Financial "Paine" Ahead?

In the 1796 pamphlet “The Decline and Fall of the English System of Finance,” Thomas Paine predicted that the English currency system would fail in 20 years, primarily because ongoing war expenditures would push national debt so high that the Bank of England would be compelled to suspend gold payments. Paine’s prediction came to fruition in 1797, when gold payments were suspended and did not resume until 1821.

Today, with the U.S. national debt’s rise to an unprecedented $13 trillion in June, exacerbated by the surge in government spending related to the military, economic, border, drug, and social equality wars that we fight today,  could we be tempting a similar fate? In “Decline and Fall,” Paine outlines the underpinnings of England’s currency failure by contending, “One of the amusements that has kept up the farce of the funding system is that the interest is regularly paid.  But as the interest is always paid in bank notes, and as bank notes can always be coined for the purpose, this mode of payment proves nothing.  The point of proof is, can the bank give cash for the bank notes with which the interest is paid?”

For today's U.S. debt system, the answer to Paine’s question of proof is increasingly no. One dynamic that is clear is that as the national debt continues to climb, the possibility of a fiscal crisis or default for the U.S. increases. In the meantime, the debt’s climb could mean higher taxes and interest rates for businesses.

In “Decline and Fall,” Paine compares then-Prime Minister of England William Pitt’s “project of paying off the national debt by applying a million a year for that purpose, while he continues adding more than twenty millions a year to it” to “setting a man with a wooden leg to run after a hare.” It could be said that current U.S. government spending is proceeding at a similar pace, wooden leg and all.  For business owners and leaders, this indicates that the next 10 years should incorporate a focus on diversification from the U.S. dollar if at all possible.

Fundamental Fixes for Today’s “Broken Benches”

According to the Online Etymology Dictionary, the term bankrupt originated in the 1530s from the Italian banca rotta, which means "a broken bench"; this phrase is derived from banca, which means "moneylender's shop” (bench), and rotta, which refers to "broken, defeated, interrupted" and was remodeled on the Latin rupta, "to break." The verb bankrupt was first recorded in the 1550s, and characterized the Italian practice of breaking the marketplace benches of bankrupt merchants.

The American Bankruptcy Institute reports that 60,857 businesses filed for bankruptcy in 2009, up from 43,546 in 2008. The bankruptcy filing rate for early 2010 appeared to keep pace with quarterly levels seen in 2009, with 14,607 filings recorded in Q1.  A recent article in The Economist points out that bankruptcy law has evolved in favor of corporate debtors, and the complexity of CLOs and other similar debt structures more frequently leaves lenders opting to wait to collect until the borrower’s situation turns around.

An effective plan for emerging from bankruptcy in today’s economy should favor repair, not disposal, of the “broken bench.” Reconstruction initiatives might include these core areas:

• Anchoring loose legs more firmly in detailed financial information on business operations and cash flow
• Repairing cracks on the surface by upgrading talent
• Eliminating wood-boring pests of inefficiency by undergoing fundamental business process reorganization with fewer fixed and more variable costs

There may currently be a  glut of  “broken benches” in our modern marketplace, but The Economist’s viewpoint suggests today’s conditions may offer bankrupt businesses a unique opportunity to get back on a solid platform for growth.

Survivors Emboldened by Surviving 

I’m sensing a change in attitude in the minds and actions of a subset of our business community:  CEOs and business owners who have come through the aperture of 2009 are now growing emboldened by their survival.  This increased confidence is akin to the boost gained from completing a marathon or making that clutch hit in the bottom of the ninth when the game is on the line.

Investments in technology and process improvements are being made. Serious considerations of bolt-on acquisitions are being acted upon. Management teams are being upgraded. 

This enhanced boldness is not quantifiable in any analyst’s report, but as I talk with executives about their businesses, I can sense confidence in the air – to a degree that is similar to how one could sense the danger in the air two years ago. Many business leaders underestimated the extent of our economic vulnerability in 2008, and we must avoid underestimating the emerging opportunities in 2010.

Anita Roddick, a British businesswoman and founder of natural beauty products company The Body Shop, once said, “Nobody talks of entrepreneurship as survival, but that's exactly what it is and what nurtures creative thinking.”  CEOs and business owners thinking beyond survival today are those who have converted their bolstered confidence into action.  What about you?

World Cup Lessons for Newly Acquired Entities

“Managing a game's opening minutes without surrendering a goal comes with maturity and experience.”

This is a quote from USA Today’s analysis of the U.S. soccer team’s 2-1 loss to Ghana, but it could just as easily be a statement on the critical nature of ensuring a strong start after a portfolio company or bolt on acquisition.

According to USA Today’s commentary, the largely young U.S. team was plagued throughout the World Cup tournament with a tendency to let their opponents score first, often before the first 15 minutes of the match had elapsed. And once those opponents snagged an early upper hand, they held on, allowing the U.S. a lead for just three of 390 minutes of total playing time.

Similarly, in business, newly acquired entities may lack sophistication in sales, finance or operations processes, and fall short of financial targets in the first few months of new ownership. Further, giving up this early lead can make a long-term win at growth more difficult.

CMF’s post transaction FORWARD program is built around our philosophy of “Good Starts Lead to Good Finishes” for new acquisitions; FORWARD is designed to strengthen financial information infrastructure and reporting capability to quickly resolve deal matters,  ensure performance visibility, and establish optimal relationships with new ownership for early success. With a good defense early in the game, management at newly acquired entities won’t fall behind and face a formidable struggle back to get the win.

Using "The Rhino Principle" to Jump-Start Complex Initiatives

When it comes to harnessing the necessary momentum to attack large-scale, complex business issues, British historian and author Paul Johnson ascribes to “The Rhino Principle.” In a column for Forbes, Johnson explains that businesses can glean valuable insights from the rhino’s instinctual method of facing challenges head-on. He notes, “ … the rhino is single-minded. When it perceives an object, it makes a decision--to charge. And it puts everything it's got into that charge. When the charge is over, the object is either flattened or has gone a long way into cover, whereupon the rhino instantly resumes browsing.”

According to Johnson, the “Charge!” methodology is also crucial to the business leader’s ability to achieve an objective. He advises the executive facing down an issue to “dismiss all other considerations from his mind, abandon all other activities and charge directly at that object, continuing to charge until the object has been secured.”

Optimization of large-scale business processes, such as the supply chain, is one area in which the application of The Rhino Principle can be the most appropriate leadership tactic for driving change throughout people, process and overall company culture. Optimization typically requires management teams to confront a long list of new and in-process initiatives, mired in various stages of planning and implementation. Just the idea of accounting for, sorting through and prioritizing these initiatives can put the entire optimization plan into an extended state of purgatory, characterized by activity that doesn’t yield much forward motion.  Application of The Rhino Principle, however, can help anchor the focus on a specific initiative until it is resolved, and then drive the selection of the next initiative to single-mindedly conquer, until the optimization effort’s goals are fully realized.

Ultimately, it is business leaders’ ability to holistically implement change that will ensure the necessary diverse competitive advantage within today’s “Wild Kingdom” of business.

Is It Time to Change Doctors?

A 1987 episode of Cheers called “My Fair Clavin” included a snippet of dialogue between psychiatrist Dr. Frasier Crane and Cheers barmaid Carla LeBec, in which Dr. Crane inquires (speaking to another character, Rebecca Howe), “May I suggest something that seems to have worked for many of my patients?” and Carla interjects, “What, changing doctors?”

This nearly 25-year-old exchange offers compelling food for thought for today’s private equity leaders and executive management teams. Executives have certain outside “doctors” to diagnose situations and assist in overall corporate decision-making and the implementation of those decisions. In a rapidly changing business environment that increasingly punishes strategic mistakes, as we shift our focus from operating within an “economic downturn” mindset to an outlook of stability and perhaps even growth, we might want to give Carla’s recommendation some serious consideration and change out some of the corporate “doctors” we have looked to for counsel in the past.

While inside institutional knowledge of “how we got here” may provide short-term actionable perspective, with everything that has changed in our business climate within the past 18 months, fresh eyes focused on current conditions and a clear perspective of the future might result in more strategically relevant answers. 

Hanging On in 2009, Letting Go in 2010

I recently came across a quote from author and publisher William Feather that I believe aptly characterizes the underlying dynamics that determined winners and losers in the business climate of 2009: “Success seems to be largely a matter of hanging on after others have let go.”

But a tenacity-oriented mentality, focused on sustaining operations within an existing business model, or continuing the pursuit of long-held business objectives, does not appear to be appropriate as we approach the mid-point of 2010.  Because growth opportunities are now visible and business issues change rapidly, “hanging on” to irrelevant models or objectives can put a company significantly behind in terms of maintaining -- let alone enhancing -- a competitive advantage. Instead, the overarching strategy for 2010 centers around a willingness to “let go” at the most opportune time.

For private equity funds, this means turning up the merger and acquisition machine by shifting most of your attention from existing portfolio company operations to bolt-on acquisitions for the current portfolio and new platform acquisitions.

For family business owners, this means finding new roles or letting go of some existing team members who cannot grow with you and seeking out outside talent that has been through the next phase of growth in your company.

For C-level executives, this means changing your mindset from defense to offense. The macroeconomic environment has just punted the ball back to you after 18 months.

The Physics Behind Staying Competitive 

Sir Isaac Newton’s second law of motion states that the force on an object is equal to the object’s mass multiplied by its acceleration. If we apply this equation to the objects of the world economy and our own businesses, thought-provoking questions emerge around finding the optimum balance of mass and acceleration within our organizations to continue the evolution towards sustainable competitive advantage.

Generally speaking, if either mass or acceleration (or both) goes up, the force of movement increases. From the macro-economic perspective, it is clear that everything is accelerating and companies are looking for the right balance of their mass (size) and acceleration (ability to move faster with the market).  In keeping with Newton’s law, it could be concluded that businesses with less mass can more easily keep pace with this acceleration in order to continue the force that they are bearing on a market.  With this in mind, business leaders should explore strategies for maintaining an optimal “mass” to ensure a company’s nimble adjustments to rapid change. These strategies can include investing full time in core competencies and outsourcing non-core activities, and investing in your management team’s skills to ensure leadership through this dynamic period.

The Economy's New Dimmer Switch

When Lehman Brothers failed in September 2008, the economy’s operational switch effectively went off. Eighteen months later, we are still looking for a definitive tipping point where the stock, credit and job markets signal a clear recovery and consumers reach a plateau of confidence that motivates their return to spending.

Historically, a V-shaped recovery has evolved that flips our economy’s operational switch back to full “on” position. Over the past 20 years, easy money has been a major catalyst that drove this recovery.    

But in the economic darkness of 2009, without easy money as a driver to switch back to the “on” setting, it is as if the economy's “on/off” switch was replaced with a dimmer. Gradually, starting in the fourth quarter of 2009, this dimmer has been rotating to the right, slowly illuminating various sectors of our economy.  The force of pent-up demand is being muted by a permanently riskier global economic backdrop (e.g., Greece), the tendency of consumers and businesses to pay down existing debt with excess cash, as well as tax and other regulatory uncertainty. 

Economic variables that can help business leaders gauge the speed at which this dimmer is rotating are the “velocity” of money, clarity of regulation and taxation, and new unemployment claims.

Winning in the "March Madness" of Business

Our picks for the 2010 NCAA March Madness tournament are in; we see parallels between the ever-changing dynamics of the business of basketball on the court and the ever-changing dynamics of an increasingly competitive environment for our companies.  In essence, all organizations are engaged in a March Madness tournament of sorts. Just as basketball players must decide on the fly whether to pass the ball or take it to the hoop,  businesses must be able to nimbly shift between conservative and aggressive tactics in response to rapid changes in their competitive environment.

One model for accomplishing this higher-level competitive responsiveness is the “Agile Enterprise,” as outlined by Michael Hugos of Center for Systems Innovation in a recent blog post on CIO.com. In contrast to the traditional, slow-moving, bottleneck-prone hierarchical structure of a corporation, Hugos relates that the business unit network organization structure and decentralized decision-making of an agile enterprise are key to managing our fast-paced business climate. A critical underlying element for successful operation of this model is thorough training that sets up trust in business units to choose appropriate actions. Hugos emphasizes that this training must include companywide “financial fluency” in areas such as balance sheets, income statements, and breakeven analysis in order to orient all staff decision-making around achieving higher profitability.

In order to stay alive in the March Madness tournament, NCAA coaches and players will need to make proactive game-by-game, play-by-play shifts in competitive strategies and on-court actions.  In a similar manner, a winning agile enterprise is comprised of departments that coordinate with each other, yet independently make effective decisions in the vein of positioning for an optimal three-point play or driving through a brief opening in heavy traffic on the way to a hard-fought lay-up.  
 
Consulting firm Challenger, Gray & Christmas Inc. computed that employers had the potential to lose as much as $1.8 billion in the first week of the NCAA tournament as employees focus on pool results during work hours.  The successful transfer of the ways of basketball onto the court of business could turn a $1.8 billion loss into an exceptional return on investment for our organizations. 

Confidence in Operational Convictions

Copernicus waited nearly 30 years before publishing his correct conclusion that indeed the sun -- not the earth -- resided at the center of our solar system.  He expressed his uncertainty and resulting hesitation to publicize his theory in a statement to a friend that,  "Although I know the thoughts of a philosopher do not depend on the judgment of the many, yet when I considered how absurd my doctrine would appear, I long hesitated whether I should publish my book."  He relayed concerns to another colleague about opening himself up to potential scorn on account of the model’s “novelty and incomprehensibility.”

In many business environments, yesterday’s conventional thinking effectively placed the earth at the center of our operating “systems.” Today, we’ve accepted the reality of a fundamentally different macro-operating environment, and continue to grapple with the new implications for our businesses’ individual orbits toward growth.

Because today’s executives don’t have the luxury of waiting decades to state (and act upon) their operational convictions, it is critical to continually challenge the base assumptions of your business to ensure these convictions still hold water. This strategic exercise should include an analysis of:

• The perceived value of your products by customers and prospects
• The interconnectedness and reliability of the supply chain
• The focus of research and development and other innovation-related priorities
• The potential impact of socio-political forces on your business

A regular review of your business’s place in the new world order can facilitate better business process and organizational design decision-making.

Looking Ahead at Nordstrom-King of Prussia

“Achieving the right look” in fashion and in business was the theme as earlier this month, more than 50 executives from metro-Philadelphia private equity funds, middle-market businesses, and professional services firms joined CMF at Nordstrom-King of Prussia for a "2010 Outlook" on business attire and business operations.

After Nordstrom’s overview of men’s and women’s executive fashion trends, the program’s focus turned to a panel of economic and M&A experts – comprised of Mark Luschini, Chief Investment Strategist, Janney Montgomery Scott; Richard Infantino, Partner, Deloitte Financial Advisory Services; and Scott Warren, Managing Partner, Milestone Partners. Using CMF’s annual “Predictions from the Center Mid-Field” as a conversation-starter, the panel offered their insights on what the 2010 economic landscape implies for middle-market businesses and investments.

While the overall economic sentiment from the panel was one of cautious optimism, with Mark Luschini providing macroeconomic data-driven perspective and Scott Warren and Richard Infantino providing anecdotal data on trends in their industries, attendees’ feedback on the venue and content was upbeat.  The response to this event suggests that regularly making connections and sharing quantitative and qualitative insights holds high relevance for decision-making in what’s expected to be a dynamic 2010 and 2011.

Confused Players Can't Win

As another round of football playoffs unwinds toward the Super Bowl, coaches’ and players’ skill sets are put to the test in high-pressure situations. Vince Lombardi, former head coach and general manager of the Green Bay Packers, oriented his players to succeed in all types of game scenarios by running the same plays over and over. When asked why he favored this approach, Lombardi explained, “It is hard to be aggressive when you are confused.”

In today’s rapidly changing business environment, employee skill sets must be effectively applied in all manner of situations. When new dynamics come into play (perhaps in the event of a company transformation such as an acquisition, sale or systems integration) and growth plan objectives are on the line, it is critical to avoid the employee confusion that can arise and divert the aggressive attention to execution that is needed.

Like Lombardi, business leaders must regularly reinforce standards of execution through ongoing, consistent messaging and “walking the talk.” If we foster an environment of functional clarity and purpose, we can ensure our team will react to new situations with an aggressiveness that yields the first-mover advantage so critical to long-term success.

A Different Sort of Deep Freeze

January 2010 has brought a deep freeze to many portions of the U.S., but even these frigid temperatures don’t come close to the chilling effect of the “deep freeze” that settled across the business community this time last year and immobilized both purchasing activity and growth plans.

Looking at our business’s top line this January compared with 12 months ago, it appears that current year revenue will be approximately three times what it was in January 2009. This January, cold air may have put the fruits of Florida orange growers’ labor at risk, but a milder business climate has enabled our labor, and I suspect that of many other firms, to begin yielding impressive harvests.

As we turn up the heat in our homes as a response to the current cold snap, perhaps we also turn up the heat to fully take advantage of this year’s “January thaw” in business climate.

A Resolution to "Speak Up" in 2010

In a recent discussion about the problems of email communication, a friend cited the quote, “The written word in the hands of a master is a poor substitute for the spoken word.”  My initial reaction was suspect as misunderstandings arise with the spoken word as well -- but then my friend added that the source of this quote is Ernest Hemingway, one of the greatest writers of all time.  From that self-effacing angle, I began to see Hemingway’s point. The written word – whether presented in a great literary work, a news article, an email, or a tweet – effectively conveys issues and ideas. But the spoken word still wields more power to move minds, motivate action, or drive home a strong point.

In fact, Hemingway’s observation seems to ring even truer today.  In business, the electronically “written word” has overtaken the use of the “proper” letter, the phone call and the in-person meeting.  Its ubiquity has, in some ways, diminished written language’s impact as a whole; more is actually less in that it is more shallowly processed, more fleeting, and perhaps, more likely forgotten. It’s also more commonly misused to convey critical or sensitive subject matter.

After pondering Hemingway’s reminder of the power of the spoken word, I find myself more frequently picking up the phone and stopping by for a personal visit to communicate and build stronger relationships. As we approach the setting of resolutions for the new year, perhaps we should “Speak Up” more in 2010.

Comcast and NBC U – A "Major Repositioning" Win?

Following “The Great Recession” of 2009, we expect 2010 to mark the entrance to the era of "The Great Repositioning" as management focuses on competitive environments, overall business strategy and operations in a world that is much different from 2008. In the next 12 months, we’ll see two playing levels of repositioning: “minor” initiatives in which businesses stay in the same game, but reposition key pieces on their chess board, and “major” initiatives in which businesses change their game altogether.

The recent announcement of the Comcast-NBC Universal merger is a major repositioning move that carries significantly more risk than minor-level maneuvering. Effective integration of the two company cultures – connectedness between Comcast and NBC personnel that ultimately delivers meaningful value to the consumer – is critical for success. Can Comcast and NBC smoothly unite their disparate worlds of content distribution and content creation when the former plays to a monopoly and the latter plays to competitive innovation?

Operational leadership will obviously be a key ingredient to success in this combination.

What I Did Before Everything Became so Important

During a recent casual conversation about the weekend, a friend asked me, “What did you do on Sunday?”

I thought through my activities that day – doing volunteer work for Students Run Philly Style at the Philadelphia Marathon, driving to the beach, reading the Sunday editions of the New York Times and Philadelphia Inquirer cover-to-cover, and even taking a nap – and responded, “All the stuff I used to do before everything became so important.”

In essence, I reverted back to behaviors that created joy on a Sunday in the ‘90s -- before the first decade of the 21st century brought the Internet, the Blackberry and related technologies that imparted an overlay of urgency to every activity, regardless of true significance.

I suspect a similar regression will take hold as 2009 moves toward closure and business leaders reflect on “what they did” over the past year and decade. Did they lose sight of core priorities as speed and transparency of information made everything become so important? Looking backward may help clarify activities that matter most for the new year and new decade that beckon.

Of “Gigs” and “Odd Jobs”

With the unemployment rate now exceeding 10 percent, it is clear that many businesses remain reluctant to hire full-time employees. But the American worker’s DNA is hard-coded with innovation, which makes me wonder -- how many of the 8-plus million of those who have lost jobs since the recession began in December 2007 have now turned to work opportunities in the “underground economy,” pursuing “gigs” and “odd jobs” that yield pay “under the table”? 

My hunch is that there are a lot more active workers in the underground economy segment than is readily apparent or acknowledged. That hunch is supported by the growing frequency of related anecdotes from friends, business associates and job seekers – stories of younger people working in restaurants and getting other cash gigs to pay the rent, and older men in their fifties now doing neighborhood odd jobs. These types of job arrangements are not unfamiliar; what’s new is they have become an integral part of workers’ longer-term survival plans.

What is your sense of the growth of the underground economy? And will the rising numbers of longer-term paying “gigs” and “odd jobs” and people doing “what they love” make talent harder to access when businesses return to hiring full-time employees?

Applying Einstein's Favorite Growth Formula

Albert Einstein is said to have bestowed greater accolades on compounding interest’s “Rule of 72” than on his theory of relativity, calling the investment doubling time formula "the greatest mathematical discovery of all time."

Over the past 18 months, we have worried about return on investment, but as growth regains a more “front and center” priority, investors and owners should dust off time-honored MBA tools, such as compound interest formulas, in order to jumpstart both thinking and action around return on investment.

As the economy gains momentum, a forward-looking approach to growth using tools such as the “Rule of 72” may even help organizations move beyond it – perhaps to the Rule of 114 or even 144 as they seek to triple or quadruple those returns.

What Goes Down Must Come Up

The cynics always say, "what goes up, must come down," but this October, we’re experiencing more promising business development activity in three weeks than in the previous nine months of 2009 -- strong anecdotal evidence that "what goes down, must come up." 

Private equity firms are firing up the M&A machine and as a result, we are seeing increases in diligence and post-transaction service inquiries. Owner operators are making investments in improving the people and processes within their operations in order to re-position -- both for growth and for sale.

Companies best positioned to rise along with the M&A and business process re-engineering rebirth are those who have spent the past six to nine months “laying the nerve endings” for new business -- diligently keeping in touch with prospects, reinforcing awareness and name recognition, and refining the ability to deliver superior products and services.

Taking Business Development from “Jungle-Fed” to “Zoo-Fed”

I love it when I find metaphors that effectively distill complexity into a few words, sizing up the situation like a custom-made Italian suit. So when a friend recently referred to her business development activities as primarily “jungle-fed,” and expressed her need to attract more “zoo-fed” business, I paused for a moment, processed the metaphor, and smiled. Perfect!

Her description is particularly apt for today’s competitive environment, which becomes more “jungle-like” every day. Interestingly, as I surveyed the room of CEOs in which this comment was made, I unscientifically observed that those with primarily “zoo-fed” businesses had revenue streams embedded in either a technology solution or software as a service, or in government contracts. 

I also concluded that my friend’s metaphor captures a key question for all business leaders in 2010-2011:  How can we increase the percentage of “zoo-fed” business at our organizations?  

Client Service Without Conditions

In this photo of a Philadelphia retail establishment, a business pledges to offer customers “the best service possible” -- but directly above this warm and fuzzy statement is a cold, harsh notice that “NO CASH REFUNDS” will be provided.

Given the current economic landscape, client service with conditions just isn’t a winning formula. Companies are now thinking longer and harder over any potential investment in a product or service, and have no qualms about walking away if the response to their terms and requirements is buried in the fine print. In our now hyper-competitive environment, if you give a potential client a reason to opt out of working with you, they will probably opt out. They know that another comparable business will accommodate the full array of their needs.

But client service without conditions doesn’t mean client service without limits. Knowing what the client’s core need is and what they give you “credit for” will create an environment whereby you can get paid for core competencies backed by expertise, proven processes, and a strong delivery track record.

"Do This, Don't Do That, Can't You Read the Sign"

I recently walked by this sign outside a Philadelphia retail establishment, and immediately thought of that Sesame Street jingle that begins, “One of these things is not like the other.” Upon further reflection, perhaps in our post-economic downturn environment, some business owners and entrepreneurs have decided that “anything goes” in the pursuit of recovery and growth.

In a world where “Auto” and “Glass” can reside with “Locks” and “Cigars,” it’s clear that business priorities and plans have grown muddled in the pursuit of day-to-day survival that has consumed many organizations over the past 18 months. In the rush to follow any avenue that nets a short-term gain, conventional operational logic has, in some cases, gone out the door.

Prospects for long-term growth remain weak unless businesses have a specific direction in mind -- a core competency to build a reputation around. More than ever, wary, cash-strapped clients want to know they are getting the “best” of a product or service before they make an investment. Ill-conceived organizational expansion that creates a “generalist” notion for the client only dilutes capability and credibility -- creating confusion instead of growth.

The Middle Market's "Thousand Points of Light"

This week on the Reuters Small Business Blog, I share thoughts on why the medium-sized, family- and private-equity owned business community will ultimately drive the tailwind of economic recovery and growth.

George Bush heralded the power of the American community as “a brilliant diversity spread like stars, like a thousand points of light in a broad and peaceful sky” in his 1988 Republican National Convention acceptance speech.

More than 20 years later, this power belongs to America’s middle-market innovators. Their innovation is what will pull our economy and our employment numbers out of the doldrums.  Read more »

Economic Counsel from "Cheers'" Cliff and Norm

Economic experts have frequently indicated we should look to the ‘80s for guidance on dealing with current national economic issues. And after coming across a few “Cheers” reruns recently, I think I agree. 

The bar’s resident know-it-all, Cliff Clavin, is often credited with an urban legend called “The Buffalo Theory,” a supposed explanation to his drinking buddy Norm Peterson that included this logic: “A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members.”

For businesses, relentless competition since the ‘80s has significantly thinned out the herd, and new species of carnivore continue to evolve and initiate pursuit. As a result, key components of survival within “The Buffalo Theory” -- speed, nimbleness and cunning -- are increasingly important to business sustainability. As our competitive environment grows more complex, the answer may be to simply run faster.

Perhaps Norm, who was always more direct and to the point than Cliffy, sums up our then-and-now competitive mentality best: “It’s a dog-eat-dog world out there and I’m wearin’ Milk Bone underwear.”

Of Rice and Business Acumen

In his book “Traffic: Why We Drive the Way We Do (and What It Says About Us),” author Tom Vanderbilt uses a rice-pouring experiment to explain the science behind traffic jams. The experiment measures how long it takes one liter of rice, poured two separate times, to flow through a funnel and into a beaker. The first time, the rice is poured all at once; the second time, it is deployed in a “smooth, controlled flow.” Notably, the second pouring is nearly 30 percent faster – just 27 seconds.

Vanderbilt’s point is that smooth, controlled movement gets rice particles, and ultimately cars, through a bottleneck faster, because inflow never exceeds the capacity of the targeted funnel, beaker, or highway lane opening; the traveling bodies aren’t slowed down by the dynamics of too-close interaction or surrounding friction.

The same “smooth, controlled” deployment strategy can prevent organizational logjams as the economy recovers and businesses make investments in future growth. An overly aggressive, “all at once” expenditure on any business resource -- talent, technology, inventory, marketing – can result in overload that muddles productivity. As we make these future investments, Vanderbilt’s 30-percent statistic quantifies the value of ensuring that significant links in the business process chain are prepared to handle the volume.

Playing Fluxx with the Economy

Fluxx, the card game with ever-changing rules, comes to mind as I reflect on the policies, initiatives and invasive tactics that have come out of Washington over the past few months. The general public can do little but play the powerless bystander as our elected and appointed officials (with lobbyist influence) proceed with changing the rules on everything from health care and employment to taxes and even purchasing a damn vehicle.

As the government, Treasury and Federal Reserve continue to intervene in the basic building blocks of the economy, it remains challenging to make predictions about the future. Previously, our insight was derived from client private equity funds and owner operators whose business activities served as primary indicators of the direction of our economy. Today, before we can gauge true macro-economic influences, we must wait for the outcome of the myriad rule changes afoot in Washington. For now, all I can say is, “What the Fluxx is going on here?”

The Lessons of "Lust for Comfort"

The great Lebanese philosopher and poet Kahlil Gibran once stated, “Verily the lust for comfort murders the passion of the soul, and then waits grinning in the funeral.” 

As our economy begins to stabilize and companies recover from losses, downsizing, and changes in competitive environments, executive leaders must keep the modern lessons captured in Gibran’s cautionary words top-of-mind. The business world’s “lust for comfort” blinded many to potentially damaging contingencies, and caused many to pay the ultimate price. 

As leaders we are beginning to recognize a need to revitalize the passions of our corporate souls. Bold leadership, critical thinking, and innovative go-to-market strategies are the keystone to this revitalization and regeneration of long-term profits. Leaders who utilize balanced, holistic communication strategies with their teams that speak to the brain’s “right side” (creativity) as well as its “left side” (logic) will see a return of individual passion among the people who comprise the company, and in turn will foster a sustainable competitive advantage. 

Sports Metaphors for Business Wins: Don't Forget "The Rebound"

“Rebounding is about taking charge. Most of my rebounds came from positioning, where I was able to get to the ball while in heavy traffic,” basketball legend Bill Russell wrote in his book, “Russell Rules.”   

These days, most executives are operating in the heavy traffic of heightened competition for less growth opportunities -- yet we largely continue to focus on simply taking shots. How many of us also have made it a priority to position ourselves or our companies for the rebound -- that is, do we have the right capabilities and relationships in place to capture new opportunities when the economy recovers and transactions begin flowing again?

Sports metaphors are ubiquitous in business discussions, but business victories are most often linked to “the score,” e.g., hitting a home run or grand slam, throwing a one-two punch for the knockout, reaching the finish line. "The rebound," on the other hand, is rarely used to illustrate the means to a financial or operational win – but in our current environment, positioning for the rebound is as important a focus as getting the proverbial point, goal, run, or touchdown.

Flintstones Policies in a Jetsons World

In August 1987, I started my first job out of college along with 16 other new associates at Deloitte and Touche in Philadelphia. At a recent get-together with a colleague from the same Deloitte class who started at the same time, our expected catch-up banter was followed by my friend’s very astute observation that many businesses and government entities still maintain “Flintstones policies in a Jetsons world.”

I believe this metaphor is an apt descriptor for many corporate and government mindsets on several fronts: 

1.  Outdated policies from the ‘90s continue to have a hold on organizational thinking and activities.
2.  These policies, in many cases, are managed by modern-day Fred Flintstones and Barney Rubbles also in sore need of an updated outlook. 
3.  A cartoon’s one-dimensional format mirrors much decision-making behavior in today’s business world.

In any type of reorganization, breaking down ingrained human behavior is the largest challenge. A changed external environment mandates internal action and evolution.  An organization’s use of a “change metaphor” built around well-known characters -- particularly for employees over age of 35 who are most likely to harbor ingrained, outdated habits -- could help expedite a safe transition from Bedrock to Orbit City.

Online Tools Cement Fate of Offline Brands

On TV’s Sanford and Son, the following famous exchange occurred between the lead character, widowed junk dealer Fred Sanford, and his son Lamont:

Fred: “I still want to sow some wild oats.”

Lamont: “At your age, you don't have no wild oats, you got shredded wheat.” 

While I don’t know if “shredded” applies to South Carolina Governor Mark Sanford’s oats, it certainly applies to his career, his family, and the Republican Party brand. His reported actions resulted in a viral surge of tweeting, blogging, and Googling that only served to expedite the demise of his reputation.

In the same week, the news of Michael Jackson’s and Farrah Fawcett’s passings also became global conversations as reaction spread through countless digital channels including Twitter, Facebook, iTunes, and YouTube.

In Mark Sanford’s case, we saw how online tools powerfully integrated with “offline” events to create rapid destruction. For Michael and Farrah, these same tools created a wave of collective nostalgia that cemented their overall positive legacies. In today’s world, the relentlessly efficient distribution of news and the resulting public response can swiftly and permanently enhance or destroy individual and corporate brand equity. 

Is Labor Day M&A's "Lucky Seven"?

The etymology of the word “September” can be traced back to “septem,” which is the Latin word for seven, and corresponds with September’s original positioning as the seventh month in the Roman calendar. Coincidentally, Labor Day falls on the seventh of September this year. While the number seven is generally associated with good luck, I believe Labor Day 2009 will be the start of much more than random good fortune for our industry, as we see the M&A markets return in the weeks that follow.

We expect our luck to change because the stars will be in alignment by the time everyone gets back to work after Labor Day: seller's price expectations, buyer's comprehension of the new macroeconomic environment (and investing in such an environment), and lender's redefinition of underwriting criteria will have been redefined.

We see business owners less confident in going it alone; buyers interested in deploying capital while prices are relatively low; and lenders recognizing that in order to meet their annual budgets (and bonus targets), they need to start lending again. While the general economy may not begin recovery until 2010, M&A will see improvements in September.

If SOX Goes Unconstitutional, Look for an IPO Boom

Running under the chassis of General Motors’ collapse, Obama and Cheney's tit for tat, and the Sotomayor nomination, the Supreme Court quietly agreed to hear a case that challenges the constitutionality of a particular section of the Sarbanes-Oxley Act of 2002, legislation imposed on corporate America as a penalty for the woes of Enron, World Com et al and their auditing firms. Ironically, those same auditing firms, (sans Arthur Anderson) reaped huge financial rewards from the implementation of SOX requirements.

The Supreme Court will hear the case starting in its 2009/2010 session, and my hope is that unconstitutionality is indeed concluded. Such a ruling would send the entire Sarbanes-Oxley bill back to Congress, opening the opportunity for review of other provisions for practicality, and repeal of the more onerous and arguably valueless provisions, particularly as they relate to small cap companies.

Should an unconstitutional ruling occur, look for a boom in new IPOs as the costs and risks associated with becoming and staying a public company decrease significantly, and private company boards review legitimate options for raising capital and achieving liquidity.

Hummer Purchase Drives Globalization Trend Forward

So a non-descript Chinese manufacturer of cement mixers and dump trucks is purchasing Hummer? The trend has started: Chinese companies are buying U.S. operations not only for the importation of a brand into China, but also for the rapid acquisition of sales and distribution capabilities here in the U.S. for other products currently manufactured in China.

This deal will go through despite the threats of protectionism in Congress and organized labor, as well as obstinance from the Chinese government. Globalization is a phenomenon that even our significant financial malaise will not stop.

The Hummer purchase is just a first hint that version 3.0 of internationalization/globalization will ensue once we get past current economic troubles. Speed and versatility will be more important than ever.

Private Equity, Start Your Engines

Until yesterday, I had forgotten the Indy 500 was run this past weekend; sports media was dominated by the colt and filly stories of Mine That Bird at Churchill Downs and Rachel Alexander at Pimlico.  Similarly, the news coming out of Detroit related to Chrysler and GM seems to be dominating other business stories, including middle-market M&A activity. 

At ACG InterGrowth, the Association for Corporate Growth’s middle market M&A conference in Las Vegas over May 12-14, the sense of "private equity, start your engines" appeared to be the resounding theme. There’s still much to fix at private equity firms’ existing portfolios, and triggers are not yet getting pulled en masse, but the activities that preface deals, such as active deal and credit sourcing, are happening.  While the money may still be on the sidelines, the men and women at private equity funds who are in control of the money are not. 

Seller's price expectations have come down, credit is slowly returning to the market, and enhanced overall economic visibility is getting the buyer engaged in a search for bargains.  The summer is generally a slow period for M&A -- and in terms of deals closed, 2009 will probably be no different.  However, the hum coming out of the ACG conference is telling us to prepare over the summer as the race is going to start soon.

The Second, and Final, Demise of Pontiac

General Motors' soon-to-be-shuttered Pontiac line is named after an Ottowan Indian chief who attempted a siege on Fort Detroit just after the French Indian War, only to make peace with the British and be assassinated by a fellow Indian years later.

Perhaps it is destiny that has brought us to this evolution at General Motors. Those who have long followed GM know that radical change has been needed at the company for more than 20 years, and now the current economic cycle has at last forced history to repeat itself with Pontiac’s second jettison.

Pontiac's seige on Fort Detroit was ultimately unsuccessful and the outcome of the latest seige on Detroit is yet to be determined.  As a consequence, over the next decade, look for Detroit to revitalize its automobile legacy, with smaller, nimbler, perhaps private equity-backed manufacturers and service providers.