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.

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.

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 20^th 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.

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.

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.

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.

Modern Business: Flintstone or Jetson

Imagine getting off the train and lugging your suitcase without rollers. You are also lugging a locking latch briefcase with your monogram on it. It weighs about twenty pounds since it contains a field manual, your last project binder, a three-hole punch, box of colored pencils, case containing protractor and drafting tools, a sheaf of carbon paper, half a ream of lined paper, another half of white paper, a heavy duty stapler and staples, and reference material you have been toting along because you haven’t been home in three weeks.

You are looking for a payphone so you can “drop a dime” and make a three minute call to your office and you are lugging the newest and baddest gadget that transforms how you do your business as a traveling management consultant – the all new Remington Rand, full key-board electric adding machine. For $169.50 plus tax, this baby means you do not have to use your client’s equipment. It weighs a little, but the convenience is worth it. Your carry your portable manual typewriter in your suitcase for ease. You manually produce your spread sheets, pie charts and graphs.

The year is 1960. The average annual income is $5,600, according to the US Commerce Department, and you are making almost $10K after taxes. You travel by train because costs a lot less than air travel. For example, a round trip airline ticket cost about $75 to fly from Cleveland to Washington, D.C. That would be around $400 today. Your client got invoiced for it but they sure liked your electric machine.

In a world without apps, business had been expanding over the previous decade and saw the Dow Jones Industrial Average climb from just under 200 to knock at 700’s door, briefly. People, not programs, made investment decisions. Modern business was like passenger train service – 1960’s improvements to 1940’s technology.

People like George S. May realized that business was composed of algorithms. Ratios and percentages ruled decision making. That meant that newer and better technology was interesting but only in so far as it added convenience and expedience to decision making. The idea that business is business prevailed. Business did not care about anything except making and protecting profit. It is not that people were not important, they were. It is just that profit motive dominated business thinking.

Liberal minded humanists tended to resent the focus of the business community on profit over people. In every era they have raised their voices in objection to the perception that business exists only for profit and, in fact, they are correct. Successful business tends to be myopic because, as I say, business is business. That brings us to the latest breed of technical minded social networkers who see themselves as the new humanists and seek to transform the business community in modern ways.

So let’s consider Fred Flintstone and George Jetson. Brilliant creations of Hanna-Barbara, the characters are enamored of gadgetry in their respective gadget centric societies. They do their jobs working for companies run by bosses whose sole interest in making a profit. Business does not care about fads or gadgets. Just ask Fred or George.

Article first published as Modern Business: Fred Flintstone or George Jetson on Blogcritics.

Are Their Lips Moving?

The adage goes like this: How can you tell when a client/customer is lying? Their lips are moving. Adages come from somewhere, especially when they are deprecating. I do not know where that somewhere is. If I did I would tell you. I am not your client. Nor are my lips moving. And why would I lie to you? The reality is, however, that the adage must be based in some arcane fact because in my consulting practice I have found it almost painfully true.

The worst part of this bitter truth is not the distortions of fact but the lies that clients tell themselves so often that the falsehoods might as well be truths. I call this phenomenon “breathing one’s own ether.” I am not talking about the ether that was proposed by the Greek philosopher Aristotle and later used in optical theories as a way to allow the propagation of light, although I could. My ethereal euphemism refers to the ether usage during the 1930s that was the first anesthetic to make patients lose consciousness quickly and completely.

Clients slap on an invisible face mask, turn on the regulator, inhale deeply, and remove the mask from their face, lungs filled with the vapor. They look me squarely in the eye and begin to recite well-rehearsed lines from the abyss of falsehood. What is worse is the look on their face when the expect me to believe them and see clearly that I do not.

As a consultant it is not my job to believe anything that a client says anyway, unless it can be verified in writing. The absence of verifiable documentation is at least a good place to start. Even if there is documentation, its veracity must be challenged because to do otherwise is to engage in a world of ambiguity, which is something I expect from salespeople and the essence of another essay.

Here is an example. “Having my spouse work in the business saves the company money.” The false economy of having a family member work off the payroll creates other issues than a compensation plan that sucks. It compromises the integrity of the business, creates huge boundary issues between personal relationships and work relationships. Job description, supervision, company policy and procedure are all compromised. It is not a successful plan.

Let me cite a couple of television shows to exemplify what I mean. One is a comedy and the other is a reality show. One is about delusion and the other about denial. First, the comedy:

Breathing one’s own ether is the reason I have a hard time watching The Office. Its central character of the American version, Michael Scott is played so well by Steve Carell that it is painful for me to enjoy. The character is delusional. He believes he knows everything and that he is a great boss. Grant you, good comedy relies on a dose of pathos. If only Michael wouldn’t believe his own bull, but then the show would become a tragedy. In business, it frequently is a tragedy and Michaels exist more than you might think.

The reality show about people breathing their own ether is Kitchen Nightmares. Gordon Ramsay’s confrontational style aside, his clients are beyond delusional, they are in denial. It is kind of like watching grown people having their faces rubbed in their own poop by the genial bombastic “Chef” with a capital C. The owners that Ramsay confronts have signed on for abuse when they insist that wrong is right. Although I have entered the frontier of outright confrontation in my practice, you do not get letters of endorsement with bombast. Nor am I producing a reality style show.

Whether it results in delusion or denial, the problem is that the behavior becomes an obstacle to success. Michael Scott and Ramsay’s restaurateurs are in their own way.

If I were to produce a show about the management consulting practice, I would call it Extreme Make-Over: Business Edition. Come to think of it, let me slap on my own invisible mask and take a snort or two. Heck, I could sell it to Cadillac, or Donald Trump, or Budweiser, that’s it. I could star in it too; I used to be a TV weatherman and was every bit as good as David Letterman. It will be perfect for Fox or the Learning Channel. We’re talking, you know. Are my lips moving?

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Originally published on Blogcritics, June 11, 2011

Factory Tours and Facts

When politicians and pundits talk about small businesses and job creation, many of them seem to rely on Chamber of Commerce created public relations photo opportunities and televised factory tours for their information rather than finding out the facts. Here are some facts that most politicians and pundits ignore in their fantasy world of U.S. businesses.

The Small Business Administration defines a small business as “one with fewer than 500 employees.” Here is the short version of what the SBA says is important about small business to the U.S. economy.

• Represent 99.7 percent of all employer firms.
• Employ just over half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Have generated 64 percent of net new jobs over the past 15 years.
• Create more than half of the nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
• Are 52 percent home-based and 2 percent franchises.

Want to astound your friends? Ask them, “Who produces 13 times more patents per employee than large patenting firms?” The answer: US small businesses do. Furthermore, you can add, according to the SBA, “These patents are twice as likely as large firm patents to be among the one percent most cited.” You’ll get “wow” and puzzled looks. But I digress.

The National Association of Self Employed adds that of those businesses employing less than 500 people

• 77.6% are non-employers, or self-employed.
• 17.3% employee 11 to 19 people.
• 2% employ more than 20 folks.

Some perspective is in order. Go to the sports page and think about Pro Football for a minute. I am not talking about the sports teams themselves, but about the financial impact the NFL wields on franchise towns like Green Bay, which is not a major market. Business News Daily says an “NFL Lockout Could Sack Small Businesses.” According to the Daily, “The livelihoods of thousands of small business owners and their employees are at stake in each of the NFL’s 32 cities. Restaurants, bars, team apparel stores and other small businesses located within walking distance of NFL stadiums are bracing themselves for a potential lockout and the ramifications it may have.” Would you like to talk about a seasonal business?

So let’s talk about Washington political rhetoric. It continues to suggest that the slow recovery is because banks will not lend to credit worthy borrowers. According to the non-partisan National Federation of Independent Business, that is not the case. The NFIB reports that the economy generated a lot of jobs by making bad loans and they are gone now. Community banks across the country have plenty of money to lend, but “the pipeline of good applicants collapsed in the recession.”

Remember the football lockout I mentioned? The NFIB says that on the job side “it is going to take a rebound in consumer spending, particularly in the service sector to make a significant dent in the number of unemployed. The manufacturing sector is doing very well, but it does not create many jobs.” Factory tours and the Chamber are good for television, not so much for business facts. Facts are boring.

Article first published as Factory Tours and Facts on Blogcritics.

Screw the Unemployed

The House of Representatives is finally getting around to jobs, the number 3 thing on its 2010 campaign agenda. House Ways & Means Committee Chairman Dave Camp (R–MI) has introduced the legislation, “To improve jobs, opportunity, benefits, and services for unemployed Americans, and for other purposes.” The bill does not have a number yet but according to its text may be referred to as the ‘‘Jobs, Opportunity, Benefits, and Services Act of 2011’’ or simply the ‘‘JOBS Act of 2011’’. But it does not have to do with jobs; it has to do with unemployment benefits. It cuts them back.

Despite the noble wording of its title, what the bill does is to encourage states to whittle back their unemployment insurance systems. The bill gives states the option of using federal unemployment-benefit dollars to repay federal loans or provide tax breaks to businesses. Not continuing to pay jobless benefits to long-term unemployed people somehow counts as “job creation.”

Representative Sander Levin (D-MI) put it this way, “This is the opposite of a jobs bill — it is a hatchet job on the unemployment insurance program.” The Ranking Member of the Ways & Means Committee, Levin said, “With this legislation, Republicans are proposing to end this year’s guaranteed benefit for the long-term unemployed.” If states follow Michigan’s example by cutting benefits and instead using federal dollars to repay loans rather than providing weeks of aid, it could take billions of dollars away from jobless Americans.

Even though federally extended benefits could stay in place for the remainder of the year, some states let those benefits expire, benefits already budgeted and paid for in Washington. By not passing simple legislative measures to ensure that the federal government’s share of weekly benefits continues, a number of states failed to extend those benefits, as Missouri did on April 2. North Carolina, Tennessee, and Wisconsin followed suit on April 16. As a result they all denied 20 weeks of federal benefits to their jobless women and men.

Last week Florida’s Republican-controlled House and Senate passed a compromise measure, just before the session expired at midnight, that would cut maximum state benefits from 26 weeks to 23 when the state jobless rate is 10.5% or higher. Florida has one of the highest unemployment rates in the country, 11.5%. It also has some of the lowest unemployment benefits. Republican Governor Rick Scott is expected to sign the bill.

New claims for unemployment insurance are again going up and 13.7 million Americans are looking for work. According to the Congressional Budget Office, federal unemployment insurance kept about 3.3 million people above the poverty line in 2009. Job growth is weak. At the current monthly rate, it would take more than five years to return to the pre-recession unemployment rate of 5%, back in December 2007. While more aid to states could help stanch job loss, legislative fixation on the federal deficit has silenced talk of more fiscal stimulus.

On election eve the new Republican House Speaker Boehner promised to hold weekly votes to cut federal spending, make jobs the top GOP priority and fight to repeal the health care law. Representative Darrell Issa (R-CA) called the election vote a "mandate" on limited government. Issa said the message to Washington was, "Advance an agenda that will create real jobs, not government jobs, but real jobs to get our economy moving again.” So far that has not happened.

As abortion foes continue to lobby Congress, the Republican House majority has been at odds with itself on handling the deficit and raising the debt ceiling, ignorant that the near-term fiscal situation that embroils them is largely unimportant to investors. The US Treasury has no trouble selling debt and is still able to borrow money quite cheaply. It can do so because investors continue to have high confidence that debts will be repaid in full. The make-believe fiscal crisis is largely made-for-television to create celebrities out of elected politicians.

The real crisis is unemployment. Our political class does not seem to understand that it is the millions of American men and women who cannot find work that needs their attention, not the defunding of anything having to do with abortion or repealing the Health Care and Education Reconciliation Act. America’s future is at stake. According to New York Times columnist and Nobel Laureate Paul Krugman, “The longer this goes on, the more workers will find it impossible ever to return to employment, the more young people will find their prospects destroyed because they can’t find a decent starting job.”

Congress has passed at least 113 bills so far and sent them to the Senate. Not one of them mentions of the words “employment” or “unemployment.” Only two resolutions contain the word “jobs”, as opposed to “job-killing,” and neither of them have anything to do with the public. Only the “JOBS Act of 2011” has a chance in the 112^th Congress because it does deal with unemployment. It screws the unemployed.

Article first published as Screw the Unemployed on Blogcritics.

Big Oil: Obama's Fake Debate

Last year President Obama got on Big Oil over “environmental procedures for oil and gas exploration and development,” in response to the huge oil spill in the Gulf of Mexico. A year later he is on Big Oil’s case again over their “making huge profits and you’re struggling at the pump.” The president jumped their case in his weekly radio address following one of the biggest oil companies, Exxon Mobil, report that its profit rose 69 percent to $10.65 billion during the first three months of the year. Unfortunately, huge profits are different from huge oil spills.

In addition to Obama saying, “these tax giveaways aren’t right” and “we need to end them,” Senate Finance Committee Chairman Max Baucus (D-MT) released a plan to end “billions of dollars in tax breaks for large, multinational oil and gas companies.” Echoing the president’s charge with the headline, “Skyrocketing Gas Prices Necessitate Action to Address Energy Costs,” Baucus called his plan a blueprint for legislation that he intends to craft in the Committee.

Its first big bullet point is, “Repeal tax breaks for the largest oil and gas companies – end tax incentives for the five largest oil and gas companies that announced tens of billions of dollars in first quarter profits this week. This includes the elimination of the section 199 manufacturing deduction, reduction in the foreign tax credit for royalty payments to foreign governments and the imposition of an excise tax on certain Gulf leases.” It is the targeting section 199 of the tax code that makes the ensuing political debate a fake.

According to WTAS, one of the largest independent tax, valuation, and financial advisory firms in the United States, Congress enacted Section 199 in 2004 “to encourage the retention and growth of U.S. manufacturing without regard to whether the output of those manufacturers was exported out of the country or consumed domestically.” What it does is to reduce the income tax assessed on the profits of targeted industries, principally manufacturing, construction and natural resource extraction (oil and gas, mining, forestry, etc.).” In its newsletter WTAS also noted, “For good measure, software developers, filmmakers and music publishers were also tagged to benefit from the new incentive.” No one complains about their huge profits.

In a 2005 study, the Congressional Budget Office reported that capital investments “like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.”

But that is only interesting. Big Oil has big pockets. For that reason any efforts such as Senator Baucus’ to curtail the tax breaks are likely to face fierce opposition in Congress. The oil and natural gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.

Other than the president and Senator Baucus, Americans are not complaining about profits or blaming Congress, which they dislike anyway. They are complaining about prices. A McClatchy-Marist poll reported that far more Americans blame oil companies for surging oil prices than they blame either political party. “Drivers split their blame, with 36 percent pointing at the Middle East and 33 percent blaming oil companies. Only 11 percent blame Obama and Democrats, while 6 percent blame congressional Republicans.”

Gallup began asking the "most important problem" question in 1939 and established monthly updates in 2001. Economic concerns became dominant for Americans in April 2008 and have since tied or outpaced non-economic concerns in all but four months and gas prices are not on the top of the list. “The top five economic problems named this month are the economy in general (28%), unemployment (26%), the federal deficit or debt (13%), gas prices (6%), and lack of money (4%).”

It should be remembered that 68% of the pump price for gasoline is the price of crude oil, which is a commodity. Refining, where most of the jobs are, makes up 13%. Taxes account for 12% and the remaining 7% goes to distribution and marketing, according to the US Energy Information Association. With the exception of diesel, pump prices have gone up more than a dollar a gallon across the US since last year. In California, we have been paying more than $4 per gallon since January.

My crude price analysis of a “Sampled History of Crude Oil Prices at The New York Mercantile Exchange” reveals the following. Five years ago the barrel price of crude cost $72. April 2007 it was $66, April 2008: $117; 2009: $52; 2010: $86; 2011: $114. Low prices below $50 occurred in November 2008 and remained there until March 2009 at $46. The record bottom was the week ending January 16, 2009 when it cost $37 a barrel. The public did not complain about Big Oil profits, although there were big profits anyway. By contrast, high crude prices occurred in February 2008 at $145 through September 2008 at $107. So far this year prices have averaged $111 per barrel. Accordingly, pump price is high.

By the way the record low was January 16, 2009 at $37. The record high to date was July 4, 2008 at $145. The cost of raw material is always passed along to consumers. Profit margins are not accidental.

Speaker John Boehner told ABC news, “I don't think the-- the big oil companies-- need to have the oil depletion allowances. But for small, independent-- oil and gas producers-- if they didn't have this-- there'd be even less exploration in America then there is today.” When asked about doing away with subsidies for Big Oil altogether, Boehner said, “We certainly oughta take a look at it.”

My great-grandfather had a similar expression to Boehner’s. An Irish immigrant and labor leader with the Congress of Industrial Organizations in the 40’s, when he wanted everyone think he was agreeing with them he would say, “Won’t it be fine when we do.” The translation is, “As if that’s going to happen.” Noted.

Article first published as Big Oil: Obama's Fake Debate on Technorati.

Not an MLM Anymore or Less

Recently, a friend invited me to a local hotel to hear a presentation about a terrific work-at-home opportunity that reminded me of my former neighbor Carol. She always needed extra money, really wanted to help people and wanted to work from home. Every other month or so she would come over, bubbling with enthusiasm about some “great opportunity” she had been introduced to by new friends of hers. She couldn’t wait to “share it” with me. So I would get out my check book and ask, “How much this time, Carol?”

I always hoped one of those programs would work for her, as I made another contribution to her learning curve. As a former executive member of the American Marketing Association, my suspicions were always aroused when I would hear her repeat one of four statements that for years have been used to recruit people into Multi-Level Marketing [MLM]. What do you think?

1. [True] [False] The Wall Street Journal has said that by the year 2010, 60 to 70 percent of all goods and services would be sold through MLM.

2. [True] [False] Network marketing is taught at Harvard and Stanford business schools and in numerous other leading colleges and universities throughout the country.

3. [True] [False] Some 20 percent of all the millionaires in America were created through network marketing.

4. [True] [False] John Naisbitt, in his best-selling book, Megatrends, says network marketing is the wave of the future.

If you answered False to each of them, you are correct. If you answered Yes to any of them, you are certainly not alone. According to mlmwatch.org, the answer to each is False with a capital F. But you just can’t keep a good false statement down, as was the case with Carol.

The Multi-level marketing strategy is one in which a sales force is compensated not only for their personally generated sales, but also for the sales of others they recruit. That creates a downline of “distributors” and a hierarchy of multiple levels of compensation. Other terms for MLM include network marketing, direct selling and referral marketing.

MLM companies have been frequent subjects of criticism as well as the target of lawsuits. Herbalife, PrePaid Legal, Amway, Usana, and others have all spent time in court to defend themselves from claims brought against them, just as any other multi-billion dollar company. They have paid large financial settlements. They have also demonstrated that they are not fraudulent pyramid schemes.

Much of the criticism leveled against MLMs has focused on their similarity to illegal pyramid schemes, high initial start-up costs, and emphasis on recruitment of salespeople over actual sales, requiring salespeople to purchase and use the company's products. Cult-like enthusiasm techniques and exaggerated compensation schemes are not uncommon complaints either, especially from people who tried it but didn’t like it.

However, cases filed in United States Federal Court are quite different since verdicts can result in jail sentences, such as the Madoff verdict. Federal agencies get involved when the venire of legitimacy is removed from an MLM, exposing it as a pyramid scheme.

Some people believe that MLMs are nothing more than legalized pyramid schemes. So, what is the difference between a pyramid scheme and MLM? Pyramid schemes are a form of fraud.

The Federal Bureau of Investigation states, “Pyramid schemes . . . are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships.”

The Securities and Exchange Commission says, “In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”

The Federal Trade Commission warns, "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."

The critical question for the FTC is, if I may paraphrase, do commissions come from selling the product or from selling the right to sell the product.

Ever hear of the Latin expression caveat emptor, let the buyer beware? It all boils down to you, as a consumer, to be wary of things that sound perhaps a bit too good to be true. Before you get out your check book and commit to raking in huge bucks for little extra effort in the comfort of your home, do some research first.

• Find and study the company’s track record
• Learn about the product(s)
• Ask some who, what, when, where, how questions
• Understand any restrictions, such as licensing
• Talk to other distributors (beware of shills)
• Use a friend or adviser as a neutral sounding board
• Take your time
• Think about whether this plan suits your talents and goals

As an income opportunity based on the mathematical idea of a pyramid, technically referred to as “an exponential expansion system”, MLMs have great emotional appeal to a growing number of people in our economy. Multi-Level marketing or Network Marketing opportunities appeal to a need for extra income for millions of households. Even so, regardless of celebrity endorsements, such systems promising financial salvation are not for everyone, especially for my former neighbor Carol.