Zoogony

The Importance of Liquidity: Liquidity Is King — Not Elvis!

Remember the saying from one of Clint Eastwood’s Dirty Harry movies—”A man has got to know his limitations”. This applies equally well to the art of economic forecasting. The art (not science) of economics is useful in forecasting what the predominant risks are facing our national economy and the resulting consequences. With this in mind, let’s examine our national economy and see why liquidity, both on a professional and personal level, will be king for the next decade at least.

Do you have a metal chain in your house? Take a look at it. You will notice all the links are of equal size. The U.S. economy can, in a way, be represented by the links in a chain. But, the difference is that the economic links are not of equal size. In addition, some links are weaker than others.

The biggest link in our national economic chain is the consumer or more explicitly, consumption expenditures. This link now represents 70% of our Gross Domestic Product (GDP) and dwarfs all the other economic links combined. This link is also the weakest link in our chain and is the one of most concern.

To put it succinctly, the consumer is tapped-out. With the direction of interest rates trending higher, Americans can not continue spending money they do not have. Household borrowing is increasing substantially faster than incomes. In addition wages earned are bearly keeping up with inflation. This trend can not continue forever. We use to talk about a healthy savings rate in this country. Now, we have little to none. The most important link in our economic chain is extremely illiquid. This will have long-term consequences for economic growth and, hence, the ability of companies to maintain their profitability and grow their top-line.

There are some things worse than having a recession, which is, having none at all. Recessions provide the impetus for both consumers and businesses to rebuild their liquidity. It is a painful process, but it sets the stage for the next strong upward expansion. For example, in the early l990 recession the average American household pared their debt by an inflation adjusted $410. This helped set the stage for the strong expansion in the l990’s. In the 2001 recession, the average U.S. household added $1,420 to their debt levels.

It is possible for awhile to avoid a business recession through Federal Reserve policy of manipulating interest rates. But, the price to be paid is high. The economy can flounder along in a tepid sluggish manner and can easily stumble into a more serious recession. You are sort of operating in an economic Twilight Zone between growth and stagnation.

Another consideration is the unusual political alliance in Washington. Democrats and Republicans in Congress disagree on many political matters, but there is one fundamental economic point they do agree on. They both like to spend increasing amounts of money on programs that can’t be sustained. Eventually tax rates will go up no matter who is in the White House.

This is unfortunate because large cuts in marginal tax rates is the one thing that can produce both sustained and substantial increases in economic growth. In the l920’s then Secretary of the Treasury Mellon went through an exhaustive study to determine what top incremental tax rate would maximize income to government yet, also, provide meaningful incentives for individuals to take business risks. The answer was a top rate of 25%. This is far lower than the current top rate of 35%.

The question, then, is how do you grow your business in an environment that will be highly competitive and turbulent. The most logical answer is to increase prices of the goods and services your company offers. Logical– yes, but it is not realistic. If anything, with the economic environment described above, the market will be dictating downward pressure on prices–not upside. This leaves one other alternative: going after market share.

We have had the mistaken belief in this country that the business future belongs to the big and the mighty. This is nonsense. The future belongs to the swift. The swift are those men and women whose businesses have liquidity (low debt levels) and are generating sufficient levels of free cash flow to take advantage of opportunities that will be presenting themselves. Free cash flow is the wherewithal, the stuff, that successful business people can use to innovate new products and services, which along with effective marketing and customer relations can be used to grab market share from your competitors.

Additionally, those businesses that have liquidity and cash flow can also secure market share by lowering prices while still maintaining profitability. This line of survival thinking falls under the category of guerrilla marketing. Let’s face it–it is a jungle out there, and the swift and nimble are the ones who will prosper in this environment.

People tend to make situations more complex than they are are. This evolves from a tendency in human nature to drift from the simple to the complex. But, in business it does not have to be this way. If you can focus on building-up the free cash flow in your business (and it wouldn’t hurt your personal life either), you will both increase its value and have a competitive edge in the marketplace. It is that simple. Good hunting!

Sanford Kahn, Business Author/Speaker, has been a professional speaker for over 30 years to both the corporate and national trade and professional association markets. He was the host and producer of the popular Times mirror cable vision series “Ask the Economist”. Mr. Kahn has authored many articles on the business impact of future economic trends. His most recent publication is The Great Economic & Business Myths That Dominate Our Lives. For more information please visit his web page at http://www.businessspeaker.biz.

PRESENTEEISM: Another Dimension

In the past few years the terms “employee engagement” and “employee disengagement” have emerged to more fully describe the employee’s level of motivation and commitment to their job. An engaged employee is considered to be passionate about their work and emotional connected to their work and to their company.

Disengaged employees are those employees that are at work but their minds are not necessarily on their jobs. The term presenteeism has also been used to describe disengaged employees. There minds are somewhere else. They could be thinking about their children, their upcoming date, a party, last’s night basketball game or be engrossed thinking about their own personal problems. From a productivity perspective this may not be that serious for a person working manually on repetitive tasks. However, in the advanced economies of the world such as those found in North America, Europe, Japan and elsewhere, where the contribution of knowledge workers to the GDP is greater than that associated with production workers in the manufacturing sector. Mental performance is the key determinant of productivity and profitability. In this setting if an employee’s mind is not on their jobs they become a significant liability to their organization. The mind today is the ultimate productivity weapon.

This new paradigm has brought awareness to the serious increase in the rise of mental disabilities. For example, it is estimated that the cost of depression to the US economy is approximately $150 billion a year. Forty to 50% of the cost of absenteeism is on account of mental disabilities in medium to large North American organizations. Prescriptions such as Prozac, Welbutrin, Zoloft, Paxil and others used to treat mood disorders and other types of mental disabilities are among the fastest rising category of drugs. To respond to this situation, managers are increasingly challenged to create workplaces that will support a mentally healthy environment.

We also know that there are anywhere from 10%-15% of employees who suffer from depression and who are not absent but who are in fact are at work. This group of employees is incapable of working at peak performance. They are at work and they fall squarely into the disengaged or presenteeism category of employees. To add to this new research in the October 2004 issue of the Harvard Business Review showed that there was an additional dimension to presenteeism. There is another threat to productivity that can be added to the presenteeism group: physically sick workers who show up at work but are not fully functioning. In a research study commissioned by Lockheed Martin in 2002, the single largest group of employees who were at work and were suffering from allergies and sinus problems had a prevalence rate of 60% and were costing the company close to $2 million in lost productivity, followed by chronic lower back pain at 21% and $859,000 in lost productivity, arthritis at 20% and $860,000, depression at 14% and $787,000, dermatitis or other skin conditions at 16% and $610,000, and flu at 18% and $607,000 in lost productivity. This research estimates that presenteeism costs the American economy about $150 million in lost productivity.

What Can We Do?

1. Human Resource Departments need to begin to collect and use the absenteeism and other health statistics in a strategic way. This means being proactive in their organizations to begin to educate their own managers.
2. Train managers to manage for performance as well as managing for health. If they see a performance change in an employee who is considered a good performer, managers need to be given the language to enter into the appropriate conversation with their employee to discern the problem. The manger is not being asked to be a doctor or psychiatrist. She is being asked to point the employee in the right direction, i.e. going to EAP or whatever is the most appropriate course of action to restore the employee to fully productivity.
3. Educate your employees. This can be done using lunch and learns. Use your own internal health statistics to determine the priority for the programs.
4. Ensure that your absenteeism policies are not encouraging sick employees to come to work.
5. View employee productivity from a systems perspective. Employee health is inexorably linked to productivity. Therefore all managers should be held accountable for both their own business performance measures as well as for their unit’s absenteeism. In other words the health of their employees is now their responsibility and not the responsibility of their health department. We worked with a client where this was instituted. The health of the employees in their department was discussed along with business issues at the weekly departmental meetings. Absenteeism decreased and productivity increased.
6. Assess your company drug plan. Does it support a healthy workplace or is it acting as a disincentive. You may be surprised what you find. Make sure that in your assessment you consider the whole system. Look at the cost side and also look at what is gained by supporting for example, employees who may be suffering from allergies and with the correct medication are able to be fully productive.
7. Introduce health promotion programs. There is a litany of programs and you have to choose the most appropriate for your organization. For example, EAP, flu shots, blood pressure testing, exercising, smoke cessation, weight loss and stress management programs.
8. But before you lunge into any of these programs make sure you understand root causes of the disabilities in your organization. For example, how much are organizational practices and leadership behaviors contributing to stress, chronic back pain and depression. Although health promotion programs can be effective, their effectiveness is dramatically reduced if organizational causes are not addressed first. The use of a leading edge diagnostics such as the Entec’s Employee Engagement Survey that measures both organizational factors and employee health factors can be an invaluable first step to identify causes of employee ill-health and to create a framework for improving health and productivity.

Better management of employee health can lead to improved productivity and this in turn can create a competitive advantage. With scare resources you may discover that reallocating funds towards health from training dollars will achieve greater productivity gains.

Kelly McCullough is a graduate with a Masters in Organizational Health from the University of Michigan. She has worked for Entec Corporation as research assistance. One of her most significant projects was her work as a research analyst on a major study of older workers that was led by Entec Corporation for the Canadian Federal Government.

Are You in AWE of Your Employees?

Employers have become so concerned about seeming “unfair” or worse becoming the victims of lawsuits by unhappy ex-employees that they’ve stopped requiring minimum standards of employees. This can only lead to poor individual and eventually poor company performance. Your best employee performers will resent the fact that you use company money to pay people who aren’t up to standard and will reduce their own level of performance or leave.

Take back the power in your workplace and set standards of performance. How to fairly assess each of your employees? I use a simple three part measurement tool with the acronym AWE or Able - Willing - Engaged.

Is the Employee Able?

This is the minimum standard of employment or continued employment. Does the employee have the basic job skills? Does he or she also have the people skills to be able to work effectively? Does the employee have family or personal issues that make it impossible for the employee to work the expected hours? Does the employee have any emotional or physical health issues that make it impossible to do the job effectively? Is he or she lacking any problem attitudes, such as racism or sexism that make them unable to be open to customer or co-worker interactions.

If you answered “no” to any of these questions, you should move the employee to another job where the issues aren’t going to affect their competency or transition them out of the company.

Is the Employee Willing?

The next level up that is also a make or break issues - is the employee willing to do the work available? Does the employee seem happy to be at work? Does he or she genuinely care about the welfare of customers, co-worker, and the company in general? Does the employee get to work well-rested and prepared so that he or she is able to be fully present and concentrate? Does the employee gracefully take on assigned tasks? Does the employee arrive at meetings on time and prepared? Is the employee open to dialogue and answering questions related to his or her work?

If you answered “no” to any of these questions, there may be some resentments that have built up meaning that the employee can do the job, but isn’t willing to give 100%. This employee needs to have the opportunity to vent frustrations, get clear instructions on what is expected, and then have the opportunity to recommit to the work of the company. If the employee remains unwilling and hinders the work of others with a poor attitude, the employee should be transitioned out of the company.

Is the Employee Engaged?

This is the highest level of employee involvement and commitment. These are employees who are engaged in the work of the company take initiative. They are problem-solvers and actively work out work problems, including inter-personal problems. They actively seek feedback about their performance. These employees are natural leaders and will lead in a project whether or not they have a management title - other just seem to follow them because of their willingness to take risks or because of their demonstrated expertise. They also look outside the company for sources of good ideas and are always setting goals to take their own work to the next level. They like to learn and will look for opportunities to take on new tasks to learn new skills. These employees give 100% because they are motivated to do so internally.

It is only if a company gets in the way of superior performance that these employees will stop working at the highest level. If they become frustrated that management does not support their efforts to raise the performance bar in the company, they will disengage and eventually leave.

Final Comment

Employees who are not able to do the job shouldn’t be offered continued employment. If you can create open communications with employees who seem unwilling, you can often turn around their performance. Your best point of leverage is taking employees who are willing and helping them become employees who are engaged. The best way to do that is to have plenty of engaged employees around. Their work behavior can be infectious. And get out of the way of the engaged employees. They want room to run and will only leave if micromanaged or not allowed room to experiment with new ideas. Follow these few simple ideas and you will be in AWE of the contributions made by your employees to the prosperity of your business.

About The Author

Jan B. King is the former President & CEO of Merritt Publishing, a top 50 woman-owned and run business in Los Angeles and the author of Business Plans to Game Plans: A Practical System for Turning Strategies into Action (John Wiley & Sons, 2004). She has helped hundreds of businesses with her book and her ebooks, The Do-It-Yourself Business Plan Workbook, and The Do-It-Yourself Game Plan Workbook. See www.janbking.com for more information.

You have permission to publish this article electronically or in print, free of charge, as long as the byline is included. A courtesy copy of your publication would be appreciated.

janbking0191@sbcglobal.net

E-Sourcing - Choosing the Right Tool and Category is Vital to Success

e-Sourcing is the use of internet technology used by purchasing professionals to find suppliers and negotiate prices or reduce cost for a wide range of goods and services. A variety of online negotiation tools are used - including RFI (Request for Information, RFQ (Request For Quotation), RFP (Request for Proposal) and electronic auctions.

It is important to understand when and how each should be used to achieve the best results. Incorrect use can bring about unsatisfactory experiences and can lead to “bad press” for e-Sourcing.

This article focuses on the criteria which should be applied to determine the most appropriate e-sourcing tool to use.

Strategic importance of the category

An auction is generally recommended for those products with a high value and a minimum or small risk. High spend, low complexity is the ideal scenario for this type of price negotiation. The level of spend which will attract suppliers will differ from category to category but as a rough benchmark we generally look at spend over £150,000.
In nearly all other cases, requests for quotations (RFQ), requests for proposals (RFP) manual negotiations will be much more appropriate.

Is the specification clearly defined?

Clear and unambiguous requirements must be specified so that suppliers are competing on a ‘like for like’ basis and not working to different assumptions. A clear set of requirements (commercial, technical, logistical etc) will allow suppliers to work out the cost of servicing the account prior to the auction. If requirements cannot be clearly specified then the RFP is likely to be more appropriate.

Are the market conditions favourable?

An auction requires competition in the marketplace. The more potential suppliers there are available, the more likely a good auction result will be achieved. Also consider the marketplace dynamics - are there new entrants eager to win market share? How profitable is this sector to suppliers? Depending on the category these conditions may change quite frequently so holding the auction at the right time is crucial. If the category does not pass this test, other sourcing strategies will be more appropriate and will probably involve the need to work closely with suppliers to secure supply and will focus less on price but on total cost.

Cost/risk of changing supplier low?

A category may not be suitable for auction if the time taken to change supplier, the risks associated with change or the cost of changeover is high. Switching costs should be clearly understood in relation to the length and value of the contract.

It is possible to auction certain complex categories but this is generally done after a thorough tender / requirements definition process has been undertaken. This ensures that both parties understand the cost and implications of doing business. Good e-sourcing platforms will cover both the tender and auction aspects and allow suppliers who have passed the non-price evaluation be ‘rolled over’ into the final auction.

In summary, e-sourcing can bring considerable benefits to optimising purchasing costs. Certain categories will work well by simply running an auction, other categories will require a more detailed tender process and others will rely on more traditional purchasing techniques. By considering the criteria above, buyers should be able to make an informed decision.

Lisa Bryan is a director of e-sourcing solutions provider Select Sourcing Ltd. She has worked in the field of procurement for many years having ‘hands on’ experience in industry (private and public sector) and in consulting. She has been working in the emerging field of e-sourcing for the past 5 years. The team at Select Sourcing have delivered over 350 e-auctions and projects across a wide range of direct and indirect categories.