved in.

The 19 page long minutes do not even mention the IOF – Letter to members July 2017 sent by the IOF President after the last Council meeting. The one that was carefully sent after the Presidents’ Conference regarding financial issues and the major revision of the budget. It was a “no event” that the IOF leadership apparently prefer to forget about and erase it from publicly documented history.

The key message of the minutes that revenues are up and expected to rise, while costs are largely under control. The funny bit is that the additional costs mentioned (regional event medals, higher overseas event advising costs, SEA for the World Games) are ones that should have been known when the 2017 budget was prepared. The fact that IOF Leadership uses them as an excuse for higher costs just underlines the feeling that the 2017 budget submitted to the General Assembly for approval was – mildly speaking – not thought through.

Yet, with all the improvements 2017 is still expected to show only a small positive result estimated at around €9,000 (85% below the €66,000 budget), and the updated forecast for 2018 was €30,000, that is over 80% lower than the €169,000 presented to the General Assembly. As expected, the GA approved original budget numbers were carefully not mentioned in the Council minutes.

Now it is official that Council expects to underperform their own budget by a 10 year combined gap of over €500,000 as a result of not meeting their own targets in any year since 2009.

IOF Net income vs budget - update

It is also interesting to zoom in the (2016-18) budgets presented to the General Assembly 2016. The gap between Council promises and delivered results has exploded.

Continue reading “Ten Years of Underperformance – Update”

Ten Years of Underperformance – Skill or Will or Something Else?

The decade long erosion of the financial stability of the IOF discussed in the previous post did not come as a result of a sudden event. It was the result of continuing underperformance of the IOF leadership who missed the budget target for 10 years in a row.

Please see updated numbers to this post here.

This post has turned out to be longer than expected. I had little time to write it, so I could not make it shorter. Here is the summary if you are also pressed on time:

  • The IOF Council has missed the budget target every year since 2009. The target set by themselves, and rubberstamped by the General Assembly without change.  It would take a miracle to achieve the targets for 2017 and 2018. That makes 10 years of missed targets. 10 years of continuous underperformance.
  • It is unlikely that this was due to lack of skills: the leading figures of the IOF during this period (Ake, Brian and Leho) all prided themselves with business background.
  • Looking at recent events one may get a feeling that the IOF leadership just did not care about the budget approved by the GA, hence they could not possibly deliver it:
    • In a letter to member federations about the difficult financial status of the IOF signed by Leho and Tom, the “GA Budget 2017” is different from the 2017 budget published as approved on the IOF website in the minutes of GA 2016.
    • In the same letter they claim that in October 2016, 2 months after presenting the 2017 budget to the GA, they already started to modify it “to get costs in line with expected income”. There was not a hint of an unexpected event that could have modified expected income in the 2 months after the GA. This gives the feeling that the Council presented a 2017 budget to the GA that was not realistic, but the GA approval gave the Council free hand to modify it to their liking.
    • The outcome of budget modification(s) started in October 2016 was not shared with member federations until 14 July 2017, nine days after the  Presidents’ Conference in Tartu. This gives the feeling that the IOF leadership decided to avoid any open discussion about budget modification with the member federations who approve the IOF budget.

Here are the details of the story that may make you wonder how long IOF member federations will put up with being treated like this.

The numbers

The Council missed their own target every year since 2009, for 8 consecutive years. They already conceded that 2017 will be missed (€66,235 surplus was budgeted, but only €9,767 was expected in July 2017). It looks also highly unlikely, that in 2018 the budgeted €169,010 surplus, that is 2.5 times(!) higher than ever achieved in the IOF’s 56 year history, will be delivered. That gives a solid 10 consecutive years of missing the budget as shown on the chart below.

For updated data please see this post published after the October 2017 Council meeting. 

IOF Net income vs budget v2

 

This level of  underperformance is most remarkable under any circumstances. It is even more remarkable, because
a) the IOF was run by experienced managers according to their CV, and
b) the budget was set by the Council themselves, only rubber stamped by the General Assembly.

Officially it is the General Assembly who sets the budget, but in practice it simply approves the one submitted by the Council. I could not find a case in recent memory when the GA modified the budget. I could not even find a case in recent memory when the GA has even debated a line item. There were some high level remarks now and then, but everything was approved as suggested by the Council. So we are not talking about some stretch targets not being met. No, simply the IOF leadership could not deliver for 10 consecutive years on their own promises made with no external pressure. Remarkable.

Skill or Will?

Seeing this level of underperformance one should ask whether it was due to missing skill or missing will. Could it happen that the leadership of the IOF did not have the basic skills required to prepare and deliver a budget for a quite simple small operation? Or was it due to lack of motivation or intention to deliver on their promises, and follow the budget approved by the General Assembly? Or was there something else behind all this?

Let’s try to find some pointers that may help us decide.

Continue reading “Ten Years of Underperformance – Skill or Will or Something Else?”

How financial stability was lost

Over the past couple of days I managed to reconstruct the process how financial stability of the IOF was lost over the past couple of years. As I discussed in my previous post, IOF finances are on a knife edge. Net cash reserves are close to zero level, and debt has jumped almost ninefold from €29,000 to €252,000 in one year from end 2015 to end 2016.

But that was not always so. A decade ago the IOF had sufficient net cash reserves to cover around half a year’s operations. Since then the combined effect of rising expenses (3 fold in 10 years!) and evaporating reserves (over 80% lost since end 2008!) has resulted in the current situation.

Financial stability has been lost for many years to come. A serious revision of the expense structure and many years of reserve building required to regain the stability the IOF enjoyed a decade ago. But that is unlikely to be delivered by a leadership involved in losing that stability.

The chart below shows how the net cash position of the IOF has decreased close to zero over the past decade due to increased costs and lower reserves. For details see the previous post. It has been adjusted for the revised 2017 forecast. Obviously, the downward revision of expenses by €100,000 was forced due to unachievable revenue targets presented to the General Assembly in August 2016.

IOF Expenses vs net cash v2

This chart shows an optimistic view of the situation. As discussed in the previous post, the actual net cash position was probably less than half of the book value at the end of 2016  due to items that were unlikely to represent cash equivalent value.

Important to note that it took a decade to build up reserves to a level that provide stability (at least half a year of expenses). It is also interesting to note that the decade long erosion of the financial position of the IOF correlates closely with the rise of the position, and thus the influence of the current and previous presidents. That may reduce the likelihood of meaningful short term adjustment of the financial strategy of the IOF.

There are three additional thoughts I would like to share on this topic:

  • the importance of reserves
  • the triple whammy of IOF finances
  • the value of financial stability

Continue reading “How financial stability was lost”

IOF Finances – on a knife edge

In the following couple of posts I have to come back to IOF finances. Over the past two months I talked to several members of the Council. I had to realize that either they did not understand the severity of the financial situation, or did not really appreciate it. “We have lot’s of cash in the bank” and “I am positive that everything will be fine” were the typical replies when we talked about IOF finances.

So let’s have a closer look at the net cash position of the IOF on 31 December 2016, the date of the last audited accounts, as published on the IOF website. Below I’ll try to explain the accounting basics required to interpret the numbers.

There are two key points people concerned about the IOF should understand:

The net cash position of the IOF is practically zero. In simple terms: there is substantial money on the bank account only because there are substantial unpaid invoices.

The IOF has started to accumulate serious debt. Short term debt has jumped almost ninefold from €29,000 to €252,000 in one year from end 2015 to end 2016.

Net cash position shows the real amount of cash reserves assuming that all current invoices are paid (including consumed services not yet invoiced), and all current outstanding receipts are paid (including revenues earned, but not yet invoiced). There are variations to this calculation, due to the sad fact of life that it is more likely that you have to pay for services consumed, than that everybody pays you all the money you expect from them. It is always a question how to find the right balance between the optimistic and the prudent approach. Here we make adjustments only when there is a clear indication that not all the monies may be received.

On the chart below you can see the estimated net cash position of the IOF at the end of year 2016. It shows the accounting book values and it is also adjusted for items that are unlikely to be “cash equivalent” (like inventory and Brazilian debt) and an estimated “membership debt” referred to in Council minutes.

IOF Net cash 2016

Despite the €191,000 in the bank, the net cash position of the IOF was only €37,000. Taking into account adjustments, the actual net cash is estimated at around €16,000.

At €16,000 (or even at €37,000) the IOF has practically no meaningful net cash reserves for its annual budget of €800,000 to €900,000. The budget overrun in early 2017 only for the World Games arena production was at around €20,000!

It should be noted that the revised budget of 2017 will not solve the problem. The new forecast is a profit of just above zero: €10,000. It was reduced from €70,000 planned for 2017 in August 2016. That, even if delivered, will not change principally the difficult financial situation of the IOF.

Below I’ll explain the various items for a better understanding.

Continue reading “IOF Finances – on a knife edge”

IOF Council attitudes – some data

I wrote my last post about the World Game accident in anger. For me it was just another unfortunate outcome of the Olympic and ceremony biased attitudes of the IOF Council I saw over the past six years. Some people less familiar with the workings of the Council – as I was myself before I was requested to join the MTBO Commission – told me that there was no real substance in that post, only emotions.

I fully appreciate that things that are obvious for me about the workings of the Council, may not be obvious for others. So I decided to compile some data to illustrate my point about the things the Council is interested in, and about the ones they are not bothered with. I have to admit, that despite having no high expectations, I was astonished by the results.

The number of Council meetings since 2010 where ceremonies were discussed was almost two times higher than the combined number of meetings where safety, accidents, injuries, athletes health and wellbeing, or competition fairness was mentioned.

This appears to be in stark contrast with the Ethical Principles of the IOF declared in the IOF Code of Ethics:

“In pursuing the sport’s goals, the governance of Orienteering shall be mindful of the physical and psychological wellbeing of its athletes.”

I used the Council meeting minutes as a proxy to the mindfulness of the Council. Few people read them, but they reflect quite well the topics the Council is dealing with. These are fairly detailed accounts of 2 to 3 day long Council meetings. Typically they are 6 to 12 pages long, though there are 4 page and 21 page long ones too. They are available on the IOF website for the periods of July 1996 to August 2003, and January 2010 to present. The ones after January 2010 (#150) are searchable. So I could easily search 36 of them spanning over 7 and a half years till today (#150-185).

Below is the summary of the number of Council minutes that contained certain key words. I counted only the occurrences with substance, as detailed below.

Council meeting minute statistics v2

I think these results speak for themselves to prove that the IOF Council does not appear to be mindful of the physical and psychological wellbeing of its athletes, both in absolute terms, and especially relative to the attention given to protocol, ceremonies, and the Olympic Dream.

See details below:

Continue reading “IOF Council attitudes – some data”

The World Games – what shall we call this?

I am lost for words. I really feel for poor Isia, the first runner of the French team on today’s Sprint Relay. I hope her injuries are not too bad, and she was lucky enough to avoid serious consequences of a situation that could have ended in a very, very bad way.

TWG Sprint Relay - French team

You can watch the video here at 25:50.

200m from the start, 15m from the map start, when everybody is in one bunch with heads down trying to make sense of the map. Barrier, thin grey bollards with sharp edges, concrete flower bed. It is a loose-loose situation in every sense.

The showcase for orienteering, two IOF advisers, LiveOrienteering coverage, full attention of the Leadership, special article from the President on the importance of The World Games on our way to the Olympics.

All the IOF focus – except for basic athletes’ safety.

Orienteering is inherently risky. You cannot make it risk free. Part of the joy is that you take on calculated risk – not only in route choice, but also in personal safety. I know this very well having involved in orienteering for over 35 years, and in MTBO – the riskiest of all disciplines – for over 10 years.

But we should do our best that athletes take on only the risk they want. They should not be exposed to unexpected hazards they are not prepared for. They should be warned, they should be routed around, organisers shall take care of the athletes at all levels. In MTBO we created an online injury database to collect data and experiences, and safety aspects especially around start and finish are regularly revisited with organisers and in Event Adviser clinics.

Here is the point where top management talk matters. Two decades of working with top managers and being in top management myself taught me that it matters much more than people in position imagine.

When all the top management talk is about high flying ambitions, attractiveness, TV production, and dignified ceremonies just like in the Olympics – it focuses the mind of organisers in one way. When there is also talk about athletes’ safety, it helps tremendously to avoid mishaps like the one we saw today.

I hate to write about this today.