Execute on your Strategies

I am back

2011-01-31T13:11:00.001-06:00

OK, OK, I have been away for a while…. more like over a year. I guess 2010 was not my blogging year. But here’s the good news (or bad for some, or even “who cares” for others) -- I am back. I am also amazed how my 2009 blogs remain very relevant in 2011. Remember my prediction that the DOW would stabilize around $10 to $12K and I even see it pushing closer to the $12K mark. Also remember the inverted bubble concept and how things might start turning around faster than we expected. Regardless, how about you catch-up on some of the previous blogs and I will start soon writing new ones.

Data Consolidation

2009-11-25T11:20:00.002-06:00

Do you need to make decisions but believe that the information you have is either unavailable or incomplete? Many companies already have reporting teams however the struggle happens when senior management needs more than a static historical view.
The best way to resolve this issue is by mining data without introducing complex and expensive systems or disrupting business flow.
In order to do so, just follow these easy steps:

Does the data needed exist? If not then work with IT to identify data needs and build a database.
Is the data correct? If not then test and recommend data fixes.
Can you get the data consistently with minimum effort? If not then prototype and test solutions to download data more frequently.

Once data is defined and stored in a “single-source-of-truth” fashion, then information could be organized to allow in-depth analyses while supporting and not paralyzing decision-making.

What is OSM?

2009-11-18T22:38:00.004-06:00

OSM stands for Office of Strategy Management. The term was introduced and then expanded on by Robert Kaplan and David Norton in their book “The Execution Premium”. The idea is that a new practice is needed within an organization to make strategy a continual process. Key concepts include:

An excellent strategy often fades from memory as the organization tackles day-to-day operations issues.

The operational plan and budget should be driven from the revenue targets in the strategic plan.

The senior management team needs to have regular, probably monthly, meetings that focus only on strategy.

The Office of Strategy Management is a small cadre of professionals that orchestrate strategy management processes for the executive team.

Down Again

2009-09-04T11:29:00.001-05:00

Mortgage rates are down again!

M&A Recovery?

2009-09-02T10:21:00.001-05:00

Manufacturing On The Rise

2009-09-01T11:23:00.001-05:00

Scammers!!!

2009-08-31T16:06:00.002-05:00

Scammers Three months ago, a hard-working friend entrusted me to advise him about an investment opportunity where an investment manager had been calling him frequently to invest in his double-digit "guaranteed" returns strategy. I was amazed that after Madoff, Petters and the likes, Ponzi schemes were still thriving!
The company is Oxford Global Partners and the scheme is still describe under allegations, but the investment opportunity had all the attributes of a Ponzi:
- Returns are “guaranteed”
- Clients sought after are hard-working people who are not financially savvy
- The setting is made to impress: They were the new tenants of the Van Dusen Mansion, and they chose the name “Oxford” to sound like a well established long-timer
- They boasted about state-of-the-art technology that helps them trade foreign currencies
- They supposedly found a loophole in trading currencies in Jordan for double-digit returns

Well, I am so happy that my friend did not invest (hopefully my advice was a factor). The company is making the news today and over $15M already disappeared. Check this Star Tribune article.

Inc or LLC?

2009-08-27T09:14:00.003-05:00

More Positive Signs

2009-08-26T10:05:00.003-05:00

New homes sold at an annualized rate of 433,000 in July 2009, which was way beyond analysts' forecasts and was up 9.6% from the previous month. This comes in conjunction with an uptick in home prices. All signs of a potential "faster-than-expected" recovery.

Finally!!! An Upswing

2009-08-25T15:24:00.000-05:00

Rotten Culture

2009-06-03T09:38:00.003-05:00

Many major companies are under pressure to clean up their act. Between bankruptcies, public downsizing and salary cuts, we are all hoping for a haste recovery. We also expect business leader to have learned a good lesson. But once recovery is here, will they have learned anything? Can a rotten culture of inefficiencies and greed be fixed through regulations.

I have to say that while the intentions are good, the surrent proposed solution are not even close to becoming applicable. It is as if you were recommending full freedom of choice and decision-making to a 3-year old kid!

It is not about rules, regulations or even education that we enjoy. It is about the maturity of financial and business communities who would be willing to work for the collective common good. Unfortunately, most businessmen are still like 3-year olds who feed on the financial system provided to them. Once there is a loophole, it becomes their "duty" to profit as fast as possible before somebody discovers the mistake.

This reminds me of the upcoming elections taking place this weekend in my homeland Lebanon. I finally believe that Lebanese politicians are a byproduct of the people. The upcoming elections are nothing but a glorification of these feudal warlords by people who enjoy a system of bribes and cheating.

Keep in mind that the Lebanese were under the Ottoman empire for almost five hundred years and the most important person in Lebanon was a khazamatji (servant) or beik. A beik was the local leader who used to kiss the babouj (shoe) of the regional Ottoman “lord”, who in turn would barely get to kiss the babouj of the sultan. Actually under an elaborate process, the Ottoman “lord” was honored to crawl on all fours, with his nose touching the ground until he reached the Ottoman sultan. He could not even raise his nose from the ground for fear of making eye contact with the sultan. After kissing the tip of the sultan’s babouj, he would crawl in the same position but backwards as to not turn his back to the sultan. That was the guy who ruled over our region (Lebanon and Syria included).

The point is that culture cannot change overnight and rules and regulations will not be effective unless the business and financial communities are ready to adopt a new system.

Financing Options

2009-05-19T22:10:00.001-05:00

Banks keep tightening their guidelines for lending to businesses, small companies are looking for ways to borrow money to sustain their operations. Many banks have also raised interest rates on credit lines.

While there is a natural tendency to return to rational evaluation of risk, choking the small business market supports a downward virtual cycle since this sector of the market contribute a large percentage of the American workforce.

In the meantime, there are other options in the market that are still unknown to many small to middle-market businesses:

External advice to streamline processes and surgically downsize non-value add activity could free up cash and decrease burn-rate.
Outside the traditional institutional capital market, individual investors are starting to move funds. For amounts less than $5M, companies should approach new avenues that can help them reach smaller investors.
Economic development has been historically underestimated and kept in the dark. Many local communities offer amazing solutions including grants, tax credits and other financial accommodations. Most companies do not know about these offers because local governments do not have the budget to advertise.

Finally, this is the time to stop following the herd and start pursuing creating financing idea without diluting shares.

Hiring or not?

2009-05-13T19:46:00.003-05:00

Below are survey results from the American Express OPEN Small Business Monitor. Compare 2006 to 2008. Small businesses that did not plan to hire or even planned to cut back remain at the same percentage level (40% to 50%). The difference is that businesses that might be hiring today prefer to report that they are not sure (mid-twenties today versus mid-teens in 2006).
There could be many explanations but the obvious ones are:

Small businesses really do not know where the wind might take them. Which is concerning because a small business is usually affected by microeconomics and -- beyond the financing piece -- small businesses with solid models should know exactly what their plan is.
Small businesses are sandbagging and are not willing to openly brag about hiring.
A third of small businesses are usually very clear on their hiring plan regardless of the economic environment. It is just the ones that are planning to cut-down that prefer not to respond clearly to the survey.

Inflation or Deflation?

2009-05-12T16:12:00.001-05:00

Everybody is talking about inflation or hyperinflation. Something similar to what happens after a country cannot meet its debt obligations. All the signs for inflation are here: Social Security is seen depleted by 2037, consumption is down, state retirement plans shortchanged. But somehow, prices keep going down and some analysts are talking about deflation. So how is the current situation different from post-WWI Germany or Argentina’s chronic hyperinflation? In short, the current situation is a global recession and other than pulling money away and investing in commodities, investors do not have many choices. Here’s a good summary from WSJ:

Economically Green

2009-05-11T17:44:00.000-05:00

Want to encourage Americans to go green? How about starting by making Green economically viable?

Some consumers are willing to pay the price for having the stamp of being Green, either financially or by sacrificing their comfort. However, if we were to expect a major cultural shift, Green would have to be economically feasible. In one area, we are always blamed for being a high turnover consumer nation. That means we tend to throw away good stuff just to be able to get a new replacement. In reality, we are usually forced to replace somewhat good stuff because it costs more to fix than to get a new one.

Last week, our 3-year old washer was not spinning well. Clothes were left soaking wet after a cycle. We called GE repair and they required $75 just for the trip. OK, we paid that. The guy showed up and in less than five minutes, he was able to figure out the problem and unclog a small sensor pipe. That was it! And he charged us $250 which is 50% of the original price of the washer! Mind you that had we purchased an insurance, GE would have charged the insurance less than $100. Other things that might end up being replaced instead of fixed include our cracked glass oven top (repair cost = $700, brand new = $600).

Outside the fact that consumers are being ripped off in a similar way to individuals with no healthcare plans, why couldn’t we enforce insurance prices on the non-insured? So how about subsidizing or enforcing rules to help fix appliances instead of replacing them, thus becoming green?

Stress Test

2009-05-07T15:27:00.002-05:00

As banks undergo stress tests, shouldn’t your business do the same even without mandate? The Sarbane Oxley (SOX) Act of 2002 was put in place for public companies as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. Privately held companies remain shielded from stress tests and SOX, but shouldn’t they subject themselves to tests ensuring the viability of continuity of their business models?

For a start, companies will need to better understand the key drivers behind their bottom line. Then different scenarios will need to be reviewed to understand the inherent risks. Following is a sample list of key drivers that would need to be subjected to testing:

Sales: What portion is sustainable, comes from repeat business, or is dependent on one large account? Are your products diversified?
Cost structure: Fixed versus variable. Does your company have a good understanding of cost per unit? Do you need Activity-Based Costing and allocations to better control your cost per unit?
Debt structure: What was reasonable a couple of years ago might be obsolete now. Do you just trust your CFO’s opinion or should you get independent advice?
Liquidity: How long can you survive a downturn?
Brand and client satisfaction: How much can you downsize before service and delivery suffer, thus hurting you long-term image?
Pricing: How healthy are your margins? Can you leverage pricing on a short-term basis to gain market share?

These are general drivers however every industry and in some cases every company has different drivers. Historical views are necessary but not enough. Companies need to leverage analytics and perform simulations to better understand risks.

More Good News

2009-05-06T16:44:00.000-05:00

Automatic Data Processing, a payroll-processing firm, said private-sector employment decreased by 491,000 in April, a 31% improvement from the revised 708,000 drop in March.
Outplacement firm Challenger, Gray & Christmas Inc. reported that job cut announcements by U.S. employers totaled 132,590 in April, an improvement of 12% from March's 150,411.
A peak in the number of jobless claims signals the worst U.S. recession in half a century may end in June, according to Thomas Lam, an economist at United Overseas Bank Ltd. in Singapore.
Banking and energy sectors made solid gains in the past month with the DOW increasing by 30% in a two-month period.
AIG, the insurer saved from collapse by the U.S., may report tomorrow that its first-quarter loss was about $5 billion. The result is an improvement from the record $61.7 billion fourth-quarter loss posted in March.
The benchmark 30-year, fixed-rate mortgage is remains low at 5.23 percent, according to the Bankrate.com's national survey of large lenders. One year ago, the mortgage index was 6.16 percent.

Sub-Contracting

2009-05-05T15:31:00.002-05:00

As more people opt (more like “forced”) to find contract versus full time jobs, they are discovering first-hand the pros and cons of such a move. Prior to the past century, most people worked as freelancers. Industrialization and the Great Depression created a sense of security with full-time jobs.

The trend for contract jobs is going up again and 1 in 4 working Americans is a contractor, compared to 1 in 5 a couple years ago. It seems like a win-win situation where a worker can find a paying gig while businesses ensure capacity flexibility. In reality, contractors take a big risk given that they are the first expense line item to be cut during a downturn. Also health-benefits and self-employment tax creep up very quickly.

As for companies, the downside is more strategic. Most organizations do not know how to differentiate between core competencies and supporting capabilities. While outsourcing or sub-contracting the latter is usually a smart decision, applying this strategy to a core competency could be detrimental to your business. There is still a need for in-house and permanent expertise to maintain and improve on core competencies.

How To Trim IT Expense

2009-04-30T10:06:00.002-05:00

Almost every organization is trying to trim expenses in this downturn. One obvious line item is IT spending. Following the Y2K and internet bubble, many organizations were caught in the IT rat race, thus exploding their spending on IT projects, of which many failed or did not deliver on promise.

Today, CEO’s are asking CFO’s and CIO’s to trim down IT costs after realizing that IT is usually not a core competency but an enabling capability. This realization is generating questions such as “How do we cut IT costs?”, “Where do we start?” and “Should we look at outsourcing?” While answers might seem obvious, culture and psychology are major roadblocks. Organizations find it hard to prioritize IT projects and they are sometimes emotionally invested that they cannot treat some initiatives as sunk costs and just move on.

The solution is simple: Do not over-design, just ensure the capability is available. To get to work, you do not need an Enzo Ferrarri, you just need a good reliable car. First of all, make sure that business is making these decisions with help from IT leaders, and not the other way around. Then, look at each project and prioritize them under the following categories: “Must-have short-term”, “Must-have long-term”, “wanted” and “nice-to-have”. Use this order to fund projects with the budget you have on hand.

It sounds simple but you will need to handle the political bickering. That’s when good cost-benefit analytics come in place. Again, business leader and not IT leaders will have to manage the analysis. Finally, hiring outside independent advisory to lead this undertaking is usually best to break cultural and political fights.

Irrational Panic Backed By Immoderate Governance

2009-04-29T15:46:00.002-05:00

Can be used to describe the current economic environment. Here are some definitions:

Irrational: Totally based on emotions and non-founded believes; not endowed with reason or understanding; lacking usual or normal mental clarity or coherence; not governed by or according to reason. Usage: “Bubbles are fueled by irrational exuberance”, “Many businesses are still run by irrational gut feel”.
Panic: a sudden overpowering widespread fright with acute extreme anxiety concerning financial affairs that results in a depression of values caused by extreme measures for protection of property. Usage: “A house flipper panicked when house prices dropped”, “Companies panic during a downturn”.
Backed By: Supported; guaranteed; secured. Usage: “Mortgage Backed Securities”, “Asset Backed Securities”.
Immoderate: Exceeding what is usual, proper, necessary, or normal. Synonyms: Excessive, inordinate, extravagant, exorbitant, extreme. Usage: “The government used immoderate measures for bailout plans”, “Companies are being overly defensive and in immoderate downsizing mode”.
Governance: Direction or control of a continuous exercise of authority over and the performance of functions. Usage: “Total governance choked the economy”, “Companies loosened governance only to be surprised by fraud”.

Strategic Planning Exercise

2009-04-28T16:34:00.002-05:00

Many companies are finally getting back to their strategic planning effort. The steady growth that used to be common-place is replaced by projections of dramatic decline. But how realistic are these scenarios? Could your company be setting itself up for failure? You can always avoid the overly-defensiveness trap by following these 5 tips:

Listen to the field and get more feedback from your managers. Nothing is better than getting direct information
Be real with you assumptions by avoiding the overly optimistic ones your company had been using every year as well as staying away from perfect-storm scenarios that could cripple your growth
Measure closely and rely much more on facts and metrics. Adjusting along the way will be crucial to a successful implementation of the strategic plan
Be opportunistic and look for quick hits and low-hanging fruits instead of going for the big-bang projects that have long-term returns that could change quickly with market variations
Keep updating and use a highly iterative approach to readjust your assumptions and keep in mind that a strategic plan is a living and breathing platform that needs to be adjusted frequently

Forget The Bear, Watch For The Car

2009-04-27T14:36:00.003-05:00

Last Thursday morning, on a trail in Colorado Springs, a pregnant woman was chased by a brown bear that was 2-feet away at some point, according to the woman’s account. In her panic, she forgot basic safety rules and was hit by car when jumping on the street. Fortunately, she was not injured and her baby is safe.

While this might seem an unlucky or even funny event, it is a great lesson for business managers. Given the economic downturn, most companies are in panic mode. So the major risk for businesses is to get blinded and be hard-hit by an event that could have otherwise been preventable. In their rush to run from the economic bear, companies are downsizing under panic and with no strategic objectives. Chances are that these companies might hurt their business models and do more damage to themselves than any powerful downturn. In the woman’s case, detectives believe that the bear was not really chasing her but was used to people and was probably looking for food in her backpack.

So always remember, when in a group, you do not need to be faster than the bear, you just need to be faster than other people in that group.

Success In A Downturn

2009-04-23T14:53:00.005-05:00

Business history teaches us that a downturn is not necessarily detrimental to your business. A good business model will always find ways to survive and thrive. In some cases, it is the best opportunity your business would ever have. Here are examples of companies that made it during downturns:

1837: Procter and Gamble is born to provide household supplies. It scores lucrative contracts with the Union Army during the Civil War. P&G uses a similar technique during the Great Depression and instead of cutting back on marketing, it starts spending heavily, especially on radio and TV (hence the term Soap Opera).

1875: Heinz Co. is forced to temporarily close down following a banking crisis. Within three months, the company convinced employees to come back and delay wages. Heinz also renegotiated contracts and dropped lease payments. Then by leveraging ketchup, the company got back on its feet.

Banker’s Panic of 1907: GM is born and revolutionizes the card manufacturing industry. It succeeded by opportunistically acquiring companies during the panic.

Great Depression: Born during the 1875 depression, IBM started spending, hiring and innovating. When President Roosevelt signs the Social Security Act, there is suddenly a heavy need for IBM machines to help process data (punch cards).

Oil crisis, 1973: Important documents needed to reach their destination within 2 business days. When oil prices dropped in 1975, FedEx was still standing and experienced tremendous quick growth.

Ethical Capitalism

2009-04-22T14:00:00.003-05:00

The question should not be whether capitalism works or not, it all boils down to ethics, trust and confidence. Many people are asking for more regulations and rules to rein in the financial industry. Extremes are pushing to bringing our system to a communist one. People are also starting to wonder whether capitalism is failing. The reality is that capitalism did not fail, ethics (or the lack of) failed.

Ethics: Our economy is based on the assumption that everybody is ethical in the way they do business. The right regulations were already in place. They were not enforced, and people went for the quick-buck instead of playing a long-term ethical game. Ethics are not luxuries, they are essential for capitalism to work the way it was intended to.

Trust: Where I grew up in Lebanon, you never trusted the other party in a transaction and always assumed that the purpose of a transaction was based on one party trying to take as much money from the other party. You always had to watch your back and negotiate, negotiate, negotiate. Both parties always felt as if they lost which hindered economic growth.

Confidence: The word “conman” originated from “confidence man”. Just like Madoff, he became a person of confidence and was able to take people’s money. Once consumers lose confidence in the economy, a downward vicious cycle takes hold of businesses. To break the cycle, you need ethics, which drive trust, which in turn drives confidence.

Note: The term "Ethical Capitalism" is borrowed from Brother Louis DeThomasis who wrote about the subject in his book "Doing Right in a Shrinking World".

IT Landscape Trends

2009-04-21T11:23:00.004-05:00

In today’s economic stress, IT budgets are being scrutinized and business is requiring ROI analysis and prioritization to approve current and proposed projects. Technology became an integral part of business but is still perceived as a supporting or enabling capability and not as a core competency (unless you are in the IT business). So what should you expect in the next 2009?

Organizational shakeup: Whether it is mergers, acquisitions, offshoring or inshoring, expect major transformation requiring IT systems to adapt quickly and efficiently.
Better valuations: CIO’s need to get better at valuing projects and estimating costs. Rough estimates and sandbagging will get you in serious trouble.
Financing options: Businesses are becoming more creative to finance large IT items. Think long-term leasing and vendor financing. This minimizes the upfront cost.
Scarcity of resources: Cuts in budgets is requiring businesses to get more done with the same amount of resources.
Legal and security: With the Satyam fraud situation, businesses realized how vulnerable their data and security was. Expect more involvement from your legal department and less flexibility to handling data.

Strategy Quandary

2009-04-20T11:49:00.002-05:00

In the current economic environment, most businesses are struggling to make strategic decisions: Acquire and invest in projects now or hunker down and wait for the promised recovery?

Options for growth abound: less competition from Wall Street buyers, more companies willing to sell and cheap talent to ensure post-acquisition success. As usual, the main question is timing: Should a company wait or invest in growth now? Did the market hit bottom? Watching the volatile market is frustrating, but waiting too long could be fatal for businesses. The situation is similar to timing a bubble burst. In hindsight, most investors wish they never waited for the Internet bubble or the real estate bubble to peak before cashing in. So how is the current situation any different? No one can time the bottom, but everybody agrees that there is more chance the market will get better in the next 12 to 36 months.

Companies need to make an educated decision based on facts and analytics instead of following the herd and play the wait-and-see game. One way to look at it would be to evaluate scenarios of a dollar invested today and the possible outcomes 3 years from now (these scenarios are for illustrative purposes only and could change depending on the industry and on the business model):
- Market dips by another 25% (the real bottom) but then recovers 3 years later
- Market remains volatile but stays at 0% growth (stuck at the bottom)
- Market increases at a steady 5% rate indicating that we already hit the bottom

In all these scenarios, investing now in new projects makes sense. Your business could be recklessly cautious and miss on great opportunities to invest and acquire. Anybody looking for short-term gains is bound to lose big sooner or later, but a long-term decision based on facts has a high likelihood of paying big.

To Regulate Or Not To Regulate

2009-04-16T14:34:00.002-05:00

A friend of mine just had her first speeding ticket and decided to contest it. The process seemed simple enough that all you had to do was to set a court date, show up hoping the cop would not be there and argue your case in case he was present. The problem is that she underestimated the inefficiency of the government process. Her first 2-hour wait led her to assign a hearing date. A month later, she showed up to her 9:30AM hearing appointment only to have to wait two hours and a half to assign a court date through the help of what looked like a physically and probably mentality slow lady (over time, the slow process must have caused a slow brain). My friend was appalled by the government inefficiencies and bad customer service. On top of that, her taxes are being wasted in that process.

Well, everybody agrees that government is usually less efficient and customer friendly than private organizations. Imagine having to go through something like that to get a loan modification (which is happening by the way, check this article from CNN). Even worse, imagine if the same process was applied to healthcare. Well no need to imagine too much, just go to countries suggested by Michael Moore (i.e., Canada, France) to experience first-hand how inefficient government is.

I am not advocating that there should be no government involvement and no regulations but we must figure out an optimal point for regulations and rules? While pro-government activists keep pushing for more regulations, we should stop and ask ourselves what is the tipping point when too many regulations will start choking the economy?

Thank Richie Rich Day

2009-04-15T10:49:00.002-05:00

It is Tax day and most people are already waiting for their refunds! But what about the ones who are not getting a refund and are still paying high taxes? The reality is that the media and our culture tend to vilify the rich. But here are some facts for a change:

Recent data available from the Congressional Budget Office indicate that the top fifth of households made 56% of pre-tax income in 2006 but paid 86% of all individual income tax revenue collected. In comparison, the bottom fifth still made 5% of pre-tax income but paid less than 1% of the total bill. Imagine if a group of five people went for a nice dinner and all ate roughly the same thing, but the wealthiest guy paid the bill, the other guys covered the tip and the poorest guy ate for free. Sure, one could say that the rich should help the poor, but shouldn’t the rich guy at least get a simple “Thank you” instead of getting the usual “You should have paid more”?

A Tax Foundation survey found that households making between $35,000 and $50,000 believe that they pay high taxes when in reality their “Effective rate” (when various tax breaks to which they're entitled are counted) is very low and is usually less than 10% of their income. According to the Tax Policy Center in 2005, just under one in 10 filers owed more than 15% of their income in federal income tax, virtually all of them had incomes over $100,000.

So to all households making over $100K, I would suggest that we thank them for a change. They are the ones supporting our system.

Potpourri Of Good News

2009-04-14T09:27:00.002-05:00

Federal Reserve Chairman Ben Bernanke is optimistic and said today that he is seeing "tentative signs" that the economy's dramatic decline is easing, but that full recovery won't come until the financial system is stabilized.

Goldman reports $1.8 billion profit, and plans to sell $5 billion in stock, paving the way for it to repay its TARP loans.

Investors betting on more good banking news pushed up CitiGroup 25 percent and Bank of America 15 percent.

The DOW, Nasdaq and S&P500 are back to where we started the year and oil is still trading below $50 a barrel.

The Dollar is gaining in strength against the Euro and the Japanese Yen.

Mortgage rates are still at historic low levels (some rates hadn't been seen in more than 50 years). The benchmark 30-year fixed-rate mortgage remains in the low 5 percent.

Rescue Mission

2009-04-13T17:05:00.002-05:00

Wow! What an amazing end to a hostage situation! As the story of the capture and freeing of Captain Richard Phillips unraveled over the weekend, I couldn’t stop thinking about how well coordinated and planned the entire operation had to be. The other side was also very experienced. According to a former US negotiator, Somali pirates have strong “business” negotiation skills. CNN states that pirates in Somalia identified the slain men confirming that two of them were among the "most experienced men" in a group that has hijacked seagoing vessels for money. So this was no easy task for the SEALs.

Historically, most of today’s business strategies have been inherited from the Military. Business tactic and execution in the past emulated training and experiences received by military commanders. Today, businesses are facing a different kind of piracy, where they need to have on their side the best negotiators, best strategists and best marksmen (figuratively speaking. I am not suggesting the killing of anybody here). The point is that when you are in a tight spot, the last thing you want to do is to capitulate by paying the money or by ignoring the situation. This is the time when you need experts on your side and your business cannot afford not to afford them. Strategy is becoming a bastardized word but true strategists should be sought after and negotiators are crucial. The trap that most businesses fall into is to believe that they have those skills in-house and for cheaper.

Good Friday

2009-04-10T11:26:00.000-05:00

My post today will be very short. Learning from a great message on Good Friday, things could get really bad, we could be hurting economically in an unjustified way, but we have to believe that we will rise above this turmoil. That’s what makes our nation a great one: Faith in the future. Have a blessed Good Friday.

5 Things To Do In A Downturn

2009-04-09T17:03:00.004-05:00

Focus on retrenching and reinventing thyself: This is not the time to panic and react on bad news. Sure “change” is becoming a buzz word, but it is more than that. Businesses cannot afford to resist and delay change in a downturn.

Reduce the academic advice and increase hands-on strategy implementation: This is the time to put to test everything you have been strategizing about. Businesses need to move from strategy formulation to strategy execution. A downturn separates men from kids.

Strive to implement strategies quickly: Time is of essence. Go for 80% solutions and beware of perfectionism. That being said, quality should never be sacrificed. Also ensure benefits are being measured and results are optimized.

Leverage facts and data: Analytics combined with a hands-on approach is crucial to enable fast quantifiable results. The time of gut-feel and shooting from the hip is long gone. Arm yourself with enough data and facts to allow you to make the right decisions.

Stop listening to the doom-and-gloomers: The sky is not falling and things might return to normal faster than you think. Make sure you are using this time to out-think your competitors.

Claim Ignorance

2009-04-08T10:42:00.003-05:00

Yesterday, a 47-year old Wisconsin man decided to clean up his apartment with gasoline. Apparently, he did not know what he was thinking when he tossed a lit cigarette into a pile of gas-soaked cushions and clothes. Later, in telling his case to the Police, he added that he knew gasoline is flammable but did not expect the dramatic results. He continued that it was a mistake to throw the cigarette and he was sorry for what had happened. Eleven other apartments were also damaged.

When you think people cannot be stupid, they always find ways to surprise you. That is what happened during the latest housing bubble. Granted that some homeowners were taken for a ride, but I bet most of them knew and understood the gamble they were undertaking. Put aside the fast-and-smooth talking mortgage brokers, most homeowners had basic understanding of the fact that they are signing up for mortgages that they could refinance later because house prices never fall down. But what if they did? And they did. So now it is easy to claim ignorance and ask for forgiveness, especially after ruining other people’s lives along the way (including their own families and neighborhood).

Back to our story about the apartment in flames, imagine if tenants of the eleven other apartments decided to fix the arsonist’s apartment because he could not do it himself and because they could not have a charred apartment in their building. That’s exactly what is happening in the market: Somebody acted stupid, claimed ignorance, said they were sorry and we got to pick up the tab.

What Great Depression?

2009-04-07T13:54:00.003-05:00

I am really overwhelmed listening to analysts comparing the current economic downturn to the Great Depression. We became so spoiled as to think that a knee scratch is similar to an amputated leg. To put things in perspective, here are some facts:

Unemployment: While we are currently at 8.3% and might be heading to 10%, this is way better than the 25% to 40% recorded during the Great Depression. Keep in mind that many European countries have been functioning for years under double-digit unemployment.
Adjusted GDP: dropped by less than 2% compared to over 25% during the GD (Great Depression).
Failed Banks: less than 1% compared to 50% during the GD.
Prices: Dropped 25% during GD version no-change today.

So call it recession, downturn or slowdown, but please stop comparing it to the Great Depression!!!

Malaysian Downpour

2009-04-06T16:31:00.003-05:00

Anyone who follows Formula One racing did not enjoy last weekend’s race when it was cut short due to torrential rains. What happened in that race is very similar to what is happening now or in any bubble situation in general. Everybody knows that in Malaysia, the weather changes quickly and one always should expect rain after a sunny morning or vice-versa. So since it was sunny, everybody expected rain. But as dark clouds moved in, rain did not come. Then there was lightning and thunder and still rain did not come. Ferrari took the gamble and got the wet tires on, but still no rain. Until suddenly, torrential rain came flooding the entire circuit with typhoonesque amounts of water. Needless to say the race had to be cancelled.

That is usually the case when things takes longer that expected to happen. In an economic bubble, the adjustment is a burst. In an extreme downturn, the same thing will happen and we will experience a quick comeback. The DOW is close to 8,000 points proving again how volatile the market is and that “recovery” or what I prefer to call “snap back to reality” might be coming faster than we expect. If you believe that the market is a leading indicator to the health of the overall economy, then we should be expecting an early return to normalcy, which is a DOW between 9,000 and 12,000.

Mortgage Rates Down

2009-04-03T13:42:00.004-05:00

Mortgage rates are at their lowest levels in recent memory! The benchmark 30-year, fixed-rate mortgage fell 6 basis points, to 5.13 percent, according to the Bankrate.com's national survey of large lenders. In the meantime, 80% of new applications are related to refinancing and the application level is back to extremely healthy levels. Banks with solid platforms such as Wells Fargo, US Bank and many Credit Unions have been inundated with volume. The hope is that these indicators are early signs of recovery.

Note: F1 Strategy compiles data from the US Treasury, Freedie Mac, Fannie Mae and the Mortgage Bankers Association.

The System Knows

2009-04-02T14:34:00.001-05:00

Yesterday, a woman in Wisconsin religiously relying on her GPS ended up driving on a snowmobile trail. Several miles down the frozen path, she got herself stuck in two feet of snow. It took the Police a while to figure out where she was in the first place, and then to bring heavy equipment and free her vehicle.

You might be saying to yourself how dumb does a person need to be to do what this woman did? In reality, while not many people would do that (except for Michael and Dwight in one of the Office’s episodes), many businesses are acting exactly like this woman. I see it everyday where business leaders stop looking at the big picture and start relying on “the system”. I worked with this head of sales who kept repeating “the system” should do this and “the system” should do that to the point where he deeply believed that “the system” could actually manage the entire sale process for him.

Well, every system is another tool in your toolbox, it definitely helps decision-making but it will not build things for you by itself. At the beginning of every project, I always make sure the stakeholders understand that the business is driving decision-making and not IT. Any IT solution that we recommend is the outcome of a business need and not the other way around.

Tojan Horse

2009-04-01T11:34:00.002-05:00

A friend narrated to me how he dropped five business cards at a car show for sales guys to contact him with a quote. He genuinely wants to purchase a car. It has been a week and one would expect sales people to be hounding him and following him everywhere he went. So how many phone calls did he receive? None. The only explanation is that sales people are so numb and believe that nobody is buying cars to the point that they are missing on the real opportunities. How can you not blame the media? “Ashton Kutcher squeals as chest is waxed”, “American Idol judges distracted by Iraheta's funky outfit” and “Ohio man charged with drunken driving on bar stool”; these were news headlines on the front page this morning. These are the “bright spots” that the news media is squeezing in between doom and gloom stories. Really!!! That’s all you can do? How about telling bright stories about the 92% who are employed? Or the people who are still purchasing cars?

We are becoming our own worst enemies. What have we learned from history? Apparently nothing. We are like a fortress surrounded by barbarians (the economic downturn). Usually, to win in such a situation, people get ready for harsher days but ensure that they are not sacrificing resources crucial to their survival during and after the siege. What are we doing instead? We are being fed and feeding on the bad news. Can you imaging people inside a surrounded fortress going on spreading rumors and stories about how strong the enemy is compared to how ill-equipped the surrounded guys are? Or can you imagine them wasting time and energy on non-value added activities (such as Ashton getting his chest waxed)?

History of surrounded cities teaches us three major lessons:
- Do not let fear take over: When surrounded people can almost perform miracles, as long as fear does not reach their hearts. Your own fear becomes your worst enemy.
- Prepare for bad times and set yourself up for better times: This is what war is about. Once you are desperate and start reacting, you lose. During bad times, strategy and planning are not luxuries but necessities. They ensure that whatever you are doing now is in line with your recovery.
- Watch out for Trojan Horses: Businesses are fooled into believing that simple and easy patches today will resolve the problem. Do not accept any gift you are handed for a discounted rate. Make sure your decisions are based on facts and are supported by a long-term strategy plan.

No Room For Error

2009-03-31T14:56:00.004-05:00

Our school system instilled the mentality that there are no losers and everybody wins just by participating. Well, this system is not sustainable when things get serious. Everybody does not win and if you do not perform, well sooner or later, your lousiness will catch up with you. This is exactly what we are seeing in the marketplace. High profile as well as average executives who had been flying under the radar are being called to the test. In a shrinking market, there will be losers, however how do we weed out the scapegoats in this case?

Some are celebrating the shakeout at GM and Chrysler. People seem to enjoy the government’s heavy hand on AIG and other institutions, but the concern is who will be replacing these? Who is willing to step up and risk their careers in this environment? History teaches us that when a solid regime is toppled (right or wrong), chaos follows. The communist regime in Russia and the Islamic extremism in Iran are good examples. I am not likening our system to these extremes but just removing people from their positions is not a good solution unless you have the replacement ready to go.

Remember how people hailed the toppling of Saddam, but we discovered later that the solution did not end there, that was barely the beginning. Well now, we see people hailing toppling of heads at corporate America, but do we have the right plan to implement the change. This situation reminds me of a discussion I had years ago with a young intern who truly believed that a two-month training would allow him to run a multi-billion dollar company with 14,000 employees. The reality is that it takes more than education, experience or charisma to be in the right job position and toppling people left and right is not a good way to resolve the problem.

Cartoon

2009-03-30T13:45:00.005-05:00

With young kids at home, it is inevitable to end up watching (and sometimes enjoying) simple cartoon films. That’s what made me wish consumers would have SpongeBob’s attitude that consists of always being positive, focusing on the task at hand and not worrying about macro-economics.

Another feature that does not stop amazing me is the short-term memory consumers and investors have. It is almost comical just like Dory, that fish in “Finding Nemo” – here we go again, I guess with young kids my TV now is locked on the cartoon channel. Dory suffers from an extremely short-term memory where she forgets things she said or heard 10 seconds ago. Imagine traveling close to the speed of light and watching time on Earth at a rate of 1 year per second. All human beings would be acting exactly like Dory. It seems that every 10 years or so, the market goes through a big adjustment and somebody from space would be astounded by how stupid human beings are. How can you keep falling in the same trap again and again?

There are many explanations to that. Our survival instinct taught us to forget traumatic events after some time, which helps us move forward. We also need to forget some things in order to take additional risk. The downside is that we keep repeating what did not work in the past. And we never seem to learn that a downturn is a recurrent event that we have to use to be ready for better days.

Still on the cartoon subject, South Park ran a great episode about the economic crisis. Check out this short clip:

Click here to view the entire episode

Irrational Panic

2009-03-27T11:47:00.002-05:00

Got back to my previous posts, especially the ones prior to March 10 (all links in this post refer to my previous posts). Some friends called me crazy when I suggested the DOW could jump by over 1,000 points in a week. Well, let’s put it this way, three weeks ago, if you were told to invest in the DOW and you will be gaining over 20% on your money in less than 3 weeks, what would have been the answer? Would you have seen the pendulum overshooting? Most people would have refused to believe it. That's the inverse of a Black Swan, or what I am calling a White Swan. That’s exactly what happens in a bubble (in this case the bubble is inverted).

This recent run might not be the comeback, but it is proof again that the market is governed by irrational emotions and that your business needs to profit from this downturn to ensure readiness for the tsunami effect.

Need What You Want?

2009-03-26T12:42:00.002-05:00

Our consumerism mentality gives us the illusion that our wants are similar to our needs. A friend of mine who is a consultant asked my opinion about whether he should invest in an exchange server, a salesforce CRM solution and other IT applications. Keep in mind that this is a single person operation. He believed that he “needed” to spend thousands of dollars to ensure he has systems in place to manage and synchronize his different e-mail accounts, calendars, client portfolio and be able to access these from anywhere he wants including his laptop, a public internet browser or his BlackBerry. Once I helped him understand his business requirements, he was able to see that he already had everything he needed at his disposal. Sure it was not perfect, but again an expensive set of solutions is not guaranteed to be perfect either. Basically, his MS exchange account with 1and1 was good enough for his Outlook, gmail and BlackBerry. A free application from Google allowed him to sync his gmail calendar to his Outlook, another free application performed the same function with his BlackBerry. Finally, a free service from Soocial allowed his contacts to be synched between all three platforms. All that at the cost of less than an hour of his time, $6.99 per month for the exchange server, and a $1,000 bill for my advice (I did not charged him but I SHOULD HAVE).

In today’s panic mode and still remembering the internet bubble burst, companies are reluctant to spend more on IT. However, there is not doubt that IT remains key for strategic success. One cheap solution is to perform a holistic identification of business requirements and compare the findings to the functionalities of systems in place. A key question that companies tend to miss is what do you already have and what is necessary versus what is unnecessary. Surprisingly, you might find out that your existing systems already give you needed and necessary information that your management is not able to leverage due to inconsistencies or non-standard interfaces and reporting tools.

If you still believe that you do not have all the needed functionalities, the next step is to evaluate necessary versus “nice-to-have” versus unnecessary requirements. Spending should be focused only on achieving competitive advantage. Your decision should be based on obtaining those necessary functionalities that you do not have today.

Once you know exactly what is needed, the next abyss to avoid is overdesign. You should always seek simple solutions to get the necessary functionalities. The simpler a system is, the more flexible it will be and the less maintenance it would require.

Spoiled Kids"R"Us

2009-03-25T10:11:00.003-05:00

Several weeks ago, a national news van parked in front on our office in Downtown Minneapolis in expectation of a snow storm that was to dump 6 to 8 inches. That’s when it struck me: When did snow in Minnesota become national news material! It snows here every other day and every winter temperatures drop below zero. A typical deviance from the mean is normal. Actually, if everything was exactly at the mean, then we should be concerned. People are horrified by an economic downturn which by no means should be considered historic. What is happening to the American culture? We built this country through hard work and hardship, so why are we wimping out on the first sign of trouble? It concerns me that we are moving from self-sufficiency to self-victimization.

Politicians pretend to understand what the “people” are going through by making such comments as “I had a tough childhood because my siblings picked on me”, or “I saw my parents struggle to keep our farm” and “it was always somebody else’s fault, we were just victims”. Listen to yourself. Do you realize how spoiled these comments are? To put it in perspective, as siblings, it was our job to pick on each others, that’s how you train in a micro-society to prepare for the real world. Compare your experience to growing up during the civil war in Lebanon and being picked on by different militia factions. How about seeing your parents struggle to find basic needs for their family while dodging sniper bullets. We had our house destroyed three times and no insurance or government helped us. Every time that happened, we picked ourselves up, moved on and rebuilt.

We hear that we want to change and grow our workforce, as long as somebody else is paying. Some politicians are even suggesting we work less to resolve the unemployment issue. I do not know about you, but last time I checked the 35 hour week that was implemented in France was a miserable failure. And finally, we are asking the government to help innovation and make businesses more nimble. There should be a ban for using the words government, innovation and nimble in the same sentence. It is like asking a 90 year old to pick up contortionism! Since when setting policy, regulations and rules helped innovation?

We are nothing but spoiled kids who cannot handle the slight hardship and who want grownups (the government) to resolve our issues. Just tough it up and move on! If your ancestors who moved to this country thought like you, you would still be under some form of dictatorship or extreme socialism.

Sore Derrière

2009-03-24T12:12:00.004-05:00

I picked up road bicycling six years ago and I am by no means a serious biker -- I spend on average about 2 to 4 hours per week on a bike. Last Saturday, I helped a friend choose a bike that fits him and his needs. That’s when I realized that over the past several years, I have advised and accompanied over twenty people to a bike shop to help them decide which bike to buy. This begs the question: Why do these people rely more on the advice of an average biker friend rather than listen to an experienced biker or even do their own research?

It seems people nowadays want real and authentic advice. An expert biker will tend to overestimate their needs and intimidate them into purchasing the lightest and most expensive bike. On the other side, performing their own research is tedious and confusing when biking is not a competency they have. As a side note, I did advice my friend to get padded shorts, so it is not my fault he has a sore derrière.

CNN ran an interesting article yesterday about how blogs have been shaping the travel industry. Apparently, blogs are taken more seriously than the mainstream media. They are authentic and read more like advice and less like a promotion. (refer to CNN’s article)

The same seems to apply to the business word. Many businesses are shying away from big-ticket consulting services that pretend to know the client’s business more than the owners do. Middle-market business owners and managers are reluctant to pay for what they already know (only packaged in a fancy PowerPoint document). Also, experts do not seem to listen to their client needs and end up providing expensive solution that do not fit immediate needs. Just like an expert biker would recommend a $5,000 carbon fiber bike to a novice. On the flip side, businesses find it hard sometimes to fix their own problems either because they usually lack the knowledge or the time to implement. Just like a novice biker would struggle making a decision based on academic research. These businesses did not forget the last time they had a sore-derrière because they listened to their own voice.

The best advice comes from an authentic business advisor, who has experience running businesses (not a fresh MBA graduate) and who is not trying to sell a canned solution. The middle-market today is in desperate need for that kind of affordable and measurable results-driven advice (Refer to F1 Strategy’s website for Business Cases).

Return Policy

2009-03-23T09:38:00.003-05:00

This weekend, I learned two important and correlated lessons: Our American culture is to blame for the economic mess (and success), and a 3-year old’s job is to remember whatever you promise them (intently or not).

Let me elaborate on the latter lesson first. During a heavy snowstorm last January, my 3-year son was riding his tricycle in our unfinished basement when he asked me to get him a “real bikey” – you know the one with training wheels. Assuming that kids have a short attention span, I learned to deflect my answers and told him that I will get him one when the snow melts. 3-year olds usually forget what they were doing 10 minutes ago. But sure enough, two months later, we’re outside chalking drawings on the driveway when my son’s already large eyes got even larger that I could swear I saw a big light bulb hover over his head and with a loud squeaky voice he proclaimed: “Daddy, the snow melted, let’s go get a real blue bikey from Target!” Not only he still remembered, but he already formulated a very specific color, shape and location. I pretended to be the tough dad by not responding to his request and by showing him that I was still the boss… and an hour later, we were picking up a new blue bikey from Target. After spending an hour putting it together, that bikey was (according to my son) too small. So we returned it and got him a nice Spiderman bikey, which ended up being too big (I have to agree here, because he could barely peddle and he ended up falling and scratching himself and the bike). So we returned that one too and I will be getting him what he calls a “medium bikey”.

So how is this story related to the first point I am making about blaming our American culture for the economic mess. Well when I was a kid, my dad got us a bike (cool red chopper). It was a teenager’s bike, weighed a ton and I was just eight. I pretended that it was a perfect fit and never told anybody when I crashed from what felt like a three-story bike. Why? Because I knew my dad could not return the bike and I did not want to lose the bike either.

My parents still have that mentality. When they visit from Lebanon, they spend hours making a purchase decision and ensuring it is a great fit to their needs. That’s when I realized how our American culture changed since return policies got easy. In a way, this helped our economy by eliminating wasted time and frustration, but it also created a culture of no commitment. People will keep assuming that their mistakes will be bailed out and that there are no real downsides to breaking a commitment. In the past twenty years, we have learned that it was OK to try things out and if we did not like them, we could just return them, no questions asked. Our culture’s return policy got really easy where we thought we could try a nice car, a large mortgage or even a marriage, with a loose return policy mentality. The neck-deep economic mess we’re in could not be a one-time gig. This will be a recurring event as long as the root-cause remains.

The Prodigal Son

2009-03-20T13:40:00.003-05:00

If so far, you have been a hard worker, smart saver, cautious investor, you must be feeling cheated. You must be starting to think that there are no downsides to recklessness, idiocy and gambling. Well, get ready to feel even worse about yourself. If you thought that by not punishing swindlers we could all benefit, what would you say if these same crooks were to be rewarded?

Trump wannabee Borrowers: Some are getting help through the first-time homeowner stimulus. By the way, renters get zippo and if you did not play the real estate market game, you are just paying from your own savings to help others.

Rating Agencies: They stand to make a billion-dollar windfall in the government's latest attempt to heal the credit markets (refer to WSJ article).

Lenders: Many banks and institutions are flooded with loans and competition is scarce. According to the Wall Street Journal, the big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers (refer to another WSJ article).

If you are surprised by this outcome, then maybe you can find comfort in knowing that this is definitely not a new trend but it has been in place for centuries. The bible’s parable of the Prodigal Son is a perfect example. After wasting his share of the inheritance, the prodigal son returns to his father, who greets him with open arms and hardly gives him a chance to express his repentance. Instead, he kills a fatted calf to celebrate his return. The conservative and wiser brother who stayed put all these years does not receive any special treatment and his faithfulness is not rewarded. The father’s response: Son, thou art ever with me, and all that I have is thine. It was meet that we should make merry, and be glad: for this thy brother was dead, and is alive again; and was lost, and is found. – (Luke 15:32, KJV)

So it seems the government is telling us that if it is taking over 2,000 years to know that life is not fair, then "tough luck".

Internet Explorer 8.0

2009-03-19T14:01:00.002-05:00

Back in the nineties, I worked for a limited time at Microsoft-France. One of the quotes that stuck in my mind was from the then-CEO at a launch gathering for Internet Explorer 4.0. He jokingly said that no matter how fast new processors are becoming, Microsoft will always find a way to slow them down. Everybody at the time thought Compuserve and AOL would eat Microsoft’s lunch because IE was very clumsy. Today, Microsoft launched Internet Explorer 8.0 and it seems to significantly best its competitors (e.g., Mozilla Firefox, Apple Safari, Google Chrome, Opera).

Regardless whether you believe Microsoft is an evil empire or a great company, one thing we can all agree on, they have been the leader in PC software for a long time. Apple, Linux and other competitors might have better technology, but Microsoft still has the lion share. The reasons behind this success are numerous and include the fact that Microsoft is great at marketing simple-to-use and affordable products. If there is a cheaper, better and faster solution, people would naturally migrate towards that. The argument that MS is using illegal techniques is short-sighted because that strategy is a short-term one. The argument is that Linux is a better and more robust platform, but the question is how come nobody figured out a way to build an empire around it just like Microsoft did? If a product is easy for an engineer to use, that does not mean it appeals to the masses. I would apply the same logic to alternative energy sources. We need an economically viable solution to make the switch a no-brainer (we also need to level the playfield of subsidies).

Today, businesses struggle to find the right solutions and that is because IT services are still run by engineers who believe they can tell the client what they need. The Y2K era is long gone and business should be driving IT, not the other way around.

Tsunami Effect

2009-03-18T13:14:00.002-05:00

On the morning of December 26, 2004, 10-year-old Tilly Smith was in Thailand on vacation with her family when they went for a long walk on the beach. Tilly noticed something with the ocean that reminded her of a lesson on tsunamis she'd had at school just a few weeks before. At first, she tried in vain to warn her parents, but when they started walking back to their hotel, the water suddenly surged. They barely made it to the second floor and watched people and property wash away.

What the market experienced in the last 6 days could be just a taste of what might be coming our way. The DOW moved up by 1,000 points or 15% within 5 days. This is proof again that the market is driven by irrational emotions. Something is definitely out of whack when you have companies like Deluxe (DLX) at a P/E Ratio of 3 and trading at below $6 a share, or when you see LifeTime Fitness (LTM) at a P/E Ratio of 5 and trading at below $10 a share.

The perception is that this is an extremely bad economy. The reality is that many businesses are still doing well. I just heard from three different placement firms that this is their best year thus far! Many large businesses have been laying people off just because they can do it in this environment with no repercussions. These same businesses are turning to placement firms to fill-in the gap. Businesses that are doing well are not incented to declare it in public and, in some cases, they are ashamed of acknowledging it. The reasons include reluctance to brag, fear of going against the crowd, or even concerns of bad omen.

Back to my inverted bubble theory, the current market frenzy could reverse very quickly and we could have a Tsunami Effect. Money is being held back and at the first sign of recovery, the market will be flooded by investors which in turn will drive values up faster than expected. The credit crunch was a major rupture at a fault line and resulted in the water receding dramatically, exposing areas that are normally always submerged. This should serve as an advance warning of the approaching tsunami which will rush in faster than it is possible to run. All the signs of a Tsunami are here: Extreme pullback of funds, blue skies in the public safety arena and a decent ocean of money still waiting for the right opportunity to come back.

Tae Kwon Do Beating

2009-03-17T11:26:00.002-05:00

Last week, a man tried to quietly rob a Tae Kwon Do studio in suburban Milwaukee.He ended up face to face with the Tae Kwon Do master. You could just imagine what took place. Fast-Forward and the robber is pinned to the floor while the Tae Kwon Do master, still holding the robber by the neck, calmly calls the Police and waits for them to arrive.

Yesterday, the new administration announced its plan to help small businesses by raising the federal guarantee on small-business loans up to 90%. So far, it’s been easy to give money away, but do we have the right controls and systems in place to keep tabs? On one side, the borrower did not change their ways, so this like sending the same robber back to the Tae Kwon Do studio in hopes that he would not get caught again. On the other side, lenders are still driven by profit, so we could be subjecting the robber to the same kind of beating he received on his first attempt.

It is true that small businesses accounted for about 70% of the new jobs created over the past decade, and credit has been drying up for them, but throwing money at the problem does not address fundamental issues. How is this different from what got us in this mess? We just finished blaming lenders for relaxing their underwriting guidelines and giving money to people who could not afford to make payments, on the bet that house prices will keep increasing? Along those same lines, the administration is relaxing the rules and giving money to businesses that might not afford to make payments, on the bet that the economy will get better soon?

Self-Victimization Syndrome

2009-03-16T08:40:00.004-05:00

When I was growing up during the civil war in Lebanon, recession meant your neighbor got shot. Depression meant you got shot. When we would hear the economy grinded to a halt, that meant you couldn’t buy bread, milk or gasoline. Credit crunch meant the bank was literally blown up. Devaluation meant the country’s currency was worthless. Put that into perspective when you turn on your TV set to listen to out-of-touch journalists dissecting the state of the US and global economy.

There is no doubt that people are hurting in this economic downturn, and I fully believe that many people genuinely need help. So what is the best way to deal with the current recession? It is all about how we interpret the information. Pessimists focus on events that are out of their control, while optimists target events that are controllable. Internal factors that could be controlled include the search for a job or starting a business. So focusing on numbers and bad news does not help in any way especially when the news is nothing but a look in the rear view mirror.

What concerns me most is the victimization trend that is sprouting in every corner. Once you start believing that you are not in control and everything that is happening to you is not your fault, then you become your own worst enemy. As Americans, we are strong because our culture was built on risk-taking immigrants who depended on themselves and themselves only. Compared to socialist or communist countries, where people learned to lean much more on their government and tend to blame everything on “the man”, Americans usually have the attitude that they control their destiny. Bailout trends might encourage people to play the victim role, thus exacerbating the recovery process.

So the faster we get over it, readjust to the recession and move forward, the better it is to our personal sanity and to our economy in general.

Worthy of note, the Lebanese people learned lessons from the Lebanese civil war and became resilient and risk-averse that the Lebanese financial system barred anyone in the country from investing in mortgage-backed securities, and Lebanon’s banks had one of their best years ever in 2008. (click here for more on the subject)

Lemonade Stand

2009-03-13T14:54:00.005-05:00

Einstein stated that as demanded by the relativity principle the observer cannot know whether he is at rest or in absolute motion. Same thing applies to many people in this economy. Knowing that the economy is bad does not shield us from going through a rough time. With all the media frenzy, a person cannot tell how bad the recession is or how to prevent things from happening, so what is the purpose of following the news? And the big issue is that most people in the media are more artists than business people. This conflict does not provide most media outlets with the knowledge to truly analyze the economic situation.

As for people following the news, national averages are deceiving, because no single person is 8% unemployed. How do you then gauge how much employable or unemployable you are? Perception is everything. For an employed person, the employment rate is 100% compared to the unemployed where the rate is 0%.

When did we move to a society of employment? Over 100 years ago, most people were independent contractors and tradesmen. There were few cases of employment such as the clergy and the army, and then there was the forced “employment” or slavery. It was after the great depression, followed by the second war, that people thought job security was linked to employment in Corporate America. What an illusion!!! How would you rate the risk of a business that has a good probability (over 50% in the first three years) where revenues could just stop overnight and where you could lose everything with no warning signs? I bet most people would agree about the high risk such a venture entails. Well isn’t that similar in some ways to employment? What equity can you pass down to your kids through employment?

Now do not get me wrong, our country is still way ahead of socialist ones where everything must be structured by the government for an illusion of “benefit for all concerned”. However, it seems one cannot have a lemonade stand in this country without having the government agencies involved and big corporations trying to figure out ways to own lemonade stands and employ salaried people. The old hierarchical structures of large organizations are remnants of the past. Our education system and government should adjust their framework to encourage independent structures and move in the direction of “free agency”.

Leadership Loss

2009-03-12T10:54:00.001-05:00

Ever wondered why the departure of a company founder or leader could be a major setback for a business?

Well, good leaders usually have a deep understanding of the big picture. It also helps if they happen to be charismatic and have the ability to rally people behind a common mission. Most importantly, they understand how to move levers and when to pull the right triggers.

Recently, the image of business leaders has been tarnished by numerous incidents of power abuse, greed and other unethical behaviors. Even in a bad job market, employees are less willing to take on big leadership roles that would expose them to tough decision-making thus risking their careers. The shortage of good leaders could also be traced back to our education system that has been encouraging students to become experts in specific fields. This is creating silos in Corporate America. It is moving resources away from leadership roles and into narrow expertise niches.

Good leaders can see through silos and link them together to get a harmonious organization. When these leaders leave, people continue working in their silos, communication breaks down and the dynamics of finger-pointing thrive. Solutions are not sought until the bottom-line starts suffering, which usually happens late in the game. The following scenario could take place: Communication between silos breaks down and knowledge is no longer shared. A couple of months later, the turnaround time and quality of products or services suffer. Clients start noticing the company’s sloppy work and two months later, they do not place a new order which in turn impacts the company’s bottom-line. The business just lost over six months in the process and it might take another six months to fix the issue?

That is what usually transpires from the departure of a leader. To prevent these issues, your company will need to get the help of internal or external experts to build a cause-effect strategic map with leading key performance metrics to help you be proactive. Notice that I just used bastardized buzzwords such as “Key Performance Metrics” and “Proactive”. Many so-called consultants and IT developers diluted the real meaning of these terms by bringing preconceived solutions to the table. So beware of this pitfall and make sure you recruit the help of true business experts that can approach solutions from a business perspective. Setting up leading indicators is more art than science.

Dual Pareto

2009-03-11T11:26:00.002-05:00

Finding the right balance between labor and IT is never an easy task. A company could always improve flexibility by minimizing any potential over-design, postponing non-urgent upgrades and purchases, and creating temporary applications to test new functionalities (where applicable).

As a matter of fact, when trying to create flexibility, most companies tend to over-automate. This creates a complexity that is usually hard to maintain or reconcile, rendering the system obsolete. The big challenge remains to selectively automate, keeping in mind that each added functionality increases maintenance efforts and reduces the ability to upgrade.

To optimize the balance between labor and IT, management should follow a few principles:

Avoid over-automation (functionality level ROI). Any overdesign will result in extra costs (e.g., development, maintenance) and always lead to sunk costs for the company.

Ensure “time is on your side”. While developing a system in a limited amount of time, there often are situations where delaying the development of certain functionalities is of value.

Create temporary simplified plug-ins. Most IT people do not recommend this solution but in reality, business should drive IT and not the other way around. Using such standard programs as MS Access or MS Excel, a company can develop small and flexible PC-based pilots which will be reversed engineered later and transformed into fully integrated modules of the larger system.

Involve senior management in some of the details. Help from senior management and from external experts is always a must to ensure that the overall strategy is being followed.

There is always a temptation to implement excessive automation which explains the fact that few companies have successfully balanced labor and IT. Selectively use external help when dealing with large projects. External help should not consist of IT consultants but rather people with the business and functional expertise in the areas you are trying to automate.

Culture Eats Strategy For Lunch

2009-03-10T10:58:00.002-05:00

No matter how great your strategy is, unless you get the buy-in from your senior management as well as your front-liners, there is no way your strategy is going to be implemented. Culture manifests itself in different shapes. It could be the “contrarians” who reject an outside idea and influence the thinking of their peers. It might be the “bullies” who are usually the loudest persons in the room and who can get people to just agree with them to make them shut up. Or it could be the “lazy” who found their niche in an organization and they would try their best to protect their fiefdom.

So how do you overcome culture barriers? You could always use the short-term fear technique such as “there’s a new sheriff in town, either you’re with me or you’re not.” A long-term solution though is implemented via a combination of leveraging facts and instilling passion.

Leveraging Facts: Most people use anecdotal metrics to defend their stance. This method is hard to break unless you have facts on your side. By doing so, you engage them to help you explain these facts. For example, somebody might say “my sales associates are idiots, they do not understand how to sell our products”. Well, if you bring a survey showing that proper training was never performed and that sales associates are behaving in line with their compensation plan, suddenly you engage people in “fixing” the situation, thus owning the solution which in turn make them more committed to implement a solution.

Instilling Passion: By nature, people hate change. They get comfortable and fight for what they spent time building. On the other hand, many people volunteer their time for their hobbies and passions, and they continuously want to improve on their work. When Carlos Ghosn took over the reins at struggling Nissan, engineers were running the show and were stubbornly comfortable in their approach to market cars. By resuscitating the Z model, which was a source of pride at the company, people got passionate and worked hard on changing and implementing the new concept. This helped create the new successful lines such as the Murano. Today, Nissan is the most profitable and growing car company

So instead of confronting culture, work with it using facts to help people understand that your opinion is not based on your gut feel but on hard numbers. then get them to work on a project they are passionate about. You would be amazed by some of the results that can be achieved by those same people that seemed to be barriers for change.

Fact-Based Predictions

2009-03-09T11:50:00.003-05:00

Last summer, at a family wedding, I got into a debate regarding real estate trends in Toronto. I assured my audience that inventories of unsold properties will increase and prices will fall. I received fierce arguments that the market in Toronto was safe from the US economy. This is typical emotional logic usually motivated by an investment people have, so they hope that by staying positive, they would not jinks their investment returns.

Since my Toronto debate, what happened to that market? The Canadian Real Estate Association is validating the slowdown and explaining it through rising unsold inventory, falling new home prices, greater resale competition and reduced credit availability. The average home prices dipped 1% in 2008, a sharp reversal from the 10% annual appreciation from 2002-2007. By January of this year, national average prices were down 11% year-on-year (though by a more modest 5-6% on a regional sales-weighted basis).

Scotia Economics is projecting another 15-20% decline in the volume of resales this year, with a further 10% drop in average prices. In Toronto, the average home price already dropped by 4% from $380K in 2008 to $364K in 2009.

Fact-based predictions are inarguably more sound than gut-feel ones, but human instinct again takes over even though it might not be the right judgment in today’s environment. It feels sometimes as if I am looking at a satellite image and predicting a storm, but it is hard to convince somebody if they look up and all they see is blue sky.

Source: Canadian Real Estate Association (CREA), Scotia Economics calculations.

The Blame Game

2009-03-06T09:33:00.002-06:00

What happened to make this credit crunch become a major recession?
Mortgage lending is a simple concept: A borrower needs money to purchase or refinance a house, while an investor is looking for a return on money based on different appetites for risk and reward. In the past, banks, thrifts or government agencies played the conduit role to connect borrower and investors. Then everybody started getting involved, including mortgage brokers, appraisers, mortgage lenders, investment banks, servicers, rating agencies, investors (Wall Street) and even the Federal Reserve.

Everybody was winning when house values virtually increased. Things started falling apart when house prices leveled, interest rates started adjusting at much higher levels and delinquencies skyrocketed. That’s when the blame game began. So who’s to blame? Is it the Trump-wannabes, or is it the greedy Wall Streeters? Everybody contributed to the crunch.

Borrowers: Most borrowers remained honest people looking to purchase or refinance their home, but many were caught in the frenzy of becoming the next Donald Trump and the high demand drove house prices to historical highs. Claiming ignorance, many borrowers hoped the government would bail them out… and in many cases, it did.

Mortgage Brokers: They helped borrowers through a maze of different products and complex terminology, and had access to many lenders with better deals for borrowers. Some used aggressive sales strategies, thus misleading borrowers through teaser rates, adjustable rates and other exotic solutions.

Appraisers: Helped assess the value of a house, but some started doing drive-by appraisals or even stated/online ones while working in tandem with brokers to jack-up home values and get loan funding.

Mortgage Lenders: Provided financial solutions to help people own their homes, but many started relaxing the rules and understating risk to try to fund as many loans as possible, reaching the NINJA levels (No Income, No Assets).

Investment Banks: Provided warehouse line of credit to lenders and securitized loans, but started combining high-risk with low-risk loans under a high-grade investment, which made them vulnerable and their small margins were quickly erased when writing-off bad loans.

Rating Agencies: Rated securities to help investors quickly evaluate risk, but allowed Wall Street to gain too much influence over rating (cozy relationships) and did not understand subprime risk.

Investors: Provided liquidity for Lenders and Investment Banks by purchasing Mortgage Backed Securities to manage their investment risk, but became hooked on the profits and did not question their exposure to subprime, and ended up with huge losses when loans started going bad at a frightening rate.

Federal Reserve: Set interest rates and heavily influenced the amount of lending, but leaned too much on interest rates in a bid to keep the economy afloat, and then tried to wash their hands from the crisis.

So here you have it. EVERYBODY is to blame.

Lead by Example

2009-03-05T07:39:00.004-06:00

Government is asking banks to start lending. Some so-called economists are lining up on news shows to throw up solutions. These include letting the banks fail. They also include nationalizing the financial industry. Well how about a win-win hybrid solution? (to use a trendy green term).

Let’s first agree that to fix the economy we need healthy banks that are motivated by Capitalism 101: profits. We cannot let the entire banking industry fail but at the same time we do not want to nationalize which goes against basic principles of capitalism and free-markets. Now that we established this objective, let us understand the root of the problem: Credit is limited because banks are still carrying over a trillion dollars of toxic assets. Hence just hoping that the issue would resolve itself over time will only yield an extremely slow recovery.

We acknowledge the uncertainty lays in the difference between the hold-to-maturity and the mark-to-market values. So what should be done to help free banks from their shackles and allow them to venture again into lending land? What if the government set its own prices to invest in these toxic assets and became a shareholder in the banks? Keep in mind that profitability could be the outcome of a long-term hold, something that only the government seems to be able to afford nowadays.

In simple terms, the best way to save a financially-strapped but sound organization is usually achieved by injecting capital in it and relieving it from bad debt, while taking an equity share and in some cases helping management with the turnaround. This is usually a win-win situation and a far better solution than letting the business fail or acquiring the entire company and replacing the management team (especially if the buyer is not an expert in that field).

Let us hope Democrats and Republicans can work together instead of bickering and sweating the small detail. We cannot afford wasting additional time while the Barbarians are at the gates. The right solution will need to strike a balance and a trade-off between government bureaucracy and capitalistic greed.

Borat in Business

2009-03-04T10:24:00.003-06:00

You know that feeling you get when you receive an e-mail containing a recycled joke being revived every time a friend discovers the internet? Some of these jokes have been in circulation for over 20 years, and I thought I blocked them from my e-mails but they are resurfacing on Facebook now (or like this old lady from church calls it: Bookface). That is the same feeling I get when I witness a business woman being perceived as less skilled than a man. I still cannot believe that some people are not over the fact that women in business are as good as men! I am not sure whether this is a generational, cultural or inferiority complex, but some men should start treating women as equals in the business space! For God’s sake, this is 2009!

I am not writing this blog to gain women’s support but as a man who moved to the US ten years ago, I always assumed that this country was ahead of others when it came to women rights. This assumption made me cringe every time I saw a woman not being treated fairly. I guess it still takes me by surprise. I notice it often when I am accompanied by my wife on a business meeting. She is a well educated and smart lady, and she definitely gets the unwanted flattering attention at first (in this case, I cannot blame anybody because she is gorgeous and I am… well… much hairier). However when we start talking business, some men (older ones mostly) suddenly shift all their attention to me and barely listen to what my wife has to say. The worst case came when my wife got referred to a medical specialist for health reasons, the old doctor kept talking to me and almost ignored my wife even though I was merely accompanying her. He was communicating with her through me without making eye contact with her even though she was sitting right by my side!

I do not believe we will ever completely eliminate sexist comments and sometime flirtatious behaviors from the work space (it goes both ways by the way), however it is about time we stopped behaving like Borat and convince ourselves that women are equal to men when it comes to business.

Soft Landing or Hard Takeoff?

2009-03-03T10:15:00.005-06:00

Most economists are projecting a slow recovery lasting 3 to 5 years. Even Bernanke last week projected a 2 to 3 years uncertain recovery. To continue with my theory of a White Swan or Inverted Bubble (see previous posts), allow me to dig through comments made during the last real estate bubble.

Do you remember some years ago how the catch phrase “soft landing” suddenly picked up steam? In 2005, Ryan Ratcliff, an economist at the UCLA Anderson Forecast stated that the weakness in the real estate sectors will slow everything down a little bit, but not enough to get an actual recession. NAR's chief economist David Lereah said that the fact that the March 2005 figures were "holding close" to the numbers recorded in the strong rebound a month earlier "is additional evidence that we're experiencing a soft landing. We may see some minor slowing in home sales as interest rates rise, but the market is clearly stabilizing."

By definition, soft landing in the business cycle is the process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession. It is usually caused by government attempts to slow down inflation.

Aren’t we hearing the same tune today, in an inverted sense? Aren’t we surprised how the irrational panic that is taking over the market keeps pushing beyond the breaking limit? Aren’t we taken aback by how intense this downturn is becoming? Well, these are all signs that when the market adjusts, it would not be a “soft landing” or in this case, “soft take-off”, but instead the market is bound to snap back.

The Passion of Business

2009-03-02T07:35:00.004-06:00

What is the most important ingredient for business success? Is it a great idea? Great leadership? Great implementation? All these traits are definitely needed but passion for the business makes it a great one.

The reality is that you tend to enjoy most what you are passionate about and what requires you to spend time on. Le petit Prince (the little prince), written by Antoine de Saint Exupéry, is a book supposedly for children. It has sold more copies than “to Kill a Mockingbird”, “Gone with the Wind” and “Goodnight Moon” COMBINED. Le petit Prince lived on his own small planet and cared for a rose that he thought was unique. When he started travelling the world, he came upon a whole row of rosebushes, and was disappointed because he believed his rose was the only one in the whole universe. Suddenly, nothing was great or unique about his rose so he lied down in the grass and wept.

Then he met a fox that explains to the Prince that his rose is unique and special, because she is the one that he loves and is passionate about.

Many businesses fail because employees are not passionate about what they do. In his biography “Shift”, Carlos Ghosn the CEO of Nissan explains how during his first 100 days at the helm of Nissan, one of the things he needed to turnaround the failing brand was to instill passion and he did so by bringing back the “Z” model.

In summary, "it is the time you have spent with your rose that makes your rose so important."

Lock Your Rates!

2009-02-27T08:34:00.005-06:00

Historically, mortgage rates and the 10-year treasury rate have had a high correlation. I compiled the graph below to trace the correlation between a 30-year fixed rate conforming loan compared to the 10-year treasury rate. The difference is rarely less than 2%. Following the Fed’s historic rate cut in November, the 10-year rate dropped from 4% to 2%. Mortgage rates followed. Do not fool yourselves but these levels could be a once in a life-time event.

I have been involved in the mortgage securitization business for 10 years and I can assure you that the yearly seasonality dictates that mortgage rates are lowest in the first quarter and that is usually because lenders adjust to the low demand in winter. This would become a different story in the second and third quarters when many homeowners prefer to move (weather and school schedule).

The point is that we are seeing a double-whammy where the 10-year rate is extremely low and it is taking place during a low-rate quarter. The odds that mortgage rates will go up outweigh the odds that they will go down. So ladies and gentlemen, if you are planning to refinance or purchase a property: Lock your rates!

Source: US Treasury; Freddie Mac.

Disclaimer: Nothing in this blog is designed as, or should be construed as legal or investment advice.

Crabby Times

2009-02-26T07:41:00.003-06:00

If you like seafood, what is common between crab legs, oysters and lobster? They are tricky to eat, and the tasty reward is worth every effort you put in. I have always wondered if I were to hire somebody for the sole reason of extracting the crab leg meat allowing me to dedicate my energy on the chewing part, would I still enjoy those crab legs as much?

In a bubble, businesses tend to lose sense of the real value of strategies. They are busy fixing the situation and mostly using their rear view mirror. They are hoping that somebody (e.g., the government, the market) would dictate a big strategy for all businesses, while they focus on the chewing part. At the beginning of the gold rush, gold seemed to be everywhere workers dug and even the lousiest digger was capable of making a good living. When resources started dwindling, only the best strategists and then the most skilled were able to find the gold. A great strategist with good skills always enjoy a downturn when every idiot is no longer able to find gold. Sounds familiar? How many idiots do you know became real estate agents a couple of years ago? How are they doing now compared to more seasoned peers?

A downturn is the perfect timing for sound businesses to plan for prosperous times. This is the time that is most enjoyable to true business strategists. This is the time to sort out the men from the boys and discover who can cope with difficult situations and who cannot. This is the time to setup your business to generate additional added value. Also make sure you equip your business with the right technologies and tools just like you need a dull knife and a nutcracker to help you enjoy those juicy crab legs.
(Dedicated to Mimi and Z)

The Fortune Tellers

2009-02-25T09:30:00.005-06:00

So Mr. Bernanke is “hoping” the recession could end later this year, but he cautioned that a full economic recovery will take "more than two or three years". Then he added: “This outlook for economic activity is subject to considerable uncertainty”.

When I was growing up in Lebanon, ladies would gather every morning for a cup of coffee followed by the traditional cup-reading event. That’s when a so-called fortune teller read the shapes left by heavy coffee sediments at the bottom of your cup. As a kid, I was amazed at first and always wondered why that lady couldn’t better her family or financial situation given her obvious gift. Then I started realizing there was a pattern to what the wicked old lady was saying. It was worthless and open-ended leaving a big room for speculations and interpretations. She would say things like: “You will receive good news after 3 signs”, that meant 3 minutes or 3 years! Or “You will receive a big sum of money, but the person delivering it might decide to keep the money and never tell you about it”. Wait, wait, what money? Who is stealing my money? Or she could add “In the future, I see your daughter getting married to someone she is not sure about”. Good luck proving that one!!!

Based on this enlightening experience, I believe the fortune teller from my childhood became so good at it that she grew a beard and called herself Mr. Bernanke. How are his statements different from consulting the horoscope page? I also really believe President Obama when he says that we will recover, but as they say “there is sunshine after the rain”. The real question is "when?" And how will our leaders contribute to the recovery?

The sad truth is that our leaders are speculating, or to use Mr. Bernanke’s word: “hoping”. In the meantime, business leaders need to use this time of chaos to clean up their business model and operations. At least this way, they can be ready for when the market comes back “after 3 signs”.

La Cigale et la Fourmi

2009-02-24T12:02:00.003-06:00

You might be familiar with this fable, “The Cricket and the Ant” written 350 years ago by French poet Jean de la Fontaine. La Cigale (the Cricket) spent all summer singing while la Fourmi (the Ant) was collecting food for the winter. When winter arrived, la Cigale came knocking at la Fourmi's door asking for food and shelter. La Fourmi’s answer was “You sang, you say? How nice, my dear! Now go and dance your life away!”

Sadly, the fable stops here. I will not delve into politics and discuss why the government is tapping la Fourmi’s savings and sharing it with la Cigale, or that la Cigale deserves death because it did not plan well. Human nature tricks us into believing that the world we live in is static. Throughout history, we once believed Earth was fixed in space, and then we thought that the Universe was in a Steady State, but the Big Bang theory shattered that belief. So why do many businesses tend to believe that the current economic downturn is here to stay?

I just wish la Fontaine completed the fable by telling us how la Fourmi also spent winter using its savings to rejuvenate and planned strategies for next summer. Imagine if la Fourmi kept saving more food during winter thinking that summer will never come. Two things could have taken place: Either la Fourmi would have become malnourished, caught some disease and died, or by summer it would have been exhausted trying to manage its resources that it did not prepare and now other ants are already collecting the good stuff.

Three Wise Monkeys

2009-02-23T09:03:00.007-06:00

...aka "see no evil, hear no evil, speak no evil". Great metaphor to describe the lifecycle of a business.

See no evil: Entrepreneurship. This is when a fresh college graduate (or dropout) decides to take the leap and start their own business. It is also when an employee moves (voluntarily or otherwise) to the self-employment arena. Surveys suggest that most entrepreneurs would not have done it if they knew or saw what was coming their way. Once they were able to see, that helped them become successful self employed tradesmen/tradeswomen. They took their skill and sold it independently.

Hear no evil: Incorporating. Not to be mistaken with the legal process, this milestone requires individuals to move from being good at one trade to managing a middle-market business. Too many small business owners fail at this transition because they refuse to hear other opinions and they stick to their trade not wanting to relegate control and delegate functions. Once they start listening, they become managers of managers and their business grows.

Speak no evil: Big Box. The business could start franchising and even go public. This is when communication becomes crucial internally and externally. Marketing takes a major role and the brand is definitely recognizable. Until a middle-market business can learn how to speak the correct language, it cannot cross this milestone. Most often, it will need experienced business advisors to help it move past this milestone.

Now how many businesses do you know that are stuck in milestone 1, milestone 2 or milestone 3. The above metaphor could be used as a guideline to quickly understand their pain points.

Where's the money?

2009-02-20T11:20:00.004-06:00

The news media is saying it is really bad out there... but 93% still have steady incomes and Americans are saving at a faster rate. Oh and by the way, mortgage refinancing has been booming. So what are Americans doing will the extra money?

Here are some facts to chew on:
Source: US Treasury; Freddie Mac; Mortgage Banking Association

Collective Amnesia

2009-02-19T17:04:00.000-06:00

Do you feel like Alice in Wonderland (no need for guys to imagine yourselves in a cute pink dress… unless you really want to)? If so, the good news is that you did not catch the virus of collective amnesia; at least not yet. This condition has not been proven scientifically although it seems to be spreading quickly. Its symptoms are very similar to the collective hallucination condition where a non-existing event is induced by the power of suggestion to a group of people… usually high on drugs.

If you did not catch the virus, you should by now feel like having one of those nightmares where all common sense suddenly disappeared and you became an outcast surrounded by people behaving outside the norms? Do you remember the deep burning sensation of being misunderstood and overwhelmed by the ignorance around you? That is how it feels today when seeing the market panicking and businesses downsizing with no strategic objectives.

Make no mistake, a single instance of amnesia is understandable and could be a medical condition, but when this condition is collective, the panic feeds on itself because people “collectively” tend to forget the same things. Can you relate to situations where you communicated a plan on numerous occasions and everybody agreed on the next steps, but somehow when confronted with deadlines, collective amnesia took over?

The market today is reeling from collective amnesia and people forgot that a downturn is an opportunity to reinvent and reinvest. People seem to forget basic economics and facts. But the truth is that facts are facts, and sooner or later, the drug effect will wear out and reality will settle in. That is when businesses will realize that they missed an opportunity to set themselves up for better days.

Perfectionism and Business

2009-02-18T13:27:00.002-06:00

What an odd combination! It is the feeling when a project is not “perfectly” complete but there is a need to launch. Businesses always struggle with finding the optimal threshold between spending and results. Many surveys conclude that 50% to 65% of IT projects fail to deliver on scope. Management consulting projects with intangible results could have a higher failure rate. So how do you decide when it is good enough?

An up-to-80% solution leads to high return on spending. In this case, work performed is necessary and sufficient to get the expected results. On the other hand, an over-80% solution leads to diminishing returns on spending. This is when the work performed often creates complexity and reduces flexibility.

80% solutions are specially adapted to fast changing markets, as they provide flexibility and help optimize the balance between labor and systems. By addressing the remaining 20% through skilled and flexible employees, a business can adapt quickly to any change in market requirements. Selective use of automation reduces technology costs, eliminates over-design, and provides a motivating work environment.

Why Do Business Strategies Fail?

2009-02-17T16:00:00.002-06:00

How many times did you hear a business manager "whine" about how his/her greatest idea never got implemented? The reasons they provide abound: "The implementation guys messed up", "senior management did not back me up", or "people kept changing their minds".

Most businesses underperform not because of a lack of good strategies but due to poor execution:
―Lack of knowledge and expertise: This leads to poor implementation of a usually well designed strategy. Management went through SWOT analysis, vision and mission setting, business planning and they communicated very well. They just underestimated the fact that their subordinates are subject matter experts which does not necessarily mean they know how to implement change.
―Culture: This is usually exacerbated through a latent resistance by the organization’s employees and partners. It is extremely hard to break habits unless compensation is aligned with strategic objectives.
―Lack of resources: This results from incorrect diagnosis of strategic requirements. Senior management underestimates the time and financial requirements leading to incomplete execution and sunk costs.

A somewhat good idea that is well implemented is much better than a great one that never materializes.

Overshooting Pendulum

2009-02-16T18:28:00.000-06:00

We all agree that the news media is not doing their job and instead is just feeding on bad news. Which means: Is it as bad as we are told to believe?

Well for a start, let us look at these facts: the national average employment rate is at 93%; it costs today more to build a house than to buy one; the upward saving trend is indicative of people sandbagging. Sooner or later, postponing spending will come to an end and more than 9 out of 10 people will realize that they still have a steady income. You know, that new car they did not purchase and that vacation they did not take is suddenly overdue.

So what do you think will happen to the market? You guessed it! But rapid growth is more challenging than a slowdown. You can always shed inefficient resources and keep your best ones, but it is much harder to hire new resources fast enough to handle an uptick. It is ALREADY a lost game for businesses that are not using this downturn to understand their core competencies, build a strategy plan, and quickly executing on that plan.

I did predict the internet, the real estate and the oil bubbles (sadly, I never wrote about it but my close friends heard me talk about it). Along those same lines, I am predicting the pendulum is overshooting the other way this time, so make sure you clean up your business model and set yourself up for the next round.

The White Swan

2009-02-13T16:43:00.002-06:00

"It seems that the current economic downturn has no end in sight", "jobs will continue to shrink", "the sky is falling"... these statements are being repeated all over the world.

Beware of the White Swan! What is happening today is an inverted situation of the Black Swan (stealing the concept from my compatriot Nassim Taleb). Today, everybody seems to believe that "all swans are black". In this case, what will happen is that somehow, somewhere, somebody will discover a white swan and suddenly things will start changing and quickly. In other words, things might get better faster than we think.

As the doom and gloom bus keeps loading herds after herds of depressed employees, some businesses will discover the situation is not as bad as people think and that the sky is not falling. When this happens, it would be too late to step out of the doom and gloom bus to join the party. So the major question businesses need to be asking is not when and how things will get better, but are we doing everything we can to get ready for when the situation starts turning around? If you are downsizing and cutting costs just because everybody else is doing it or because your finance team is forecasting a decrease in volume, then you are behaving just like in a bubble situation and following the herd until the bubble pops and leaves you in ruins.

Businesses need to learn from the bubble era and apply those same learnings to the current downturn. Many businesses today wish they set themselves up for this perfect storm. So why aren't they setting themselves up for better times?