Tuesday, February 24, 2009

moved my blog to www.growroe.wordpress.com

I've moved my blog, to achieve better results in search engines, to www.growroe.wordpress.com.. I sincerely hope you continue to read me.

Rich Eichen

Wednesday, February 18, 2009

Failure is a failure if that's all it is - it's only a life event if you learn from it

“There were always good short-term reasons for not doing something”
Quote from A. Andrew Shapiro regarding General Motors current state, NYT, 2-18-09

Craig Ferguson, the TV personality and late night talk show host, was being interviewed by Michael Eisner the other day and mentioned that one of the reasons he truly loves this country is because America is the place where if you fail, you pick yourself up, without shame, and “get on with it”. I would add, "just don't repeat it".

This is neither the time to sit there and wallow in pity, nor is it the time to act rashly. Leaders are all going to fail at least a little bit during this depression, no matter how hard we try. OK, I agree, there’s a wide range on the Fail Continuum and not all of us are going to hit the iceberg. But a good percent of us will either scrape the iceberg or come pretty darn close.

Many of today’s business leaders, of all stripes and sizes of company, came of age in the Era of Plenty. We had economic downturns, but they were not implosions on the order of what we have now and will have for 3-5 years to come. Yes, 3-5 years to come. I met yesterday with an Investment Banker whose institution didn’t need a bailout, and he told me his trading desk was preparing for Dow 6,000 later this year. Nice. Most of today’s leaders have never seen mass hyperinflation, mass unemployment, deflation, gas lines, general strikes or experienced the pessimism of the 1970’s. As leaders they’re only good as long as things are good and so their minds are aligned to repeat success and not early detect failures.

How to become great even during these times and emerge stronger than before? The answer is to stop giving good reasons for inaction and take hard decisions when necessary going forward. Which decisions? That’s where institutional introspection and learning from past failures and near misses has to take place. What red flags did we miss? How early did they appear? Were they rampant or was it a quick blip we missed? Did we not act on them because we missed them or was it denial? Did we miss them because we didn’t have the right information to spot them? Did our business processes and controls act as we expected? Again, do this analysis objectively, fast, thoroughly, ahead of time, even have it vetted by an outsider if you wish, but do not use it as an excuse for short-term inaction.

I’ve blogged previously of how managers will repeat mistakes and make the same bad decisions, with slight variations, again and again. I’ve seen this first hand when I step into a situation and nearly 100% of the time, they’ve done this mistake before in some recognizable form, but they didn’t actively think and learn.

The American Cancer Society once had a TV campaign, now more applicable than ever, where they said the 5 most dangerous words in the English language was 'maybe it will go away'. GET ON WITH IT.

Tuesday, February 17, 2009

Selling your company or getting investors - Is your company worth what you think its worth or what someone will pay for it?

Had a very pleasant conversation today with a senior Investment Banker from Jeffries and Co. who told me today’s multiples for selling a company. To put it politely, they’re startling.

In sum, in the very best case of same revenues as last year (or even a slight increase), and same profitability, the current SMB multiple is around 3-4X EBITDA. If this year’s revenues are running less than equal to last year’s, you’re seen as damaged and virtually unsaleable except at ridiculously low prices, or not at all. Both of us have seen recent instances where potential purchasers walked away in the belief that an already damaged company will only get worse - and cheaper.

If you’re unprofitable, don’t even think of selling as a company, think of your company as a selection of fungible assets. When I asked him today’s multiple on the Top Line (usually it’s been in the range of 7-12 times for the past few years, depending on industry), he mentioned that in today’s market, Top Line without profitability isn’t even thought of.

The lesson is clear – what your company is worth (even if you’re not selling it's good to have an objective figure as a measure of how you’re doing) is what someone will pay for it and if there’s any issues affecting the Financials, all bets are off. Uncover hidden issues, fix those plus the one’s you already know of NOW.

Wednesday, February 11, 2009

How did we ever get here? Planning and executing a layoff

A NASDAQ listed software vendor reduced their staff by 20% in 1 day. Some of the reasons made sense because the company was terribly overstaffed with Managers reporting to Managers, Directors to Directors to Senior Directors to Executive Directors. Within a week Management had lost credibility when word got out that a number of the now laid-off employees had been hired, granted a performance bonus along with the rest of the company, and were then terminated, all within 30 days of their hire date. There has to be a better way.

Much of the current MBA level and academic management literature talks about what makes up a leader, how do you hire and inspire staff, etc. Thought provoking concepts like leading by values, leading by example. Really good material, assuming the economy was still in 2004. Well, pardon my being a bit hands-on here but these days the thoughts which should be in the literature should revolve around who do I layoff and how do I minimize the impact it will have on my remaining employees and competitors. We won’t even go into what the heck our MBA programs (and I have an MBA) teach which produces the bunch of business leaders we now have.

While you’re planning the details of the layoff, you should ask yourselves “how did I get here?”. No, not the economic downturn, but the fact that you’re overstaffed. Do you pay market and get employees who are competent but not superstars (and therefore may require more of them to get the job done)? Should I have outsourced certain functions to begin with? Should I be proud or concerned that my employees usually stay for 10+ years, often doing the same job or a job 1 promotion grade higher (ex:. , am I getting new blood with new ideas)? Is my facility located in a comfortable community but not geographically desirable for the top performers in your industry and so they don’t even think of applying? A time like this gives you the license to ask yourself and your Leadership Team some hard introspective questions about what kind of employees you want going forward, i.e. is this a time to not just layoff excess personnel but a time to reshuffle the deck and your tenure assumptions as well?

So who do we structure a layoff? There are a few schools of thought. The Horizontal school goes for an X% company wide reduction, spanning all departments. Often, this leaves every business function understaffed and trying to reorganize itself to get the job done. Resentment is generated by employees feeling overworked and sad they are doing the work formerly done by co-workers and friends. Much time will be spent during breaks and lunches speculating on why individual employees were singled out for the layoff. Was someone not the boss’ friend? Were they malcontents? Were they inflexible? Were they the last hired, regardless of competency? If there does not seem to be a consistent thoughtful plan it could appear to be, at worst, vengeful or arbitrary.

The Vertical approach is summarized by the reason “we are no longer in (fill in business or location)”. If you’re going to cut back in a market, think if you should even be there or if your cutback will tarnish your name and give a leverageable advantage to your competitor in terms of customer support, presence, etc. Why spend money only to look poor? If you’re leaving a business segment, perhaps it can be sold off, but bottom line, everyone in that unit is laid-off, top to bottom. Resist the tendency to keep the to-be closed unit’s Senior Management in the company, unless the reason the business was cut had nothing at all to do with their performance in even the slightest way. Never mind this “you learned your lessons on my nickel” thought process – trust me, they’ll make similar mistakes again. For the surviving employees, this approach makes the most sense since presumably the now shed business unit was either unprofitable or not strategic going forward and the applicable Senior Management was not improperly rewarded with continued employment at the expense of their employees.

This is also a great time to mix the two approaches (calling it Diagonal is a bit odd) by leaving a business or location entirely and combining this with a very small general force reduction. The number of laid-off employees should be overwhelmingly guided by the Vertical approach, on the order of 70/30 Vertical to Horizontal. If you reverse the emphasis, it can be seen, internally and in the market, as panicky or ‘crashing and burning’.

When do we know we have to lay-off? Some will wait until a bad Quarter gives them either a reason or political cover to do so, but my recommendation is to be proactive and

• Model what your Financials will look like at the most likely % revenue reduction, and then reduce it by another 5%. Restate your projections to the worst case (and hopefully you’ll come in ahead of this restated plan, looking the hero)
• Since this is rarely linear across the entire company, look at what businesses/locations will fall the fastest and most – these are your prime targets for deep review
• Decide if those businesses/locations are mission critical now and 24 months from now
• Use your ROI per Employee bogey to determine the proper Financial Employee Level.
• Determine if you wish to recast your employee profile towards fewer, higher value employees both now and for the future, or if you wish to keep your regular employee profile and just have them do more until you can hire at a later date. The latter approach may involve increased errors and decreased customer satisfaction, so be prepared.
• Reorg on paper to support the Financial Employee Model in daily operations and be ready to restore a normal daily operating environment as quickly as possible
• Work with your Labor, Business and, if applicable, Bankruptcy attorneys to ensure all notifications are filed, protected groups accounted for properly, etc.
• Include your PR people as well if you think this could be a news event.
• It is not uncommon for Presidents and Interims to call their peers at strategic partners and key customers to give advance notice and perspective.

One last comment: make sure, on the day the layoff will be executed, you publicly announce the event and after all involved have been notified, publicly declare the layoff is over. Absent your closure announcement, everyone will go comatose, awaiting their turn. Eventually your remaining employees will figure out that the layoffs are over, but your being taken as credible at face value will be shot.

Tuesday, February 3, 2009

Legal was so 20th century, the 21st is all about Lawful

Bonuses, spas, resorts…living the 20th Century model in the 21st Century – no wonder it seems odd

We’re all amazed at the cupidity surrounding those executives granting huge bonuses and one can say they’re unethical and from a PR point of view, a bit stupid. But, are they legal or are they unlawful?

Something being ‘legal’ has a base understanding that it is in technical compliance with the Law. An act being termed "lawful" implies it has a strong ethical correctness. So, you can perform an act which is technically legal but publicly perceived as unlawful.

For many years and before we all knew about Green activities and fuel efficiency, I drove a Chevy Suburban. Great truck, ideal for hauling kids, towing pretty much anything you can imagine, skiing gear stays inside and clean, etc. I used to joke with my friends who drove smaller cars that in an accident, just based on size and momentum, I would win immediately in the Court of Physics, even if I lost later in a Court of Law. Luckily, I never had to prove this, but the parallel here is that in this business climate you can easily win in the Court of Law but big time loose in the Court of Lawfulness. And the public, the purchasing public, the voters, the majority of people in this country, are collectively members of the Court of Lawfulness and so ticking them off is not a bright survival strategy.

Let’s not forget that for most of the 20th Century, information and public perception could be controlled. In the fuller age of the Internet, ie the 21st Century, information comes out as it comes out. Even employees are more likely to use blogs, email, social sites, etc to let their feelings be known. The public controls perception now. Most senior executives came to power in the 20th Century, are products of that Century’s culture and just don’t get how life has changed and so are genuinely amazed by the uproar.

Those businesses surviving this quasi-depression will be those who do everything lawfully, ie never have to risk bad perceptions, public backlashes, angry Congressman and the costs involved in remediation.

It’s actually easier to be both legal and lawful than just legal. And more profitable as well.

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Monday, February 2, 2009

Can you figure out when you're business-blind and business-deaf before it's too late?

"Blindness cuts one off from things yet deafness cuts one off from people." Helen Keller

Put into today’s business perspective,
"Blindness cuts one off from assessing reality, yet deafness cuts one off from executing survival." Rich Eichen

Business litigators with whom I regularly meet have been noticing a disturbing trend – increasingly, business owners come to them when it’s too late. By the time someone comes in looking for Business Bankruptcy protection under Chapter 11, all that can usually be accomplished is to pay the senior executives a few more paychecks before it’s time to close. One very senior attorney actually said, with great understated wisdom based on reality, “I talked to them a year before. Now they come in a year later and my job is to give them a decent burial”. Putting it another way, the senior executives went from being business-blind and business-deaf for about a year to now out of business.

EMT’s focus on the ‘Golden Hour’, the 60 minute window for advanced emergency treatment where severely injured or ill patients have a good chance of survival. After the Golden Hour, it’s you vs. the actuarial tables. In today’s quasi-Depression, I’d reduce the timeframe a business has to begin repairing itself from the 1 year mentioned above to a ‘Golden 6-Months’. After that Golden time, more likely than not your business (or customer for that matter) will join the 90% of companies (in N. NJ) who never make it out of Chapter 11. Given how crucial accurate understanding of your business’ health is during these perilous times, what delays recognizing you’re in the Golden 6-Months window?

Financial statements can cause business-blindness. They can easily show the business having solid receivables, plenty of inventory and assorted assets such as buildings, equipment and trucks. But in reality, if your business is just servicing debt and paying salaries, in effect it’s out of business. In previous Blog postings we’ve covered many of these various signs and considerations, so no need to rehash them.

Hearing but not listening to objective outsiders causes business-deafness. Many times, 6 months to a year before the end, you’re starting to hear from your CPAs, Trusted Advisors, attorneys and secured and unsecured creditors. The ultimate test of business-deafness is when people stop talking to you. Either it’s too late or they figure you’re beyond taking constructive input.

In my experience, the best way to avoid having a company fall into such an unhealthy state is to convene, for 1 hour monthly, a group of Tursted Advisors consisting of your leadership team, a Turnaround/Crisis manager, your business attorney and perhaps your CPA/Audit Partner. A phone or a web based video conference works well to make this as efficient as possible. The goal is to ensure your team doesn’t go blind/deaf to reality and should it come to it, further ensure the Golden 6-Months window is recognized as early as possible. And of course, worst case, should a Crisis Manager be needed, you’ll have someone already up to speed, preserving as much of the Golden 6-Months window as possible for working things back to health.

This was not a fun article to write, but please understand how dangerous business-blindness and business-deafness can be.

Friday, January 23, 2009

Draconian times result in ‘Draconian Threats’

In normal times, we all perform the standard 4 box SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), but I’ll bet you the ‘T’s are really only mildly disturbing issues in retrospect. The usual list of Threats I see in SWOTs are just not sufficiently draconian and therefore the mitigation planning is not designed to handle today’s bizarre economy. We’ve come to a fork in the discussion here. For those companies deeply recession affected and nearly out of Cash, it’s too late to redo the T’s – core survival is at stake and you have to deal in the now (see our other postings for insights to consider). This posting is for those companies who are not yet affected and wish not to be.

Today and in the near future, we need to reverse order the boxes and our focus to identify and plan for ‘Draconian Threats’. If they are taken care of, the Strengths and Opportunities will happen.

What are some ‘Draconian Threats’ to be planned for now that we’re in the midst of a quasi-Depression? Here’s what I’m seeing:

Some companies have had their best customers stop making bulk buys and go instead into month by month mode. This is much different than a downturn – it’s a complete change in how you forecast, stock and operate. Will it become the new norm? If it does, will your demand generation and business models have to adapt long term?

Other companies have seen their market basically dry up. At least one Ocean Freight shipping line has taken delivery of multiple new container ships, just to sail them into drydock, even though the loans are still in effect. Again, this is more than a downturn – it’s acknowledgement that they cannot get a correct fix on future container shipping needs.

Crazily, some healthy companies could be in jeopardy because one of more of their commercials landlords are in bad financial shape and the bank can foreclose on their buildings.

The underlying strength which permitted many companies to issue their own Performance Guarantees and Letters of Credit in lieu of escrowed cash have evaporated and now various regulators and key customers are demanding thick cash escrows or large and tight Performance Guarantees backed by a 3rd party. Who has this spare liquidity these days? So, your business is fine, but you’re running out of cash.

CPG companies have marquee brands and value brands in each category. In bad times, many brand-loyal shoppers move to value brands for the savings. Do you make value brands less effective and risk harming your company’s reputation? If the value brand has sufficient quality not to ding your company’s image, you run the risk of customers not moving back to your more profitable marquee brand, negating some of the millions of dollars spent each year in marquee brand equity and of course, reducing margins.

If you relied on financing customer’s purchases either through your existing lines or through friendly Banks…enough said.

Without belaboring the point by showing too many ‘Draconian-Threats’, the key identifier of a Draconian Threat is, unfortunately, usually an after the fact utterance of “wow, we never thought that could actually happen”. Those companies who will survive this terrible economic time will be those companies who revisit their SWOT analysis now and quickly come up with the extreme worst scenarios and plan accordingly.

In this economy, that 1% probable ‘Draconian Threat’ may very well have a 100% chance of occurring. Plan accordingly.