Failure to Launch: Reasons Company Strategies Don’t Succeed

Today's post is written by David Mead of Mead Consulting. We couldn't agree more with what Dave has to say.

In 2008, I heard a presentation by Michael Canic of Bridgeway Leadership who discussed the reasons that strategies fail. He quoted statistics that over 65% of all strategies fail to reach expectations. Why do so many business strategies fail? Below are some key reasons. Knowing the barriers to successful planning and execution is the first step. Clients that follow our recommendations have been significantly outperformed the competition. We like to say, “A good plan, well executed, beats a great plan, poorly executed, every time.” Contact us if you would like more information.

1. No clear definition of success

Fuzzy goals lead to fuzzy outcomes. While it seems obvious, many organizations simply don’t articulate the specific goal of a business strategy. If the goal of your customer intimacy strategy is to form deeper customer relationships, that’s fuzzy. If the goal is to increase customer retention by 10 percent and increase annual revenue per customer by $10,000 and net profit by $1,000, that’s clear. Here, deeper customer relationships may be the mechanism to achieve the goal.

2. Too many goals

When everything is a priority, nothing gets accomplished. Many so-called strategic plans have too many goals, objectives, success drivers, strategies, initiatives and so on. Worse, it’s not clear how these various appendages are linked. Is it any surprise these plans sit on shelves and collect dust? Choose to do fewer things much better.

3. Metrics and Alignment - Either no metrics or vague metrics

Many plans are simply a brainstormed list of things to get done by unspecified people at indeterminate times. A plan with specifics outlines who will do what by when. It takes into account the sequencing and timing of tasks, activities and resources. Make certain that the goals of everyone in the organization are aligned to the few key objectives.

4. Visibility - Progress isn’t measured and managed

Ever notice how plans placed in the spotlight flourish while those left in the dark shrivel? Any plan worth executing is worth tracking. A monthly meeting with a tight agenda can quickly determine what actions have been taken; what progress has been made; what will be accomplished over the next month and by whom, and what, if any, challenges have emerged. This builds commitment, accountability and confidence in the process.

5. You lack the right people

Some of those nice people who work for you may not be the right people to get the job done. That statement makes you uncomfortable, doesn’t it? Many have been loyal, are committed to the culture, and may be friends and family. However, If you are truly committed to winning, or achieving success - however you define it - then at some point you have to take a long, hard, honest look at the capabilities of your people. Point them in the right direction, support them, develop them – give them a fair chance to succeed. But if they can’t get it done, then your responsibility is to get people who can.

6. Flexibility – Failure to update the plan to stay real

Reserve the right to do what makes sense. Plans are based on assumptions that can change over time. If they do change, then the plan may need to change. A quarterly “recalibration” meeting is a good forum to test your assumptions and determine which, if any, have changed. The meeting may result in either a revalidation or redesign of the plan. It ensures the plan stays real and relevant.

7. Reaction to Failure - Failure is met with indifference or an inquisition

Is your team serious about its definition of success? Your response to failure sends a clear message about your commitment to winning. Just as importantly, it sends a message about your credibility. Do you ignore a failed initiative and move on to the next big thing (which conveys that you really weren’t that committed and you shouldn’t be taken seriously)? Do you look for scapegoats (which communicates that you don’t take personal responsibility and can’t be trusted)? Or do you first look in the mirror, take responsibility, then publicly commit to getting it right, and effectively engage your people to make it happen? Your choice speaks volumes about who you are as a leader.

Let us know your thoughts.

Mid Year Sales Planning

The following was written by my good friend Chip Doyle, a Sandler Sales Franchisee.
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He who fails to plan is planning to fail - Winston Churchill

Prospecting plans are more than a necessary part of a salesperson's tool kit. The planning process creates accountability and a sense of teamwork for salespeople. Good plans also improve the salesperson's outlook and motivation. By measuring the results of a plan, salespeople can identify what's working and what isn't and adjust accordingly. And last but not least, planning and accountability insures activities that fill the pipeline are not subordinated to client fulfillment work. This one drives me nuts. As an example, seller-doers (people like CPA's, consultants, architects, engineers, etc) pray for business but as soon as they get some, they complain that they don't have time for business development. This is just a sophisticated way of admitting they don't have a plan.

You can be a part of your own plan or part of someone else's - David Sandler

The year is almost half over and odds are you've made some progress towards your prospecting and sales plan. If you don't have a prospecting plan yet, stop reading here and start planning!

Planning has Pitfalls

Unfortunately there are predictable traps that I see clients fall into related to planning. Occasionally they will use the planning process to procrastinate action. I also see salespeople that fail to adjust plans over time based on new information or tracked results. Planning is not a one-time activity. It's a recurring process. Not every week, but certainly every six months.

More frequently I see plans with no priorities or activity sequences specified. John Argenti, author and founder of the Strategic Planning Society said "A plan is a list of actions arranged in whatever sequence is thought likely to achieve an objective." Make sure you assign priorities or some sequence in your planning process.

"It is almost always the decision maker that makes the decision work, not the choice which makes the decision work." - David Sandler

I also see companies attempt to build consensus around an ideal plan. It never happens. There's no need to try to build the perfect plan. The key is to get your salespeople on the right course so they can realize the benefits of the planning process.

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We are halfway through the year. How are your sales? How are they compared to plan? What are you going to do to modify or create your plan?

Ready...Set...Wait? Leading Indicators and Small Business

The following was written by my good friend John Dini in San Antonio. I couldn't resist re-posting.

In the last few weeks I've talked to a score of small business owners who say that things are improving for their companies. Several have been involved in trade shows that had record attendance. A few manufacturers are seeing a strong uptick in orders. Retailers are experiencing increased traffic.

We all know that the businesses who are positioned to move early in a growing market get the jump on those who aren't, but how do you know whether this is the time to move? Most entrepreneurs behave like "retail" or individual investors in the stock market. They are too late into a bull market to capture most of the profitability, and too slow to get out in a down slide to avoid most of the losses.

The stock market professionals say that when huge volumes of retail money (from IRAs, 401Ks and other self-directed sources) begin pouring in, the rally is probably over. What worries me is that in the last 60 days I've met 5 people who told me they "didn't need the income" from their job or business, because trading their personal portfolio was making them enough money to live on. They have apparently forgotten 2000. I know several successful individuals who would have retired years ago if they hadn't been suckered into the tech bubble right at the end.

So do you start looking at expansion of your small business now, or wait until you are completely certain, and probably miss the bulk of the opportunity? How do you know when it is the right time to bet on the economy?

The first rule is to stop reading the newspaper, and turn off the financial news stations. For the vast majority of small business owners, what happens in "the economy" means nothing compared to what happens in your local market.

I have a client who owns a machine shop. Nationwide there is clearly a surplus of manufacturing employees. In our local market, a new plant by a big publicly traded corporation has begun recruiting. It doesn't matter to my client whether manufacturing unemployment nationally is 10% or 13% or 20%. Locally, there aren't any skilled employees available. Would this be a smart time for him to cut wages or benefits? Of course not. Regardless of the national situation, he is in a dog fight for good workers.

Business owners need local measurements of what is happening in their industry. These are typically not published anywhere. You need to develop and track your own. Establish relationships with other business owners who are "upstream" of you in the food chain. They may not be a precise predictor, but they can give you a better idea of whether an uptick in business is an anomaly or a trend.

For example, a subcontractor to residential subdivision builders maintains a relationship with a civil engineering firm that serves the same market. While his contracts for home construction vary according to monthly sales, when the civil engineer starts platting whole new subdivisions the trend is longer term. The civil engineer talks to the real estate agents who represent large parcels. He wants to know when the residential developers are negotiating for new tracts of land. It doesn't matter much to either of them what the national numbers are. They don't do business nationally.

A fast-service restaurateur of light (frankly- hip) food follows approval of financing for new apartment complexes. An office furniture dealer tracks leasing rates. A pest control company tracks the backlog in residential sales. A cash register dealer tracks announcements of new retail centers.

Most small businesses thrive according to the skills of the owner. If you have 1% market share, you can grow to 2% market share and do well even in a shrinking market. Leading indicators can tell you when it is time to focus on taking existing business from competitors, and when it is time to put your efforts towards chasing new business.

Are Things Really as Bad as They Say?

In a recent Board meeting (consisting of small business owners) we had a conversation about the state of the economy. The question on the table was “are things really as bad as “they” say”? While the news out of Washington and most everything else in the press is negative the Board found reasons to be optimistic!

In spite of everything, small business owners find ways to grow their businesses and become financially successful. This economic swing is no different. Yes, business is run differently and won’t go back to the “old ways” but there are people out there making money in a down economy (including these Business Owners).

The economy will come back! What it will look like remains a question but it will come back. While unemployment is “high (9.7%)” compared with what we have seen in the past, the fact is we still have a lot of people working – 90% of the population!

At the end of the day, it is about remaining optimistic and looking for opportunities. While you need to keep on top of the economic news, there is no need to blame the economy. Find new and innovative ways to run your business. Small business owners (and Americans as a whole) have always persevered during difficult times.

Here is the message from one group of very successful business owners – focus, focus, focus!

Share your thoughts.

Egyptian Pyramids and Small Business

I was having dinner with friends over the weekend and were started talking about upcoming travel or tripe we wanted to take. One friend had just returned from India, another couple was just in Thailand and I had been in Mexico. Africa came up and while I have already been to Africa twice, I was sharing that I had to go to Africa at least twice more – once to see the mountain gorillas and the other to see the great pyramids in Egypt. The more we got into the conversation, the more I started mapping the pyramids to small businesses.

How could I make a leap like this? Well, in order to construct the pyramids, the teamwork required b y the labor force (which was anywhere from 20,000-30,000 people at a time) was, well nothing short of amazing. The architecture is extremely sophisticated. In this case, the architecture is equivalent to the business plan. The Egyptians knew their strengths and weaknesses – no doubt about that.

When it came to the actual construction, well the Egyptians were specific in what they had to do, when and how. Think about it – they figured out how to move very large, heavy blocks of stone, and not just move them but move them to the required height. While there is dispute as to how they did it, they figured out how to build ramps on an incline so they could move the blocks of stone. I always admire innovation.

If you understand your strengths and weaknesses (not to mention opportunities and threats – SWOT) then you can create your architecture or plan. Many business owners let the challenges of achieving their plan get in the way of planning so they either don’t plan at all or the plan isn’t as aggressive as it should be. Just think – if the Egyptians had let the challenges of building pyramids get in the way of their elaborate design, then we wouldn’t have them to appreciate and wonder in amazement. Once you know what you want the final outcome to be (your company vision), you don’t have to figure out how to get there right away. In fact, you won’t! But you can start by breaking down the first steps into bite size baby pieces and then build from there. The Egyptians figured out how to build their pyramids so you can build your company. You just need to update your SWOT, create your company vision and then focus on breaking things down into bite size baby steps that most likely will take you years to achieve. Just think – you are building your own pyramid/monument.

I haven’t schedule my trip to Egypt for anytime soon but I do have the architecture or business plan in place that lets me know when I will be able to go!

Keep Your 2010 Resolutions Simple

As we start the New Year there is usually excitement, optimism and renewal in the air. Some people set very loft resolutions and goals, others don’t do any goal setting, some aren’t goal setters, period and then there are those like myself who are continually setting goals thus setting “New Year’s Resolutions” is relatively meaningless.

I want you to be successful in the goals that you set. The trick is to set goals that are achievable and then keep building or adding on to those goals. In short – take lots of baby steps that will allow you to achieve your bigger picture goal. Way too many business owners don’t do any planning or goal setting because it then becomes this heavy weight that they are unable to execute on (or don’t know how to execute).

The secret is K.I.S. – Keep It Simple. Try breaking your goal down into small weekly bite size pieces. Just focus on one part of your goal each week. An example many can relate to – if your goal is to lose a certain amount of weight, during one week just focus on cutting out soda drinks. Add water and tea to your diet. That is it. In the following week you can add or change something else in your diet that will help you achieve your goal.

From a business perspective you might have a goal that says you want to implement and execute a marketing plan. Great, break it down – one week focus on defining the elements of the marketing plan, the following week focus on completing certain sections of the marketing plan and so on until the plan is complete. From an execution perspective, again start simple. If your marketing plan includes social media – start simple. For a week or maybe a month, focus on making Twitter part of your regular marketing activities. Then add another component of your social media plan. Start slowly adding in various components of your marketing plan until performing marketing activities becomes part of your company behavior/culture. When the year comes to an end you will have achieved your goal!

Make sure that you include others in helping you achieve your goals. Having people there to help and support you will make it that much easier to accomplish your 2010 resolutions. And don’t forget to celebrate your victories along the way! There is no need to wait until the end of the year to acknowledge that you got things done! For every baby step you complete, do some sort of celebration. This can be a little personal thing you do for yourself or something bigger that you share with team members.

I wish you well on your journey in 2010. You have the potential for greatness in you! Go for it! Start small. Make a promise and keep it.

Get Planning, Get Buzzing

Most small business owners typically dread business planning, not just annual planning but the ongoing planning meetings and activities that it takes to make sure that you actually execute on your plan. This is a personal challenge for me.

As a small business owner myself, I know that when I plan, execute to the plan and update the plan great things happen. I have several clients, small business owners, who are deeply entrenched in planning; so much so that if it isn’t currently part of their culture, it is quickly becoming part of the culture. These business owners and their employees are seeing the results of planning in all areas of the organization.

Their offices are “buzzing”. People are on the same page, all moving in the same direction, toward the same goals. They are, dare I say it, motivated and excited! They face the same economic challenges as the rest of us but everyone from the business owner down is focused on what needs to be done to move the business forward.

I won’t hesitate to tell you that these are also the businesses that are seeing the greatest successes! These organizations have taken the leap of faith and committed to crystallizing where they want to go, by when and how they will get there. Are there bumps along the way? Of course, but because they have well thought out plans they can make adjustments as needed.

They don’t have all of the answers (and they don’t need all of the answers) but they have a solid game plan, are executing, and continually reviewing where they are compared to where they are supposed to be.

Seeing the tremendous results being achieved by these small businesses is a great thrill for me. My goal is to get Main Street healthy and these companies are wonderful examples. As we are nearing the end of 2009, invest the time and at least get your strategic planning process started. It will be worth it!

Anticipate the Best, Prepare for the Worst

Editor-in-Chief Robert Levin discusses business planning during uncertain times.

By: Robert S. Levin

Fall is an interesting time of the year. We’ve got one eye on finishing the current year strong, and the other on planning for the next year. When it comes to planning for next year, there is good reason to start early, but the reality is that most of us will want to procrastinate planning more than we have in years past.

This is totally understandable, because while the marketplace has settled down a bit, the state of the economy has caused us to say, “I have no idea what is going to happen next year.” But that doesn’t mean that we should not plan. In fact, it means that a plan for 2010 is even more important than it has been over the past few years.

Without a well-thought-out plan, we will not be in a position to react if business picks up or slows down considerably. So, how do you plan in time of uncertainty? Here are a few of the things that we are doing at NY Report, as well as what other business owners have told me they are trying:

Create projections for the worst-case, expected, and best-case scenarios. In the past, I just created one set of projections; however, this year I will create three, because the degree of uncertainty is much higher. The projections include plans for cutting back on certain expenses if we get into the worst case, and increasing investment in the best case.

Plan to utilize freelancers for new projects. You pay a premium for freelancers, but if things aren’t going well, freelancers are easier to cut than employees.

Examine cash flow (not just profits) when considering new products and services. Two reasons for this: 1) customers are paying slower, and 2) access to credit might not be there when you need it.

Remember that in every market there is opportunity. So this year, I am paying even more attention to how my industry is changing and how we need to evolve in order to capitalize on these changes.

If, after reading this, you are still thinking “Everything is really up in the air and planning is just a crapshoot,” you might have a point. But by giving careful consideration to these ideas, you will increase your odds of success significantly. We cannot let uncertainty prevent us from taking advantage of opportunities, nor can we be oblivious to threats.

An Exercise

Nothing fancy. Just presume, for a second, that the post on Oct. 4 - The Triple Threat Phase 2 was substantially right. We will have a technical recovery from an economic perspective, but it won't feel anything like prosperity. Ask yourself two questions: 1. What will my business look like two years from today if the economy stays exactly as it is this moment? 2. What did I do to make my company that way?

Why Projects Fail and What You Can Do About It

I recently met with a young start-up company with a terrific idea and as I was listening to their story it reminded me that most companies have failed projects or at least late projects and usually don't know what has happened until it is too late.

What’s the first thing you think of when you hear a company has announced a product release date? How about when one of your competitors releases news that their sales numbers or revenues are off this quarter? If you’ve been around for a while, you might wonder when the real product release date is, and feel pretty confident, maybe even smug, that your own company is on target for its release date(s), sales numbers and revenues.

Or is it? How do you know? While no company gets products to market on time every time and has quarters where sales and revenue don’t meet targets, winning companies track these important project milestones, and continually try to answer the question “why?”:

• Why are we late to market?

• Why are sales not happening?

• Why are revenue projections not being met?

A variety of causes can create these business roadblocks to successful projects. Let’s take a look at some of the issues and questions that, if answered honestly, can help you make your programs be wildly successful.

Getting Products Developed and Launched on Time

Time-to-market is critical for most projects, and rarely will you find a business owner, product manager or product marketing manager that will say otherwise. So why are projects late, and what can you do to help bring them in on time? First, it is important to look at the big picture from an operational perspective.

Program Goals

• Have the goals, there are usually many, of the program been clearly defined and communicated to the team?
  
  
• What are the specific launch objectives? What is the timing?

Processes

• Have you outgrown your product development model?

• How effective are your development processes?

• Who manages your programs – program managers, product managers or engineering? How effective are they?

Once you have program goals and objectives and appropriate processes in place, you have three variables that can be adjusted in product development and launch - time, resources and functionality.

Time Issues

• Is your project scoped and clearly defined based on time to market?

• Can time be added to a program (usually not)?

Resources Issues

• Are appropriate stakeholders participating and adding value to the team?

• Do you have enough development resources?

• What benefit, if any, is gained by adding resources?

• Are marketing resources allocated for a successful product launch?

Functionality

• Are your features and benefits clearly defined?

• Have you prioritized your features by importance?

• Is there too much functionality relative to time and resources?

• If/when you have to cut features, do you know (based on market requirements) which features can go and what must stay?

Achieving Your Sales Numbers

Generally speaking, there is no single reason as to why sales numbers are not achieved. It is usually a combination of sales execution, product and/or company issues and lack of competitive intelligence, assuming that realistic yet aggressive sales numbers have been created based on current market conditions.

Sales execution

• How effective are your direct and indirect sales channels?

• Do you have partners that aren’t contributing?

• Are your direct sales teams focused on the right markets?

• Do you have a sales system that is used by the entire sales team?

• Is there a subsequent sales process that everyone follows?

Product/Company Issues

• Do you have the right product packaging, pricing, and service options available for prospects?

• Have you assessed your product mix and analyzed your product distribution strategy?

• Are the right products and services being sold by the right partners?

• How are your messages resonating?

• How high is the quality of leads generated by your marketing programs? Is your sales collateral useful in the selling process?

• Do you know why you win and lose deals? Do you analyze win/loss factors and evaluate and realign processes and potentially products?

• How are your manufacturing processes working?

Lack of competitive intelligence

• What is your competition saying about you?

• What competitive traps are you setting and what traps are your sales teams walking into?

• Has the competition positioned you as a follower?

Hitting Revenue Targets

Often sales and revenues goals are not achieved due to ineffective attitudes and behaviors exhibited by your sales team.

Outside of your sales team, there are other factors that may result in lost revenues: operational inefficiencies are one of the biggest culprits that can eat into your revenue stream. Review your internal processes – in EVERY organization – and measure your operational effectiveness. Things to look for include

• Quality issues (rework, waste, etc.)

• Inefficient use of resources

• Time – does it take too long to achieve the desired outcome? Why?

• Communications – how effective are your internal and external communications?

We will not go into other revenue impacting items such as travel, expenses, headcount, etc. We leave that for the CFOs.

So why is this really important? Let's face it, times are tough. Successful companies are positioning themselves NOW for the economic recovery. While we aren't expecting a rapid increase anytime soon, the bottom line is that new products and services will help increase your business. New products can get you into new markets or expand existing markets by offering new features and functionality. So take a look at your projects and make sure you set yourself up for success!

We’d love to hear your what you have done in order to make your projects successful. Leave us a comment.

The Triple Threat: Phase II

The following post was written by my friend and colleague John Dini in San Antonio, TX. It is very thought provoking. Let me know what you think. Enjoy.
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I am by nature a relationship-oriented person. I like people, and I want them to like me. I’ve been watching my clients struggle with this economy for what seems like forever. They all desperately want this damn recession to end, and so do I.

I don’t like to be the bearer of bad news, but I don’t think most of us are going to be very thrilled with 2010. My January posting on Planning for the Strategic Triple Threat was discussed by hundreds of business owners in The Alternative Board® around the country, and re-posted in places that eventually came back to me from surprisingly far afield. We are now entering Phase 2 of the triple threat, the slow recovery.

Last week I attended a presentation by John V. Duca PhD, Vice President of the Dallas Federal Reserve Bank, and another by Joseph Stiglitz PhD, the author and Nobel winning economist. Neither one said anything that I hadn’t already read or figured out, but nothing in either speech made me very happy.

1. What Underlies the “Recovery?”

I am going to be succinct in delivering the facts. Some are from the lectures and others from my own research. They speak for themselves.

Economic growth is projected to be positive again in the third quarter, by a fraction of a percent. This would mark the “end” of the recession.

Bank lending spreads are at 1930’s levels. (Any of my clients who have gotten their credit lines renewed in the last 6 months will attest to that.)

Unemployment is at 9.8% of the working population. The U-6 measure of unemployment, which includes those who have given up looking and who are employed part-time but still seeking a full time job, is at 17%.

Bank failures in 2009 are right at 100. That will probably double in 2010.

The household savings rate spiked to almost 7% in May, and continues in the mid 4% range, even against strong equity indices.

The total number of home mortgages that have been refinanced or principle-adjusted through government relief programs in the last 2 years is less than the average month’s new foreclosures.

Except for non-conforming jumbo mortgages, the US Treasury, via Freddie-Mac, Fannie-Mae or FHA, is currently underwriting 100% of the homes sold in the US.

Commercial property mortgages on bank’s balance sheets are still exempt from mark to market, disguising the real state of those banks for the moment.

The FDIC is bankrupt

$400 billion of the $800 billion stimulus will disappear without a trace

Asia has emerged from the recession. South America barely felt it. Neither is waiting for us to start spending again to move forward with their economic plans. Enjoy the Olympics in Rio de Janeiro.

The G-20 meeting in Pittsburgh tacitly accepted the need to move to a new world reserve currency from the US Dollar. Only the refusal of the host country to place it on the agenda kept it from being the major topic.

We have tripled our current deficit, which we are funding by “printing” money.

I don’t want to hold back, so I’ll toss in a couple more things that are more observation than fact, and then move to a discussion of what we should be doing.

Our government is currently focused on health care reform. Regardless of what you think about the programs or proposals, two things are plain. One, “budget neutrality” however that is defined, will come only at a substantial increase in the costs of employment. Second, it will not include the looming explosion in Baby Boomer Medicare, which predates the “reform” and is therefore not included in the calculations.

Both of the speakers, when asked about different events in the future, had disturbingly identical responses. “I can’t say. We are in uncharted territory.”

The Domino theory in Vietnam was a crock, but right now we have so many things falling on each other that the metaphor seems appropriate.

2. What does it mean?

Let’s look at the above facts in light of their effect on our businesses.

Economic growth and unemployment
The projections I’ve seen are for slow growth. Some say we will have a double dip recession: two quarters of replenishing inventories and the supply chain, followed by another slowing. That is the “W” shaped graph scenario.

Others say the recovery will be a “U.” Still others say an “upside down square root sign” meaning a long flat period. No one, absolutely no one, says we will have a “V” shaped recovery such as in the 90’s and 2002.

So growth will be slow, likely in the 1% to 1.5% range. Some, like Stiglitz, say we will face “3 to 5 years of Japanese style malaise.”

Employee productivity increases by an average 2.2% annually. It has been much greater with the layoffs and through the introduction of the PC, but 2.2% is the long term average. We are still adding about 1% to the working population annually; although that may rise due to delayed retirement by Boomers who have seen their savings shrink.

So we need around a 3.5% growth rate in GDP to absorb productivity increases and new entrants before we start shrinking the unemployment rolls. No one is predicting 3.5% growth in the next couple of years. In addition, we have to return all the employees on short hours or short pay before we hire anyone. Look for unemployment to stay this way for some time.

Consumer spending
As I pointed out in January, the explosion of credit led to a huge overbuilding of commercial space. More on that later, but the savings rate of all Americans has jumped from a negative 2% to about 5%. With consumer spending at 70% of the pre-recession GDP, that put almost 5% of the national economy out of circulation.

I learned a new term this week; “the paradox of thrift.” The more people save, the worse the economy becomes, and so the more people save. Add to that the 17% that can’t save because they don’t have enough for expenses already, and the consumer driven economy looks pretty grim.

The rising stock markets have pulled some of that money away from savings. I admit to not being clear on exactly how that’s figured. I think retirement account investment is savings, but direct investments are not, but I’m not sure. Either way, if we get a bump in interest rates and a slip in the markets, just watch how that savings rate spikes again. No one wants to be caught like they were last October.

Banking and Commercial Lending
It’s a good time to be a conservative, solvent banker with an underpinning of consumer deposits. You are borrowing from the Fed at essentially zero, and lending it out at the best spread you’ve ever seen.

The truth is, you need to make a lot of money because the FDIC just asked you to pay the next few years of your vastly higher deposit insurance premiums in advance. Ouch! The FDIC reserves didn’t even make it through a year of this mess. What happens when the next year is worse, and the FDIC has already borrowed through 2013? I’m betting on more special assessments, putting greater upward pressure on rate spreads. That slows business even more.

It could be worse. You could be one of the many (some say a majority) of banks whose balance sheets depend on commercial real estate mortgages. Office buildings and strip centers have low occupancy, and many of the rents are at discount. Here’s what that would normally do.

As a banker, I value your building by its income stream, or capital return rate. If you are projected to generate $100K in rents at say, 85% occupancy, and I expect a 10% cap rate, then I would value your building at $1,000,000. You put in $200,000 (20%) and I will lend you the other $800,000.

At the end of 2009 I look at your results, and find that you were only 70% occupied, and did some discounting, so that rents actually came in at $62K. Now your building is worth $620,000 by my calculations.

So I reset the value on my books, look at your remaining mortgage balance of $775,000, and nicely ask you to come down to the office with a check for $155,000 to make up the difference. That’s if I don’t ask you to bring $279,000 so I have an 80% loan-to-value ratio again.

What? You don’t have $155,000 (or $279,000) because your rents were down? No problem! Since TARP I no longer have to “mark to market” on my assets. So I can roll your financing for $775,000 on a $620,000 building because I judge, in my expert opinion, that over the life of the loan the asset will someday be worth as much as I have it on my books for. Neat, huh?

As Dr. Stiglitz said, there is seldom a good reason for markets with poor transparency to become even less transparent. Many banks will do this until their balance sheet becomes so unrealistic that they fold even though they are technically solvent under the current rules; thereby increasing the pressure on the FDIC.

Finance
By now, you are probably asking the same question millions of Americans have voiced, which is “Why don’t the regulators do something about this?”

Short answer: Because there are 5 (count ‘em, five) financial industry lobbyists in Washington DC for every Congressman.

Longer answer: Because our national legislature has lost any appetite for regulating the markets, (which just might be related to the short answer.) They will hold hearings on Merrill Lynch bonuses, slap a few people around, and move on.

Everyone (except those of us who are paying for it) is pretty comfortable with the current system. People in the financial industry get paid huge sums to take big risks with other people’s money. If they succeed, their huge paychecks get even huger. If they fail, we socialize the losses. That means everyone shares.

The institutions that were deemed “too big to fail” were merged, so they became even bigger. Now they are “too big to fix.” Where we used to let them crash, wiping out the debt holders and shareholders, now we “have to” save the mutual funds and union retirement funds, so we pay everyone off with tax dollars. Actually, we are paying it with your children’s tax dollars.

If you were proud of not being one of the spendthrifts, of not running up your credit cards, of not hocking your house to buy big screen TVs, I have news. Your government decided to do it for you.

The Deficit
My mom says “I know things are bad, but I live on Social Security and a few CDs. None of this really will affect me.”

Perhaps, but it really affects us all. The deficit makes us less credit worthy as a country. A recent issue of The Economist compared the US Federal Reserve Bank’s balance sheet to the Bank of Zimbabwe. Isn’t that comforting?

Maybe we’ll start getting emails from Fed employees, offering to transfer millions in frozen accounts if we just give them our bank account number. Oh… they already have our bank account numbers. Never mind.

The “Third World” is rapidly gaining. China has pretty much blown us out of Africa, as business goes. They are passing us in trade with Brazil, and the rest of South America is following. Their economy will grow at 6-7% this year, and that was in a recession. The developing world just passed the USA in total trading volume with China. We are now their second best market, and Europe is catching up fast.

China, Japan and the Middle East are acutely aware that they hold trillions of dollars in US debt; and that we are printing money to devalue our currency through inflation, making that debt worth less to them every day.

As long as they though they needed to lend us the money to buy their stuff, it was a price they had to pay. Now they are beginning to understand that they can get along without us. They will soon start to demand the risk premium that’s appropriate for debt that will decline in value over its lifetime.

In 1981 I was factoring our receivables at 6 points over prime. The prime rate hit 18%. That meant my first 24% in gross margin went to pay financing costs, before any operating expenses. Our company was snatched up at a bargain basement price by a German supplier who could borrow at more reasonable rates.

Our creditors’ big decision now is when do they want to step up and take the one-time hit? Money is a theoretical mechanism anyway. (Read “Greenback” by Jason Goodwin) Introducing a world trading currency would cause a huge fall in the dollar, but it would relieve their need to accept dollars, and the deflation risk that accompanies them, in the future.

For us, it means we start paying for our imports, especially oil, in a currency that has to be exchanged at whatever its current value is. We screamed about $4 a gallon. The Italian Lira buys gasoline at $4 a quart.

So how do we stop borrowing or printing money to pay our bills? It isn’t going to be easy. Take the stimulus bill for an example. Why aren’t we seeing the effect of an $800 billion infusion?

Because the first $400 billion disappeared. That’s how much the state budgets were under water for 2009 and 2010. Most states are required to have a balanced budget. No revenues, no services. Despite the many political speeches about being frugal, budget cuts were only by a fraction of what was missing due to reduced income tax and sales tax collection.

I have a friend who is a legislator on the appropriations committee at the state level. They were apportioning the stimulus money as soon as it was passed. Ten billion for education? That’s ten billion less that the state has to find. Fifteen billion for highway construction? One more highway we don’t have to pay for.

So at least half of the stimulus money is going to maintain current spending levels. The biggest impact of the stimulus is that things aren’t a lot worse than they are. The states have mostly avoided massive layoffs of their own.

We can’t stimulate the recovery by lowering interest rates, as is customary. Rates are at zero, so have no place to go. So the other choice is another stimulus bill. That means borrowing more. That means printing more money. You can probably see where this is going.

As to my Mom, she probably gets more on her CDs and no COLA on her Social Security. Her finances are a wash. Not so for the rest of us.

3. Why do you want to depress everyone?

Let me make this plain. This is NOT a political blog. Nothing I’ve said here places blame or points fingers. We are talking about gravity. It is what it is, and the effect is there whether you like it or not.

I’m not making any of this up. I’m not saying whether health care reform is right or wrong. I’m not trying to pin it on this administration, or the last administration, or Wall Street, or indolent Americans, or the Chinese. Facts are facts. It’s gravity.

I do think that the Fourth Estate plainly likes this administration more than the last, and is more favorable in its coverage. I do think that the media across the board avoids complex and difficult issues, and this problem is very complex. I do know, for a fact, that most folks don’t want to think about living though more of the same when it comes to 2009.

So when the talking heads tell you things are getting better, examine the information, not the delivery. Is losing “only” 500,000 more jobs actually an improvement? Is a positive GDP by itself enough to bet your next expansion on? Be very, very critical of what you see and hear.

Don’t ask me whether to buy or sell stocks. I have no clue. I’m taking the time to write this because I want my clients and other business owners to pay attention and to be ready. You are ready if you are running your business the best you can. You may say that you are doing that now, but you will need to do better.

4. What is a business owner to do?

Getting back to the basics is a hackneyed phrase, and like most over-used sayings, has lost much of its meaning. Here is what you can focus on.

Cash
Cash may be the only thing you have to fall back on if you hit a bump in the road. Your credit line is likely to be reduced, and may disappear. At the very least, it will be a lot more expensive than it was.

Do not pay down debt. Unless you fear a loan call because you are breaking covenants, continue paying today’s low-interest notes over their term. $100,000 in cash will make that $5,000 note payment for 20 months if you run into trouble.

Profits
Maintain profitability at all costs. It is the only way to generate more cash. You may want to take out the profits for tax purposes, but be prepared to lend them back.

It’s hard to keep up margins in a brutal pricing environment. You have no choice. Back in the inflationary 80’s we cancelled all catalogs and price sheets. Every one of our 5,000 SKUs were “call for price.” No one liked it, but we didn’t have a choice.

Many of our members are making the tough decision to give up the demanding, high volume-low margin customer. Whether you can afford to do that is dependent on your fixed vs. variable costs.. If you have high variable costs, especially if you are in a service industry, you may be better off without them.

Employees
If you decide to drop marginal business, drop those variable expenses immediately. Don’t become a cheerleader for “we can replace it in time.” You probably can’t, and you are bleeding cash every day that you try.

It’s cold, but if you lay off people the likelihood is that most of them won’t be going very far. You can get them back if you need them.

The last 12 months have shown you who gets it and who doesn’t. Every one of my clients admits that they have employees who acted like the recession was someone else’s problem, or have found it a convenient excuse for underperforming. It’s time for them to go, and seniority isn’t a factor.

Every termination, whether voluntary or involuntary, is cause to reexamine job descriptions. You should have one of those WWII posters up, but this one says “Is this hire really necessary?” Can you split the job up? Can you do it with a part timer? Can you do it with TWO part timers? There are plenty of folks out there in that 17%.

If you haven’t frozen wages, think about it now. Offer to share some profit instead. If there is an employment tax for health care, you will be sharing the burden instantly.

Purchases
Every purchase should provide a long term cost savings. Start downsizing vehicles at every opportunity. It really isn’t a question of whether fuel will be vastly more expensive. It’s only a question of how soon? By the time everyone else wakes up, small vehicles will be selling at a premium.

When your technology vendor says it is time to upgrade, demand to know what you will gain. “Faster” isn’t a feature if the operator isn’t currently at maximum capacity. The business world turned Vista down flat, and got away with it. Even Microsoft is learning that the customer has power.

Green is nice, but frankly it is a self-imposed competitive handicap to those who don’t participate. If paying more for electricity that is supposedly wind-generated makes you feel good, that’s great. If you can afford to be uncompetitive because your costs are higher, better still. (For the other guy)

My responsibilities are first to my family, second to my employees, and third to my clients. I feel a responsibility to the planet and humankind, but only after I’ve taken care of the first three. Short-sighted, I know. So shoot me.

By the way. At the risk of sounding like an investment advisor, I wouldn’t buy commercial real estate just yet.

Sales
I’m finding that sales people are the worst when it comes to blaming the economy for their performance. That’s why I started the series on compensation.

It’s harder than it was. Just answering the phone isn’t selling. Closing takes twice as long, collecting takes three times as long, and you have to beat off four competitors to get a reorder. So what’s your point?

The tribes who eat well during lean times are the ones with the best hunters. If your hunters aren’t getting the job done, you have to invest in better ones. This is the toughest place to suck it up. You can’t afford to lose a single sale, so what do you do about the salespeople you have who aren’t doing the job, but whose absence may cause more lost sales?

You can reduce your profits to add capacity until you can fire someone. You can fire them now and try to save as much as possible. You can reduce their compensation and let them quit, while preparing to cover their production. There is no painless way to do it.

A hard decision, but we are in a profession of hard decisions., and a time of hard decisions. It won’t be the last one you make in the next couple of years.

And if this keeps you Awake at 2 O'Clock...well, join the club.