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The business economist at work: the chief economist at AT&T.

The Economic Analysis Section at AT&T has the four requirements needed for successful functioning: Access to management, visibility, independence and adequate resources. Both short- and long-term forecasts are prepared, tailored to the needs of the users; they are a basic input to the company's planning process. The Economic Analysis Section provides the company's business units with monthly reports on developments in industries in which the company operates and also prepares forecasts of these industries. Reports and advice are prepared on public policy issues as well as forecasts and analyses of international economic matters. Externally, the economics staff participates in outside industry organizations to present the company's views and also to exchange information with other professionals.

RECESSION OR EXPANSION? Inflation or price stability? New and/or higher taxes? Growth or stagnation abroad? Whither interest rates and the dollar? And -- how will all of those forces affect various industries and companies?

Those are only a few of the myriad economic issues with which a modern corporation must cope to operate successfully in today's world. And those are the sorts of issues that are the heart of the job of chief economist in those corporations.

Dealing with such issues causes the job of chief economist to be one of the most interesting, most challenging, and -- if positioned and performed properly -- most influential within the modern corporation. Interesting, both because of the complexity and diversity of the issues and because of their direct impact on the fate of the firm. Challenging, not just because the complexity of the issues, but also because the economist essentially lives in the unknown future, seeking to determine both what will happen and how that happens will affect all of the various elements of his corporation. And influential, because, if he does that successfully and if he is positioned properly so his views are both known and followed, the chief economist can help his company to capitalize on opportunities that might otherwise be lost and to avoid mistakes that, in their worst instance, could send the company reeling toward losses and layoffs.(1)

Obviously, the enormity of those responsibilities cannot be met by the chief economist alone. Rather, he is to a great extent dependent upon the efforts and acumen of his staff. Therefore, the chief economist must not only be a skilled economist, he must also be a skilled supervisor/manager/administrator. And, shifting our focus somewhat, he also must be a skilled communicator, for he essentially must make his analyses and judgments understandable to and accepted by decisionmakers throughout the corporation. If he fails to achieve acceptance of his views by them, he might just as well not have done his work to begin with.


At AT&T, the economics function is shouldered by the nine-person Economic Analysis Section, headed by the chief economist and including four professional economists with training at the Ph.D. level and four support personnel. The unit reports through to the Chief Financial Officer, one of two vice chairmen at AT&T, which is a very common and entirely logical reporting arrangement for the economics function. However, the unit's location within the CFO organization, reporting to the Corporate Vice President of Tax Planning and Compliance, is both less common (perhaps unique?) and less immediately logical.

In some respects, that reporting arrangement is an historical accident. Before the Bell System was divested, the economics function was in the Budget and Tax Division (and, incidentally, was three times its present size, as it served a company some three times as large as AT&T is now). With divestiture, the budget and tax functions were separated, reflecting a greater centralization of both functions under the new AT&T. Interestingly, and, as discussed below, I think appropriately, the economics function was placed with the tax function rather than with the budget operation.


In one sense, the economics function could be located almost anywhere in the corporation and still operate successfully (indeed, my past surveys of such reporting arrangements have shown the function in other U.S. corporations to be located variously in corporate planning, finance, treasury, comptrollers, marketing, the chairman's office, etc.). In my view, however, it matters little where in the corporate structure the economist is located. What matters is the culture in which the chief economist operates. If he is to be successful, that culture must provide the chief economist with four characteristics: access, visibility, independence, and resources.(2)


Access to managers throughout the corporation is essential, including direct access (when necessary) to senior managers across the full spectrum of the corporation through the chairman of the board. The filtering of the economist's views through one or more layers of management on the way to the decisionmakers can only dilute and perhaps distort the message, making that message significantly less useful than it would be if the economist had direct access.


Visibility is needed, because the economist cannot, in today's complex corporation, know everyone in the firm that has need of his services. Only by giving the economics function good visibility throughout the firm can today's corporation hope to make full use of its economist in helping to meet all of the corporation's diverse needs.


Independence is important, because the economist's views may not always be popular within the corporation (sometimes not even with his direct supervision), and the temptation to modify or change those views to meet some perceived corporate need can sometimes become well-nigh irresistible. That does not mean, of course, that the economist will have the final say in how his views should be reflected in corporate policy, which is obviously and unequivocally the responsibility of the company's management team. It does mean, however, that the firm's management team should have the benefit of the economist's real and undiluted views. For example, an uncomfortable budget situation for the coming year should not be fixed by pressuring the economist to raise his forecast of economic growth -- hence, the wisdom, in my judgment, of keeping the economic forecast separate from and independent of the budget process. (If the company does not believe that its chief economist, aided by his professional staff, is the most qualified person within the firm to make judgments about prospective economic conditions, it should replace him with the person that is the most qualified. However, if the company is not willing to delegate to that person the full responsibility for providing the economic forecasts under which the company will operate, it will never realize the full value that the economics function can bring to its table.)


Finally, to operate successfully, any function needs at least certain minimum resources, and the chief economist also must be positioned to complete for those among all of the other needs of the corporation. For the economics function, an overhead activity that usually brings no direct revenue to the firm, competing for resources has been an increasingly difficult problem, as U.S. corporations have struggled to restructure themselves and cut costs. In some instances, restructuring may have caused some firms to "throw the baby out with the bath water" by doing away with some economics functions that were more than worth their costs. However, that trend seems to have run its course and to be reversing itself now, as evidenced by the reestablishment of the economics function within some firms and the more than 200-person increase in the membership of NABE over the past two years, which itself reversed a four-year decline.


At AT&T, the economics function has benefitted from all four of the crucial characteristics discussed above. Throughout my twenty-year tenure on the job, I have been allowed direct access to whomever in AT&T's management team I felt the need to contact. The function's visibility has benefitted from direct, company-wide distribution of its reports and forecasts and has been enhanced by an annual company-wide conference on the economic outlook and by articles about and by the section in various company publications. As chief economist, I have been given complete and unequivocal final say in the economic forecasts that are included in the company's business plans (a commitment perhaps made easier for management by an earlier, "managed" forecast that went badly awry.) Finally, while being cut to only one-third of the staff that was employed prior to the divestiture of the Bell System, and while not immune to continued budgetary pressures since then, the economics function at AT&T has received sufficient funding to meet its responsibilities to the corporation in a satisfactory manner. (Of course, thin human resources have been augmented by the extensive use of new computer technologies, as well as by the appropriate use of various external economic services.)

Within that culture, AT&T's economists are able to provide the information, advice, analyses, and forecasts about the economic climate and economic issues that the company must have to operate efficiently and successfully. That body of expert advice and assistance broadly falls into the following categories: forecasts of the domestic economic climate; determining the impact of the economic climate on the firm's markets; public policy issues; international analyses and forecasts; and support for particular departmental problems and activities.


A major product of AT&T's Economic Analysis Section is its forecast of the U.S. economy, both short- and long-term. The short-term forecast, which is updated every quarter, extends two to three years into the future by quarters and covers more than 100 economic variables. AT&T's long-term forecast is prepared each February and extends ten years into the future.

Those forecasts are one of the basic inputs to the company's planning process: each business unit within the AT&T enterprise uses those forecasts in preparing its business plans. In this way, the company achieves both efficiency and consistency. Because only one forecast is prepared for the entire company, there is no duplication of effort within the company, and because all business units follow the same forecast, managers making decisions about resource allocations among competing projects know that the budgets and plans for all such projects were based upon the same assumptions about the economic climate.

A major issue in many firms is whether such forecasting should be done internally or whether the need for such forecasts could be better met by using the forecasts of an external econometric forecasting service or consultant. Although our track record shows our forecasts to be at least competitive in their accuracy with those from other sources, that issue was put much more firmly to rest at AT&T a few years ago by Bob Kavner, then AT&T's chief financial officer. As Kavner put it to me, "AT&T does not do its own economic forecasting because it can do it better than anyone else. It does its own forecasting so its forecasts will fit AT&T's needs like a glove, not like a mitten."

We achieve that fit for our forecasts by tailoring them to the needs of our forecast users. Those users essentially dictate the timing of the forecasts (so that a fresh forecast is available coincident with the timing of the particular needs of AT&T's business planning process) and the series provided (so each business unit at AT&T has forecasts of the particular series that are most closely related to its own markets).

For example, AT&T's forecasts of growth in the long distance market are based on very detailed econometric models that are worked up for each state and even metropolitan area. Such detail is essential if the company is to have the proper amount of facilities in each locality to handle the call volumes that will occur there. To meet the need for such detailed forecasts, we have arranged with an external econometric service to provide state, regional, and industry simulations of our economic forecast, to be available coincident with the needs of that business unit. Similar tailoring occurs to meet other particular AT&T needs.

All of the data in AT&T's economic forecast is available to users throughout the enterprise in an online computer system (including the detailed data by states and regions). In addition, some 2,000 paper copies of the forecasts, including its supporting rationale, are distributed to managers at all levels throughout the company, and the forecast is also put into AT&T's internal electronic mail system. Finally, a company-wide forecasting conference is held each year at the beginning of the planning process for managers with the greatest needs for information about the economic climate.


Knowing what will happen in the economy is of little use to a firm unless it also knows how its own markets are affected by the economy. Most of the work in that area at AT&T is done directly in the business units needing it (as noted above for the long distance service markets -- work that involves many times the effort and employees on the economics staff). However, the Economic Analysis Section itself does provide advice and assistance to many of the other business units within AT&T to help them learn how their markets are related to conditions in the overall economy. The Section also provides monthly reports of developments in the industries in which AT&T operates, as well as forecasts of those industries based on AT&T's forecast of the economy.


Modern corporations also require advice and counsel from their economists on all sorts of public policy issues. Many of these, such as tax policy, have a very direct impact on the well-being of the correction. Others, such as the overall level of the federal budget deficit, may affect the corporation less directly. However, in both instances the corporation may need to take positions on issues that, in the last analysis, are fundamentally economic in nature.

The economic unit at AT&T gets involved rather extensively in both kinds of issues. For example, it was deeply involved in the company's efforts during the process that led to the Tax Reform Act of 1986, providing analyses of the value to the country as a whole of various tax provisions that promote investment, research and development, saving, etc. (Other units within AT&T look at the impact of tax changes on the company itself.) More recently, the economics section has done extensive analyses of the pros and cons of a value-added tax in terms of its impact on the overall economy -- discovering in a rather extensive study of twenty-two OECD countries over a twenty-year period that neither the level nor the changes in either value-added taxes or income taxes are related to the level or the change in saving rates among those countries. By looking at such policies in terms of their impact on the overall economy, the chief economist can help to shape corporate positions based upon what would be best for the overall economy and can also provide great support for the company's lobbying efforts in Washington as it seeks to achieve tax policies that do not unduly harm the industries in which AT&T operates.


An area that is almost totally new to the chief economist's responsibilities since divestiture is that of providing analyses and forecasts on international economic matters. Prior to divestiture, AT&T was a purely domestic corporation, and its economists worried about international matters only as such matters affected the domestic U.S. economy. With divestiture, however, AT&T has been moving aggressively into international markets, and that has brought a whole new need for analyses and forecasts to support those efforts.

A major part of that new work involves working with the company's foreign exchange traders in its Treasury Department. The Section's international economist brings an economic perspective and expertise that, when melded with the market perspective and expertise of the traders, enables AT&T to run a highly successful foreign exchange operation.

The Section's activities in the international arena do not end there, however. Twice a year it provides economic forecasts for some thirty countries abroad to help guide business units throughout AT&T in their efforts to penetrate foreign markets. The Section also analyzes legislative proposals with international aspects affecting AT&T and its industries. Finally, it provides such things as economic, financial, and sovereign risk analyses that are used in connection with the consideration of new ventures, acquisitions, and mergers.


Many needs that AT&T has for economic information do not fall neatly into the broad categories discussed above, and the Section stands ready to provide whatever advice and assistance in the area of macroeconomics that might be needed by any unit within the AT&T enterprise. Examples of such departmental support include:

1. Support of Labor Relations in its efforts to

achieve fair labor contracts with the company's

bargained-for employees. Such support might

include analyses of particular issues important

to bargaining (e.g., industry productivity, the

impact of deregulation and competition on the

company's operations), but it always includes

analyses of wage trends, inflation, and other

economic issues needed to prepare the

bargaining team for its negotiations.

2. Because of the great extent to which AT&T is

regulated, AT&T maintains a staff to deal

strictly with regulatory agencies and

regulatory issues. For that reason, the massive

changes that have occurred in the industry in

The 1980s have not affected the scope of the

chief economist's activities as much as many

observers might have expected. However, to

the extent that regulatory issues relate to

macroeconomic issues, the economics unit has

provided support to AT&T regulatory matters

staffs both before and after divestiture.

3. AT&T has one of the biggest pension funds in

the country, and the investment of those funds

is managed by a special unit within AT&T.

However, each meeting in which that unit

reexamines its decisions about the investment

directions for AT&T's pension funds is

preceded by a presentation on the economic

outlook by the chief economist.


Meeting the above responsibilities requires the chief economist in a modern corporation to become extensively involved with external organizations that are concerned with economic matters. Basically, there are two broad reasons for such involvement. One is that, on public policy issues, such external forums provide an opportunity for the company to make its views both known and felt. The other, which is especially important to economic forecasting, is that no small staff can discover by itself everything that it needs to know about the economic situation and outlook, and an exchange of information with others in the profession provides both large economies and additional insights in that regard.

On public policy matters, the chief economist or members of his staff support the company's goals through participation in any number of outside organizations, including the Committee for Economic Development, the Technical Consultants to the Business Council, the U.S. Chamber of Commerce, The Business Roundtable, and various other industry associations and organizations.

Given the complexity of the U.S. and world economies, it is especially important for company forecasters to have good contacts with other professionals located across a spectrum of industries and organizations. AT&T's economists keep tuned in with others in many different ways. For example, the NABE itself is a major source of such information, with the annual policy conference in Washington and the NABE Annual Meeting of particular importance in that regard. However, we at AT&T put such importance to learning from others that we host our own luncheon group of some twenty economists from outside industries, which meets monthly at AT&T's headquarters in New York to exchange information and ideas about what is happening in their particular industries and areas of expertise. The early beginnings of that group can be traced all the way back to 1920, when there really was very little in the way of information about the economy from government sources, but the activity is still of such value that it is an active group today and is an important element to the information network of all of its participants.


Thus, the chief economist and his staff bring analytical skills and expertise to the corporate table that can address a broad spectrum of issues of crucial importance to the success of the firm in today's world. Therefore, if he is properly positioned and has established his credibility within the firm, the chief economist can influence the fortunes of his company far beyond what the typical size of his staff might suggest.


(1)For simplicity's sake, the traditional masculine pronoun will be used throughout this article in referring to the chief economist and, more generically, to the economist. In doing that, however, I do not wish to ignore the many women who are, have been, and will be chief economists of U.S. corporations -- including AT&T's own Virginia Dwyer, who was chief economist of our Western Electric Company in the early 1970s enroute to becoming Senior Vice President-Finance of AT&T prior to her retirement in 1986. (2)Of course, the economist also needs credibility within the firm, but that is something he must earn by his own performance.

Ken Militzer is chief Economist, AT&T, Morristown, NJ.
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Title Annotation:Ken Militzer
Author:Militzer, Ken
Publication:Business Economics
Date:Jan 1, 1990
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