Leadership & Business

Capitalism rules!

While the old saying, “when the US catches a cold, the rest of the world gets the flu,” can certainly serve to make us Americans feel a little guilty about our role in a global depression, at least we can take solace in knowing that it is our system of capitalism that actually should lead to us recovering faster than the rest of the world.

The reasons are simple.  Our employer friendly environment in the US—the very system that has allowed companies to quickly downsize—is precisely what is going to lead to our faster recovery.  Consider what would happen if, as in the cases of China and Germany, the government slowed the pace of layoffs.  That would force companies to continue to pay unneeded employees instead of investing in their recovery efforts.  In China, the government has ordered state owned businesses not to lay-off people and in Germany, the government has reached an agreement with the largest companies to refrain from layoffs for six months.  That all but assures that the time it will take for those companies—and those economies—to hit bottom will be extended, thereby extending the time it takes for recovery.  In the US, companies are finally starting to react and in a big way.  Were we to mitigate that reaction, we would simply lengthen the bottom of the bathtub curve that is going to define our depression.  Fortunately, as I’ve noted over the past few days, the government stimulus plan is going to take a lot of time, so we don’t have to worry too much about that elongating the tub, either.

It’s ironic that while capitalism is clearly the cause of our problems, it will be capitalism that saves us, too.

Some quick updates.

Just a few days ago I wrote about what a joke the idea of a stimulus package is for our economy (I also talked about why that’s good news, not bad).

Well, it seems the Congressional Budget Office has figured it out, too.  The CBO has just announced that by its estimates, the current stimulus package on the table would, at best, see 7% of the allocated funds spent before the end of the year.  So even with an $800 billion plus package, we’re only talking about $50 billion to $60 billion being spent this year. That’s a third of the meaningless stimulus package from last year. 

On a completely different note, I’d like to call your attention to an article in the January 26th edition of Newsweek.  The article I’d like you to read is on page 69 and is titled, “The Refugees Who Saved Lewiston.”

Months ago I wrote that the “Elephant in the Room” was immigration.  And with the economy in the tank, I imagine our nation’s appetite for immigration has gotten even smaller. I hope people read this article and come to understand that our declining economy is not a reason to reduce immigration. And in fact it more likely is a reason to increase it.

Stimulus, Schmimulus

There’s only about one silver lining to the coming stimulus plans of our new government: TIMING.  That is to say, it’s going to take quite some time for any real money to hit the economy.  First, Congress has to pass a bill.  Then, specific projects, if not identified in the bill, need to be chosen. Some already exist on the drawing board, but still, plans need to be laid, bridges designed, contractors given the opportunity to bid.  Contracts need to be awarded and new people hired. It will take many, many months before any real money hits the market—and that’s a good thing—because maybe it will give us a chance to hit the bottom before it does.  Of course, by then it will be too late to stop the spending and will more likely help fuel inflation, but we can fight that battle when we get there.  What we really have to hope for is fast enough contraction that we get back to a supply and demand balance before the money hits; otherwise, we’ll be dragging out the depression even longer.  The good news—that’s exactly what’s happening.  For the first time in months I’m becoming cautiously optimistic.

Think about the last stimulus package:  $160B.  For what?  To keep the retailers alive for another month?  That’s what it amounts to.  Had we not spent the $160B, our national deficit would be about $150B lower (remember, some taxes were generated), and the retailers we propped up would have realized a month earlier how bad things were going to get.  They’d have started laying people off a month earlier. And we’d be a month closer to the end.  That may sound cold, but it’s the truth.

Right now what companies need to focus on—as I said the other day—is the reality that none of us can really predict the timing of anything with any great accuracy these days.  So while I am becoming cautiously optimistic that I see some precursors to a bottom, the responsible thing to do is to continue to assume the worst.  Our economy is, if nothing else, extremely fragile right now. Where the end lies cannot be predicted because we cannot predict the behavior of others—whether we’re talking about governments or terrorists. While there are signs that we may soon reach a supply and demand equilibrium, there are still many things that can tip us over yet another cliff.

One thing I would like to encourage you to do is to start thinking about the things that you can be doing differently without spending money.  There’s a certain “paralysis” that has persisted for the past few months as companies grappled with reality setting in and made downsizing plans.  Now that the bulk of the downsizing is done, the paralysis is lifting.  Now is the time that tough times can be turned to our advantage.  These are the times when new ideas start take hold, like the shop in Dubai that’s serving $1 cups of coffee, taking tremendous market share away from Starbucks.  There are new risk sharing and partnering models that are popping up in B2B businesses.

Once an industry hits its bottom, it’s remarkable how quickly things can get back to normal.  Who would have thought, for example, that the airlines would be achieving stability during such times.  Only a year ago it looked like the entire industry could go bust, but they downsized and restructured.  Many thought their efforts would be in vain, only to be crushed by a contracting economy, but that’s turning out not to be the case. They downsized—cutting not only heads but also flights—to achieve a supply and demand balance.  The flights I take today are more full than ever.

So take note:  we can’t predict the turn, but it will come, and surprisingly fast.  The time to capitalize on unusual opportunity is now.

The Doomsday Scenario

On January 2nd, 2008, I didn’t predict that we’d enter a recession.  I went on the record and said the recession had started.  Despite another eleven months of denials by economists and politicians, at the end of November 08, the National Bureau of Economic Research (NBER) declared that the recession had in fact started back in December 07. Vindication!

In an earlier blog on November 26th, before the NBER had even declared that we were in a recession I went on record as saying that the depression HAD started.  Vindication again?  We’ll know soon enough.

Some in my company have asked why I’m such a pessimist.  Why can’t I be more positive about things, they ask? The answer is simple.  Whenever my company has gone through a tough spot for one reason or another—inevitable in any young company—I could be the visionary optimist, boost people’s spirits, and they’d fight through it.  We always turned things around.  Unfortunately, my optimism can’t turn around our economy.  And I don’t think a new President can turn a structurally wounded, globally intertwined economy around, either.  So the much more responsible thing for me to do is to be a realist.  I promise everyone—when I believe things are starting to turn around, I will be the biggest economic cheerleader you’ve ever met. 

Now, what should you be doing about all this uncertainty? Managing risk is certainly the job of every CEO, but it may sound more like a black belt’s topic to dive into the nitty gritty of mathematically defining different statistical interpretations of risk and the difference between downside risk and upside risk.  There are several algorithms that can be used, but here’s a layman’s interpretation of what I’m talking about.

I’ve had quite a few clients recently explain to me how they are working to:

“Avoid cutting so deep that we’re unprepared to reap the benefits of recovery.”

My reaction:  absurd!  I think that’s an irresponsible mindset for most companies.  Here are two examples of the difference between upside and downside risk:

1. In the American system of justice, we consider the risk of sending an innocent person to prison much more severe than the risk of freeing an innocent person. Hence, the requirement to be “convinced beyond a reasonable doubt” and for conviction by a unanimous jury.
   
   
2. In the casino, if you only have $100 and lose it, you go home.  You’re out of money so you can’t gamble more to win it back.  If you win $1,000, you can keep playing until you lose it all, including your $100, so you still go home.  You could quit, but many don’t.

What’s the point? The point is that making excuses not to cut as deep as you can has almost become a part time job for many executive teams. Which risk would you rather come to fruition: the risk of not making as much money in 2010 and 2011 as you otherwise might, or the risk of not being around in 2010 in the first place?

 To help you think it through, here are all the reasons you SHOULD be cutting deeper:

1. How do you know what you’re really capable of until you cross that limit by taking a chance on cutting too deep?
   
   
2. With skyrocketing unemployment, you can always hire someone if you need to.
   
   
3. In fact in many cases, you might be able to hire back the same person you let go given that the time to find new work has been growing fast.
   
   
4. You can tell your people you expect them to work longer hours and weekends to survive the depression, but until you actually push them to do it, many won’t.
   
   
5. When you have enough people to do things that no longer matter, they keep doing them.  Only after you cut deeper are people forced to truly prioritize.

Here are some additional considerations that many are still avoiding:

1. Start reducing salaries and do it fast.  Do it on an individual by individual basis.  In good times, we are perfectly happy paying someone inside a “band” and as long as they are in the band we pay them 5%, 10% or more to get them to move from another company.  We wind up with two people doing the same job but one makes more money than the other.  The “market rate” for people becomes less the driver than the desire or need to get them on board as long as they are in the band.  In tough times, their market value means everything.  So assess market value and start renegotiating salaries down to the bottom of the range for everyone.
   
   
2. Make it clear that salary cuts are not temporary. They’re indefinite.  If and when the economy turns around and you or your employee feel they are underpaid because their market rate has risen, a raise is always negotiable.  But do not set an expectation that you’re giving automatic raises back to the “old” salary when the economists declare the depression is over.
   
   
3. Treat someone making $150,000 a year differently than someone making $30,000.  A ten percent hit to someone making $30,000 a year might mean they can’t pay their mortgage.  For the person making $150,000, it means they can’t contribute as much to their 401K.  One can take it—the other can’t.  You need to cut AS MUCH AS YOU CAN, but no further than each person’s personal financial limit.
   
   
4. Stop making excuses for not doing the things above.  There is no massive defection happening at companies that are more aggressively cutting headcount and wages.  In fact, there’s substantial anecdotal data that says:

• When you layoff a big group of people, but then you only cut my salary, you’re actually signaling that I’m valued and you want to keep me.  You’re cutting other people and costs so you CAN keep me. That actually gives me a sense of job security.
  
  
• I know that if you do lay me off, you’re going to give me a decent severance package.  If I go to another company and a week later they shut down my business unit unexpectedly, I’m the last hired and my severance is next to nothing.
  
  
• The unknown is very frightening.  If you’ve been keeping people in the loop on what’s going on and how the layoffs and cuts are going to stabilize things, that’s a psychologically safer place for me to be than a new company where I know nothing but the propaganda I got in the interview.

The bottom line is that when faced with situations we’ve never had to deal with before, bold action is something we avoid because we don’t want to get it wrong.  In this particular case, however, the risk of inaction or insufficient action is MUCH greater than the risk of overreacting.  Everyone knows that old saying, “plan for the worst, hope for the best.”  Well, we’re all hoping for the best. It’s time for those in charge to do their jobs and start planning for the worst.