Dow 15,700

June 13, 2010October 23, 2021 tomkapostasy1 Comment

Dow 35,000 was a dream in the go-go 1990’s when the new economy had supposedly broken all of the old rules. Dow 3,500 was a distinct fear in March, 2009 when stocks had fallen by more than half from their peak. Dow 10,000 is the most visible reference point in the current stock market.

Every investor and business degree holder knows that stock values are fundamentally based on the expected risk-adjusted net present value of future after-tax cash flows. They are also tempted by the “efficient markets hypothesis” that says that stock valuations incorporate all information about future returns and therefore set the present value in a rational manner. On the other hand, they understand fluctuations, random walks, animal spirits and the history of under and over valued stock markets.

http://stockcharts.com/charts/historical/djia1900.html

http://www.investorsfriend.com/return_versus_gdp.htm

Individuals who believe that stocks return 7-8% on average in the long-run through 2-4% dividend yields and 4-6% price increases, must conclude that the stock market is inherently irrational. It has been 30% undervalued or overvalued a majority of the last 100 years. Overvalued 1922-31. Undervalued 1932-54, except for 1936-37. Undervalued 1974-86. Overvalued 1996-2008.

Stocks were overvalued by 137% in 1929 before tumbling to -67% undervalued in 1933. Stocks reached an undervaluated low of -58% in 1942. Stocks reached a new -50% undervaluation during the depths of the 1982 recession. In 15 short years, by 1997, they reached a 57% overvaluation. They rose to 115% overvalued in 2000, before retreating to a mere 38% overvaluation in 2003. In 2008, stocks were 67% overvalued compared with the long-run trends.

Based on 100 years of history, the Dow Jones Industrial Average at the end of 2010 should be 9,000. The expected value in 2020 is 15,700, providing a 5% annual valuation return and 2% dividend return. Investors who bet against long-term average valuations do so at their own risk.

Year	Trend	Actual	+/-
1910	50	62	24%
1911	53	60	14%
1912	55	60	9%
1913	58	60	4%
1914	61	58	-5%
1915	64	56	-12%
1916	67	80	19%
1917	70	80	14%
1918	74	70	-5%
1919	78	75	-3%
1920	82	100	23%
1921	86	70	-18%
1922	90	80	-11%
1923	94	90	-5%
1924	99	85	-14%
1925	104	100	-4%
1926	109	130	19%
1927	115	140	22%
1928	121	190	58%
1929	127	300	137%
1930	133	250	88%
1931	139	190	36%
1932	146	80	-45%
1933	154	50	-67%
1934	161	90	-44%
1935	170	90	-47%
1936	178	130	-27%
1937	187	175	-6%
1938	196	100	-49%
1939	206	130	-37%
1940	216	125	-42%
1941	227	125	-45%
1942	239	100	-58%
1943	250	125	-50%
1944	263	130	-51%
1945	276	160	-42%
1946	290	200	-31%
1947	304	170	-44%
1948	320	170	-47%
1949	336	175	-48%
1950	352	200	-43%
1951	370	250	-32%
1952	388	260	-33%
1953	408	260	-36%
1954	428	260	-39%
1955	450	380	-15%
1956	472	500	6%
1957	496	500	1%
1958	521	475	-9%
1959	547	525	-4%
1960	574	600	5%
1961	603	580	-4%
1962	633	700	11%
1963	664	550	-17%
1964	697	750	8%
1965	732	900	23%
1966	769	950	24%
1967	807	850	5%
1968	848	900	6%
1969	890	950	7%
1970	935	800	-14%
1971	981	850	-13%
1972	1,030	900	-13%
1973	1,082	1000	-8%
1974	1,136	850	-25%
1975	1,193	700	-41%
1976	1,252	850	-32%
1977	1,315	1000	-24%
1978	1,381	850	-38%
1979	1,450	850	-41%
1980	1,522	850	-44%
1981	1,614	950	-41%
1982	1,710	850	-50%
1983	1,813	1000	-45%
1984	1,922	1200	-38%
1985	2,037	1200	-41%
1986	2,159	1300	-40%
1987	2,289	1900	-17%
1988	2,426	1900	-22%
1989	2,572	2100	-18%
1990	2,726	2600	-5%
1991	2,890	2500	-13%
1992	3,063	3000	-2%
1993	3,247	3300	2%
1994	3,442	3700	8%
1995	3,648	3800	4%
1996	3,867	5000	29%
1997	4,099	6500	59%
1998	4,345	7800	80%
1999	4,606	9000	95%
2000	4,882	10500	115%
2001	5,175	10000	93%
2002	5,485	10000	82%
2003	5,815	8000	38%
2004	6,163	9500	54%
2005	6,533	10500	61%
2006	6,925	11000	59%
2007	7,341	12000	63%
2008	7,781	13000	67%
2009	8,248	7000	-15%
2010	8,743	10000	14%
2011	9,268
2012	9,824
2013	10,413
2014	11,038
2015	11,700
2016	12,402
2017	13,146
2018	13,935
2019	14,771
2020	15,657

Things Fall Apart

June 13, 2010June 13, 2010 tomkapostasyLeave a comment

California voters in every county except far left San Francisco County and far right Orange County approved Proposition 14 which changes the state constitution to require the primary election to select the two highest vote recipients, without respect to their political party.

http://en.wikipedia.org/wiki/California_Proposition_14_(2010)

California may once again be on the leading edge of American history. This change seems to be a rejection of the current primary system where candidates in both parties are required to pander to the extremists and activists before tacking back to the center to win in general elections. Ironically, the Tea Party movement seems to be tapping some of this frustration by the average centrist voter, while at the same time pulling the Republican Party even further to the right.

In the shadow of “The Great War”, William Butler Yeats wrote:

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

http://www.online-literature.com/donne/780/

http://en.wikipedia.org/wiki/The_Second_Coming_(poem)

The optimistic progressive consensus of 1880-1910 among the leading classes had been severely weakened by the war. World War II shattered the last idealistic sentiments in Europe, leading to the post-war time of European community, skepticism and limited idealism. The United States picked up the progressive banner with the New Deal, WWII, post-war global organizations and economic recovery, the cold war, New Frontier and Great Society. Temporarily derailed by the Vietnam War, Energy Crisis and Japanese competition, the U.S. once again embraced the optimistic progressive spirit in the 1980’s, but with a distinctively right-wing flavor following the Reagan revolution. Twenty years of economic and geopolitical progress delivered a new sense of American exceptionalism, leading to the Bush administration’s overreach in Iraq in response to the perceived terrorist threats after 9/11. Most commentators agree that we now face a more uncertain multi-polar future (see 2/1/2010).

How did the American public reach this point where most voters clearly see that the political system does not work (see 1/26/2010)?

Congressional and state legislator gerrymandering has played a major role. The average voter can see that many legislators are simply incompetent party hacks with extremist, populist rhetoric, but no sense of responsibility for governing on behalf of the citizens. The advantages of incumbents have lead to their re-election and increased voter cynicism (see 12/12/2009). This year, unprepared voters elected Alvin Greene as the Democratic SC senate candidate and nominal Democrat, 29 year-old Tim Crawford to oppose Dan Burton.

http://en.wikipedia.org/wiki/Gerrymandering

As the financial and volunteer resources required for election have grown, the power of extremist/activist groups in both political parties has grown significantly. As the country’s population and standard of living have grown, narrow economically rational voters have reduced their participation, thereby increasing the power of those with strong ideological views.

Citizens of all political views have become more independent, decreasing the role of many individual and institutional influencers who once promoted the center (think US News & World Report in the 1960’s). Politicians and political parties have become far more sophisticated in identifying and capturing the resources of those with the strongest beliefs.

After the break-up of the Democratic Party’s “solid south” position following passage of the 1960’s civil rights legislation, the Republican Party developed a more philosophically consistent right wing position on all economic, military and cultural issues. The Democrats have tried to move towards the center, but the left-right and Democratic-Republican dimensions of American politics have become synonymous for almost 40 years. The Republicans have effectively attracted millions of Catholic, Baptist, working and middle class voters from Democratic strongholds, while the Democrats have rode demographic trends and recaptured some socially moderate and upper middle class voters on the coasts.

The modern media has returned to its 19^th century roots, adopting explicit political and populist positions in order to sell advertising. This promotes partisan posturing and coverage.

Politics no longer attracts citizen legislators with moderate views. Political positions have very low compensation compared with other options for highly competent citizens. The price of entering a campaign is so high that only individuals with hopes for a 20 year political career, radical idealists or the very wealthy rationally pursue elected office.

Non-party primaries, campaign finance reform, independent districting commissions and grass-roots political participation can all help to return our political system to the center, where reasonable compromises can be found for the benefit of all. Without some structural changes, we run the risk of having the divisive and unproductive political results seen in Italy, Greece, Mexico, Venezuela, Japan and Germany. A solid majority of the American people desire centrist solutions to our challenges. Structural changes can help to ensure that we have a self-improving system, or at least that we do not see “things fall apart”.

What Customers Really Want

June 6, 2010October 23, 2021 tomkapostasy1 Comment

As organizations and organizational units adopt more customer-focused strategies, there is a need to better understand what customers really want. Although firms can invest years and decades in marketing research on this question, they can also choose to obtain 90% of the value in a single day by facilitating an honest discussion with key leaders and customers.

Those who have adopted the quality/process view believe that the first step is to confirm that customers mostly (only) care about the perceived value of final results. They will pay for a value added process or feature, but don’t care about other activities. Richard Schonberger proposed that all customer needs can fit into a small number of categories, which can be used to define and prioritize the findings.

Customers value final product or service quality. More today than before; and more tomorrow than today. Some customers value process quality, because it reduces their risk, serves their customers or is required by regulators. What quality level is required to remain in business, to meet expectations or to differentiate a product?

Customers value delivery speed. Product lead times have fallen from weeks to days to hours to minutes. Service delivery is sometimes measured in seconds.

Customers value flexibility. They expect your firm to have the capacity to meet their orders within standard lead times. They expect you to make exceptions. As in the Pink Panther movies, they may agree to a standard lead time or capacity, but when they need an exception, they want you to ignore what they told you before. Expectations regarding flexibility vary widely across industries and firms and can change rapidly.

Customers seek value. They want lower prices or total cost of ownership. They want features and benefits that are cost-effective, which meet their needs or which are market leading. This is a very broad category, but firms must operate with some understanding of what is expected.

Customers value information. They want business relations with clear information flows, minimal transaction costs and shared accountability for risks. Ideally, you anticipate and fulfill their needs in a cost free way, without surprises and take care of surprises of all kinds: regulatory, supplier, customer, competitor, acts of god, etc.

Finally, customers value personal relationships. This varies by culture, industry, firm and purchasing agent. Business relations are rarely purely business relationships. Personal connections, loyalties, favors, culture and understanding often matter.

Firms or business units should understand what their customers want. They should identify minimal, expected and differentiated performance levels. They should understand relative customer priorities. This may require formal marketing research or trial policies or pricing exercises to determine real preferences. This may require sales, marketing, engineering, production and finance to work together like never before.

A consensus one-page QSFVIP customer profile can help to shape decisions at the strategic and tactical levels.

Project Opportunity Analysis Template

June 6, 2010June 6, 2010 tomkapostasyLeave a comment

		Opportunity Analysis – Name of Project

		1. Key Strategic Priority Areas/Critical Success Factors
10	A	Creatively addresses more than one of the nine key strategic priority areas.
7	B	Directly targets a significant improvement in one key strategic priority area.
3	C	Contributes to the achievement of one key strategic priority area.
	D	Provides benefits, but does not address any of the nine key strategic priority areas.

		2. Annual Strategic Plan
10	A	An integral and significant preplanned component of the annual strategic plan.
7	B	An initiative within the annual plan.
3	C	Consistent with focus areas of the plan, but not defined as a planned initiative.
	D	Provides benefits, but is not connected to the initiatives defined in the plan.

		3. Mission, Vision and Precepts
10	A	Creatively addresses more than one precept or component of the mission.
7	B	Directly targets a precept or component of the mission.
3	C	Contributes to a precept or component of the mission.
	D	Provides benefits, but the connection to the mission and precepts is weak.

		4. Long-term Strategic Plan
5	A	Creatively addresses more than one goal of the plan.
4	B	Directly targets a significant improvement in one goal of the plan.
2	C	Contributes to the achievement of one goal of the plan.
	D	Provides benefits, but does not address specific goals of the plan.

		5. Program/Product Portfolio
5	A	Builds on an existing area of strength, leveraging a core competency.
4	B	Provides services the organization has targeted for growth or improvement.
2	C	Addresses an area of weakness considered critical to portfolio of services.
	D	Serves a new area, a weak area, or one that de-emphasized.

		6. Customer(s) Served
5	A	Targeted to serve an existing primary customer group.
4	B	Serves a customer group which has been identified for growth potential.
2	C	Serves a secondary customer group, by leveraging an existing program.
	D	Serves a secondary customer group or channel, which others could serve as well.

		7. Proven Demand for this Service
5	A	Members, customers and sponsors have paid for this program before.
4	B	Marketing research and tests indicate that this is a top priority service.
2	C	Marketing research supports some demand, but dollar value is unproven.
	D	Some constituents demand this service, but no research or market proof.

		8. Brand Consistency
5	A	Service reinforces key brand messages and is promoted with existing vehicles.
4	B	Service is consistent with key brand messages, but requires separate promotion.
2	C	Service connects with some brand messages and requires separate promotion.
	D	Service is not consistent with key brand messages.

		9. Delivery Channel Environment
5	A	Reinforces historical and current programs and values in delivery organizations..
4	B	Consistent with historical programs and values in delivery organizations.
2	C	Some degree of innovation or stretch that may be a concern to some players.
	D	Innovative program designed to introduce change for delivery partners.

		10. Financial Resources
5	A	Earns a financial payback of investment in one year or less.
4	B	Earns a financial payback in two years or less.
2	C	Breaks even in more than 2 years, but provides significant qualitative benefits.
	D	Qualitative benefits are deemed to exceed quantitative costs.

		11. Sponsor/Funding Resources
5	A	Creates a strong opportunity to attract new sponsors and contributions.
4	B	An attractive project 80% likely funded in a year, without harming programs.
2	C	More than 50% funding chance, but may compete with existing programs.
	D	Less than a 50% funding chance or clearly competes with existing programs.

		12. Information Technology
5	A	Uses existing capabilities without modification.
4	B	Uses existing or planned strong capabilities with minor enhancements.
2	C	Uses existing capabilities, but requires development outside of current plans.
	D	Requires pioneering development work to provide appropriate service.

		13. Delivery/Operations/Processing Capabilities
5	A	Uses existing strong capabilities without modification.
4	B	Uses existing strong capabilities with minor enhancements.
2	C	Uses existing capabilities, but requires significant development.
	D	Requires pioneering development work to provide appropriate service.

		14. Human Resources
5	A	Service can be provided by existing staff and structure.
4	B	Service requires some additions to staff in existing categories.
2	C	Service requires new staff skills and minor adjustments to structure.
	D	Service requires major initiatives in recruiting, retention and structure.

		15. Monitoring and Evaluation
5	A	Success is easily measured by existing measurement and evaluation tools.
4	B	Success can be measured with only minor enhancements to current system.
2	C	Success can be measured, but will require adjustments to existing measures.
	D	Success is difficult, if not cost prohibitive, to measure directly.

2010 Graduates: Live a Great Life

May 31, 2010October 23, 2021 tomkapostasyLeave a comment

Graduates, I encourage each of you to “Live a Great Life”. This is your right, your choice and your destiny.

We each live in three worlds: the world of commerce, the world of choice and the world of community. I believe that “a great life” comes from balancing these three worlds. In eighth grade, our industrial arts teacher, Mr. Laurie, told us that our first project would be a foot stool and that it would have three legs. One student spoke up, “Mr. Laurie, I think it would be better with 4 legs”. Mr. Laurie calmly responded, “Tom, I have found that 3 legs provide the proper balance for a successful footstool. If you tried 4 legs, it would take you the whole semester to make them the same length and the final stool would be 3 inches tall”. As I learned in this school, balancing the three legs of commerce, choice and community is essential to “living a great life”.

World of Commerce

The world of commerce is important as we emerge from the Great Recession. Completing high school is a great accomplishment. But it’s not the end of learning. You will continue to build your problem solving and communications skills and you’ll pursue new degrees and certifications. Lifelong learning is now required for everyone.

Our guidance counselor, Mr. McGinnis, urged us to be serious about our careers. He said “choose something which interests you, build skills in that field and focus on one industry”. In spite of the many options and uncertainties in life, pick that one path and treat it like it’s the only one.

Securing employment is difficult today. You can improve your odds by thinking about jobs from the employer’s point of view. Employers want clear “yes” answers to three simple questions: “Can you do the job? Are you self-motivated? Are you manageable?” Focus on these and you will always be an attractive job candidate.

Be confident about your economic future. Don’t listen to the nightly news. The sky is not falling. The U.S. economy grows by 3% per year on average. That doesn’t sound like much, but since the Diamond Alkali factory in Fairport closed 30 years ago, the US economy has grown by 160%, from $5 trillion to $13 trillion dollars. There will be recessions, but you will succeed.

Education, career skills and positive attitudes will make you succeed in the world of commerce. Always invest in yourself first. Save the first 10% of every paycheck. Invest it for your retirement. When you are 53, you will thank me.

World of Choice

We also live in a “world of choice”. In 1974, we were emerging from a “world of tradition” and sought a “world of choice” where we could “express ourselves”. Our parents cautioned us to “be careful what you wish for”. The number of choices and options today can be overwhelming. You now have great responsibility for your own future.

First, you must accept and love yourself as you are. Believe that you were created just as you are for a purpose. My classmate, Jim Kulma, shared a book with us in 1972. It was titled “I’m OK, You’re OK”. It sold 15 million copies because its advice was very sound.

This is not an invitation to be self-centered. We all need to become more self-aware. Discover your talents and your non-talents. Listen to others. Seek feedback and advice.

Because we have so many choices, engagement in life is critical. Many adults, in their roles as workers, family and friends, choose to not fully engage in life. They try to avoid responsibility for themselves and their choices because they are afraid of making mistakes. Unfortunately, “there is no place to hide”. Others will hold you accountable anyway. Embrace responsibility and make it a habit.

Engage in life; explore and experiment. When you are older, you will not regret these adventures, but you might regret the things you missed. Have the confidence to “take the road less traveled”. As we learned playing “Milk League” baseball, “you can’t get a hit, if you don’t step up to the plate.”

View life as an exciting journey. Don’t make it a death march in pursuit of a single goal, like career success. Don’t think “If I only had a better job, a winning team, a better spouse, a bigger house or a full head of hair, things would be different”. Joy comes from living life, not from dreaming about or even from reaching goals.

Accept that “life is not easy”. Life remains a challenge. Use the “in spite of” strategy. In spite of the challenges, risks, hurts and pains, I will choose to do X. If the challenges become too great, get help. Family, friends and counselors are ready to help. They all want you to succeed.

World of Community

We all need to earn a living and make wise choices. But, to be happy, we must also live in the world of community. We live in a world that glorifies material success and the individual. However, history, science and common sense tell us that happiness does NOT come from wealth and introspection. Happiness comes from relationships. Every wisdom tradition, including psychology, has found that people are truly happy ONLY when they live for something outside of themselves.

In our everyday lives, family matters most. Family life is difficult. But, we were created to live with others. We give and we get even more in return. On my wife’s nightstand, there is a picture of two identical dogs sitting on a beach, much like the Fairport beach, at twilight, with the quote: “Love does not consist in gazing at each other, but in looking outward in the same direction”. Invest in a high quality family life. It will provide the greatest rewards.

Fun social groups matter. Make time for bowling leagues, youth sports, church groups, boy scouts, girl scouts and playing cards with friends. These low-cost activities create a high quality life.

Your local community matters. There is great value in the familiarity, pride, loyalty and common interests of the local community. Village residents already know this. Your big city neighbors yearn to find this sense of place, security and belonging.

Our national community and government also matter. In a society with 300 million members, it is tempting to be a “free rider”. We have found that democracy is the best form of government. It allows the hopes and values of the people to be translated into laws to guide society. Society needs your active involvement in the political process. Our future depends upon it.

Finally, spiritual belief matters. We all have a deep need to matter and to be significant. This is fulfilled by connecting to something larger than ourselves. We all ask the same questions: “what is the meaning of life?”, “where did the world come from?”, “why was I created?”, and “what happens in the long-run?” These religious questions are part of our deepest nature. Finding your relationship with eternity, mankind, truth and god is a vital part of your journey.

We live in these three worlds of commerce, choice and community. Your generation inherits a world that is more complex, fast-paced and demanding than those of the past. Some scholars wonder if we are “in over our heads”, with the demands of life exceeding our capabilities. I believe that we are blessed to be able to lead even richer lives today. I agree with the author Harold Kushner who says that God always provides each of us with the strength and capacity to make our journeys with confidence.

On behalf of the “class of 1974” and the Fairport community, I wish each of you success on your journey. I am confident that you are very well-prepared for the exciting worlds which lie ahead.

Negotiating Work-Life Balance

May 22, 2010October 23, 2021 tomkapostasyLeave a comment

During the Great Recession the balance of influence has shifted markedly towards employers. Labor productivity increased throughout the two years, in contrast to prior recessions when it declined. Productivity increased because employers were unwilling to replace departed staff and found ways to motivate the remaining staff to redistribute the work load. Unless firms were already over-staffed by 5% or suddenly found new ways to identify and eliminate activities, this delegation of work is unsustainable in the long-run. Far-seeing firms and their best employees have a common interest in helping staff to improve their ability to negotiate a healthy and realistic work-life balance. Firms which push too hard will eventually experience costly turnover.

Many firms tend to push too hard and then back off as needed. Determining the breaking point for staff is more art than science. Employees at every level – hourly, salary, manager, director and VP – have an important obligation to push back constructively. Especially in the United States, where we have embraced the long-term benefits of free market capitalism without the need for balancing social values or government regulation, every employee has a responsibility to attain the work-life balance that optimizes their happiness. Wise managers will coach staff in this direction while at the same time asking for more!

Employees need to deliver and focus on long-term value, establish personal goals, delegate, prioritize, evaluate options, negotiate and employ proper tactics.

Employees need to actively participate in identifying ways to deliver 3-5% productivity improvements each year. This is the price of admission to the modern labor market. These short-term and long-term actions deliver the value required for organizational survival. They outline a program of activities that allows managers and staff to minimize the number of reactive initiatives undertaken.

Employees need to establish their own values, mission and goals. Without countervailing forces, the need to earn an increasing income will always prevail. A personal life plan is required to provide a counterbalance to the unlimited requests of firms today. Staff members need to accept that everyone is replaceable and that some day they will be gone and the firm will move on without them. They also need to observe that most senior managers have found ways to balance their own personal objectives.

Staff members need to become world-class delegators, moving work down the hierarchy and to supplier partners. Individuals who constantly attract and retain new responsibilities will become overwhelmed.

Staff members need to deeply understand that there are an infinite number of goals and an infinite degree of performance that can be requested. This applies to employees at all levels. It is an inherent component of the employment relationship. Employee goals need to be prioritized. Modern firms understand that they must emphasize product innovation, customer intimacy or operations excellence. They also know that customers desire varying levels of quality, speed, flexibility, value, information, risk and personal relations. They know that income statement and balance sheet goals, short-term and long-term measures, financial and operational goals, accrual and cash-flow results all matter but with different priorities. They understand the trade-offs between risk and reward. Employees must work with their managers to explicitly prioritize what matters most and to set goals based upon achievable results.

Employees need to negotiate their annual and immediate goals. The quality revolution has highlighted the need to base goals upon defined capabilities, instead of top-down requirements. Employees need to master prioritization in setting annual, monthly and daily goals. Employees, managers and the finance department need to understand that there is an optimal degree of stretch in targets and budgets. Employees and managers need to understand that there ARE short-term trade-offs between cost, quality, speed, flexibility, risk, relations and brand perceptions.

Employees need to be effective tacticians. Annual SMART goals need to be realistic. Staff members need to flex their schedules to meet peak demands and address unexpected events. They need to recoup this time in slow periods.

In a challenging environment, every employee needs to understand their role and negotiate achievable objectives that help their firm to thrive.

Getting Started on Emergency Preparedness

May 20, 2010October 23, 2021 tomkapostasyLeave a comment

We seem to live in a world filled with unpredictable risks: a banking crisis, potential Greek debt default, H1N1 flu, gulf oil spill, Icelandic volcano ash, terrorist attempts, etc. Many small and medium-sized businesses defer emergency preparedness planning because they are unable to find the handle to get started or they fear a bottomless pit of cost with no expected benefits. Doing nothing is a choice, but it is not the best choice.

Any firm can complete the first three steps of an emergency preparedness plan in less than one day: outline the potential risks, prioritize their likely impact and outline the required preparedness measures which would address the risks. Most potential risks are generic. The attached checklist can be modified to highlight any other risks.

The identified risks can be prioritized through a simple weighting scheme. For each risk, rank its probability of occurrence in the next 10 years as 1-5, with 5 being highest. For each risk, separately evaluate the potential human and property/asset risks from 1-5, with 5 being the highest damage. Calculate the potential impact as the probability score times the SUM of the human and property impacts. Sort the risks from high to low. There will be a natural division of scores that highlights your top 5-15 risks.

For each risk, determine what emergency preparedness steps are required. Most will be addressed by a small number of generic recovery steps.

Shelter on-site for 4 hours, including emergency air supply.
Shelter on-site for 16 hours, during threatening weather.
Shelter on-site for 72 hours.
Quickly evacuate building and account for occupants.
Activate emergency communications plan/alternate command authority structure.
Activate emergency business recovery plan
Activate long-term quarantine plan.
Other specialized recovery steps.

Once these first three steps have been completed, progress can begin on developing the recovery plans, including any immediate action steps that can be taken to reduce the risks or impacts of high potential impact threats.

Emergency preparedness is a major investment. Getting started is the most important step.

Group	No.	Risks

Brand	1	Key executive or representative incident
Brand	2	Product recall – safety, functional problems
Brand	3	Public relations crisis, fraud, suppliers, legal, political

Hazard	4	Biological – plague, insects, animals, malaria, anthrax, terror
Hazard	5	Chemical – on-site, storage, warehouse, adjacent, terrorist, gas leak
Hazard	6	Communicable disease – long-term impact (Avian flu, H1N1 flu)
Hazard	7	Explosion – natural gas, terror, plane, truck, car
Hazard	8	Fire – on-site, garage, storage, adjacent, roads, utilities
Hazard	9	Local accident, making buildings inaccessible for 30 days+
Hazard	10	Nuclear accident, truck, terror, bomb, other radiation release

IT	11	Computer virus or malware infection, major
IT	12	Major internet access failure for more than 1 day
IT	13	Servers and co-location servers destroyed, restart

Natural	14	Earthquake – structural damage, fire, water, utility damage
Natural	15	Flood – on-site, nearby, preventing access
Natural	16	Severe winter storm, ice, heavy snow
Natural	17	Tornado, high wind storm, hurricane, hail storm, lightning

Personal	18	Armed threat, violence, hostage, robbery, escapee – nearby
Personal	19	Civil disturb, riot, war, occupation – on-site, nearby, country

Supply	20	Bank, fin system, invest failure, long-term recession
Supply	21	Critical supplier, shipper, facility or resource failure
Supply	22	Labor supply disruption

Transport	23	Major loss of staff due to travel accident
Transport	24	Major transportation interruption – road, train, air or ship
Transport	25	National travel emergency requiring alternate travel
Transport	26	Vehicles – collision, liability

Utility	27	Communications, utility service interruption
Utility	28	Long-term electrical power outage
Utility	29	Safe drinking water failure

Outsourcing Success

May 17, 2010 tomkapostasyLeave a comment

After four decades of outsourcing in many functions and industries, it is clear that success requires more than leverage. Outsourcing success requires a compelling rationale, a clear and flexible framework and positive personal relationships.

The rationale for outsourcing is based upon core competencies, provider capabilities, economics, strategy and fit.

Buyer core competencies can not be outsourced. The provider must deliver the outsourced function as a true core competency, not just a low price. The provider is able to own responsibility for the outsourced function. The provider has world-class skills and invests in improvements. The provider is well-capitalized and experienced in the customer’s industry. There is no beta site or learning by doing dimension.
The provider has the skills and culture to be a third-party provider, including a customer service mentality, flexibility, creativity and change management skills wrapped around professional competence.
The contract allows the buyer and provider to both win financially. The provider is capable of reducing unit costs each year. The provider’s initial bid and investment make economic sense. The provider can justify a fully qualified account manager dedicated to making this contract work.
The buyer has a clear strategic reason for outsourcing and has structured the deal to ensure its delivery. This can be cost, quality, capacity, service, delivery time, risk management, creativity, technology, systems or intellectual property access.
The hand-off from buyer to provider is a good fit. Either the function can be very well-defined and delegated cleanly or the function is inherently virtual and both firms thrive in a matrix environment. The buyer emphasizes product innovation or customer intimacy and the provider delivers operational excellence (or some other clear division). The provider is able to perform in the buyer’s steady state or high growth and change environment. The provider is comfortable with the buyer’s status in the Fortune 100, Fortune 1000 or middle market world.

The framework for an outsourcing agreement is well-defined, flexible, empowering, balanced and aligned.

The contract is detailed, comprehensive and robust and meets the needs of finance, legal and operations. The strategic objectives and measures of success are clearly defined.
The contract is a model of world-class delegation. Important results are defined, but the means to achieving them is left to the provider. Micromanagement and administrivia is avoided like the plague.
The relationship between single agents for the buyer and provider is clearly defined. The provider account manager is welcomed as a full business partner on the buyer’s staff. A competent buyer rep is assigned to manage the contract, with his career depending upon its success. The two reps are given the authority and flexibility to manage day-to-day issues. A dispute resolution framework, including billing, is defined. The contract supports a wide range of operating conditions and triggers for re-opening negotiations.
The provider has adequate capacity and power in the agreement to succeed. The minimum and maximum volumes are reasonable. The provider has a fair economic deal and leverage to negotiate as required.
Contract incentives align the interests of the buyer and provider. The contract provides time for the provider to digest start-up costs and benefit from learning curve effects. Each side benefits from greatly increased service volume.

The relationship between the buyer and provider reflects a true partnership, shared resources, trust, opportunities and planning.

The partnership anoints the provider as the sole provider of services in their category. The contract gives the provider reasonable security and expectations of ongoing business unless someone clearly outbids them. The business is not re-bid based upon opportunities. The business is not divided by high and low margin components.
The buyer and provider work together to find every opportunity to leverage their skills, suppliers and knowledge. Terms reflect the firm with the lower cost of capital. Transaction and billing costs are minimized, assuming good faith. Everything learned in the bidding process is incorporated into the contract. The contract recognizes that there are inherent trade-offs between costs and services.
A trusting relationship is developed. The provider is on-site, attends meetings and communicates with the buyer daily. The provider has a quality management system that provides confidence. The provider is transparent in sharing information and risks, including competitive intelligence.
Both parties actively promote win/win opportunities. The buyer is an active reference for the provider. The buyer seeks new products, services and applications from the provider at list price.
The provider is involved in the planning process. They attend strategic planning meetings. They get 90 day notice of annual budget targets. Both parties negotiate annual changes in good faith.

Buyers tend to have greater leverage in outsourcing services. To achieve the best long-term results, they need to negotiate long-term win/win deals with providers.

Indiana 2050

May 13, 2010August 30, 2023 tomkapostasy4 Comments

It will take some time for the official 2010 Indiana census to be complete. The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.

Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050. The population will increase from 5.2 to 6.4 to 8.0 million residents.

In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000. These four counties contained 1.9M people, or 36% of the 1970 population. They grew to 2.0M in 2009 and an estimated 2.2M in 2050.

By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list. By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.

Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%. Ten of the 92 counties will experience two-thirds of the growth across the next four decades. Based on recent trends, Hamilton County will add 300,000 residents. Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%). Marion and Allen counties will add 80,000 residents at 10-20% growth. Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.

Five Indianapolis area counties will experience 70% or higher growth. Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind. The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M. This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050. The Indianapolis area will grow from 28% to 33% of the total state population.

Eleven counties will change population ranks by three or more places. Boone and Hancock Counties will climb 9-10 places. Shelby, Clark and Hendricks Counties will rise 3-4 places. Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places. Howard County may drop 7 places.

Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050. Growth will be highly concentrated in a small number of urban counties. The top ten counties, each with 200,000 or more people, will account for 50% of the state population. The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population. These 21 counties will capture 80% of all growth,

averaging increases of 60,000 people. The remaining 71 counties will experience growth of 4,000 people each on average.

			Pop	Pop	Est	2009-50		2009	2050	Chg
SMSA	County	City	1970	2009	2050	Growth	Pct	Rank	Rank	Rank

Vincennes	Knox	Vincennes	42	38	38	–	0%	37	37	–
Terre Haute	Vigo	Terre Haute	115	106	106	–	0%	17	19	(2)
South Bend	Elkhart	Goshen	127	201	273	72	36%	6	6	–
South Bend	Kosciusko	Kosciusko	48	76	104	28	37%	19	20	(1)
South Bend	LaPorte	LaPorte	105	111	120	9	8%	15	16	(1)
South Bend	Marshall	Plymouth	35	47	59	12	26%	31	31	–
South Bend	St. Joseph	South Bend	245	268	289	21	8%	5	5	–
Richmond	Henry	Newcastle	53	48	48	–	0%	30	34	(4)
Richmond	Wayne	Richmond	79	68	68	–	0%	25	29	(4)
Muncie	Delaware	Muncie	129	115	115	–	0%	14	17	(3)
Louisville	Clark	Jeffersonville	76	108	148	40	37%	16	13	3
Louisville	Floyd	New Albany	56	74	94	20	27%	21	23	(2)
Lafayette	Tippecanoe	Lafayette	109	168	248	80	48%	8	8	–
Kokomo	Cass	Logansport	40	39	39	–	0%	36	36	–
Kokomo	Grant	Marion	84	69	69	–	0%	23	27	(4)
Kokomo	Howard	Kokomo	83	83	83	–	0%	18	25	(7)
Indianapolis	Boone	Lebanon	31	56	114	58	104%	27	18	9
Indianapolis	Hamilton	Noblesville	55	279	579	300	108%	4	2	2
Indianapolis	Hancock	Greenfield	35	68	144	76	112%	24	14	10
Indianapolis	Hendricks	Danville	54	141	261	120	85%	11	7	4
Indianapolis	Johnson	Franklin	61	142	242	100	70%	10	9	1
Indianapolis	Madison	Anderson	139	131	141	10	8%	13	15	(2)
Indianapolis	Marion	Indianapolis	794	891	971	80	9%	1	1	–
Indianapolis	Morgan	Martinsville	44	71	101	30	42%	22	21	1
Indianapolis	Shelby	Shelbyville	38	45	61	16	36%	33	30	3
Ft. Wayne	Allen	Ft Wayne	280	354	434	80	23%	3	4	(1)
Ft. Wayne	De Kalb	Auburn	31	42	54	12	29%	34	32	2
Ft. Wayne	Noble	Albion	31	48	68	20	42%	29	28	1
Evansville	Vanderburgh	Evansville	169	175	189	14	8%	7	11	(4)
Evansville	Warrick	Booneville	28	59	84	25	42%	26	24	2
Columbus	Bartholomew	Columbus	57	76	96	20	26%	20	22	(2)
Columbus	Jackson	Brownstown	33	42	45	3	8%	35	35	–
Cincinnati	Dearborn	Lawrenceburg	29	51	71	20	39%	28	26	2
Chicago	Lake	Gary	546	494	534	40	8%	2	3	(1)
Chicago	Porter	Valparaiso	87	164	232	68	41%	9	10	(1)
Bloomington	Lawrence	Bedford	38	46	50	4	8%	32	33	(1)
Bloomington	Monroe	Bloomington	85	131	171	40	31%	12	12	–
	Subtotal	37 counties	4,091	5,125	6,543	1,418	12%

	All Others	55 counties	1,104	1,298	1,459	161	12%
	(Pct of State)		21.3%	20.2%	18.2%	10.2%

	Indiana		5,195	6,423	8,002	1,579	25%
				24%	25%

Indianapolis			1,251	1,824	2,614	790	43%
(Pct of State)			24.1%	28.4%	32.7%	50.0%

Prioritize, If You Dare!

May 7, 2010May 10, 2010 tomkapostasyLeave a comment

“Managers do things right; leaders do the right things”. In the current environment, where the “right things” of new products, customers and deals are on hold, the best leadership may lie in prioritizing existing operations. In essence, prioritization is choosing to “do the right things” within the existing portfolio of activities.

Prioritization begins with the calculation of net benefits. Maximizing benefits or minimizing costs is insufficient. Priorities reside in those activities with the greatest net benefits. This can be defined as benefits minus costs, as a payback period or as return on investment (ROI) or net present value (NPV) for large projects. The comparison of costs and benefits is the essence of this approach. Calculating risk-adjusted discounted values of after-tax cash flows within an asset portfolio is usually just “nice to have”. Rank ordering available projects by their net benefits is the next greatest source of value.

The Pareto Principle says that 80% of net benefits are delivered by 20% of activities. Mathematically, with any reasonable range of costs and benefits, this relationship holds true. In simplest terms, the Pareto Principle says “cut off the tail”. It also focuses on the concept of relative value. We want to compare the ratio of benefits to costs, investments or activity.

This applies to time management, where a log of time for one month reveals 10% of activities that should be eliminated. The bottom 10% of products, product categories, stores, bank and library branches face the same indication that they are not cost justified. Customers, divisions and business units face the same reality. Some make money, while others do not. Activity based costing calculations indicate that the lowest performers cost the firm more than was apparent. Even individual performance can/should be considered on a rank-ordered basis. The bottom 5-10% should be identified annually and considered for performance improvement plans in every group of 10 or more employees.

In emergency situations, triage must be applied. Limited resources must be applied ONLY to the activities that can benefit and survive. Those which will fail receive no investment. Those which will succeed anyway, receive no investment.

At times, a two-dimensional grid should be used to determine activities which will deliver benefits. In the classic Boston Consulting Group approach, business units are categorized by high and low growth and margin potential. The top right units with high growth and margin potential get all of the investments and high-powered managers’ attention. Low growth and margin businesses face divestiture. High margin, low growth businesses become the proverbial “cash cows”, generating cash flows to feed other units.

Opportunity cost is a fundamental concept in prioritizing opportunities. There is no absolute scale of expected returns. There is only the “next best alternative”. Even when business units have poor prospects, they must be compared with the realistic opportunity costs of doing nothing or divestiture.

Prioritization does not apply just to eliminating the negative end of expected business results. Investments should be made in those activities with the greatest potential. The Gallup Strengthsfinder approach applies this to human performance, demonstrating that natural talents provide the greatest relative return. Firms should invest in those products and markets with the greatest potential. They should also invest in facilities, equipment, IT projects, researchers and sales staff who deliver incremental value. Many firms are inappropriately constrained by ratios and potential future change management costs. Investment and product portfolio managers understand that there is value in starving losers and investing in winners.

The most sophisticated version of prioritization is employed in the principle of comparative advantage. David Ricardo’s theory of international trade applies to countries, companies and units. Comparative advantage says that relative benefit/cost ratios between countries, firms and units determine the best possible distribution of production. ONLY those who are comparatively most productive should produce goods or services. More than a century later Michael Porter applied this to companies, determining that those with true core competencies would succeed in the long run. Treacy and Wiersma’s book on “The Discipline of Market Leaders” indicates that firms can only have competitive advantages in one of the three areas of product innovation, customer intimacy and operational excellence. Only the “best of the best” will prevail in the long run. Outsourcing of non-essential functions is indicated.

Given the clear economic advantages of prioritization, why is this not universally applied? Net benefits, the Pareto Principle and comparative advantage are beyond the comprehension of some economic actors. Comprehensive, systematic calculations are applied only by a specialized subset of firms and functions.

Perhaps more important is the personal cost-benefit calculation of individuals. I could prioritize activities by relative benefit-cost, but I would be subject to criticism for eliminating the bottom 10%. Perhaps it is better to not “rock the boat” and avoid the penalties of change management.

Some sophisticated managers follow the advice of Dr. Deming who highlighted the great risks of overreacting to random variations. Managers should set an appropriate time-frame when using relative performance measures.

Dr. Deming also preached that managers need to “drive out fear”. For some employees, any rank ordering or evaluation of performance creates fear. Some individuals believe that people should not be subjected to performance standards or rankings because this is not “fair”. For most organizations, the essential competitive nature of employment and corporations is understood and accepted. Highly risk-averse individuals should not be employed by firms which face competitive pressures.

This does not contradict Maslow’s theory that security/safety is at the base of employee motivation. Security oriented individuals should be guided to careers and positions which meet their needs. The other 80% of employees should be counseled to understand the long-term competitive nature of labor markets.

Prioritization is an effective and essential business strategy in all business conditions.

Good News

… and commentary

Author: tomkapostasy