How to Fly Over Recessionary Obstacles

Win, my mountain biking partner, and I looked down the ten-foot drop.

"Should be fun," he said as we backed away from the edge and climbed up the hill to get some runway. I wasn't so sure. He climbed on his bike, pedaled to get a little speed, and took the plunge, effortlessly gliding over the rocks, roots, and stumps.

My turn. I felt the adrenaline rush as I clipped my feet into the pedals. My heart was beating fast. My hands were shaking. I took a few tentative pedal strokes forward and inched up. I felt my front tire go over the edge and I started to descend, checking my speed as I weaved around the obstacles.

Suddenly I hit something and my bike abruptly stopped. But I didn't. I flew over my handlebars and ended up on the ground, lying beside my bike, front wheel still spinning.

"Dude," Win laughed, "You OK?"

"Yeah." I brushed the dirt off my elbows. "What happened?"

Neither of us knew. So I picked up my bike, climbed up the chute, and did it again. Not just the chute, the whole thing: the adrenaline, the weaving around the obstacles, the abrupt stop, the flying over the handlebars.

"Dude," Win laughed again. I was officially in the movie Groundhog Day. I climbed back up the chute and did it again. And again. I must have done it five times before I figured out what was stopping me.

Me.

A mountain bike has to be going fast enough to make it over an obstacle. The bigger the obstacle, the more momentum the bike needs to get over it. There was one big unavoidable rock, and each time I came upon it I unconsciously squeezed on my brake. That slowed me down just enough to turn the rock into an insurmountable wall.

I needed more speed to keep moving. So I climbed back up and did it again. I stared at the rock and picked up speed. I kept my eyes on it right to the point where I squeezed on my brakes and flipped over my handlebars again.

I knew what I had to do but I couldn't do it. It was just too scary. As long as I was focused on the rock, I couldn't prevent myself from braking.

But I wasn't ready to give up. So I climbed back up and tried one more time. This time, I decided to focus ahead of me - ten feet in front of where I was at any point in time. So I would see the rock when it was ten feet away, but I wouldn't be looking at it when I was going over it.

It worked. I slid easily over the rock and made it down the chute without falling.

I'm a huge proponent of living in the present. If you pay attention to what's happening now, the future will take care of itself. You know: don't regret the past, don't worry about the future, just be here now and all that.

But sometimes, focusing on the present is the obstacle. Take driving a car, for example. If you didn't look ahead to see where the road was going, you'd keep driving straight and crash at the next curve. When you're driving, you never actually pay attention to where you are; you're always paying attention to what's happening in the road ahead and you change course based on what you see in the future.

It's the same with running a business. These days I see a lot of leaders who remind me of me mountain biking down that chute. They look with fear at their current numbers or at the government's current reports, and then without meaning to, they squeeze the brakes. In some cases they're still laying people off or, at least, not hiring. They've drastically reduced training or stopped it altogether. Their employees are still worried about their jobs and they, the leaders themselves, aren't reassuring them because they're worried about their jobs too.

But right now, focusing on the present business environment will cause businesses to fly over their handlebars. This is not the time to look at the present. It's the time to look ten feet, or ten months, ahead.

RIght now customers are careful about where they spend their money. More than ever, they want to be treated well. Whatever dollars they choose to spend will go towards the companies who respect them, who provide them with the kind of service they feel they deserve.

But companies filled with nervous employees each of whom, with little or no training, is doing the work of three people, cannot provide good service.

Those companies will lose customers. When the demand does come back and customers start spending more money, they'll spend it on the companies that take care of them now.

Whether or not we are in the recovery, we need to act as though we are. The companies that do so will emerge from this recession stronger than when they entered it.
Pretend it's already June 2010. What decisions will you make? Make those now. I propose three immediate ones:

1. Invest in hiring more customer-facing employees. Make sure you have a slight surplus so every customer call is answered immediately. If a customer leaves a message, return the call without delay. Hiring people who will positively impact the customer experience will bring in more business more cost-effectively than anything else you can do.
2. Invest in training people who are in customer-facing roles. A satisfied customer is your best PR and marketing. Train people to connect with customers, build relationships, and provide thoughtful and expeditious service.
3. Invest in the activities that give employees a sense of commitment to and security in your company. Talk to them about their careers. Recognize them for jobs well done. Share your plans for the recovery. Celebrate their successes.

These three things are often the first to disappear in a recession. So the companies that do them now will have a huge advantage over the competition. Customers are fed up with poor service. The businesses that give them great experiences will be the ones they switch to. It turns out that your recovery might be as simple as being nice to your customers.

"You done?" Win asked me, waiting not so patiently at the bottom of the chute.

"Yeah, I think I figured it out."

"Let's go then." With that, he was off in a blaze down the trail.

How Small Businesses Win Big in Tough Economies

Blinded by mass layoffs and the financial follies of Fortune 500 companies, we have overlooked a smaller but more important transformation: the increasing importance of small businesses in our economic recovery. After all, small businesses employ more than half of our private sector workforce. And history, as well as the Small Business Administration, readily reminds us that the ability of small businesses to create jobs is a key factor in any resurgent prosperity.
That's all well and good, you might say, but what difference does any of this make when the media keeps bombarding us with reports that many small businesses are going bankrupt? Well, you can choose to wring your hands in frustration or you can look to the facts. For every small business failure, dozens more are actually thriving despite the economic panic.
What are these small businesses doing to outperform the economy? Consider the following strategic approaches:

Action. This is an entrepreneur's best weapon. Things happen fast these days and fluidity favors small businesses — you don't need to sort through the layers of bureaucracy that can slow down, or even cripple, larger companies. Small businesses can adapt to any circumstance quickly. As every thriving entrepreneur knows, speed breeds success.
Planning is important. Plans aren't. It's good to have a strategy in place, but don't succumb to analysis paralysis. With things changing almost hourly, can you afford to spend time following a bloated plan that was outdated almost as soon as it was completed? Spend your time with your ear to the ground and respond accordingly.
Innovative financing. There are a number of resources available to small businesses and innovative approaches that can have a positive impact on your bottom line. Diana Ransom touched on some of these tactics in a WSJ Smart Money column. She recommends offering upfront pricing, using seller financing, and switching from fixed to variable costs. She also recommends selectively discounting items. Although, I've gone on the record as saying discounting can damage your brand, the key word here is selective. Circumstances also come into play. If your business is based in a community that is particularly vulnerable economically (such as Detroit, let's say) or your target audience is responsive to discounts, then by all means try this approach.
Give the people what they want. People are staying home more and they're looking for value. Smart companies are tapping into that. For instance, Skinner Baking is giving people what they want: comfort food during hard times. And I'm willing to bet that the sales of that much maligned blanket with sleeves, the Snuggie, aren't going to do too badly this winter either, what with people staying home and turning down their thermostat.
Test, measure, refine, repeat. Small businesses have another added advantage these days that they didn't have in past recessions — social media and sophisticated online marketing tools. You can measure the success of your marketing and advertising and conduct all the market research you need in real-time with a click of the mouse. You can engage your customers online in a number of low-cost ways. And you can optimize your website so your customers can find you quickly and easily. Likewise, effective use of eCommerce capabilities can help keep you in the black with minimal overhead.
What tactics are you using to keep company performance up while the economy is down?


Jeffrey M. Stibel is an entrepreneur and brain scientist. He studied business and brain science at MIT Sloan and Brown University, where he was a brain and behavior fellow. Stibel has authored numerous academic and business articles on a variety of subjects and is the named inventor on the US patent for search engine interfaces. He is currently President of Web.com (NASDAQ: WWWW) and serves on academic Boards for Tufts and Brown University, as well as the Board of Directors for a number of public and private companies.

Should Entrepreneurs Sell in Today's Economy?

You may be surprised to learn that now — even in this economy — could be a great time to sell the company you've spent years building. But entrepreneurs hoping for an exit strategy could make costly tactical errors if they don't understand what's changed in the last year. In our experience advising companies, entrepreneurs in this environment are vulnerable to making three significant mistakes if they don't understand the new rules of the game.
Mistake 1: Assuming getting 100% cash-at-closing is the optimal outcome. It used to be that we'd counsel clients to get as much cash as possible at the closing of the sale and to be cautious about earn-outs, i.e. deals where portions of the sale price are contingent on the seller meeting pre-specified objectives in the future. In these types of transactions, exceeding those objectives will often greatly enhance your payout. In addition to the obvious inherent added risk, earn-outs can be tricky to negotiate and even trickier to enforce.
However, in this economy we've reversed our stance. Most companies' earnings are depressed in 2009 so earn-outs often offer the ideal mix of value, upside and security. Consider this: You decide to sell 50% of your company at the going multiple, say 6X your EBITDA and then 25% each year for the next 2 years. As the economy recovers, your earnings accelerate and you exceed your projections, reaping the reward from the recovery by multiplying those increased earnings to reach the final 2 portions of your purchase price.
Mistake 2: Assuming you know in advance who the buyer of your business will be. Many of our clients think they know who should buy their companies (they even may secretly be wishing for a particular buyer). Making this assumption is dangerous today. That's because too many prospective buyers are in no position to acquire other companies. They may already be carrying too much debt, or their own businesses may be underperforming. Usually, when a company is faced with its own challenges it will be reluctant to buy another company, no matter how good the match. The likelihood that one of a handful of buyers who you think should buy your company will actually turn out to be the buyer is lower today than it was a year ago. Approaching a smaller universe of buyers will almost surely result in disappointment. As a result, sellers should look to broaden the pool of prospective buyers, including even those they might view as long-shots.
Mistake 3: Not realizing it may be in your best interest to sell now — even if you don't have to. A popular misconception is that no one would sell their company during a downturn if they did not have to. Exit multiples (the ratio of a company's value to its earnings) are lower now and there are fewer buyers willing to be aggressive with their bidding. But, that doesn't mean that your company will sell for more next year or two years from now. Many companies and some industries are still winning premium pricing, including technological innovators and strong cash-flow performers.
In fact, there are some really good reasons not to wait for the economy to rebound before selling your company, including these scenarios:

• You've had a strong year despite the down economy and can show consistent growth for the past few years. If this is the case, you'll appear to be the rose in a field of weeds and will still receive premium pricing.
• Buyers are overwhelmed with prospects in good times and it's a lot easier to get lost in the shuffle, whereas in down times, most companies will get a better review even when the fit may not be apparent at first.
• A number of strategic buyers are sitting on cash reserves. While they may have been outbid/out-finessed by financial buyers in the past, many are ready to jump in the market now that most financial buyers are sidelined.
• Too often, sellers who are waiting for the economy to turn around will wait too long. Selling now, even for a slightly lower multiple, is often a better outcome than waiting for the perfect moment and realizing you've missed the opportunity entirely.

Reed Phillips and Jessica Luterman Naeve are managing partner and managing director of DeSilva + Phillips, a boutique investment bank which specializes in traditional and digital media.

The Next Crisis: Coming in 2011

With the Dow reapproaching a five-figure level, we have felt at least some temporary economic reprieve in recent months. But I have talked to many astute people recently (both Democrats and Republicans) who question the stability of the upturn. Some of the those who believe that this might be a dead cat bounce, or what economists term a double-dip recession, are pretty damn smart. Among them is Harvard University professor Martin Feldstein, who explained in a recent interview with CNBC that the massive stimulus is supporting the upturn and that support runs out by 2010. We may be in a precarious position by 2011.

Bill Achtmeyer, my long-time partner and Chairman and Managing Partner of the Parthenon Group, agrees that macroeconomics eventually win out and we should carefully brace ourselves for what might loom ahead — the next crisis in 2011. Below I share excerpts and the footage from our video.

Give us your perspective on what we have to look forward to, or not look forward to, in the next eight quarters.
I think we have six quarters that will be very promising between now and the end of 2010, and then I think we are going to hit huge headwinds in 2011 and 2012.
Why the headwinds in 2011 and 2012?
The key reasons are the aspirations of this congress and administration, while laudable, in terms of health care and global warming, there is the reality of the cost burden. The cost of putting both of these programs in place and the necessary requirements to fund them through tax increases is going to have a very dampening effect on our recovery.
Why do the next six months appear to be stronger?

Macroeconomics are inextricable. You get the benefit of lag times, and we are going to benefit from a combination of a lot of factors which I think will let us sail through in a positive way during this period of time. But things catch up. And by the time everyone sorts out what's being contemplated here it's going to rear its head in 2011 and 2012, and it'll be very hard to get in the way of that.
You advise CEOs every day. Assuming you are CEO of a company today, what do you do?
I'd be extraordinarily focused on investments outside of this country. To the extent you have a global footprint, if you are not overinvesting in Asia and the developing countries, you are out of your mind because that's the source of growth.
I would also do everything I could within the Western countries to gain share in the next six quarters, whether through acquisitions, prices, or whatever it takes to get you in an extraordinarily strong market position. If you're not there, or don't think you can get there, then I would get out of those businesses. I think we'll find another consolidation hitting those businesses in 2011 and 2012 when we've gotten rid of the riffraff. We're definitely going to be getting rid of a lot of other things.
That perspective is great if you are in a position of strength. What about if you are someone is in the bottom half; someone who is likely to be part of the riffraff?
Great time to sell, particularly in 2010. Values are coming up. They will look to be pretty good relative to what you've had in the last 24 months. They won't look as good as they were in 2007, but they'll look pretty good, and they're not going to get much better.
And the debt availability to support that is going to return?
I think you will have debt availability during this time and then it may get tight a little later.
What about inflation?
Pretty low for now. It'll all come home to roost in 2011 and 2012.
Final thoughts?
It's comes back to relative market share. The stronger your relative market share — that is the more distance you can place between you and your nearest competitor — the better off you'll be.

Is Obama a Micromanager?

On August 12, the Wall Street Journal carried a feature article entitled "A President as Micromanager: How Much Detail is Enough?" The word "micromanager" is a pejorative, one that carries a lot of baggage.
Micromanagers are, according to Webster's, people who "manage with great or excessive control, or attention to details." Nobody, but nobody, likes working for a micromanager. So is Obama is the kind of guy who just loves to live in the weeds and who insists on controlling what other people do? Or is he an especially intelligent, curious guy in a mission-critical job who has high expectations of his staff, and who is able to absorb more information than the average mortal?
In 2004, I wrote an HBR case study about a PR manager named Shelley who suffers under a micromanaging CEO named George. She's a professional who knows how to produce, but George wants her to do things his way. The boss loves to tell her how to do her job, including how to write press releases. He's driving her straight up a wall. Responding to the case, one commentator -- Jim Goodnight, CEO of SAS Institute -- noted that "the difference between setting direction and micromanagement is knowing when to get involved and when to get out of the way."
Many agree that in attempting to deal with the hundreds of problems on his plate, Obama is trying to take on too much, too fast, or that he's trying to absorb too much information at once - but that's not the same as micromanaging, which is really about the urge to control others. According to the WSJ article, Obama wants to know the fine details about economics - including details about different forms of credit relative to the risk, derivatives, and the vagaries of financial regulation. Reading the article, it sounded to me like Obama wanted to make sure his people got him the right information; that he knows the issues; that he heard opposing viewpoints; and that he is doing a pretty good job of keeping up to speed on events. Comparing this kind of behavior to that his predecessor, I feel relatively comfortable.
What do you think? Is Obama a micromanager? and if he isn't, then what kind of manager is he?

Is Obama the Financial Dubya?

"As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds."
***
"As well as BlackRock and Pimco, Legg Mason, another big mutual fund company, and BNY Mellon Asset Management, a big asset manager, have said they are interested in starting retail investment funds to participate in the government's plan.
For the investment managers, the benefits are potentially large. These big firms can charge healthy fees to investors for taking part. They will also have the marketing prestige of being the firms the government turns to at a time of crisis to help sort out the country's financial mess."
Now, I'm pretty slow sometimes. So let me ask some stupid questions.
Is there a reason that people can't just buy equity and debt in the plan, well, directly?
Is there a reason middlemen get a guaranteed profit in a new segment?
Is there a reason that only one side of the table is represented in this deal — the sell-side?
How come the benefit to taxpayers is still not a part of the calculus?
Here's the only reason I can come up with — and it's a lot worse than America 2009 = Japan 1989.
Obama is the new Dubya. When it comes to finance at least, the parallels are way (way) too striking to ignore.
Consider:
1) Obama has discarded the advice of nearly every eminent economist in the world.
2) To go with the advice of "his" team.
3) Because access to him is apparently controlled tightly by Summers and Geithner.
4) So Obama is bubbled from the growing disbelief at his lack of economic literacy.
5) A plan that is likely to result in massive looting is blindly sailing ahead.
6) Policy is clearly biased in favour of those who can afford to buy it. Hence, banks win — again.
7) And it doesn't matter if policy works or not — so we get perverse policy after policy.
You know what? Hiring some kids to revolutionize media is how Obama won an election. But the failure to do the same across the government is going to be how he blows his presidency.

Obama's Taxing Transition

This post is part of our in-depth look at Obama's First 90 Days in office.
What a difference a few days can make to the trajectory of a transition. At the end of last week, I was prepared to give our new President an "A" for outstanding efforts to create positive momentum. Now I'm thinking he deserves a B-minus at best. Why the shift? In a word, taxes. Specifically the lack of payment thereof by the President's cabinet nominees.

It's not the failure to pay per se, it's what it tax issue symbolizes. Because the first few weeks of every executive transition are about symbolism, not substance. The goal is not to make deep substantive changes happen, that comes later. The goal is to make a few symbolic moves that resonate with key constituencies and signal the right intentions. Make the right moves and it boosts your credibility. But symbolism is a double-edged sword. Make some significant symbolic slips and you risk a rapid erosion of your credibility. You also give your opponents a stick with which to beat you from that point forward.

The first couple of weeks of the Obama transition really were picture perfect. From the decision to involve a respected evangelical minister in the inauguration, to announcing the decision to close the Guantanamo prison (but with a time delay to work out the details), to the lifting of the ban on Federal funding for international family planning, to the approval of a stem-cell research project, to the push to achieve a bipartisan consensus on an economic stimulus plan, the President was on a roll.

Then it emerged that his nominee for Treasury Secretary, Timothy Geithner, failed to pay taxes for benefits he received while working for an international organization. While almost certainly the result of an honest mistake, and ultimately not fatal, the picture of our new Treasury Secretary being a tax delinquent is not a pretty one. It's easy fodder for the late-night comedians.

Had that been it, the fuss would rapidly have dissipated. But then in rapid succession Obamas's nominees for Secretary of Health and Human Services Tom Daschle and Chief Performance Officer Nancy Killifer succumbed to embarrassingly large (Daschle not paying $140K) or just plain embarrassing (Killifer having a lien put on her home because she didn't pay employment taxes for household help) tax problems.

To paraphrase an old saw, "once is a coincidence, twice is a trend, three times is enemy action." Only in this case, it's friendly fire.

The tax troubles are highly corrosive of Obama's credibility on at least two levels. First, why were these issues not caught during the vetting process? Neither of the two possible explanations - stupid concealment by the nominees or incompetence by the vettors - reflect well on our new President. Then there is the potent symbolism of Democrats pushing for higher taxes even as they fail to pay them. The Republicans have already picked up this club and begun to beat the new Administration with it. "It is easy for the other side to advocate for higher taxes," Representative Eric Cantor of Virginia, the House Republican whip, told a party retreat last weekend, "because you know what? They don't pay them."

The risk is not just that this will complicate future efforts to revise the tax code. It could easily become symbolic of a broader and deeper hypocrisy on the part of the new Administration which, after all, has staked its credibility on improving ethics and increasing transparency in Washington.

While we are on the subject of symbolism, finally, I'm also quite unimpressed by the President's decision to limit the salaries of executives of companies that take "exceptional" government funds. At best, it strikes me as very bad policy. At worst, it's a cynical play to divert attention from the Administration's own emerging ethical problems - call it the Obama Political Recovery Act of 2009.
What do you think of Obama's taxing troubles? As a new leader, is his transition at risk?
This post is part of our in-depth look at Obama's First 90 Days in office.