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.