Sunday, January 29, 2012

A Laissez Faire-y Tale

Libertarianism and deregulation successfully trashed the US economy. Americans lost their savings, their homes, and their jobs in record numbers unprecedented since the Great Depression. Former Federal Reserve Chairman Alan Greenspan’s libertarian philosophy that markets know best is responsible for the U.S. financial crisis that erupted at the end of George W. Bush’s presidency. Greenspan’s acolytes – Treasury Secretaries Robert Rubin, Larry Summers, and Timothy Geithner – also bear responsibility for the existing international economic debacle. And it all began with Ayn Rand.

Rand immigrated to the United States from Russia in 1926, the year Alan Greenspan was born. The celebrated fiction author of the novels The Fountainhead (1943) and Atlas Shrugged (1957), Rand championed libertarianism. She famously told Mike Wallace in a 1959 CBS television interview that she believed in “the separation of state and economics.” She opposed all regulations of markets. Greenspan became her pupil and she was present when he was sworn in as President Gerald Ford’s chief economic advisor. That she came from an oppressive government regime likely explains her extremist laissez-faire attitude – something that Republicans love.

By the time Rand became a Hollywood screenwriter, President Franklin Roosevelt signed the Banking Act of 1933 (Glass–Steagall Act). This New Deal legislation established the Federal Deposit Insurance Corporation (FDIC) and introduced banking reforms to control speculation. Following an era of corruption, financial manipulation and "insider trading" resulted in more than 5,000 bank failures following the 1929 Wall Street crash.  The Glass–Steagall Act also allowed the Federal Reserve to regulate interest rates in savings accounts.

Deregulation fever took hold in 1980 with the enactment of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) that gave the Federal Reserve greater control over non-member banks. Among other things DIDMCA allowed banks to merge, forced all banks to abide by the Fed's rules, and removed the powers of the Fed under the Glass–Steagall Act to set the interest rates of savings accounts. Ronald Reagan became president that year, famously saying that government was not the solution to the country’s problems, “government is the problem.”

The Alternative Mortgage Transactions Parity Act of 1982 (AMTPA) removed regulations that barred banks from making anything but the conventional fixed-rate loans. That gave birth to the kind of mortgages that put borrowers in default situations; Adjustable-Rate mortgages (ARM), Balloon-payment mortgages, and Interest-only mortgages crushed borrowers. The option-ARM allowed borrowers to underpay by as much as they want during the first few years of the loan so that the unpaid monthly interest got tacked onto the size of the loan.

A $300,000 mortgage could become a $350,000 loan. Homeowners could find themselves out of equity, upside down, and into default.

As for Alan Greenspan, he continued to build upon his libertarian Wall Street-friendly influence in Washington. On August 11, 1987, the Senate confirmed Greenspan as President Reagan’s nominee for chairman of the Federal Reserve. Paradoxically, the Ayn Rand influenced, anti-regulation, free-market economist Greenspan became the ultimate regulator as the head of the central bank. Two months later, on October 19, the Dow Industrials' plunged 508-points and the New York Stock Exchange crashed.

But as a disciple of Ayn Rand, Greenspan presumed that “the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” as he testified before Congress. He sought and attracted fellow believers in free-marketeering who grew in their influence and power during the Clinton administration. Greenspan’s inner circle included Wall Street financier Robert Rubin, Harvard economist Larry Summers, and the Treasury Department’s Timothy Geithner. Each of them became Secretary of the Treasury.

The so-called go-go ‘90s seemed to confirm Greenspan’s hands-off approach to regulation. But as a result the financial world suffered a fiscal heart attack in 1998.  

Long Term Capital Management (LTCM) started to meltdown. The secretive computer model driven firm made huge leveraged bets on various forms of arbitrage, in particular securities called over the counter derivatives. Derivatives made up an unregulated $27 trillion dollar international market. Unfortunately, LTCM’s proprietary computer models failed when a financial crisis in Russia fractured their virtual financial world and crashed those models. It took a private bailout, overseen by the Federal Reserve, to prevent systemic financial catastrophe.

Congress summoned Fed chairman Greenspan. He again assured them that markets know best. He told them that he knew of no regulations that could prevent people “from making dumb mistakes.” So despite the systemic meltdown, Congress took no regulatory action. The following year Congress sent President Clinton the Financial Services Modernization Act of 1999 (Gramm–Leach–Bliley Act) which he signed. The Gramm–Leach–Bliley Act allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate.

From 1999 to 2008 the grateful financial industry spent $2.7 billion on lobbying, while individuals and committees affiliated with it made more than $1 billion in campaign contributions. During this time, the banking industry hid its use of off-balance-sheet derivatives and its excessive use of leverage. That created a shadow banking system  in which the banks relied heavily on short-term debt. The lobby got what it wanted and Greenspan got the praise. However, Greenspan's apparent successes in managing the economy from 1987 to 2006 are a façade. That management created the largest credit bubble in world history.

President George W. Bush awarded the Presidential Medal of Freedom to Alan Greenspan after his 18 years at the Federal Reserve In 2005. Hailed as a financial wizard, Greenspan retired in 2006. Dr. Ben Bernanke, a Princeton University Economics Professor, succeeded him. Goldman Sachs Chairman and CEO Henry M. Paulson became Treasury Secretary. Greenspan’s protégé Timothy Geithner served as the CEO of the Federal Reserve Bank of New York. The U.S. housing bubble continued to swell.  

In 2008 a systemic failure like the LTCM meltdown a decade earlier hit the Wall Street. The investment house Bear Stearns began to meltdown. It imperiled the interconnected global financial market, largely because of derivatives that had been created with toxic mortgage backed securities. Federal intervention in the form of a loan to J.P. Morgan Chase as an intermediary allowed Bear to be bailed out, but it did not solve the underlying problems such as secrecy, avarice, and fraud.

Next, the epidemic mortgage crisis forced the Treasury to nationalize Fannie Mae and Freddie Mac, putting each of the mortgage giants into conservatorship. Secretary Paulson said that "that conservatorship was the only form in which I would commit taxpayer money to the GSEs [Government Sponsored Entities]."  The Treasury committed to invest up to $200 billion to keep the GSEs solvent.

Wall Street’s Lehman Brothers faced bankruptcy next. Secretary Paulson decided to teach Wall Street a lesson. He told Lehman management that the government would not step in. Lehman needed a buyer but found none. Forced into bankruptcy, the government allowed Lehman to fail. With that, the systemic risk plunged Ireland into trouble. The Bank of England had to start bailing out banks. Iceland went bankrupt. China faced 0% growth. At home U.S. banks stopped lending. The world financial system began to meltdown.

Then one of the world's biggest insurers, American International Group (AIG), fell victim to the mortgage backed security crisis. This time, however, the government decided AIG truly was too big to fail and seized control. The $85 billion deal demonstrated the government’s extreme concerns about the danger of what such a collapse could pose to the financial system.

Secretary Paulson and Fed Chairman Bernanke called congressional leaders to Nancy Pelosi’s office and bluntly requested $700 billion dollars to save the US economy. At first rejected by the House, the Emergency Economic Stabilization Act of 2008 was signed into law by U.S. President George W. Bush on October 3. It created the Troubled Asset Relief Program (TARP) which allowed the United States government to purchase assets and equity from financial institutions.  

To solve the lending crisis, Secretary Paulson summoned 9 of the largest banks’ CEOs to the Treasury. He forced them to accept capital injections that made the United States a stockholder. To prevent the failure of Wall Street’s Merrill Lynch, Paulson arranged its buyout by Charlotte based Bank of America. Under TARP some banks got bailed out. Other banks were seized by the FDIC and placed into conservatorship until they could be purchased.

In retrospect, many analysts and economists now blame weak Fed policies for the 2006–2008 housing crash, the Wall Street financial crisis, and resulting recession. Failing to take action to stem the bubble in housing prices, inadequate oversight of financial firms, and keeping interest rates low for an extended period are major contributors.

Alan Greenspan now says, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." He testified to congress that he “found a flaw.” Greenspan said the crisis had shaken his very understanding of how markets work. He also agreed that despite his former opposition to it, financial derivatives should be regulated.

The Ayn Rand-inspired laissez faire libertarianism that Greenspan and his fellow US financial regulators practiced not only failed on a colossal level but led to phenomenal government interventionism. Deregulation and the absence of regulating allowed for massive investment fraud hidden in an opaque and secretive international monetary system. It also concentrated Wall Street firms and U.S. banking, which will continue to pour money into opposing past and future regulations. Rand’s philosophy emanated from a world coming into the 20th century. It failed the world coming into the 21st.  

 Originally published as A Laissez Faire-y Tale on Blogcritics.

Thursday, December 29, 2011

Budget: What Budget?

The so-called Ryan budget that occupies so much news space, as its author does televised news-talk shows to explain it, misses an important point. Its center piece is to go after one of the large transfer payment generating machines in government, Medicare. Government payments to individuals, whether they are mailed or direct deposited, are called transfer payments. Two of the other large transfer payment generators are the Social Security Administration and the Veterans Administration.

The important point to consider is that government programs are overhead and therefore are fixed expenses. While it is true that transfer payment amounts are trending upwards and will continue to do so as the post-WWII generation reaches retirement age, they are still fixed expenses which are only part of a budget equation. The other two parts of the budget equation are variable costs, also known as the cost of doing business, and revenue. Business revenue comes from sales. Government revenue comes from taxes.

Budgets that propose to reduce revenue work when a business plans to downsize as a company strategy. For example, instead of making a 2% margin on a volume of $20M in revenue, a $400K profit; the downsize strategy is to make a 10% margin of $10M revenue, a $1M profit. You can see why a budget that cuts fixed expenses and reduces revenue is unsellable to a board of directors and to stockholders unless the strategy is to downsize the business. So is the idea of downsizing the federal government and reducing taxes. But that is a political digression.

A budget or the lack of a budget is an elephant in the living room of a business. Many times, as a management consultant, my job has been to say to business owners, “Hey, you have an elephant in your living room. What are we going to do about it?” Then come the excuses that it’s in their head or that their accountant does it or that they have a spreadsheet that they purchased with their business plan online or that they are working on it, etc.

Any planning that a company tries to make without a budget is a shot in the dark or some other metaphor connoting guesswork. Many times entrepreneurs lack business training per se, which is why they go to SCORE [Service Corps of Retired Executives] or they bring in a consultant. Many business owners make the faulty assumption that their accountant takes care of their budgeting for them. The accountant is a good person to ask about the arithmetic, but generally speaking a budget is not an accountant’s job.

An accountant’s job is tax, just as an attorney’s job is law. In my view, the only times that a business owner needs advice from either profession is when they are dealing with the IRS or dealing with contractual matters. They both are without doubt the wrong professions to ask for business advice. Asking an accountant for business advice is like driving a car and trying to see where you are going by looking in the rearview mirror. An attorney can only tell you for certain what routes not to take and will find ones not to take that you never knew existed.

To be fair, the accountant and the attorney and the banker, for that matter, all look at the same financial data. Each is a different audience, if you will. They look at different things in addition to how they are going to get paid for looking, which is its own consideration. The major sections of the financial data that everybody looks at are overhead, considered a fixed expenses, and costs, which are considered variable expenses. Revenue is the paramount consideration for business.

“Why are you in business?” is a straight forward question with only one correct answer: to make a profit. You would be amazed at how many times business people tell elaborate tales in answer to that question about providing something for their fellow human beings or some such thing. Others seek to revolutionize something or to create new atmospheres. It sounds good but it does not matter. Making and protecting profit is the only thing in business that matters. Business cannot succeed at that venture without a budget and an organized, annual budgeting process.

But government is not a business. Balanced budgets exist in business. Revenue minus expenses minus costs equals profit. Prudent business management is all about balancing revenue and costs to achieve profit. Successful management thinks inside the box, because that’s where the money is. Budgets make profits happen.

The idea of a federal budget is relatively new. You will not find a federal budget mentioned in the Constitution. The Budget and Accounting Act of 1921 created the U.S. General Accounting Office as part of the Legislative Branch to audit the federal books and prevent fraud. The 1921 legislation created the Bureau of Budget in the Executive Branch to coordinate budget submissions by various departments and agencies. By the 40s, the idea of a balanced budget was so much old political rhetoric. Political parties say things they think that voters want to hear. That is what the Ryan budget does. That is all that it does.

 Article first published as Budget: What Budget? on Blogcritics.

Saturday, November 26, 2011

Sorry, Cain Fans

Within the first few minutes of his appearance with David Letterman, Herman Cain told the host and audience two things that disqualify him for public office. First, candidate Cain proclaimed that he is “not a politician.” Second, he stated that the “country should be run like a business.” It does not work that way. If a person is not a politician, they do not qualify for an elected government position – appointed, maybe, but not elected, where being a politician is requisite. As to running government like a business, that is a false analogy. It does not work that way.

Government is like business” is a text book example of the false analogy. In such an analogy, two objects, A and B, are shown to be similar. Then the argument is that since A has property P, B must also have property P. The analogy fails when the two objects, A and B, are different in a way which affects whether they both have property P. You have heard this populist argument that just as business must be sensitive primarily to its bottom line, so also must government.

The problem is that the objectives of business and government are completely different. Business is all about profit and governments are all about people.

Both business and the government have budgets. Budgets are based upon revenue and expenses. However, business revenue is based upon sales and government revenue is based upon taxes. The revenue mechanisms are entirely different, hence the false analogy. Governments can only increase revenue by passing laws to raise taxes, which may have irksome political implications beyond the grasp of the finest CEO. Businesses can only increase revenue by increasing sales.

In either case, reductions in spending do not increase revenue. Less spending only impacts margin, which is not a government consideration at all. The government does not have a Profit and Loss Statement or a Balance Sheet, where there is such a thing a negative equity. The concept of equity is not governmental.

The whole idea of a federal budget is relatively new anyway. The Constitution does not even mention such a thing. The Budget and Accounting Act of 1921 created the U.S. General Accounting Office as part of the Legislative Branch. Its purpose is to audit the federal books and prevent fraud. That 20s legislation created the Bureau of Budget in the Executive Branch to coordinate budget submissions by various departments and agencies. By the 40s, the idea of a balanced budget existed but was considered just so much old political rhetoric.

Speaking of the Constitution, the balanced budget amendment, H.J.RES.2, came to the House floor and went to committee last January. Last week Congress failed to pass it, as the Super Committee succeeded to fail.

Budgets that propose to reduce revenue only work when a business plans to downsize itself as a company strategy.

Let’s say that a company makes a 2% margin on a revenue volume of $20M, which is a $400K profit. The company’s downsizing strategy is to make a 10% margin on a revenue volume of $10M, a $1M profit. The $600K difference is sellable to a BOD because it cuts fixed expenses and reduces revenue. The idea of downsizing the federal government and reducing taxes may sound good, it is just that the government has no mechanism to reduce its size.

President Reagan said, “No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!”

Balanced budgets only exist in business. Prudent business management is all about balancing revenue and costs to achieve profit. That is why successful business managers, as Cain claims he is, think inside the box. That is where the money is. Likewise, successful politicians think inside the box, because that is where the votes are.

At his word, Cain says that he knows all about being a business person but not about being a politician. So, why should anyone vote for him? He is missing the point. Politicians do not just say things they think that voters want to hear. Politicians say things that are calculated to appeal to an electorate constituency. Candidate Herman Cain says things that may sound good to him, but they did not sound good to television show host David Letterman. Sorry, Cain fans, your candidate does not qualify.

Bragging about not being a politician and expecting to become president is like bragging about not being a business person and expecting to become a CEO.

Article first published as Sorry, Cain Fans on Blogcritics.

Thursday, October 6, 2011

Easy To Buy

Ten years after my first entrepreneurial failure, I had to force myself to learn sales, at which I seemed to have to work harder than everyone else. It was hard in a simple way. Like playing a musical instrument, it took a lot of practice. The sales cycle begins and ends with prospecting. The routine is seeing new people and following up on them. The difference between success and failure is the dogged tracking of everything and constant measuring of minutia. But, the thing that finally got my attention was easy to understand and embrace. To quote the psalmist Jimmy Buffett, “it was so simple like the jitterbug it plumb evaded me.”

Make it easy for the customer to buy.

Exceeding customer expectations, human connection, and relationship building are key components of making it easy. So, how about hardware gadgets and software applications? Does technology make it easier? My answer is a definite “maybe.” Let me make it easy for you to buy this essay on whether or not social media accomplishes my axiom. Remembering that hindsight is 20/20, let’s look at the innovations that founded our present situation.

Consider an analogue Internet connecting people by a web of railroad tracks and postal routes that allows for two-way communication utilizing printed multi-page websites. Welcome to the dawn of the 20th Century.

President Abraham Lincoln signed a law on May 20, 1862 called the Homestead Act of 1862. Applicants who were over 21 and who had not born arms against the United States got a “homestead” or grant of 160 acres of undeveloped federal land west of the Mississippi River. They had to live on it for five years and improve [farm] it in return for a deed. Eleven states had left the Union at the time and there would be political and regional issues as a result, but aren’t there always when a government gives people anything? The point here is that the Act expanded western settlement which followed the growth of the railroads.

The postal system implemented Rural Free Delivery (RFD) in 1896. Since the country was literally wireless, telephone wireless, two-way communication was by post. RFD also made the mail order business possible. By permitting the classification of mail order publications as aids in the dissemination of knowledge, it entitled those catalogs a one cent per pound postage rate. That

made the rural distribution of catalogues quite economical while the railroads provided distribution to delivery points.

The Sears, Roebuck and Co. catalog called itself the "Book of Bargains: A Money Saver for Everyone," and the "Cheapest Supply House on Earth," claiming that "Our trade reaches around the World." At the apex for mail order merchandise, you have the model website for its time that included testimonials from satisfied customers. The catalogue made every effort to assure the reader that Sears had the lowest prices and best values. The 1903 catalog included the commitment, "Your money back if you are not satisfied."

The point is that it is not just one thing that makes a milestone, but a combination of things that is transformative. The combination of catalogue, RFD, and the rail system made it easy for customers to buy.

Talk about making it easy, here are some more combinations for consideration. The increasing use of the credit card from 1958 is a significant development for consumers and culture. Add that to the introduction of the American Telephone & Telegraph (AT&T) 800 toll-free service in 1967, so that subscribers like Sears could allow their customers to reach them without toll charges, and you have a milestone.

The next milestone occurred when the development of an Internet from 1957 is coupled with the relative affordability of the personal computer in about 1986. Add to that combination the growth privately owned shipping services with incredible logistics like UPS and FedEx and by 1994 the Dotcom bubble is on with the founding of Amazon. The next year brought Craigslist, Yahoo and eBay. That being noted, the milestone is that consumers could look at an online catalogue, call a customer service agent, process and pay for an order and have it delivered the next day.

Just for the record, Sears decided to quit producing its “Wish Book” catalogue in 1993 in favor of making it easy for customers to buy online.

We arrive, finally, at the business use of social media. I will argue that the first social medium is analogue – a bulletin board in a common area that uses paper and thumb tacks. I will further argue that Twitter and Facebook form the electronic generation of the same. How important are they?

According to Demandbase CEO Chris Golec, “Despite its increasing influence, it’s important to keep in mind that no business sale is made without the buyer going to the corporate website first.” In fact research shows that such sites are seven times as effective at generating sales leads as social networks such as Twitter and Facebook. 25% of survey respondents admitted the most sales leads came from their website, followed by 14% who selected email marketing campaigns. Online advertising followed that. Social media accounted for 3% of respondents’ recommendations. What’s on your website?

I am not suggesting that social media should be ignored. Neither am I suggesting that business has to have a Facebook page and a blog because everybody else does, although that is tempting. Instead I will argue that businesses need to think about implementing social media as part of its message mix, if for no other reason than to accomplish three things: engage their customers and exceed expectations, make a stronger human connection, and build better relationships. If those can be done strategically, by which I mean being able to measure the results, perhaps another milestone will occur.

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Article first published as Easy To Buy on Blogcritics.

Wednesday, August 10, 2011

The Human in Human Resources

Assume you are the CEO, president, or owner of a company and you have the responsibility and authority to make decisions. Some of them can be delegated but the ultimate responsibility is yours. Your company has an executive management position to fill. In the Human Resource department of your company you have a person working for you with the responsibility for selection and placement of personnel. They have posted the position opening on an on-line job board. In this economy with its extreme unemployment rate, especially in the management ranks, that someone is now buried.

While they have merit and arguable utilitarian value, the number of Job Boards has increased dramatically since Monster appeared. That cute name brand has been copiously copied since 1999. Job boards now have boards. Just like everything else that started on the Internet as a free service, many job boards, such as Ladders, are fee based -- not free. For fees that range from low monthly rates to high single pay prices, the boards sell their customers résumé writing services to rewrite a job seeker’s copy using language that a person might read into language that a computer program reads.

Your responsible Human Resources person has received a plethora of applications and cover letters in response to the job posted on the job boards on your company’s behalf. You likely have some bright person in charge of the application screening process and they may be using some flavor of HR software to scan résumés and cover letters for key words and key phrases that display the highest probability of matching the criteria of the job description. The software helps HR people automate the selection process.

Job seekers know this and many spend money to have job board companies apply their résumé writers with their proprietary HR adapted software to make sure that the processed résumés that your person receives have the highest probability of making the probability cut. The software helps the job board people make résumés and cover letters more acceptable to an automated process. Think of it like homogenization. An odd word choice, perhaps, but forensically it’s true. Both postings and résumés become exercises in cliché as a result.

Bear in mind that the Human Resource function has other critical and largely legal ramifications for which HR software has become important. Document creation and filing, such as employee agreements and employee handbooks, are but two examples of the kind of paperwork that has become highly significant in our litigious society. Such documentation helps prevent an enterprises’ administration from accidentally giving away the proverbial keys to the company. HR is much more than just creating selection hoops through which prospective candidates must jump.

Depending on the level of the functional position, other layers of sifting through applications can be used to find the most desirable criterion matches. Profiling is another passive discriminator, as opposed to an active one which would be illegal. Similar to Myers-Briggs personality testing, or eHarmony profiling for that matter, corporations can pay outside HR enterprise companies to screen selected applicants and play matchmaker to select the best fit. Human Resource is not about dating, however.

The cost benefits of HR software applications and the efficacy of personality profiling as interesting topics themselves aside, sooner or later decisions have to be made about people that can only be done by a person, either you or someone you have designated to make that decision for you. There is no application for that other than, perhaps, a coin toss. It might sound facetious, but the cliché “all things being equal” is a circumstance in fact. If the automated process has done its job, presumably, you can pick a large coin and flip it. Throw a dart.

At the executive level in an organization the criteria changes. There are four areas at which successful management executives must demonstrate their skills: organization, delegation, functional management and supervision. Industry experience is always a plus. However, it is less important that the software business executive have experience writing code, or that the grocery business executive have experience in buying produce, than it is for the software executive to deal with the code writing manager or the grocery executive to deal with produce buying manager. Executive experience is personal.

Eventually, a name and phone number appears on the screen of a screener. At this juncture, a person talks to a person to arrange a telephone interview. From that point on the Human Resource function become human again. The idea of better technological hole and peg fitting process pretends to reduce errors in judgment. But do better holes make better pegs or vice versa? The fallacy of the idea is that the human quotient of Human Resources can be outsourced, and that turn-over and training costs will necessarily be reduced.

To me this is a case of if you believe it is so; you will buy in to it being so. I remain pessimistic about the increasing automation of the Human Resource process of candidate selection. That pessimism is based on what the ultimate management function is: making decisions. If something helps a decision makers make better decisions, I can support its use. By the way, there is an app for Monster, an application for the so-called smart phone, which is actually not a phone but a radio devise. However, as you may have gathered, I am concerned that software does not solve everything; people do, like the human in Human Resources and you.

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Article first published as The Human in Human Resources on Blogcritics.

Wednesday, July 20, 2011

Still an Analogue World

As much as I use PowerPoint and Excel to make a point, I still think it is a good idea to know how to use a paper napkin or a white board. There is something almost magical in that kind of performance because it is personal, almost intimate, especially when you are dealing with professional sales people. If you are too cool to draw a picture, there are a lot of people you are going to miss. Lest we forget, for many people it is still an analogue world.

One of my clients was a digitally inclined auto dealer who employed 10 to 14 sales people. Automotive sales forces are of a variable nature because they tend to have a 30% attrition rate. It’s not for everyone. The client faced two major problems in sales. Basically, he hated his sales people and they hated him in return. It was a digital divide. The other problem was pricing. The client discounted vehicles below break-even and posted them on the Internet. Sales did not know about it but their computer savvy customers did.

The client invested in ten furnished computer cubicles with really nice big monitors, whiz-bang phones, and the super-duper training seminars that were included. His sales force grudgingly endured the latter and pretty much ignored the former, except for outbreaks of pornography watching and chat-room chatting. The client could not understand why “his guys” did not use the great tools he had given them. When they did use them, he said, “They’re like a bunch of monkeys with typewriters.” He told them that.

It didn’t help that the client had been through a Dale Carnegie sales training program. His framed certificate of training made him conclude that that he was a great salesperson. Unfortunately, he sucked air as a sales person. He genuinely lacked people skills. He did not know how to listen to prospects. That made him impatient with them. Nor could he understand how people refused to follow his robotic and raced through presentations. It did not help that the client told his sales people that they didn’t know what they were doing, which he did.

One thing that self-described great sales people like auto dealers have in common is that they are marks. They are called “lay-downs.” They will buy anything. They have no sales resistance. Because they are such great sales people, they overcome their own objections. They are especially vulnerable to the bane of all professional sales people existence called “Susie Sales Girl,” who is the willowy well-heeled blond who sells sales seminars, full-page color newspaper ads, websites, bus advertising that forgets to include the dealership phone number on a 30 vehicle fleet, novelty pens, and enough balloons and helium for the Macy’s Parade. When they sell computer hardware and software, clients can’t write a check quickly enough.

Dealers are not the only people who get sold hardware and software. Many business owners buy into the idea that software by itself can solve everything, or at least that it should. It is the using of the software, along with everything that implies that can be problematic after the sale. The biggest after sale problems are technical support and user training. Support and training are rarely onetime events but tend to be treated as if they were. However, when such a tool as a complex computer application cannot be used, the hardware might as well be a boat anchor. Except for sailors who just bought a new boat, no one wants to admit they bought a boat anchor for their business.

My client had purchased 10 boat anchors as well as a jumbo monitor for the conference room, where he routinely put his sales crew to sleep with PowerPoint presentations and webinars. That created a hate-hate relationship enhanced by technology.

Organization integrity was the management issue in this case. As an owner, the client had assumed to position of General Manager and Sales Manager. He employed a Service Manager, Finance Manager, Parts Manager, an Office Manager, a Personnel Manager and a Facilities Manager. But in those positions they had no one to report to because the owner was so busy in his area of least competence. So those managers were more or less on their own. The organizations’ lines of communication atrophied and business suffered as a result.

To correct this situation required me taking on the position as General Manager myself until a new GM could be selected and hired. Next came the tasks of appointing a Sales Manager and establishing a balanced management organization with a routine reporting and communication process. By establishing an organization structure that put a management buffer between department managers and ownership, it became easier to coordinate department functions to take care of the business.

I am not suggesting that it was easy. Routines had to be changed and there was a sort of smiling resistance. Everybody wanted to keep doing what they had been doing, such as the owner meddling with customers and sales people and department heads running their own shows. By the end of 13 weeks of regime change, the operation began its recovery.

About the sales department and the boat anchors, that issue was to get the sales people to see what was in it for them to use the tools that the business owner had purchased. As I explained almost daily to the client, his guys were good sales people. They were analogue people who were skilled at listening to customers and overcoming objections as if it was a game. All they needed was a product to sell, a pen to write with and a piece of paper to write on. What they needed to believe was that there was value in learning to make the “Internet machines,” as they called them, help them with their sales work – prospecting, following up and tracking results.

To do that required me putting a white board in my office so that my department managers and I could draw on them. It did not require telling them what I was doing as much as just doing it and getting them used to doing it. Together, we used the analogue tool to hash out what we wanted the digital tool to do for them. With time the managers began to own their Excel spreadsheets and use them in their reporting, as opposed to shoving programs down their proverbial throats. It also helped to supplant the jumbo screen with a jumbo white board and to make sales meetings more interactive. I replaced emitted light with reflected light. No one got sleepy.

Even the owner succumbed to something as simple and analogue as me writing on a cocktail napkin to demonstrate the difference between mark-up and gross margin pricing. I succeeded in showing him that MSRP (Manufacture Suggested Retail Price) was not a markup but a margin above the break-even point. All of the overhead costs involved in selling a vehicle, including the helium and balloons, were absorbed plus adding a gross margin. When I showed him how a mark-up price of a vehicle over invoice left money on the table, I got his attention. When he saw that discounting a price below his break-even cost him money, he picked up the napkin and put it in his pocket. The next day he showed me a pricing spreadsheet he created from the napkin. He still has it.

If there is a moral to this story, it is that how you get your message across is not important. Getting the message across is. The sales people took ownership of their workstations to increase their personal sales and quit resenting sitting in front of a monitor. The dealership quit leaving money on the table by pricing and discounting correctly. People developed new routines for a new General Manager to oversee. Whether or not those folks lived happily ever after I cannot say. What I can say is that software does not solve everything. People do. It is just that sometimes you have to draw a picture with them.

Article first published as Draw a Picture: It's Still an Analogue World on Blogcritics.

Sunday, July 10, 2011

Family Advisor and Business Savior

If you tell someone that you are a college professor, you get asked, “What do you teach?” If you tell someone you are a management consultant, you get asked, “What do you do?” In my consulting practice I organize small companies as the person they call in to get rid of former best friends, spouses or family members from the operation. [Specialty: getting Pops to retire early.] Here are three case examples. 
The wife was in tears as her husband told me that their $17M a year international wholesaling company was tearing their marriage apart. She had been working as a registered nurse until a thieving employee, who the couple had regarded as part of the family, was arrested and charged with embezzlement. Now the woman in tears revealed that the arrested party had been the company bookkeeper and that she, the tearful one, had left the nursing profession to take the embezzlers place. The marital problems began about the same time, two years earlier, and the discussion of divorce had begun.
The owner’s son would not look me in the eye as his father explained how everything had been running along just fine in his $8M a year filling station franchises, one at each end of the town. The son had closed his own profitable motor cycle repair business to come into the family company and try to get the operation back into the black from red hole that was swallowing the family alive. The son took me aside later and confessed that he didn't know how much longer they could stay open that the banks were calling every day for loan payments. As to paying for consulting services to help save them, he didn’t know how the invoices could be paid.
The client’s wife and business partner in the $14M a year lumber company asked me if I was in law enforcement, as I walked through the office to step outside for a minute break. When I asked her why she thought that, she noted that I would ask a casual question each time we met and each time the questions seemed unrelated, but she was certain that they were related. Later, when the computer with the company books crashed, she retrieved a computer from home that had a copy of the books. Asked why she had been paying vendors from the client’s personal account, she mentioned the IRS lien on the business that had not been previously revealed.
These three cases are diverse but have elements in common that are typical of small multi-million dollar businesses. They all involve family members in some capacity or another. They are all on the brink of foreclosure, bankruptcy or collapse. They involve businesses that generate strong cash flow but produce a negative profit. In other words, they were all doing just fine and making money when they were million dollar companies and home life was good. Getting bigger was not better.
Incidentally, the three examples I have chosen are all from the pre-recession economy.
I have no objection to family members working for a company so long as the integrity of the business organization is uncompromised. To determine integrity I mean honestly answering some questions that need to be asked. Do working family members have job descriptions? Are they competent in their company position? Are they properly supervised? Do they conform to all company policies and procedures? Is their compensation appropriate?
These are the same questions that should be answered for any company employee, by the way. Look at it like this, Boss’s Spouse is not a job description. Being a business owner is not the same as being a competent business manager. Being a family member does not ensure proper supervision. Non-conformity to policy and procedure is what other employees look for, such as anything that appears to be special treatment. Working in a business without compensation is as bad a plan as being paid more than a non-family member would be paid.
A $100K a year salary for a $30K position looks like theft to employees. Not being paid for a $30K position is a terrible compensation plan and a false economy that is inconsistent with competent management.
The first case required solving the work-family boundary issues that created the marital problems. The second case required reorganizing the company and changing its management. The third case required law enforcement intervention. It is all part of being a family advisor and business savior. That is what consultants are.

Article first published as Family Advisor and Business Savior on Blogcritics.