A great editorial in the Wall Street Journal today.

Manager's Journal:
What Enron Did Right
By Samuel Bodily and Robert Bruner

11/19/2001
The Wall Street Journal
A20
(Copyright (c) 2001, Dow Jones & Company, Inc.)

  This is a rough era for American business icons. Subject to the
vagaries of age (Jack Welch), product failure (Ford/Firestone tires),
competition (Lucent, AT&T), technology (Hewlett-Packard and Compaq), and
dot-bomb bubbles (CMGI), managers and their firms remind us that being
an icon is risky business. The latest example is Enron, whose fall from
grace has resulted in a proposed fire sale to Dynegy.

   Once considered one of the country's most innovative companies, Enron
became a pariah due to lack of transparency about its deals and the odor
of conflicts of interest. The journalistic accounts of Enron's struggles
drip with schadenfreude, hinting that its innovations and achievements
were all a mirage.
   We hold no brief regarding the legal or ethical issues under
investigation. We agree that more transparency about potential conflicts
of interest is needed. High profitability does not justify breaking the
law or ethical norms. But no matter how the current issues resolve
themselves or what fresh revelations emerge, Enron has created an
enormous legacy of good ideas that have enduring value.


   -- Deregulation and market competition. Enron envisioned gas and
electric power industries in the U.S. where prices are set in an open
market of bidding by customers, and where suppliers can freely choose to
enter or exit. Enron was the leader in pioneering this business.

   Market competition in energy is now the dominant model in the U.S.,
and is spreading to Europe, Latin America, and Asia. The winners have
been consumers, who have paid lower prices, and investors, who have seen
competition force the power suppliers to become much more efficient. The
contrary experience of California, the poster child of those who would
re-regulate the power industry, is an example of not enough
deregulation.


   -- Innovation and the "de-integration" of power contracts. Under the
old regulated model of delivering gas and electricity, customers were
offered a one-size-fits-all contract. For many customers, this system
was inflexible and inefficient, like telling a small gardener that you
can only buy manure by the truckload. Enron pioneered contracts that
could be tailored to the exact needs of the customer.

   To do this, Enron unbundled the classic power contract into its
constituent parts, starting with price and volume, location, time, etc.,
and offered customers choices on each one. Again, consumers won. Enron's
investors did too, because Enron earned the surplus typically reaped by
inventors. Arguably, Enron is the embodiment of what economist Joseph
Schumpeter called the "process of Creative Destruction." But creative
destroyers are not necessarily likable, pleasant folks, which may be
part of Enron's problem today.


   -- Minimization of transaction costs and frictions. Enron extended
the logic of de-integration to other industries. An integrated paper
company, for instance, owns forests, mills, pulp factories, and paper
plants in what amounts to a very big bet that the paper company can run
all those disparate activities better than smaller, specialized firms.
Enron argued that integrated firms and industries are riddled with
inefficiencies stemming from bureaucracy and the captive nature of
"customers" and "suppliers." Enron envisioned creating free markets for
components within the integrated chain on the bet that the free-market
terms would be better than those of the internal operations. The
development of free-market benchmarks for the terms by which divisions
of integrated firms do business with each other is very healthy for the
economy.


   -- Exploiting the optionality in networks. In the old regulated
environment, natural gas would be supplied to a customer through a
single dedicated pipeline. Enron envisioned a network by which gas could
be supplied from a number of possible sources, opening the customer to
the benefits of competition, and the supplier to the flexibility of
alternative sourcing strategies. Enron benefited from controlling
switches on the network, so that they could nimbly route the molecules
or electrons from the best source at any moment in time to the best use,
and choose when and where to convert molecules to electrons. This
policy, picked up by others in the industry, created tremendous value
for both customers and suppliers.


   -- Rigorous risk assessment. The strategy of tailored contracts could
easily have broken the firm in the absence of a clear understanding of
the trading risks that the firm assumed, and of very strong internal
controls. Enron pioneered risk assessment and control systems that we
judge to be among the best anywhere. Particularly with the advent of
Enron Online, where Enron made new positions valued at over $4 billion
each day, it became essential to have up-to-the-second information on
company-wide positions, prices and ability to deliver.

   The unexpected bad news from Enron has little to do with trading
losses by the firm, but with fears among trading partners about Enron's
ability to finance its trading activity. In a world where contracts and
trading portfolios are too complex to explain in a sound bite,
counterparties look to a thick equity base for assurance. It was the
erosion in equity, rather than trading risk, that destroyed the firm.


   -- A culture of urgency, innovation and high expectations. Enron's
corporate culture was the biggest surprise of all. The Hollywood
stereotype of a utility company is bureaucratic, hierarchical, formal,
slow, and full of excuses. And the stodgy images of a gas pipeline
company -- Enron only 15 years ago -- is even duller and slower. Enron
became bumptious, impatient, lean, fast, innovative, and demanding. It
bred speed and innovation by giving its professionals unusual freedom to
start new businesses, create markets, and transfer within the firm.

   Success was rewarded with ample compensation and fast promotion, and
an open-office design fostered brainstorming. The firm's organization
and culture was by all accounts not a safe haven for those who believe
the role of a large corporation is to fulfill entitlements for jobs.
This was a lightning rod for the firm's detractors. And yet, it could
serve as a model for more hide-bound enterprises to emulate.

   Enron was a prolific source of compelling new ideas about the
transformation of American business. It created a ruckus in once-quiet
corners of the business economy. It rewrote the rules of competition in
almost every area in which it did business. It thrived on volatility.

   The proposed sale of Enron to Dynegy risks the loss of a major R&D
establishment, especially given Dynegy's track record as a second mover
following Enron's lead. Beyond what is likely to be a difficult and
time-consuming antitrust review, Dynegy's greater challenge will be to
find a way to make Enron's spirit of innovation its own. Or so we all
should hope, because prosperity depends on the ability of firms to
reinvent themselves and remake their industries.

   ---

   Messrs. Bodily and Bruner are professors at the University of
Virginia's Graduate School of Business Administration.