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.

Excellent tools for small (very small) businesses

Check out this post from the NYT.....

Top 25 World Banks

In most recent times these folks have lost nearly $100 billion - do you think they are actively seeking new loans right now? Probably not - if you are a customer tread lightly and bring a solid bit of collateral (not mortgages, sorry) to the table.

It's a goofy lending world out there, but for the folks under $21MM in Revenue at least you have the SBA to consider.

Dissent on Your Board - Plan on it

The new SEC policies cited in Fair Game this weekend show that in public company situations it's good to have dissenters on your board.  The article refers to a study by the IRRC Institute that shows if a company has dissenting board members (submitted say by a rich guy or a hedge fund) then both short term and long term shareholder returns are substantially higher.  Great for public company situations, and the SEC is going to make it easier now, but how can this apply to a small company/ private situation?

Well, surely you are not going to sit a foe on your board, but they shouldn't all be yes men either.  Outside advisers, from the ranks of attorneys, accountants, and bankers, not to mention customers (if you are a supplier) can be a great resource for alternative strategies, contrary ideas.

Make a point of having a broad representation on your board and you will find the advise can lead to better business outcomes for your company.  Your pocketbook and your employees will thank you for it.

Shortage of Doctors - No Kidding?

When I saw the title of this NYTimes piece I thought, yep that's what happens in a free market for a scarce resource. The free market moves resources to where the demand is greatest, keeping all satisfied at the market price. When you limit supply, as doctors have been for years by the AMA regime, resources continue to follow demand, but not all will get what they need, and pricing differences will drive the solution, highest prices (in the cities mostly, or the Mayo Clinic) will get the docs. Economics 101 and a really bad way to allocate a public resource. Fix that Obama, a hard nut to crack.

Speak with Your Investors, It's Tough Out There

We are in a rough time for all small businesses, but especially for relatively new or start-up businesses. The medical device market is one of them. In this excellent New York Times article the writer describes an innovative company that is suffering from current market conditions.

I went through a similar situation early in this decade when the company went from 120 people to less than 80 after a new round of money from investors. That was just after the bottom fell out from the Tech bubble (remember April 2001 - kind of gets lost because of 9/11 that year, but it was bad for the market for sure). New products get the first shaft, for sure.

In addition, professional investors are again starting to focus on under-performing companies, witness a little fight/fray going on in the Chicago suburbs as described in a recent article by Greg Burns in the Chicago Tribune. The dispute revolves around a hedge fund manager who holds a small company's stock, and it disappointed with the market performance relative its peers and focuses the complaint on overhead and related costs in the corporate suite.

These are nervous times my friends, keep hold of your cash and find ways to survive. Keep in close contact with your investors (keep those friends close, and enemies closer), make them feel special, else they might pounce and end your run.

Baseball for Small Business and a Sports Business event

Since opening day is just around the corner, Wait it's today!, I wanted to post a little reference to a nice article currently on Inc. magazine's site about small businesses that are servicing big league baseball teams. The article focuses on businesses providing everything from protection netting to biodiesel recycling at Turner Field, the home of the Braves. It's just nice to know that the all American sport provides a great number of jobs to small businesses. It is the American way after all.

I also wanted to give a shout out to my local business school club which is hosting a stellar panel discussion among renowned sports business executives in Chicago on April 23rd. The Ross Alumni Club of Chicago, local home of the graduates of the University of Michigan Business School, is hosting it's 6th annual Spring Conference, a dinner discussion around the topic of Sports Business; for the love (or profit?) of the game; with open online registration (with full details) currently ongoing. It's open to grads and friends (e.g. the general public) as long as tickets are available, get yours now for this exciting event!

More Detail on the SBA revamp

Though it doesn't affect demand for borrowers products, the new SBA flexibility can help a small business survive these challenging times. More news on the program and it's effects today from the Chicago Tribune.

SBA Loans are Open Again!!

As Melanie Lindner writes in Forbes, the SBA loan market is being freed up by the Obama administration's injection of $15 billion for purchases in the secondary market. This market works like the mortgage market and has been frozen for several months now. By freeing this secondary market banks will have new capacity to originate new loans.

Even better for borrowers, through the end of 2009 the SBA is waving origination fees (not sure about the bankers, I'm sure they'll still want their fees), and upping the percentage the government guarantees from 75% to 90%, making these loans much more attractive to lenders.

So it's now time to go to your banker and ask, what amount and terms can I get now to sustain and grow my business?

Healthcare in America, will it get Fixed?

From President Obama's latest speech, "We can no longer afford to put health care reform on hold." Good news for who? Bad news for who? Hard to be sure at this point, but we can't hope to go on with the double digit rise of the cost of health care.

As noted by Robert Frank in an artcle from February 2007 (when we weren't so wrapped up in the Economy and it's problems that we could rationally discuss health care issues), he noted that "...we spend more than twice as much on health care, on average, as the 21 countries in which life expectancy exceeds ours. American costs are so high in part because the reliance on private insurance multiplies administrative expenses, currently about 31 percent of total outlays." A certain target for the reformers will be this dubious spending on administrative costs in the system, not on customer care directly.

I am aware of a doctor group, and it's not an unusual situation for the industry, that has over 3 times as many administrative staff as doctors, mostly dealing with receivables. These receivables are a big headache, getting payed by the hundreds of insurance companies with different paperwork, dictates, and procedures, not to mention the complexities of Medicare, is a nightmare.

If the administrative costs are to be addressed, the big losers will be health care insurers, Aetna, the Blues, etc as described in today's article by Reed Abelson in the NY Times. The winners will be consumers, doctors, the companies who insure their workers, and the public in general from lower healthcare prices. This is something to anticipate and be prepared for, the later more so if you are on the insurers side.

Stimulate Demand and Supply will Follow

Everyone wants their piece of the pie, the pie being the $787 billion stimulus plan. But the cries from small business for more of the pie have gone on deaf ears, according to their mouthpieces at the NFIB and SBEC.

Of course direct assistance is preferable, but haven't we finally gotten past the days of trickle-down Reganomics? Remember the Lafer curve? Is a payroll tax holiday really an effective stimulus? I think not, it will surely keep the lights on a bit longer for struggling small businesses. But isn't the free market supposed to weed out the week suppliers?

With consumers representing 2/3's of economic demand in the economy, should not the biggest stimulus go that group. And in the bill it does, the biggest single item ($116 billion) is for a tax cut for individuals. People are not spending as much as they were, and won't until they feel better about the economy and their prospects. The direct stimulus to consumers will temporarily prop-up their spending until the job engine restarts. This is what the small business community needs, even if they can't see it right now. Fix the demand side and supply will follow, Economics 101.

Sorry About that Inventory, Prices Must Come Down

As George Reisman notes in a recent column, falling prices are not the cause of deflation, they are the solution to it.

Reisman defines deflation as the lowering of DEMAND for goods - this lower demand drives prices lower so that equilibrium is reached.

The losers in a deflationary environment are asset holders. People with fixed assets (like houses) and even liquid assets (like stock market investments which are held long term), as well as companies with large finished goods inventory; all have seen a large decline in the value of these assets over the course of 2008.

Reisman rightly implies that holding off on clearing the market is not the solution. This is what happened during the 30's in America, and Japan in the 90's. In the former case money tightened thus driving prices higher, not lower as they needed to go to clear the market. In Japan, the money supply was opened wide, but institutional restrictions held prices artificially high.

In our current situation, the Fed has opened the money supply widely putting short term interest rates close to zero. By pumping lots of liquidity into the market they hope to stimulate demand. As well, prices are falling in the housing market, and no restraints on falling prices have yet arrived (e.g. beware price controls, remember them from the Nixon era?).

The market must be allowed to clear to get the economy moving again, however the looseness the Fed is now encouraging and enforcing through it's various powers, will most likely result in rampant inflation sometime around late 2009 - 2010 so beware.

Why Delay the Repeal of the Tax Cuts for the Rich Indeed

Robert Frank made a measured argument in a recent New York Times Economic View column opining that cuts enjoyed by the rich from ancient times (the original Bush tax cuts, and due to expire in 2010) should be repealed now, and instead given to the middle class and poor. Indeed we could expect "..the immediate effect would be an increase in total spending roughly equal to the additional revenue from repealing the (tax) cuts."

This argument is compelling given the relative need for increased cpmsumer spending across the board. The redistribution will be used for needs, not savings. Although we need to encourage saving more in the long run, right now we need the spending.

America needs a spending recovery to get us out of this recession, not a few rich dudes hoarding tax cuts in their holdings for heirs. Listening Obama??