Author: tomkapostasy

Retired finance and operations executive interested in public policy, especially where data can help to frame the issues.

The Financial Paradigm

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The financial decision-making paradigm was developed in the 19th century by the “marginal” school of economics and refined into modern financial tools by the 1950’s.  In essence, it says that by comparing incremental benefits with incremental costs, that rational decisions can and should be made.  While academic economists refined the exact conditions under which this is logically true, practical business professionals have simply just adopted these tools.  Business students learned to choose the greatest net benefits.  Some also learned to calculate the risk-adjusted, interest-rate discounted incremental after-tax cash flows.

In practice, finance professionals and business decision-makers have seen limitations in the theory, but adapted it to make “rational” decisions.  If qualitative factors exist, they are ignored, translated into numbers or considered separately.  If key numbers are unknown, they are estimated, modeled or limited.  If factors are interrelated, a simulation model is run or lesser factors omitted.  Cash flows 30 years out are ignored due to their low present value.  Rules of thumb are used as simple linear relations.  The whole is defined as the sum of the parts.  The principle of diminishing marginal returns is used to eliminate inconvenient, minor or detailed items.

For short-term or long-term decisions, the standard financial decision making tools are adapted to meet most situations.  With experience and business judgment, decisions are made with a high degree of confidence using this single approach.

In addition to the common “adjustments” accepted by financial analysts in practice, there are deeper criticisms regarding the financial paradigm.  It is inconsistent with the historical, accrual cost approach required in public accounting.  Managers are unable to estimate factors, so they are constructed by analysts.  For major investments or decisions, the inherently qualitative factors may be most important.  Fully-loaded costs are used throughout most financial systems, so decisions are guided by “the numbers”. Purely financial incentive systems lead to padding, managed numbers and missed opportunities.   Focusing on financial results alone leads to neglect of the asset, operations and customer levels of the balanced scorecard.  Accounting systems are not structured to monitor key decisions, but to eventually report historical costs.  The financial decision making paradigm does not directly help managers to solve problems or serve customers, but it can create an adversarial relation between line managers and the financial staff.

The 1980’s “quality revolution” lead to a time when there was significant support for a variation on Shakespeare’s maxim: “first, let’s kill all of the accountants”.   Since then, finance and accounting professionals have fine-tuned their models, linked to the balanced scorecard framework, enhanced allocations through activity based costing, simplified ROI models, learned quality paradigms and deliver a mixed dashboard of financial and operations measures.

 The financial decision-making paradigm remains at the core of modern business decision-making because it does a good job of organizing the key factors, determining the level of detail needed to make good decisions and communicating those decisions to others in a consistent fashion.  No paradigm is perfect, but the marginal cost-benefit approach is doing very well moving through its second century.

Production Strategy

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Financial success often depends upon making wise strategic and structural decisions.  The Pareto Principle or ABC rule says that 20% of a firm’s products will deliver 80% of its volume or profit.  For most organizations, on a purely mathematical basis, some version of the Pareto Principle will hold true.  It may be 10% or 33% of the products accounting for most of the results, but this clustering is nearly universal.  Focusing on those activities that provide the greatest “bang for the buck” is a good strategic and tactical approach to business.

Production methods (including services) can also be classified into ABC categories.  The oldest method: custom or handicraft production can be labeled C.  The big breakthrough of standardized parts and mass production can be labeled A.  The hybrid products delivered by modular stages as in an assembly line can be labeled B.  Again, most organizations find themselves with a combination of mass (A), modular (B) and custom (C) produced goods. 

Since mass production has inherent advantages and is the lowest cost approach, firms should add modular products when the incremental benefits outweigh the costs.  Moving to the custom level involves the same benefit/cost comparison.  The incremental percentage margin is set by the marketplace and tends to decline through time as competitors add similar products, better features and benefits are offered and processes are refined and costs removed.   Sales and product managers will usually overestimate the margin benefits, while finance and production managers will underestimate them.  On the marginal cost side, the roles will often be reversed. 

The relative benefits and costs will vary from case to case, but the general structure and decisions will always need to be addressed.  In order to generate higher margins, firms need to offer products which appear to have greater custom appeal and this requires additional costs.  Firms which neglect to evaluate these trade-offs or which allow case by case negotiations often find that they have too many custom products and too little profit — or too few value-added products and too few customers.

There are four strategic approaches to this inherent trade-off.  First, firms can be disciplined and choose just one of the 3 production types.  They can deliver goods in a narrow range (A), using focused factory techniques.  As Henry Ford said, “any color you want as long as it’s black”.  They can adopt an operational excellence strategy and reduce costs through time.  Or, they can develop a modular strategy with well-defined processes for production, product development and marketing (B).  By leveraging the efficiencies of a set of highly effective modular processes, they can deliver new products and services at moderate volume with higher margins.  A product innovation strategy can be delivered this way.  Finally, they can choose a customized production strategy (C) and deliver highest margin niche products to specialized users.  This approach can attempt to leverage mass or modular production, but the real focus is on developing or adapting products to meet specialized needs.  This fits best with the customer intimacy strategy.

Unfortunately, the explosion of product choices in the 1970’s and 1980’s resulted in most firms delivering some messy, unintended combination of A, B and C products.  The mass production world moved from 90% A and a little B to 50% A, 40% B and 10% C in many cases.  Some firms even found one-third each as their production profile.  A second overall strategy has been to outsource the production of A level mass production items to the lowest cost source: in a focused factory, to a market leader, as an import, as a drop ship or through a partner.  A third strategy is to develop a truly modular production line ala Dell and move all production through a single highly refined process.  A fourth strategy is to outsource the customized work to partner firms, IT implementation shops, other engineering firms or to repackaging firms.

It is possible to combine mass, modular and custom product deliver flows within a single firm, but it is not easy.  At a minimum, firms need to make decisions in these terms, monitor the results and adapt to ensure that the marginal benefits justify the marginal costs.

Strategic Planning: Balanced and Disciplined

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Of the many planning methods proposed and widely used in the last two decades, two stand out for their impact and longevity.   Michael Treacy and Fred Wiersema’s “Discipline of Market Leaders” was published in 1994, closely followed by  Robert Kaplan and David Norton’s “Balanced Scorecard” two years later.  How do the two interact ideally?  Can a strategy process and strategy be both balanced and disciplined?

 The discipline of market leaders is to prioritize resource investments into one dimension of strategic choices, while making modest investments in the other dimensions.  Treacy defines the generic dimensions as Operational Excellence (cost reduction), Product Leadership and Customer Intimacy (best total solution).  Based upon market opportunities (customers and competitors), wise organizations choose one dimension for emphasis and align all other variables to support that choice.

 The balanced scorecard emphasizes the importance of measures and a complementary planning process that ensures that four levels of activity are reviewed:  Learning and Growth (asset management, broadly speaking), Internal Processes (operations, product development, customer interface – the how), Customer Satisfaction and Financial Results.  Asset management feeds optimal processes delivering customer satisfaction and financial results. 

 The two approaches seem to conflict: one says focus (discipline) while the other says diversify (balance).  The resolution lies in their application.  The balanced scorecard provides a universal framework of the factors that drive business success in a logical sequence.  Organizations still have to compare their direction (mission, vision, values) with their situation (SWOT) in order to determine critical success factors.  CSF’s help the organization to select those 10-20 measures that best cover the landscape. 

 The discipline of market leaders is making strategic investment choices, while the balanced scorecard is using a planning and control process that highlights opportunities and links strategy to results.  The advice from Treacy and Wiersema is to focus on a single dimension, rather than to spread the investments evenly.  In balanced scorecard terms, this means that the measures will emphasize different dimensions.

 Focusing on operational excellence indicates the use of more measures in the Internal Processes and Asset Management levels.  Customer intimacy requires customer satisfaction measures, key internal process measures that impact customers and a touch of asset measures regarding the adequacy of the products offered.  Product leadership requires measures of customer satisfaction with the features and benefits set offered, the product development process itself and the availability of key technical resources that create products.

 Organizations will benefit from finding ways to apply the insights from both camps.  Strategy and structure matter more than ever.  The best answers continue to be “both/and” rather than “either/or”.

 http://www.amazon.com/Discipline-Market-Leaders-Customers-Dominate/dp/0201407191/ref=sr_1_1?ie=UTF8&s=books&qid=1262473135&sr=1-1

 http://www.amazon.com/Balanced-Scorecard-Translating-Strategy-Action/dp/0875846513/ref=sr_1_1?ie=UTF8&s=books&qid=1262554699&sr=1-1

 http://www.slideshare.net/kennyong/balanced-scorecard-for-strategic-planning-and-measurement

Role of Corporate Culture

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In the years since World War II, the organizational environment has changed from
 one of static, mechanical efficiency optimization to another of dynamic, organic,
 effectiveness evolution.  Global competition, innovation and limited resources in the
 face of a growing and wealthier world population have lead to non-stop, disruptive
 change in all industries.  This change is accelerating, impacting all organizations
 which now need to improve their activities or face extinction.  
 
 In addition to competitive industry threats, organizations must compete for highly
 qualified staff as never before. The increased requirements for success mean that
 there are more organizations pursuing a limited number of high potential employees. 
 Increased organizational demands for mastery level skills, flexibility, innovation,
 accountability, teamwork, tolerance, self-control, service, self-motivation and loyalty
 have outstripped the ability of labor markets to provide these new versions of the ideal
 employee.  Organizations with the greatest needs and resources are providing
 compensation and work environments to attract, motivate and retain these
 individuals.
 
 There is a growing consensus by thought leaders  that  success requires:
 
 A. Innovation
 
 The ability to digest changes by staff members at all levels and functions.
 The ability for all staff to innovate and apply innovations made elsewhere.
 A customer focus that shapes decisions and relations that first meet external needs.
 
 B. Best Human Resources
 
 Access to the very best human resources at all levels and functions (inside, outside)
 A work environment that is attractive to the very best human resources.
 Cost-effective recruiting/retention of high value employees, contractors,  suppliers.
 Staff members whose value-added assets and results grow by 5% annually.
 Embracing diverse talents, perspectives and cultures in decisions and practices.
 
 C. Cost-Effective Use of Resources
 
 Best use of all resources by matching talents and experience to needs.
 Best use of resources through developmental delegation focused on results.
 Best use of leadership, management and professional roles.
 Synergy from combining complementary talents to produce breakthrough results.
 
 D. Alignment Within Complex Systems
 
 Engaged, self-motivated staff with a minimum of management overhead costs.
 Shared accountability, reducing the need for oversight and measurements. 
 Complex processes that connect many individuals, departments or organizations.
 Systems that motivate achievement, rather than attempt to control behavior.
 Less detailed planning/forecasting, with more capacity for adapting to situations.
 Commitment to a team, organization or mission that motivates personal effort.
 Alignment of global supply chains, without fully integrated planning systems.
 Elimination of waste, duplication and conflict through coordination mechanisms.
 
 Overall Strategies
 
 Organizations that are able to evolve and adapt in a challenging competitive
 environment must have several complementary overall strategies, including:
 
 Effective Strategic Plans … 
 … clearly defining direction, evaluating situations and choosing priority actions.
 Human Resources … 
  … attracted, engaged and motivated by a true commitment to win-win results.
 Leadership … 
 … to set direction, coordinate plans, engage staff, serve customers and inspire.
 Resources … 
 … financial, supplier, brand, processes, patents, intangible and tangible assets.
 Performance Management Systems …
 … planning, reporting and improving systems.
 Culture … 
 … a set of values/expectations that create alignment and motivate optimal results.
 
 Culture
 
 A well-defined organizational culture honestly reflects the expectations of staff
 members for each other and for the organization as a whole.  A set of values defines
 what is expected in terms of behaviors and habits, and what is deemed
 unacceptable behavior.  These values are consistent with the organization’s history,
 customers, experience, strategy and institutional features.  A well-defined culture is
 internally consistent.  It captures the history and expectations of the organization.
 
 An effective organizational culture supports the drivers of success.  It promotes
 innovation and change management.  It values and rewards high performers.  It
 embraces cost-effective practices, especially in terms of delegation which
 empowers strong employees.  Finally, it honors accountability and promotes the
 ability and commitment of staff members to create alignment as an intrinsic part of
 their daily work.
 
 In the end, an organizational culture serves to make explicit the bargain between
 employee and organization in a challenging environment.  Organizations are
 modifying the way they do business to attract, engage, motivate and empower
 individuals who can create the most value.  In return for a commitment to the
 organization and the benefit of their services, employees are provided with an
 environment that maximizes their personal growth, rewards and market value.  
 
 Different organizations select different individual values to define the essence of their
 ideal or preferred cultures. Taken as a collection of values, they clearly provide an
 answer to the question, “what is it like to work at …?” The values represent ideals,
 both of staff and organizational attainment.  They describe what employees want to
 be like, what they aspire to show at their best.  Organizations can slowly change their
 values if they find that the existing set is inadequate to meet the needs for survival. 
 This is a slow process, requiring very significant investment in selecting, defining,
 complementing and implementing.
 
 As an ideal system that coordinates and controls behavior, cultures and values in
 organizations are like those in other social institutions: families, churches,
 communities and clubs.  They are effective only when the members believe in them. 
 This means that leaders are held to a high standard.  It means that trust is essential. 
 It means that individuals must have personal relations with others and that emotions
 matter.  Inconsistent messages or behavior can rapidly undermine commitment. 
 Like an emotional bank account, organizational values can be a reservoir of goodwill
 or an overdrawn checking account.  Directors, management and staff are required to
 hold each other accountable or the values and culture can quickly become
 worthless.
 
 In addition to setting an example in their personal behavior and creating an
 environment of trust, senior managers are responsible for ensuring that
 complementary policies, procedures, processes and plans are consistent with the
 organization’s values.  The primary focus is on human resources systems for
 recruiting, performance management, training, advancement and benefits.  Systems
 for planning, measurement and control are equally important.  Managers must also
 commit to enhanced communication to ensure that consistency is understood or
 inconsistencies addressed.  In addition, managers must operate consistently,
 holding all to the same standards. Managers must develop open, constructive
 relationships with their bosses, peers and staff which allow for constructive
 communication to address situations that appear to challenge the organization’s
 values.
 
 Summary
 
 The demands on organizations are greater today than ever before.  Organizations are
 concluding that global competition, innovation and competition for the best staff will
 continue.  To survive in this environment, they are adjusting their structures to
 promote innovation, best human resources, cost-effective use of resources and
 alignment within complex systems.  A key strategy is to define a set of values which
 comprise the organization’s culture and expectations.  By formally defining their ideal
 values and committing the organization to operating in accord with these values, they
 are seeking to attract, engage and retain the best employees, who are then motivated
 and aligned to produce the greatest results for the organization.  This organizational
 effectiveness strategy is being adopted and refined in all industries with increasing
 success.  It is not the easiest strategy, but it promises the greatest individual and
 organizational rewards to those who can commit to living up to the high standards of
 an ideal culture.

ROI on Personality Styles

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In a world of non-stop change, financial managers agree that “alignment” is the most difficult challenge faced by most organizations.  Through time, more equal access to all other resources has grown: materials, suppliers, facilities, financing, technology, products, entrepreneurs and human resources.

 Organizations have used a variety of methods to create alignment.  Military command and control, strategic planning, portfolio management and process management in various forms have been tried with mixed success.  In some static environments with less technology change, less competition and simpler processes, these approaches have worked well.  In the highly specialized, global, decentralized, changing, virtual world of today, many organizations have concluded that alignment can best be achieved through defining, shaping and reinforcing their corporate culture.

 A critical element in any corporate culture initiative is helping all staff members to have the self-awareness and other-awareness to manage their relations with others.

 My favorite introduction to self-awareness and paradigms is through the fable of “The Blind Men and the Elephant”.

 http://www.peacecorps.gov/wws/stories/stories.cfm?psid=110

 Individual blind men conclude on the basis of their personal investigations that an elephant “IS” a wall, a snake, a spear, a cow, a magic carpet or an old rope.  The moral is that an elephant is more than the sum of his parts.  Attempts to generalize from limited information or paradigms are doomed to failure.  The blind men can see neither the forest, nor the trees.  Many individuals have these same blind spots.  They are unable to see the big picture and they passionately hold onto their world view because they are not aware of the possibility of another approach.

 To help staff members with the personal growth needed to overcome this limitation, many organizations implement a personality styles program.  Myers-Briggs, DISC, Predictive Index, Gallup Strengthsfinders and a dozen others can be used to help all staff understand a few key results and begin to practice seeing the world from multiple perspectives, even forming the habit of expecting to employ multiple perspectives.

 These programs deliver 5 main lessons.  Individuals tend to behave in their own patterns or styles, which can be described.  No pattern is inherently better or worse, except as a means for completing certain responsibilities.  Personal styles make individuals especially effective in functions (accounting, sales, design, or engineering) that match their natural talents.  Individuals are not limited by their styles, but these habitual behaviors are more natural and using other complementary styles requires significant effort.  Since organizations have many functions and individuals with different styles, it is necessary for all staff members to be aware of their styles, recognize the styles of others and learn how to flex their styles to get along with others.

 Since these programs have been implemented many times in most firms across 30 years, one might expect that self-awareness would be the norm, followed by cross-functional cooperation and sophisticated used of different perspectives.  Unfortunately, many of these programs have not delivered the desired results.

 For personality styles programs to build self-awareness, complement corporate cultures, align teams and deliver results, firms need to invest more resources.

 1)      All managers, beginning at the top, need deep training, evaluation and feedback.

2)      All staff require experiential learning, examples, reinforcement and consistent guidance.

3)      Firms need to use the tool everywhere to create the skills, habits and expectations: training, hiring, promotions, cross-teams, planning, performance evaluations, etc.

4)      Firms need to break down the functional barriers and require a mix of styles in each function, job rotation for managers and cross-team experience for everyone.

5)      The personality styles tool, profiles and understanding needs to become part of the culture.  This is the language we use.  These are the stories we use.  These are the executives we use as examples of this style.

 Invest the resources to create a real asset for your organization.  Half of an investment produces little return.

Indiana Redistricting Proposal Adds Value

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“For the want of a nail, the shoe was lost; for the want of a shoe the horse was lost; and for the want of a horse the rider was lost, being overtaken and slain by the enemy, all for the want of care about a horseshoe nail.”  —  Benjamin Franklin

 Now, more than ever, society must rely on real economic growth to make the pie larger and allow us to choose how to divide the pie.  In the hot policy areas – global warming, health care, unemployment, alternate energy, retirement security, national security, adequate food – all solutions depend upon our ability to grow the economy.

 The private sector, especially in the last 30 years, has demonstrated its nearly unlimited ability to create value.  The contrast between productivity growth in the competitive sectors (ag, manufacturing, distribution, communications, mining, transportation, media, banking, IT, services) and the others (government, social services, utilities, education, health care) is instructive.  About 60% of the economy delivers 3-5% annual productivity improvements, while the other 40% is stuck at 0-1%.

 The slow growth sectors are all in areas where market failure is the rule – sometimes because services are natural public goods and sometimes due to natural monopolies, externalities, or unequal information.  In each case, there is a key role to be played by the government in shaping these industries to pursue continuous improvement as happens naturally in other sectors.

 Unfortunately, our political system does not produce “philosopher kings” who cooperate to find optimal solutions.  In a two-party democratic system, the best that can be hoped for is that the two parties will define contrasting, yet centrist policies and employ politicians who can seek re-election by solving some problems rather than merely demonizing the other side.

 The gerrymandering of Indiana congressional, senate and representative districts every 10 years encourages a polarized political environment.  The party in power draws districts to maximize their representation by creating as many 55-60% safe districts as possible, while consolidating their opponents into as few 80-90% majority districts as possible.

 This process results in extreme left and extreme right candidates winning nearly all races.  Centrist candidates have no chance in stacked districts.  Centrist voters have no influence in stacked districts.  The political parties attract extremist candidates.  They attract extremist supporters.  Only in a small minority of districts do voters have a choice between two qualified centrist candidates who mainly differ by a modest degree on the political spectrum. 

 The Indiana Senate’s Republican Caucus, Secretary of State Todd Rokita and Carmel representative Mike Delph have floated various proposals to turn redistricting over to some form of non-partisan commission, required to take advantage of the computer software which can define boundaries to maximize the compactness of each district, without considering socio-economic, religious, racial or political factors. 

 A visual example of the current skewed districts versus neutral districts is shown at http://bolson.org/dist/IN/.

 Members of both political parties should be able to see that the skillful use of gerrymandering today is a recipe for failure.  Even California voters are now seeing that structures that lead to polarization can bankrupt a state.  Indiana voters who care about the future should pursue this “good government” initiative.

Indiana Metro Growth Trends Continue

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Since 1900, a majority of Indiana counties have grown by less than 0.4% per year.  These 47 rural counties have been trapped in a time machine, slowly evolving from 20,000 to 24,000 people per county.  In 1900, they accounted for 38% of the population.  This dropped to 23% in 1950 and 17% in 2010.  These counties account for half of the counties and land, but only one-sixth of the population.  The urbanization of Indiana continues slowly, decade after decade.  The 47 rural counties had a population of 960,000 in 1900 when William McKinley of Ohio was elected president and only 1,120,000 in 2010.

 On the other hand, the urban counties have more than tripled in population (+241%), increasing from 1.6 to 5.3 million.  Indiana has grown by 155%, from 2.5 to 6.4M people.  Fully 96% of this growth has taken place in the 45 urban counties.

 The ten medium-sized cities and their immediate counties increased by two-thirds between 1900 and 1950 and then by one-sixth through 2010.  They accounted for 460,000 people in 1900, increased to 760,000 in 1950 and maintained minor growth to 870,000 in 2010.  Evansville, Anderson, Muncie, Terre Haute, Kokomo, Marion, Richmond, Bedford, New Castle, and Huntington grew from counties with 30-70,000 residents in 1900 to counties with 40-170,000 citizens across the century.

 The five largest cities – Indianapolis, Fort Wayne, Gary and South Bend/Elkhart – grew significantly faster.  They increased from about 0.4 million in 1910 to 1.4 million in 1950 to 2.2 million in 2010.  The rapid growth from 1900 to 1950 has since tapered off.  These 5 areas have grown from one-sixth of the state’s population to slightly more than one-third.  

 The greatest changes have taken place in the suburbs.  Fully 28 counties plus Lafayette and Bloomington have benefited from the growth of metropolitan areas.  These 30 counties have grown from a 1900 average population of 23,000 (abut the same as the rural counties) and total of 680,000 to 860,000 in 1950 (up 26%) to 1,950,000 (up a stunning 186%) in 2000 and an even higher level of 2,250,000 in 2010.  The suburban counties have increased from 27% to 35% of the Indiana population.

 Indiana’s population growth is expected to drop back to 6% for the 2010 decade after a 10% increase in 2000, 1% in 1990 and 6% in 1980.  This follows a post-war period where 15% growth per decade was the norm.  This decade continues to show very unequal growth.  The 30 suburban counties show a 14% growth of 305,000 people.  The other 62 counties increased by only 1%, from 4.1 to 4.2 million people.  The 30 suburban counties have 88% of the population growth. 

 Indiana has been blessed to have 6 urban areas that drive significant population growth: Chicago/Gary, South Bend/Elkhart, Ft. Wayne, Indianapolis, Cincinnati and Louisville.  The state legislature would be wise to adopt policies that reinforce this century long trend.

The Effective CFO: Black and White!

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A friend of mine has been a highly successful CFO with middle market companies for 25 years.  I pondered what made him succeed in a variety of companies and industries.

 He’s professionally competent and intellectually curious.  He’s always had a large professional network.  He is a good listener and is especially skilled at cutting through ambiguous or complex situations to identify the core problem or most promising solution.  He understands the basis for business success in his industry and he’s a good negotiator.

 On the other hand, he’s sometimes overly direct, not a technical leader in the CPA profession, not someone who automatically attracts the spotlight, doesn’t outsmart the quantitative business analysts and doesn’t often lead cross-functional projects.

 I think he succeeds because he has established a role and the skills to guide all key players to honestly confront the gray reality of situations.  He offers the financial perspective, but is just as quick to insert a sales, strategy or cultural viewpoint.  He ensures that risk versus return is considered through numbers, stories and analogies.  He contrasts short-term with long-term factors.  He plays devil’s advocate as needed to derail quick decisions or to shore up support for a tough alternative that must be chosen.

 In addition to these decision making skills, he has the wisdom, courage and skills to anticipate the perspectives of the key roles and to guide players into greater self-awareness and understanding of other perspectives.

 He helps finance, accounting, HR and IT staff to see that the fully integrated system and a 1,000 page policy and procedure document, without exceptions, is probably too structured.  He encourages engineers and six sigma black belts to reduce variation and to consider financial and strategic implications.

 He works with entrepreneurial owners to support change and risk taking, but to also gauge how much can be digested, how it can be hedged and what an ideal portfolio looks like.

 He works with boards and shareholders to understand that stock values do not always go up in a predictable manner, unless the books have been “managed”.  The long-term growth in shareholder value includes short-term fluctuations.

 He works with IT, engineering and product developers to have resources, time and authority to learn, experiment and develop new products – within a framework of long-term evaluation.

 He provides sales and marketing teams with the freedom and flexibility to meet company goals, but ensures that measures of final results are fair and the system can’t be beat.

 The effective CFO serves as a fulcrum in Jim Collins’ world of “both/and”.  Stakeholders and role players must be able to leverage their talents and preferred styles AND the contrasting factors which must also be considered for long run success.  CFO’s need to be more than gray; they need to be both black AND white.

Labor Market Failure and Recovery

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After 18 months of hiring freeze, it’s time for all profit-maximizing firms to kick start their recruiting.  At present, we’re hiring too few, we’re too focused on exact hiring matches and we’re unwilling to invest in the future.

 The recession was first sensed by wise businesses in 2Q 2008.  The banking crisis of Fall, 2008 terrified even those whose careers went back to 1974-1982 when the last panic of gas prices, inflation, interest rates and Japanese competition derailed the post WWII expansion.  While the freeze and risk-averse decisions were justified at the time, they are wrong today.

 The all-in cost for a senior professional staff member is roughly $100,000 per year.  A good hire lasts for up to 10 years.  A typical hire is a $1 million investment.  In the current environment with 16M candidates chasing 3M jobs, the odds of finding a great candidate are excellent and the ability to hire at 20% below old market salaries is a given.  Firms with a strategic view of human resources should be first in line to hire these high ROI assets – TODAY.  Every good hire is a $200-300,000 addition to the firm’s net worth.

There is little joy in HR departments these days.  Hiring volume is down so the pressure is on to reduce HR staffing and to NOT use external recruiters.  The volume of applicants per position has quadrupled.  HR’s ability to use on-line application forms and screening tools has improved, but not enough.  To cope with the excess supply, HR and hiring managers have decided to make an exact match of past experience by industry and function to the position the penultimate criteria for hiring.  This allows the greatest percentage of candidates to be eliminated in the first screening. 

 Unfortunately, this means that many qualified candidates are not considered.  Narrowly experienced and over-tenured candidates are favored, even if they have had the same experience for 8 years in a row.  Firms pursuing this approach will soon find that they have hired adequate candidates who have limited upside potential.  They are also likely to find that they have made many “hiring errors” because they have not given equal weight to the questions of personal motivation/drive and teamwork/manageability.  I recommend Martin Yates “Hiring the Best” as a guide.

Firms that continue in “hiring freeze” mode have a bias towards replacement of existing positions versus investment in the staff who deliver future value.  There are thousands of highly skilled project managers, business analysts, scientists, quality specialists, product managers, marketing researchers and other professionals who are unemployed because firms are unwilling to restart the investment cycle.  This recession will end and success will depend upon investing in new products, new customers and better processes.  There may be some areas where NOT replacing a separated employee is the right choice.  Successful firms make decisions one choice at a time rather than relying on simple rules.

 Firms that have their financial house in order need to race to the labor market while supply exceeds demand and hire skilled, motivated team players to pursue the next cycle of business investments that deliver long-term value.

Civic Investment in Monuments

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I’ve noted a pattern in our local government investments.

CIB Conseco Fieldhouse, CIB Lucas Oil Stadium, Carmel Clay Parks Monon Center, Indianapolis Airport Authority Midfield Terminal, Carmel Regional Performing Arts Center and the CIB Convention Center Expansion seem to have the same issues.

They were built with public funds to meet public and private needs.  The bondholders are well secured by public revenue sources and commitments.  The operating revenues are less than what is required.  The users do not want to pay more.  Current political forces are criticizing historical decisions and current operations.  The public thinks that the politicians are incompetent and/or captured by special interests.  The public wants a simple solution that does not include more taxes.

The greatest problem is that these facilities inherently serve BOTH private and public purposes.  The CIB facilities serve customers, but also the nearby local businesses and our collective sense of importance in hosting the undefeated Colts.  The airport serves passengers, but also economic development.   The Monon Center offers an alternative health club, but also provides subsidized recreational programs.  The CRPAC offers ticketed cultural events, but also subsidizes local arts groups and stimulates the hospitality and retail arts industry.

In each case, the public is confused because it is not clear what part of the capital and operating costs are due to private and public uses.  It is not clear what part of the costs are being paid by the users and what is being picked up by the public through current and future taxes.

Political and civic leaders would be well served to clarify these “buckets” of costs, benefits and responsibilities in the future.  It is not easy to do and any well-defined fence will be inherently arbitrary and sub-optimal.  However, the political costs of an ostrich approach are now apparent.  I’m sure that many local leaders decided that this “direct” communications style would be impossible, because well-informed Hoosiers would choose to NOT invest in any ventures where each did not personally receive an ROI.   I point to the overwhelming success of the Wishard Hospital campaign as a counterexample.  I point to the recent consensus that requires schools and other local groups to seek voter approval as a situation of “what’s good for the goose is good for the gander”.

State leaders should review these investments and outline a state review process that meets the public needs.  There is an inherent bias towards overinvestment by civic and political leaders.  Many constituencies benefit greatly in the short-run from major projects.  The operating deficits are often a decade away.  The positive ego benefits of creating 50-300 year monuments is too attractive.

Future capital projects should be required to clearly explain public and private benefits, costs and funding sources.  The projects should protect taxpayers at a level equal to bondholders.  Contingency funds should be included to handle the typical 5 year business cycles.   Even with these constraints, our local leaders will be able to justify investments in viable projects.