Thursday, November 5, 2009
Sunday, October 25, 2009
Economy in Limbo
Although economic conditions in the US have improved the rebound in jobs will be slow. President Obama's top economic advisers warned last Thursday that they expected unemployment to climb above 10.0 per cent by the middle of next year and job growth to remain "anemic" through the end of 2010.
The economy has lost 7.2 million jobs since the recession began almost 2 years ago and needs 100,000 new jobs each month just to keep pace with population increases. The US is about 9.0 million jobs short of where it should be.
Unemployment will not come down until there is a sustained increase in GDP growth of 3 per cent. This rate maybe achieved in the July-September period after four negative quarters in a row. However, a consensus of leading economists see a slowdown to around 2.0 percent GDP growth in the fourth quarter as the expansion stalls.
The economy is fragile and could easily fizzle out. Until the unemployment rate comes down the US economy is going to remain in trouble. Only when we start spending again and confidence returns to the private economy will the real recession be over.
So, as I have said all year, this is not the time to show improvements in demand that underlying in business plans, projections and forecasts. Small and medium size business must continue to aggressively focus on retaining existing customers, shed all costs and expenses that are not absolutely necessary, negotiate improved terms with vendors and only invest in new products and services if the amount to be committed is low and there will be some positive cashflow in a very short period of time.
The economy has lost 7.2 million jobs since the recession began almost 2 years ago and needs 100,000 new jobs each month just to keep pace with population increases. The US is about 9.0 million jobs short of where it should be.
Unemployment will not come down until there is a sustained increase in GDP growth of 3 per cent. This rate maybe achieved in the July-September period after four negative quarters in a row. However, a consensus of leading economists see a slowdown to around 2.0 percent GDP growth in the fourth quarter as the expansion stalls.
The economy is fragile and could easily fizzle out. Until the unemployment rate comes down the US economy is going to remain in trouble. Only when we start spending again and confidence returns to the private economy will the real recession be over.
So, as I have said all year, this is not the time to show improvements in demand that underlying in business plans, projections and forecasts. Small and medium size business must continue to aggressively focus on retaining existing customers, shed all costs and expenses that are not absolutely necessary, negotiate improved terms with vendors and only invest in new products and services if the amount to be committed is low and there will be some positive cashflow in a very short period of time.
Tuesday, September 29, 2009
The new rules in compensation
We know that there has not been a job market like this in years. The old rules don’t apply. Here are three perspectives reported in the August 2009 edition of Inc. Magazine with the same goal: a work force lean and flexible enough so that when the economy does begin to rebound the company will be in a position to pounce.
Reduce rates of pay.
A review of a work process and work group showed they were paying at a rate above the industry average, technology had automated important parts of the job and there is a large inflow of unsolicited resumes from experienced workers. You know a pay cut no longer seems unreasonable. The implementation of a pay reduction is the difficult part especially when your staff are located all across the country. Make it very clear why you need to take the action. Let the staff know you will be on standby for feedback and questions. Make it clear that the cuts are permanent.
Implement a tiered commission plan.
Customer discounts can play havoc with the bottom line when customers begin to expect them and salespeople earn a portion of their compensation as a commission on signed contracts. In difficult times the sales staff lose very little when they discount the customer price. The answer is a tiered commission structure. Salespeople earn a bigger commission the less they discount the price. For example when a deal closes at the list price there is an earned commission of up to 8% if the price is over $50,000. But if the price is discounted 10%, the commission would drop to 3%. The system creates incentives to discourage discounts and align interests of salespeople and the company.
Hire the right people.
The lead partner had grown concerned that his junior partner wasn’t the right person to manage the company as it entered the next phase of growth. A resume stood out from the many that had flooded in. The person had all the accomplishments that were needed and was willing to accept the base salary of the currents second in command. After careful thought the second in command was asked to step aside and began to negotiate the terms of the exit. The new man was taken on the road for meetings with employees at sites of six projects in nine states to explain the move. The change went so smoothly that the CEO began looking for other places that might benefit from new blood. He decided to upgrade all B level players to A level players. The company quickly found more seasoned candidates who were willing to take the positions for a smaller salary but more upside if they succeeded. “ When we replace the B players , it actually elevates morale. They are not dragging down the average anymore.”
Reduce rates of pay.
A review of a work process and work group showed they were paying at a rate above the industry average, technology had automated important parts of the job and there is a large inflow of unsolicited resumes from experienced workers. You know a pay cut no longer seems unreasonable. The implementation of a pay reduction is the difficult part especially when your staff are located all across the country. Make it very clear why you need to take the action. Let the staff know you will be on standby for feedback and questions. Make it clear that the cuts are permanent.
Implement a tiered commission plan.
Customer discounts can play havoc with the bottom line when customers begin to expect them and salespeople earn a portion of their compensation as a commission on signed contracts. In difficult times the sales staff lose very little when they discount the customer price. The answer is a tiered commission structure. Salespeople earn a bigger commission the less they discount the price. For example when a deal closes at the list price there is an earned commission of up to 8% if the price is over $50,000. But if the price is discounted 10%, the commission would drop to 3%. The system creates incentives to discourage discounts and align interests of salespeople and the company.
Hire the right people.
The lead partner had grown concerned that his junior partner wasn’t the right person to manage the company as it entered the next phase of growth. A resume stood out from the many that had flooded in. The person had all the accomplishments that were needed and was willing to accept the base salary of the currents second in command. After careful thought the second in command was asked to step aside and began to negotiate the terms of the exit. The new man was taken on the road for meetings with employees at sites of six projects in nine states to explain the move. The change went so smoothly that the CEO began looking for other places that might benefit from new blood. He decided to upgrade all B level players to A level players. The company quickly found more seasoned candidates who were willing to take the positions for a smaller salary but more upside if they succeeded. “ When we replace the B players , it actually elevates morale. They are not dragging down the average anymore.”
Thursday, August 20, 2009
Healthcare costs makes CEO’s sick.
Small business that do provide insurance to their employees pay up to 18% more per worker than large firms pay for the same insurance according to a report released by White House Council of Economic Advisors in July. This essentially imposes a tax on small businesses and their employees because broker fees and administrative costs are higher than paid by larger businesses. As a result, more small businesses are not offering healthcare to their workers. Employees of small business account for about one-third of the nation’s uninsured. Only 49% of firms with 3 to 9 workers and 78% of firms with 24 workers offered any health insurance in 2008. This compares to 99% of firms with 200 or more employees.
Federal Healthcare proposal attempts to level the playing field.
- Healthcare Exchange: Will allow small business to purchase insurance through an exchange to provide better coverage at lower costs
- Employer contributions to Heath Care Costs: Employers that do not provide or substantially contribute to their employees heathcare will be required to pay a percentage of their payroll as a contribution to a national plan.
- Small Business Exemption: Exempts small business from the requirement to provide health care benefits or contribute to the costs of the national plan.
- Small Business Health Tax Credit: Small business will receive a refundable tax credit of up to 50% on premiums paid by small business on behalf of their employees.
What to do in your business in the next 6 months.
Expect healthcare costs to rise another 10% to 13% next year. For the next 6 months the outcome of federal healthcare legislation will remain largely unknown and what it means to employer costs.
According to Marianne Frazen of the DFW Business Group on Health, “It’s kind of an employer’s market. If they are going to do anything to manage their costs, this is the year to do so. It’s in everyone’s best interest to do so.”
See switch from PPO to Consumer Driven Plans.
Consumer Driven Plan have higher deductibles, usually $1,500. Employees can draw from their health savings accounts or health reimbursement arrangements. Unlike PPOs the balances roll over from year to year. Consumer Driven Plans reduce cost.
Annual physicals and screenings are excluded from higher deductibles, so there is no disincentive for preventive behavior with Consumer Driven Plans. About 40% of mid-size companies currently offer consumer-driven plans. Early signs show an additional 15% to 20% of companies have begun to consider these plans.
Expand Auditing and Wellness programs.
Employers who focus on health management and wellness programs have yielded the biggest returns. More companies are auditing the use of their medical benefits and know approximately 65% of small business. Expect many companies for the first time to add higher premiums for smokers.
Federal Healthcare proposal attempts to level the playing field.
- Healthcare Exchange: Will allow small business to purchase insurance through an exchange to provide better coverage at lower costs
- Employer contributions to Heath Care Costs: Employers that do not provide or substantially contribute to their employees heathcare will be required to pay a percentage of their payroll as a contribution to a national plan.
- Small Business Exemption: Exempts small business from the requirement to provide health care benefits or contribute to the costs of the national plan.
- Small Business Health Tax Credit: Small business will receive a refundable tax credit of up to 50% on premiums paid by small business on behalf of their employees.
What to do in your business in the next 6 months.
Expect healthcare costs to rise another 10% to 13% next year. For the next 6 months the outcome of federal healthcare legislation will remain largely unknown and what it means to employer costs.
According to Marianne Frazen of the DFW Business Group on Health, “It’s kind of an employer’s market. If they are going to do anything to manage their costs, this is the year to do so. It’s in everyone’s best interest to do so.”
See switch from PPO to Consumer Driven Plans.
Consumer Driven Plan have higher deductibles, usually $1,500. Employees can draw from their health savings accounts or health reimbursement arrangements. Unlike PPOs the balances roll over from year to year. Consumer Driven Plans reduce cost.
Annual physicals and screenings are excluded from higher deductibles, so there is no disincentive for preventive behavior with Consumer Driven Plans. About 40% of mid-size companies currently offer consumer-driven plans. Early signs show an additional 15% to 20% of companies have begun to consider these plans.
Expand Auditing and Wellness programs.
Employers who focus on health management and wellness programs have yielded the biggest returns. More companies are auditing the use of their medical benefits and know approximately 65% of small business. Expect many companies for the first time to add higher premiums for smokers.
Wednesday, July 15, 2009
US Savings Rate Up – Does it matter?
According to a report in last week’s New York Times, the Federal Reserve reported the US savings rate jumped 6.9% in May the highest since December 1993. The amount saved - $768.8 billion - was the most on records that started in January 1959.
There are two views on this.
View #1
“Once consumers feel a little safer about the economy and their own jobs, they are going to spend some of their savings” predicted John Canally, Economist at LPL Financial, adding that he did not see recent changes in consumer behavior “torpedoing the recovery.”
View #2
“One legacy of the current recession, however, may be the longer-term dulling of both these forces (rising bond values and easy credit. Editor) Americans have taken a huge hit in net worth that may take years for them to recover. And given Washington’s proposals for revamping the banking system, financial transactions will probably be more tightly regulated, and credit may never be quite as freely flowing as it was during the bubble heyday,” says Catherine Rampel.
My View
I’m with Rampel until something really strategic changes. So, downgrade your business model assumptions that show a fast return to previous consumer spending levels.
Here’s why
Rampel questions if the increase in the savings rate is impressive. She concludes that it is not, at least in historical terms. In fact, it’s about equal to the average savings rate of the last 50 years according to Rampel.
Rampel goes on to say. “As you can see, the long-term average has primarily been dragged down by Americans’ savings behavior over the last three decades. Not too long ago, in fact, the personal savings rate was even negative, indicating that Americans were spending more than they were earning.”
“While savings behavior is somewhat driven by the business cycle — savings rates tend to go up when times are bad — there have been a few longer-term, secular forces that have probably motivated Americans to save less and less of their income.”
“One, their net worth’s were rising, thanks to a bond rally, a stock market rally and rising home values. On paper, as in their 401(k)s, they were worth more, so they felt they could spend more with little need to continue funneling huge chunks of their paychecks into the rainy day fund.”
“Two, credit became increasingly easier to come by, particularly after deregulation of the late 1970s and 1980s (as well as the housing bubble, which allowed Americans to treat their homes like A.T.M.’s). Why save up for a big purchase like a car or a house when you knew you could just finance all or most of it? In other words, we will probably exit this recession with much higher savings rates than we had going into it. “
I’m with Rampel, at least for now.
There are two views on this.
View #1
“Once consumers feel a little safer about the economy and their own jobs, they are going to spend some of their savings” predicted John Canally, Economist at LPL Financial, adding that he did not see recent changes in consumer behavior “torpedoing the recovery.”
View #2
“One legacy of the current recession, however, may be the longer-term dulling of both these forces (rising bond values and easy credit. Editor) Americans have taken a huge hit in net worth that may take years for them to recover. And given Washington’s proposals for revamping the banking system, financial transactions will probably be more tightly regulated, and credit may never be quite as freely flowing as it was during the bubble heyday,” says Catherine Rampel.
My View
I’m with Rampel until something really strategic changes. So, downgrade your business model assumptions that show a fast return to previous consumer spending levels.
Here’s why
Rampel questions if the increase in the savings rate is impressive. She concludes that it is not, at least in historical terms. In fact, it’s about equal to the average savings rate of the last 50 years according to Rampel.
Rampel goes on to say. “As you can see, the long-term average has primarily been dragged down by Americans’ savings behavior over the last three decades. Not too long ago, in fact, the personal savings rate was even negative, indicating that Americans were spending more than they were earning.”
“While savings behavior is somewhat driven by the business cycle — savings rates tend to go up when times are bad — there have been a few longer-term, secular forces that have probably motivated Americans to save less and less of their income.”
“One, their net worth’s were rising, thanks to a bond rally, a stock market rally and rising home values. On paper, as in their 401(k)s, they were worth more, so they felt they could spend more with little need to continue funneling huge chunks of their paychecks into the rainy day fund.”
“Two, credit became increasingly easier to come by, particularly after deregulation of the late 1970s and 1980s (as well as the housing bubble, which allowed Americans to treat their homes like A.T.M.’s). Why save up for a big purchase like a car or a house when you knew you could just finance all or most of it? In other words, we will probably exit this recession with much higher savings rates than we had going into it. “
I’m with Rampel, at least for now.
Wednesday, June 24, 2009
10 steps to reduce operating costs by 40%. You have got this far through the tough economy and vendors and service providers need your business.
Remember the 80%/20% rule. This task should not be given more than 30 days to get done.
You need to get the unit prices down to the level paid by your competitors so that you can yield the higher cash flows when the we stop going down and the up turn comes. Remember, as each day passes and the economic down turns get's closer to the end your negotiating leverage for lower prices is diminished. When the up-turn comes you will have to wait 3 years and another downturn to get the rates you must negotiate now.
Its' simple.....
1. List you top 15 vendor/service providers by the amount of spending in the past 24 months
2. Estimate how much you will spend with each of these vendors/service providers in the next 24 months
3. Make a copy of your vendor/service provider invoices for the last 3 months.
4. Find two alternative vendors/service providers for each of the 15 product/service categories already being provided. Find their websites, print-off and read. Use the internet to get ratings on each of the potential new vendor/service providers.
5. Arrange for one of the two potential alternative vendor/service providers to provide a competitive quote based on your projected 24 month projected volumes. Avoid providing prospective vendors copies of invoices from existing vendor/service providers or details of current pricing and terms.
6. Contact your existing vendor/service providers and request a updated quote. Start this process at the same time you contact alternative vendors/service providers. Mention that you have a company wide project underway to make sure that your costs are in line with current market rates. Your own customers are demanding that you do the same!
7. Insist that existing vendors and prospective vendors provide blind quotes. Don't let your supplier give you a quote that is anything other than the best and final.
8. Meet with your existing vendors if they are not the lowest and agree on the the lowest quoted price if possible. You avoid the cost and time required to switch suppliers. Consider having 2 suppliers. Give one supplier 75% of your business and promise the other supplier that you are always willing to switch if price, service and quality of product and service can exceed the preferred supplier.
9.Before you agree to anything, make sure that a there are no hidden costs/expenses. Have the supplier price out an indicative delivery for the next month or 3 months and initial it.
10. In these times the value of discounts for early payment or extended payments terms can be of great value to your business but make sure that you have negotiated the rates for normal payments terms before switching to payment terms.
You need to get the unit prices down to the level paid by your competitors so that you can yield the higher cash flows when the we stop going down and the up turn comes. Remember, as each day passes and the economic down turns get's closer to the end your negotiating leverage for lower prices is diminished. When the up-turn comes you will have to wait 3 years and another downturn to get the rates you must negotiate now.
Its' simple.....
1. List you top 15 vendor/service providers by the amount of spending in the past 24 months
2. Estimate how much you will spend with each of these vendors/service providers in the next 24 months
3. Make a copy of your vendor/service provider invoices for the last 3 months.
4. Find two alternative vendors/service providers for each of the 15 product/service categories already being provided. Find their websites, print-off and read. Use the internet to get ratings on each of the potential new vendor/service providers.
5. Arrange for one of the two potential alternative vendor/service providers to provide a competitive quote based on your projected 24 month projected volumes. Avoid providing prospective vendors copies of invoices from existing vendor/service providers or details of current pricing and terms.
6. Contact your existing vendor/service providers and request a updated quote. Start this process at the same time you contact alternative vendors/service providers. Mention that you have a company wide project underway to make sure that your costs are in line with current market rates. Your own customers are demanding that you do the same!
7. Insist that existing vendors and prospective vendors provide blind quotes. Don't let your supplier give you a quote that is anything other than the best and final.
8. Meet with your existing vendors if they are not the lowest and agree on the the lowest quoted price if possible. You avoid the cost and time required to switch suppliers. Consider having 2 suppliers. Give one supplier 75% of your business and promise the other supplier that you are always willing to switch if price, service and quality of product and service can exceed the preferred supplier.
9.Before you agree to anything, make sure that a there are no hidden costs/expenses. Have the supplier price out an indicative delivery for the next month or 3 months and initial it.
10. In these times the value of discounts for early payment or extended payments terms can be of great value to your business but make sure that you have negotiated the rates for normal payments terms before switching to payment terms.
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