Stan Hanks: Enron Memoriam

Stan Hanks was the founding CTO of Enron Broadband, which collapsed with the rest of Enron when the corporation went bankrupt in 2001.

Stan left the company prior to the collapse, when he started to grow suspicious of the company’s strategy and leadership.

“At the time, one of our big recruiting challenges was hiring people in a highly competitive market. We actually had to compete with Google on hiring. This was ’96 or ’97 and we had wireless Internet everywhere in the building.”

“The corporate culture was always to hire the best and the brightest, and to make them prove they were the best and the brightest.”

Stan led an ambitious project to enable trading of bandwidth. Broadband as a commodity.

“To make this work, we had to get more bandwidth than we knew what to do with, and we had to create applications that required so much bandwidth that you could not use them in a non-commodity environment.”

“I was building the biggest IP network in the world. We were trying to find places to build capacity that nobody else had ever built. We had guys digging holes, laying fiber.”

“To make commodity trading make sense, you have to find a way to commoditize it in a way that makes sense in the industry. You have to find a pain point. In coal, or soy beans, the product is fungible–you can say ‘this is grade A, it has these characteristics, it provides this value.’ You know what it is, you can trade on price exclusively.”

“In the case of bandwidth, the price benchmark we used was not relevant to anyone in the industry. Over the course of time, that could have been rectified, but that was not the way things worked out.”

The bandwidth trading project was Enron’s equivalent of a moonshot project. But it was not an unprecedented challenge.

“Enron had created markets before. They had created markets for carbon transfer credits, and weather derivatives.”

Some of the technology worked, but Enron presented it as working even better. Enron’s mission was to optimize the stock price. Perception was prioritized over actualized technology.

“A lot of the things that transpired in the analyst conference in 2000 that sent a lot of people to jail talked about things in specific ways.”

“It was not possible to deliver on some of the technical promises. The streaming video–it worked, but it had issues. The server for Real Player had this huge memory leak, for example.”

“It was still a long way from being there. Saying ‘we have an architecture defined’ is different than saying ‘we have a finished building’.”

But upper management interpreted the situation selectively. Like the mark-to-market accounting with which Enron cooked its books, the plans for Enron Broadband were treated as a finished product.

“There was a characterization between what happened at WorldCom and what happened at Enron. At WorldCom, they misreported some revenue accidentally, and didn’t have the moxie to step up and restate things. At Enron, it just felt different. The tone and tenor was more of a carnie side show, where the game is rigged, and you know the game is rigged. You think you can knock the milk bottles over, but we’re gonna take your money anyway.”

“Overnight, our head count doubled. And there was a shift where decisions were no longer being made on the basis of long-term thinking. They were being made on the basis of mark-to-market accounting, and a trader’s book of business. But if you don’t actually have the bandwidth in place, you can’t sell it.”

“We had equipment, and stuff sitting in warehouses waiting to be deployed. But we had a real clear misunderstanding of what the business that we were in was looking like, and how we had to manage that relative to a traditional Enron business.”

“I had very candid talks with both CEOs, and I got resources allocated, and scientists and engineers. But there’s this feeling–an inconvenient truth. We really had to do something, we couldn’t just claim that it was done. And the extent to which that involved effort beyond what was imagined by the folks in Houston was really daunting.”

“The tipping point was when we started treating the entire business like a trading book. We had purchased this stuff that was sitting in warehouses but we couldn’t get permission to deploy it because it screwed up the way the books looked. And that’s really where things shifted, and nobody in the C-suite was willing to stand up and say anything.”

With traders taking precedent over technologists, Enron became a financial abstraction of its former self.

“The guys on the trade floor–some of them had engineering degrees. But Enron was a case of greed. People acted in accordance with their compensation. It made it really hard to form teams.”

“We ridiculously compensated people for making money for the company on paper. It was a real difference between how Skilling ran the company versus his predecessor.”

As technology has advanced, so has the potential for financial obfuscation. I asked Stan whether he thought there could be a corrupt technology company like Enron on the market today.

“I look at where the money comes from in these companies, and it makes you wonder.”

“I think of a herd mentality a whole lot. There were so many people building networks, and all of these guys talked as though they were going to get all of the bandwidth that existed. You couldn’t make any sense of it. As soon as someone cuts the price, everyone has to and it’s a race to the bottom. The telecom nuclear winter of 2001-2005.”

“I’m skeptical of herd mentality in everything.”

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