DETRITUS

Detritus is an accumulation of disintegrated material. That’s what comes to mind when I’m thinking of Detroit and what its demise portends for the future of our public finances at large. It is irony that the city that is synonymous with the mismanaged private sector auto industry (no offense to Ford) and had to endure the managed bankruptcy of General Motors and Chrysler is now itself at the top of the iceberg of a growing mismatch between publicly made commitments and the capacity to deliver against these commitments now and in the future.

Detroit has the dubious honor of being the test case for how a public entity can finally face the fact that it has promised more than it can deliver, renege on its obligations and try to start anew.

I see it as a flaw of our democratic system that we can let it come this far, with open eyes, and then have no more choice other than seek refuge in bankruptcy.

It is only the scale of the Detroit default that sets it apart from what is happening all over America. Municipal bankruptcies are popping up all over the place, Stockton and San Bernardino, CA, Harrisburg, PA, Detroit, MI and the cause is just about the same everywhere: incompetent, dishonest and self-absorbed elected officials willing to give away the store to their constituents to be popular and get re-elected. It was no different with General Motors and Chrysler. It was much easier for top executives to give in to UAW demands that would not affect the P&L until after they would have retired than to manage productivity, payroll and retirement expenses in a responsible way and get the UAW to see it the same way.

Unfortunately, we are still only seeing the top of the iceberg.

Just looking at unfunded pension liabilities carried by the States, gives us a glimpse of the magnitude of the problem. The State of Illinois, by itself, has a pension fund shortfall in excess of $100 billion, growing by $17 million every day. The Economist, in its July 27, 2013 edition, points to calculations by the Centre for Retirement Research at Boston College that reckon that the combined pension fund shortfall of all States may be as high as $2.7 trillion. It also reports that Moody’s reckons that schemes are 52% underfunded.

Of course, at the Federal level, it is little different. There too, our public officials have promised much more than they can deliver with existing tax revenues and funding authorizations. The scary part there is that the unfunded obligations under our entitlement programs are not even included in the $17 trillion National Debt. No wonder that my children and their peers have no confidence and, therefore, little expectation that Social Security will be there for them. They are right, unless Congress gets its act together and deals with the important issues of deficit elimination, debt reduction, tax- and entitlement-reform.

State and Federal Governments have no access to Chapter 9 Bankruptcy that municipalities and counties have. They have no other option than to restructure their finances in such a way that they can move forward. In almost all instances that means that they will have to renege on earlier made promises.

There are no good solutions when governments of any kind have allowed to let things get out of hand. The bill becomes due someday and the only question is: who is going to pay it. In the case of counties and municipalities, if the public authorities don’t answer that question, it will ultimately be answered by the bankruptcy court.

In the case of Detroit, which reportedly has a deficit of $18 billion, this means that the bankruptcy court will have to decide how to split the burden between creditors and city employees and retirees who will have to learn to live on significantly less that they were promised by a succession of city officials who have failed them. The outcome will send ripples far and wide in that it will most certainly be precedent setting and affect the municipal bond business and the rights of public-sector workers in every municipality, county or State that has failed to tailor the entitlements of its employees to its revenue producing capacity.

The only good thing in this is that it will almost certainly hasten the process of converting public pensions from defined income programs to defined contribution programs. This process, which is nearly completed in the private sector, is well under way, at least for new employees, in States like Alaska, Michigan (!), Nebraska and Utah.

Detritus is the right word for the mess we are in, because our system of entitlements has been disintegrating even though our public officials prefer to live in denial of this reality until they no longer can, like in the case of Detroit. The real question is: “What needs to change in our democratic process to keep politicians from over promising and under delivering and how can such change be brought about.” That is a question for which there is no bankruptcy judge – or any other arbiter – to answer. The answer can only come from the public that has to hold its politicians accountable for the decisions they make.

A good place to start would be to severely cut or eliminate the retirement benefits and other perks of the very same public officials who signed off on the entitlements that now turn out to be unaffordable. If ordinary public servants have to suffer then the officials who brought this misery about should be the first to see their privileges slashed.

Fire Your Customer?

That is not such a dumb question as it might look at first glance.

Who does not have some customers who want it all on their terms; who nickel and dime you to death; who burden you with unsubstantiated claims and unwarranted returns? Who make you jump through hoops and never pay you on time and only as much as they think they owe you? Do you recognize that customer inside your business?

There is a disproportionate resource (time and management) commitment associated with managing this type of customer. Fire him! Since you don’t get all of the business from your market place anyway, leave this customer to your competition. It will absorb their scarce resources and take their eyes off the ball.

Just like there are undesirable customers, there are also undesirable suppliers, sales representatives and SKU’s.

As a rule, every distributor owes it to him/herself to set up financial tracking systems that allow for the systematic calculation of margin contribution (per month, fiscal quarter and year as desired) per:

·         Customer

·         Supplier

·         Sales Representative

·         SKU

Once these data are available on a routine basis, the magic of the spreadsheet will then easily allow you to rank your customers, suppliers, sales reps and SKU’s in descending order of margin contribution. Voila. You have all you need to dramatically improve your business. All you have to do is draw a line at the bottom 5-10-25% percent of the customers, suppliers, sales representatives and/or SKU’s and resolve to cut out unproductive elements in your operations. You draw the line where the numbers indicate you don’t get an acceptable return for your resource commitment. Let the numbers do the (hard) work for you and cut out the dead wood, religiously and periodically.

Keep in mind that poorly performing customers, suppliers, sales reps and SKU’s are a drag on your financial performance, your operating efficiency and your working capital. Since Cash is King, put it to work where it is appreciated and provides a handsome return.

Not doing anything about below par performance on the part of customers, suppliers, sales reps or SKU’s will quickly become demotivating to those who do perform and will not go unnoticed by the marketplace and employees. It will create a culture of the wrong kind in and around your business.

Growth is a vital part of business, but it also can be a cancer if it becomes growth for growth’ sake. If growth is top-line oriented without regard to the contribution it delivers to the bottom-line it serves no good long term purpose. Sometimes it is better to pull back from top-line growth by taking out the undesirables. It may turn out that firing your bottom 25 customers, terminating your under performing suppliers, killing your under performing SKU’s and dismissing your under performing sales representative(s), is the best thing you could do for your business! 

Just make sure that your information systems let you know with precision which ones to cut.

THE REST OF THE TEAM

“The main ingredient of stardom is the rest of the team.” John Wooden.

As you climb the ladder in the business world, you get to see a lot of resumes. I have written them, read more than I care to remember and edited many for friends who had good reasons to update their resume.

The one thing about resumes that strikes me now that I have left the field of active career makers is that, without exception, they always include statements like: 

“While at company blank (you fill in the name), I grew sales by 50% and increased margins by 1.2%.” or,

“I turned around a business that was moribund into a top three contender in its field.”

I know, because I have written similar representations in the many resumes that I have maintained over time.

But when, the other day, I hit upon John Wooden’s quote that I repeat in the heading hereof, it dawned on me how misleading and preposterous such representations are. Business is a team sport rather than an individual sport. Business is much more like football or basketball than it is like golf or weightlifting.

Our first resume writer may very well have been in charge of a sales team that achieved the 50% increase in sales and the 1.2% increase in margins, but it would not have happened without the team delivering the results. That does not denigrate or take away from his accomplishment as a team leader, but his resume should not state what it does but rather something like “While at company blank, the sales team under my leadership grew sales by 50% and increased margins by 1.2%.”

Our second resume writer may, as business lead, very well have been in charge of a turn-around of the business segment he was responsible for, but would the turn-around have been successful without the front office directing, supporting and financing the plan and without the staff- fed up with operating in a moribund environment – accepting accountability for the results of the work they were performing? In this instance the intellectual honesty of the resume would be significantly enhanced if it stated: “I was given every opportunity, including a motivated and competent team, to turn around a business that was moribund into a top three contender in its field and I made it happen.”

In either case, the real accomplishment of the resume writer was the fact that he was able to create and manage a team of people that collectively knew what they were doing, wanted to make their hard work matter and were willing to hold themselves accountable for the team achieving its objectives. That is no small feat and worth of a prominent display in the resume.

If you want to be a star, in sports or in business, you’d better first build a team that is competent and motivated to help you achieve your goals. The next challenge will be to keep your team focused and on track and to make sure that you give credit where credit is due: with the rest of the team.

The Blinding Light of the Obvious

At one point in my career, I had a boss who knew that he had to invite discussion among his key staff members of how the company we worked for was doing and where it was heading. But he was doing little more than paying lip-service to business-school conventional wisdom. His favorite response to anyone coming up with an idea for the improvement of the business was: “you strike me with the blinding light of the obvious”, suggesting that he had long considered the idea being brought forward and already incorporated it in his plans for the future. If the idea had any merit it had to have come from him.

It will not surprise anybody that this way of denigration of participative management eventually took the wind out of the sails of all the key employees and the outcome is predictable: the company, which once was an industry innovator and leader, was absorbed by a corporate giant and no longer exists.

In American politics, the blinding light of the obvious plays a very different role. Even the most common sense steps toward improvement of the system are being ignored or tabled. It is as if the blinding light of the obvious never penetrates Capitol Hill or the White House.

How else can we explain that:

1.       At a time of burdensome federal deficits and debt, we continue to subsidize farmers while commodity prices for the main crops they produce are and have been at above average levels;

2.       We artificially pump up the price of corn by continuing to subsidize the use of corn for ethanol production (which, without government support could not compete with oil) for automobile fuel use;

3.       As the only nation in the developed world, we allow pharmaceutical companies to advertise their scary wares directly to the public (with cautionary warnings and all) rather than leave it up to our doctors to decide what’s good for us;

4.       Congress votes to spend money on military hardware (tanks and aircraft) that the military does not even want, at least not in the numbers provided by Congress;

5.       Faced with threatened insolvency of our big entitlement programs Social Security and Medicare, we fail to take the simple steps, outlined by a variety of think tanks, public interest groups, columnists and engaged citizens that can put these programs back on the path of long term sustainability;

6.       Faced with structural budget deficit and a messy, ineffective and metastasized tax code, we can’t have a serious debate about simplification let alone the merits of a consumption tax versus income tax and the use of sin taxes to discourage dangerous behaviors;

7.       We know that our world dominance depends on how well we educate our children and yet we let the cost of higher education, particularly at the top schools, move out of reach for just about all other than the very rich;

8.       We know that our health care system is the most expensive in the world without offering, across the board, best in class results, but we utterly fail to bring cost under control even with the largest legislative effort in decades: we specifically prohibit Medicare to negotiate the cost of pharmaceuticals like the health insurance companies do and we prohibit the free flow of medicine from across the Canadian border.

There is so much the Federal Government, legislative and executive branch, could do to keep America competitive, but the system is paralyzed. Washington is immobilized by interest groups and petty jealousy between Republicans and Democrats.

It is as if the army of politicians inside the Beltway is under control of the mob and scared to death to do anything that the boss will not condone. The boss, of course, in this case is the lobbyist for whatever special interest group rules the roost. It is demoralizing to see how much our legislators are beholden to institutions like the NRA, AARP, NEA, UAW, ACLU, not to speak of the lobbies for major industries like defense, banking, oil and gas, pharmaceuticals, healthcare, financial services and communications. The voting public should be the boss, but its influence has been hijacked by institutions with pockets deep enough to buy the subservience and vote of our representatives.

The net result is that the Nation’s business no longer gets done. The Federal Government can no longer proclaim that it sets the rules of the game by which all constituents have to play and it is incapable of creating optimum conditions for free enterprise and citizens to shape conditions for a brilliant, sustainably competitive future.

One has to be blind, blinded by the lightning strike of the obvious, not to see how even the most common sense solutions to our challenges get stopped in their tracks because of the sway special interest groups hold over our legislators on both sides of the aisle. So, the question becomes: how much longer are we going to tolerate this perverted façade of representative democracy?

THE SAUDI FLAW

We blame the Islamic Arab world – and in particular the Kingdom of Saudi Arabia – for denying a good part of its population, the women, an equal role in building the future of their countries and we wonder how in this day and age a nation can prosper if it leaves a large percentage of its population on the sideline.

The answer is more likely than not that it cannot prosper under those conditions. It can stay afloat for a while, particularly if the nation is a hydrocarbon rich country that can generate wealth by exploiting its natural resources. But it is unlikely that it can reach its full potential if not the whole population is engaged in the nations building process.

In the USA we don’t have that problem. Or do we?

Warren Buffett just recently made a case* for women to shatter what- he believes- are mostly self-imposed limitations on themselves. He blames these limitations on lingering after effects of centuries of institutional inequality between men and women. There is more than symbolism in the fact that our Declaration of Independence declares “all men are created equal”.

Warren Buffet writes: “The closer that America comes to fully employing the talents of its citizens, the greater its output of goods and services will be.”

Arguably, the contribution of women in our society can be enhanced by removing any and all remaining vestiges of a time we should finally leave behind. This is particularly the case with women’s opportunities at the top levels of business and government, where women remain significantly underrepresented in spite of great progress over the last decades. But there is a whole other segment of our population that we should focus on if we believe that “running on all cylinders” is a prerequisite for success in the race to the top of nations. And this segment is by and large equally divided between men and women.

First of all, we need to realize that nobody counts the number of people employed in the USA. The Federal government through the Department of Labor makes an effort (not very successful) to measure the unemployment rate, but what would be really interesting to know is the number of people who are employed (and by deduction, the number of people who are left out of the labor process).

Isn’t it somewhat befuddling that our government cannot tell us what percentage of the population is engaged in the labor process? And, therewith, the percentage of the population that is not?

The Bureau of Labor Statistics measures a metric that it calls the “Labor Participation Rate”, which stood in April of 2013 at 63.3%. This statistic measures the number of people in the labor force that is either working or actively looking for a job as a percentage of the civilian population aged 16 and older.

It also measures a metric that it calls the “Employment-Population Ratio”, which stood in April of 2013 at 58.6%. This statistic measures the proportion of the civilian noninstitutional population aged 16 years and over that is employed. It includes people who are under-employed in terms of the time they get paid for or in terms of the level of work they are asked to perform.

Thus it appears that also in our country close to half of the population is left out of the labor process. Some percentage of this “unengaged” population is either below working age, retired with no intent to get re-engaged or studying full time.

The bottom-line is that the Federal Government cannot tell us with any degree of precision what percentage of the work-eligible and work-capable population is actually disengaged from the labor process and thus not participating in the growth of our economy and the strengthening of our nation. But we can come at it from another angle:

We know from the Census that the USA has a population of about 314 million, that about 74 million are below age 18 and about 42 million are over the age of 65. Since some unknown percentage of these age-groups are employed (let’s assume 10% of this populus), it follows that our labor pool would be approximately 210 million.

We know that in April of 2013 we had

·         11.7 million unemployed

·         14 million on disability (a staggering number!)

·         2.3 million in prison (a staggering number!)

·         7.6 million involuntary Part Time

·         2.3 million marginally attached

These 5 categories add up to 37.9 million people in the USA that would theoretically qualify for the workforce but are either unemployed or underemployed. That represents 18% of the labor pool. Arguably, this number is a more accurate measurement of disengagement of the labor process than the unemployment rate of 7.5%.

Warren Buffet, in his interview in Fortune, states: “No manager operates his or her plants at 80% efficiency when steps could be taken that would increase output”. We point the finger at the Islamic Arab world for running their nations at 50% efficiency by denying women the right to participate. But we should not be blind to the fact that we run America at much less than 100% of its horse-power.

If America wants to stay on top in the race of nations, it will have to find a way to run on all cylinders and get a much larger part of the labor pool, men and women, engaged in supporting its economic growth and development.

*In the May 20 issue of Fortune

ON LEADERSHIP

Leadership is hardly a topic to be dealt with in a column for a blog or a magazine, because it has so many aspects, but it is too important to success in business to ignore it. It is also a near inexhaustible theme for writing, because the world offers so many examples of leadership that are worth studying, because they are inspirational and worth following.

In all of my attentiveness to samples of leadership that I have seen, heard or read about, one stands out as a model that is near impossible to replicate. Like a world record that may never be broken or Cal Ripken’s string of 2,632 consecutive baseball games played. Part of the improbability of surpassing my top pick of leadership lies in the fact that it happened almost a century ago and at the other end of the world. The principles of leadership, though, are unaffected by time and location and the model could be replicated given the same degree of determination, discipline and persistence exhibited by Ernest Shackleton in his ill-fated Antarctic expedition in 1914-1916.

The story of Sir Ernest Shackleton’s expedition on board the Endurance is too long and nuanced to be repeated here, but is worth reading. The authoritative book on the expedition, with exceptional pictures taken by Frank Hurley – one of the crew members – is written by Caroline Alexander under the title “The Endurance” and was published in 1999 by Knopf.

The reason why it should be studied by believers in the value of leadership is because it exemplifies leadership of the highest purity of purpose: When the expedition vessel Endurance got trapped in pack-ice in the Antarctic summer of 1914 and ultimately broke up nine months later– killing the expedition’s mission – Shackleton shifted his pursuit from being the first person to cross the Antarctic continent on foot to the single purpose of bringing every member of his 27 crew home to safety. He must have known that this was an odds-defying feat, if he could pull it off.

Having lost, with his ship, his shelter and most of his stores he had to improvise every move he made on his way to a safe return to civilization, which his team ultimately made in September of 1916. His major challenges were time (more than 2 years of hunger, disease, frostbite and deprivation), distance (thousands of miles of drifting and floating) and weather (two Antarctic winters).

After the break-up of the Endurance and having camped out on drift ice for six months, the crew made it - with two salvaged open life-boats - in 15 days to the uninhabited Elephant Island. It was now April 1916 with another winter approaching. On this barren, desolate island Shackleton left most of his team behind to try to reach in one of the open life boats -with 5 crew members and without proper navigational instruments - the nearest whaling station on South Georgia Island 650 nautical miles away. Risking the good chance of getting lost in the huge expanse of the Antarctic Ocean, which would have doomed every one of the 27 members of the expedition. He got there in 16 days through some of the worst weather and seas imaginable and was able to arrange a vessel to pick up the expedition members who were left behind on Elephant Island. Shackleton himself captained the vessel that picked up the castaways on August 30 of 1916.

The elements of Shackleton’s leadership are unmistakable from just the outline of this story. They come vividly to life if you read the blow by blow account of the expedition as written by Caroline Alexander:

•          To place the safety of the crew ahead of his personal ambition as an explorer
•          To acknowledge defeat when the Endurance was lost and timely switch the mission at hand
•          To never relinquish the responsibility for making the tough decisions
•          To never ask something from members of his team he was not willing to do himself
•          To maintain discipline among a team of 27 individuals, each with a different appreciation of the   situation they were in and constantly confronted with life-threatening conditions
•          To never lose faith and give up on his mission in spite of near insurmountable adversity
•          To completely succeed in the (revised) mission

What makes this showcase of leadership so exceptional – and most likely not to be surpassed – is that the mission was achieved without any of the comfort and technology available to modern day explorers.

Leadership is of all ages and knows no boundaries. It is a vital component of any human endeavor. You will have difficulty identifying any highly successful business enterprise, where the leadership component was missing.

THOUGHT LEADERSHIP

“When you come to the fork in the road, take it.” (Yogi Berra)

“If you don’t know where you’re going, then any road will lead you there.” (Lewis Carroll, Alice in Wonderland)

High on the “To Do” list of business leaders figures the need and indeed the obligation to spend a good portion of their waking/working hours on figuring out what the world in which they operate will look like 3-10 years down the road and make some decisions on how to position their businesses to operate profitably in that changed environment.

This planning for the future may very well be the hardest job a business owner/leader has to do. Most of us are simply not trained or wired to force ourselves to think in a disciplined way about what may or may not happen down the road and then consider the impact on the business you’re running. It is risky business, even if you get yourself to build a vision of the future. What if you’re totally off base? Can you bet the farm on something that may - or may not - happen?

But the hard reality is that unless you’re just along for the ride and accepting that it will come to an end, you have no choice as business owner/leader to know, if not where you’re going, at least where you want to go so that, when you come to the proverbial fork in the road, you have already figured out which direction to take.

Fortunately, there is a structured way of dealing with this issue of decision making for the future. It is called “Thought Leadership”.

Glenn Llopis, the founder of the Center for Hispanic Leadership, wrote an excellent article for Forbes in August of 2011 in which he defined a “Thought Leader” as “a person who identifies trends, common themes and patterns within a particular industry or functional area of expertise to help others identify new opportunities or solutions for growth”.

Thought Leaders can teach your organization how to generate better ideas on its own. A big name in this field is Vijay Govindarajan, co-author of “The Other Side of Innovation” and a professor at Dartmouth Tuck School of Business. Vijay Govindarajan takes a facilitator approach: “What I want is for companies to self-diagnose their problems and self-discover their own solutions through my thought leadership”.

This is very much the type of support Aileron* offers – at very little cost compared to the astronomical fees top consultants charge – to small business owners.

It is lonely at the top!  Small business typically does not have much bench strength and who does a business owner turn to when he/she sorts through the options for the future? Best Practices Sharing is somewhat helpful but, by definition, only addressing something that is already in place, something that is already happening somewhere. The harder part of Thought Leadership is the thinking about circumstances that may or may not play out but, if they do, will materially affect your business. It is thinking about “how to stay ahead of the curve”.

If you are a business owner/leader you have no choice but to spend a good part of your time in scenario planning. In thinking about where you want to drive your business and what direction you will take at every fork in the road that presents itself on your journey into the future. You are also well advised to invite all of your key employees – the ones that you would not want to lose – to participate in the Thought Leadership process.

The final thing that matters is that, while charting the course may your job as the business owner/leader, you are better off if you have a few professional pilots along the road to keep you off the cliffs and the shallows that could sink your ship at any time.

Thought Leadership matters. It is one of the top responsibilities of the leaders of any organization. But in today’s complex world it should not stay in their hands. It needs to become part of the organizational culture and be driven down into the ranks and embraced there. From time to time it needs to be checked, refreshed and kept on target by external professionals.

*Aileron is a training and support institute for small business owners in Dayton, Ohio (www.aileron.org). Readers who are business owners in a range of up to $50 million in sales and want to bring their operation “to the next level” should check out this incredible resource with its own entrepreneurial origin!