R&D Success Not All About the $ Spent

So, it's not all about the R&D spending, you must have good innovators, yeah!  China will not swamp us with all their spending.

The Case for Change

Following the 2007-2008 recession, in staving off a total crash, the economy and some stop gap solutions were handed off from one administration to the next.  We still lost Lehman Brothers, doesn’t seem like such a big deal now, does it?  The bounce back to normal has been very slow, and the argument now is what should be done going forward and should a new administration take over the reins.  Recently David Brooks, the rather conservative commentator for the New York Times recently made a good case for a Romney administration based on the underlying tenets of Private Equity.  But can a private sector approach be made to solve the current problems with the US economy?

Brooks argues that a Private Equity approach with a focus on change should be a case for Romney.  Romney seems to be focusing on the Venture Capital side of Bain for his model on how to achieve job growth. Confusingly for the Romney story, Bain Capital was involved in both sectors.

First let us distinguish between Private Equity firms (“PEFs”) and Venture Capital firms (“VCFs”).  PEFs address the market for investment in underperforming companies, usually mature, with returns pegged to economies of scale, cost cutting, and leverage to achieve an appropriate risk/return.  It has been shown recently that this activity has a net neutral effect on overall employment.

VCFs address the market for newer growth companies in need of funds to access customers, build staff and other resources, and fund working capital needs.   The risk here is higher, as many of these investments will fail, and the resulting expected return is higher.  Here “hiring” growth can be explosive, by some measures netting some 2% of total US GDP.

If Romney were to tout his PEF experience, this is not an area to site job growth, rather change management.  This might be the smarter play.  If he continues to tout his VCF experience, citing some 100,000 in job growth, then is he planning a targeted investment strategy in young companies?  Isn’t this what the Communists do?  I think the message is confused, but maybe Brooks has the right approach.

Or maybe a more appropriate comparison should be made to the Romney tenure running Massachusetts.  But that’s for another post.

Rob Cannon is a frequent guest contributor at SMBmatters and is a principal at Cannonomics.  He is a virtual CFO for hire.

Labor Market Efficiency Changing?

David R. Kotok has written a salient commentary about the current state of the Labor Market. In it he describes what is going on in the above “Beveridge Curve”.

In summation, the shift to the right of the data points over time indicates a less efficient labor market. That is, for any one data point, say Feb ’12, a concurrent job vacancy rate in say Nov ’01 shows a much lower U-6 (fully loaded) unemployment rate, here approx. 9.3% versus 15%.

How can this be? Are there so many more folks now looking for a job with the same level of jobs available (vacant)? He does not posit a definite reason for this move, but a recent paper in the Harvard Business Review lends some insight. What if the current ease of travel and taste for independence was driving some of this shift? What if people were taking a trade off in income for flexibility?

In The Rise of the Supertemp, HBR, April 2012, Miller and Miller assert that some 16 million Americans are working independently today (Source, MBO Partners). These include an estimated 3 million managers and professionals, defined as folks with graduate degrees or equivalent who seem to desire the flexibility of temporary work. And what if this group tended to stay independent, given their level of talent and the ability to choose what they work on and with whom to work.

To quote from Miller and Miller, “The only comprehensive survey of U.S. Independent professionals to date, conducted in September 2011 for MBO Partners, found that close to 80% of independent workers are satisfied with their situation, including 58% who are highly satisfied.” Further, only 19% said they planned to seek a traditional job.

The ground rules for successful Supertemp engagements are project oriented and include:

1) Focus on what needs to be done now – this means specifying your most critical objectives
2) Define the work clearly – agree on written deliverables
3) Identifying additional resources required
4) Identifying the internal sponsor – the one who can make things happen internally, in small company cases this is usually the CEO
5) Check in regularly – to reassess goals and objectives.

Hurdles to an efficient market for Supertemps remain, e.g. the difficulty of obtaining healthcare outside traditional employment situations, and tax reform.

Regardless of the ongoing issues, we believe that temporary work is here to stay for the highly talented managers and professionals (think engineers, lawyers, accountants, CFO’s, etc.) and will lead to a continued “inefficiency” in the traditional “Beveridge Curve” for the U.S. Employment market, or should we say to a new level of efficiency based on a permanent Supertemp professional class, working how and when they want to.

The Modified Dutch Auction

This should be the norm. Really, only good guys like Boston Beer, Google, and Morningstar have done this? At least a venture capitalist like Hambrecht has caught on. Please do read for details.

Strategy Focus

If we take the learnings my recent post about the Strategy Revolution, that is focusing on the customer first and foremost, there is another area of distraction that is fundamental to the business marketplace. It occurs in all sizes, but is acute in the arena of private companies. The problem is relying completely on your accountant to do all the financial work.

Accountants do a fine job at what they generally focus on:

1) Accurately calculating and presenting the numbers produced by the business for tax filing.
2) Devising strategies to lower the company's taxes going forward.

Note that there is nothing in their activities to help you run the business more efficiently or effectively, it's just not in their charter.

What you need to bring to the table, in addition to a focus on the customer, is a focus on making your product or providing your service as efficiently as possible. This is a competitive requirement, otherwise someone else will be the provider. I have worked with clients in all arenas who don't know how to use their numbers to manage effectively. The old saw about good, fast, and cheap is prescient, pick two and knock the heck out of them. That means you can choose which two of three to compete on. The truly best can provide all three to dominate a market, speed, quality, and price.

A Strategic CFO/Treasurer may have an accounting background, but they must be able to look forward to drive the operations to maximum performance though budgeting and incentives. A focus on the bottom line does not need to trump the overarching purpose of customer service, but rather works hand in hand to provide that service so that you provide it at the best value.

Healthcare Costs

A bevy of information linked from The Big Picture, to me the non-surprise was the % of non-farm payrolls in the Education and Health Services (think latter), which is now at 15% vs. a low of just under 4% during WWII. Ever wonder why healthcare costs have risen astronomically, this is a primary factor.

Do your Managers outperform?

A long FT article (linked above from Jan 27) examines the performance of English football teams (think soccer here in the USA). The article makes a good management read. But I will summarize the main points in case you don't have time (it is quite long):

1) 90% of football club performance can be tracked to the players. That is the salary level payed for these "employees", whether it be in Yankee height, or Oakland low, can predict most of the success of the team. Makes sense, more payroll = more talent, and the more you win.

2) That leave 10% for the Manager's (think CEO) effect. Some Managers outperform, while some under-perform, just like in the real economy.

I believe, but will not site, comparable studies exist for competitive business (afterall most pro sports leagues operate in a type of Cartel arrangement). In any event, my conclusions would be:

A) The CEO pays for positions, not individuals. But if your overall pay is average for your industry, you should expect average performance, financially and customer-wise. If you can afford to pay more, then the customer related performance should go up.

B) Then again, a very talented manager can make much more than his/her 10% difference, driving an average crew to outperform it's pay grade by a long shot.

Prescription - Hire good managers, pay-up for staff, or a bit of both. But for success' sake, at least do one of these.

Strategy Revolution

Forbes has published a review of Roger Martin's "Fixing the Game". I consider this a seminal work in the area of leadership and management strategy. I also thought it was an appropriate focus for a return to the blogging sphere.

The review points out fundamental weaknesses in our current financial incentive world. For public companies it's all about managing earnings and expectations.

The best companies have avoided the traps, but they are few. I think mostly of Apple, who's leadership (not just the departed) focuses on the customer, and not on what the customer thinks it needs (no market research here) but rather on what they really want (but just don't know it yet).

Translating this to the private market, the focus needs to be on serving the customer best, and only then will profits follow. Maximizing shareholder value (a term called the "dumbest in the world" by no less a titan than Jack Welch) should not be the driving force. Incentives are OK, but they must be tied to customer related goals as well as profitability.

You small guys trying to do things better, keep the focus on your customer and you will succeed. Just bring in a good financial mind to incentivize the workforce and count the beans.