Wednesday, December 31, 2008

Prefix ‘Fr’ may be set for 2009!

With only a few hours left in 2008 many around the world are looking for hope in 2009. For many, 2008 will be the year of financial decimation, a year like none other. The last recorded time of such financial collapse was the Great Depression. It is no wonder why some economists have referred to 2008 as the “mini-depression of 2008”. When the first signs of financial collapse began showing signs in 2006, organizations kept pushing forward – at full throttle. That full throttle pushed the global economy into a huge downward spiral. Even after the global injection of over $3 trillion, world economies are trying to find direction. Recently the Wall Street Journal published their 10 predictions for 2009, any single of which alters the world as we know it. More than three occurring will completely change the economic world order.

It continues to baffle me why, with all of the indicators, we continue down our historical path. Failure to act on indictors was something I wrote on before. Recently I found this to be the sentiment of others. While being delayed at Chicago’s O’Hare airport I met an energy mogul from Toronto, named Mike. Through our lengthy conversation on renewable energy he expressed how the majority in the market fail to internalize that “dino-fuel” is coming to an end. However, in his quest to build renewable energy resources he also spends considerable time studying human behavior. He shared that the human brain uses emotions to solve problems. That is why we are where we are today; we didn’t fix the problems, we stuck our heads’ in the sand and pretended they didn’t exist.

I sense that 2009 will be the year of ‘reorganization’. It will be a time in which economic markets shed more deadwood. It will be a time of more organizations crashing and little hope for the financial markets. It will be a year of ‘succession’, a rebirth, a time for antiquated companies’ thinking to die away to make room for new and innovative companies’ thinking to germinate and grow. Results of a literature review, prove this idea isn’t all that far fetched. There are countless articles on the next generation, who will survive, and the new economic order.

In cross posts on the Legal Profession Blog and the Empirical Legal Studies Blog, Indiana University Law Professor, William Henderson, predicts that more big law firms will collapse in 2009. Henderson says “a large proportion of big firms are in “one hell of a vise” because of the potential for weak collections and continuing costs after layoffs. Firms could be stuck with “vast expanses of Class A office space” after layoffs while making severance payments to its former lawyers”. A November survey of the nation's 700 top law firms by Altman Weil found that most were collecting fees at the same rate as last year. But the legal consulting firm did note “some softening” in balance sheets, particularly in firms with more than 250 lawyers and in major legal markets. It sounds that that these large firms are ‘fr’agile. This ‘fr’agile position, probably a result of being imbued with historical ways of thinking/operating, leads to being ‘fr’angible. As Henderson contends that the destruction of these firms results in pieces, of once revered practices, go ‘flying off’.

Lindsay Fortado of Bloomberg reports Thacher Proffitt & Wood, a 160-year- old New York-based law firm, will close down after the subprime crisis slashed demand for its structured-finance practice and more than half of its attorneys left for a competitor. Delving deeper into the cause of the demise reveals the old school mentality; emotional reaction instead of practical action.

However there are some firms that are not only surviving but thriving and growing. These firms have broken out of their bondage of emotional reaction, making them ‘agile’ in today’s economic space. Susan Berson of ABA Journal reports that attorney Nancy Jochens who specializes in construction law sees expansion in her Kansas City, MO practice. Her practice is prospering by way of practical action, by being involved in international ventures. For 2009, her firm is planning a Dubai office. Why? Because, Dubai is in a construction boom! “You have to be willing to go where the opportunities are, even if it means learning something new, like the language and customs,” Jochens says.

The succession of 2009 and beyond will be characterized by a single word, ‘agile’. Each organization must choose their pre-fix; some will choose ‘Fr’ and as such die a painful death. While others will forgo a pre-fix, and be a true reflection of ‘agile’, by way of their survival beyond 2009!

Survival comes down to losing your ‘Fr’ prefix and making 10 core changes. (

Tuesday, December 16, 2008

Getting to the Focal Point

As the economic rollercoaster continues to hurl the world through insane curves at breakneck speeds it is almost impossible to believe that one day this economic turmoil will be a fleeting memory. How organizations move from this 3G ride to a sense of sanity and survivability is determined how they live out each day. The focus of today, I feel, will dictate the rebound of tomorrow. I feel the approach organizations take to survive these times will solidify their fate when the markets settle. Their focus today defines their future.

Each day global markets undergo huge swings from red to black and everything in the middle. As a means of surviving organizations undertake cost cutting measures while trying to increase revenue. These survival techniques cause me to question where their point of focus is; survival for today or beyond. To me, the slashing of head count screams a short sighted approach to long term survival. Granted, many organizations need to prune their ranks and what better time than now. However, it begs the question why wasn’t pruning done before? I suppose the dead wood have been around before this economic downturn.

Although I am not aware of every company’s circumstances, I do find it interesting how similar organizations take grossly diverging tactics given the exact same environment.
I believe that an organization’s priorities or focal points are a direct reflection of their culture. Their culture defines how they view their circumstance and ultimately how they will react to the situation. It is almost seems like some innate law that ties culture, through perception, interpretation into behavior. Lately, however, it is almost as if brilliant business minds have resorted to simplistic survival tactics of head-count reduction. It almost seems to an outsider that the approach is purely a knee-jerk slash and burn.

The question begs, what was their focal point? Surely the primary focus is survival in this economic turmoil. But, what is the secondary focus? Or was there even one? If the organization’s focus is simply to pare back costs to survive, this is purely a very short sighted view. Organizations must take a broader and more far reaching view as their primary view. The focal point at this time should be customer satisfaction and identifying additional competitive advantages. The organization that focuses on these focal points at a time when head count shrinkage is the norm for their competitors, they now create their kick start when the economic storm blows over.

Until recently I haven’t been aware of organizations adopting a more strategic approach than culling the ranks. However, two recent articles bring to the forefront of discussion how organizations do have options beyond ‘slash and burn’. Ian MacMillan and Larry Selden in Change with Your Customers – Win Big (Harvard Business Review, December 2008); contend that organizations must exploit the economic downturn by identifying and meeting emerging customer needs. When all one’s competitors are downsizing etc, the break-away organization that evolves with their customer now creates a bond with their customer, where the switching costs later becomes enormous. That firm now has a customer for life!

The changing with your customer model requires a strong customer focus as a core belief of the organization. This may be well beyond the capability of some if not many organizations. However, organizations can also gain value by introspection before eradication. An in depth view of the organizations, the skill set of its staff and the geographical business demands can allow organizations to keep their intellectual capital away from the guillotine of redundancy. Luke McLeod-Roberts in Managing the Downturn: Alternative Endings (The Lawyer, December 8, 2008) suggest that organizations need to look beyond the hard cost savings through redundancy and see the enormous soft costs being bled away. The loss of the organizational knowledge and the intellectual capital often far outstrips the costs savings of redundancy. McLeod-Roberts interviewed the leaders of prominent legal practices regarding how firms navigate the road of survival. Once again, to me, the lack of diversity in solutions seems to be culturally rooted. It is interesting how McLeod-Roberts proposals where shot down by some firms and embraced by others. The plethora of options other than redundancy seems so clear to those who are not culturally entrenched in their belief of their uniqueness:

“I don’t think creative alternatives to redundancies are being played out sufficiently,” says Weedie Sisson, ­principal coach at Peer Professional Development, a career consultancy for the legal profession. “These ­alternatives take a little more effort and conversation than going through the redundancy process, which is a specific route.”

Organizational survival at anytime is more than a matter of increasing revenue and reducing costs; it is a matter of competitive advantage. In times of turmoil, the focus of the organization must be to survive not only until the economic storm clears, but to focus beyond. It is those who have positioned themselves well during the storm, will be the ones blazing new trails in the new economic era.

Sunday, December 07, 2008

See-Saw Capitalization

With another day of doom and gloom news hitting the streets, many organizations are frantic about how to survive the current economic climate. Simply peruse the news sources; companies are screaming for more revenue and slashing costs in hopes to keep their heads above water until January 20. According to published polls, “things will be better in 2009.” However according to economists, yes 2009 will show signs of turnaround… in Q3! Survival during these times requires more financial savvy than has been needed in the last 50 or so years.

It is interesting to spend some time examining different organizations and how they are reacting to this climate. In the corporate world, businesses are shutting offices, stores and cutting back production shifts in manufacturing lines. In professional services like accountancy, organizations are staffing up to provide companies with ‘Survival Services.’ In the law firm arena, many firms are cutting staff anywhere from 8-12% and shutting offices. While others slash, burn and bonus the remaining staff. The question begs, what is the right survival technique for these times.

In watching this economic climate slowly meltdown over the past 24+ months, I am confident in saying that survival is based on reading and reacting to the market indicators. I am reminded of a luncheon more than 24 months ago when the first spark of a credit problem struck. I spent the remaining hour foreshadowing what was to unfold. Reading and interpreting the market indicators are so very important, but even more is to react to them – do something. It is in the doing something that many companies fail.

Following a law office CFO luncheon in Texas, I was approached by a CFO who indicated that his firm was feeling the economic climate very hard and if I had any suggestions. In keeping the conversation light and trying not to come off as the oracle of economic wisdom, I suggested better client relations, more direct marketing and revaluating the firm’s capitalization. This simple suggestion precipitated a plethora of questions, first of which, why not cost cutting? I have always felt that cost cutting measures are secondary to putting the customer first. I explained to my colleague, that cost cutting before sterling service leaves the firm vulnerable to a competitor who provides better customer care. Also, cost cutting for fiscal responsibility should be at the forefront of financial management.

Within a week of my return and of my last submission I was asked on two occasions what is the optimal amount of working capital for an organization, one firm engaged me to help them in that area. A simple Google on working capital will bring back over 11million entries; everything from definitions, to books to companies who have ‘figured it out’. Personally, I don’t believe there is the ‘right’ amount of capitalization for any company, as there are so many contributing factors. However, with a few simple rules the ‘right’ amount may be very closely approximated.

Working capital is defined as current assets less current liabilities. In reality it is the amount of money I need to satisfy my current obligations. Borrowing from accounting theory, current is the time period of 1 year. So working capital is the amount of money I can generate on an ongoing basis to meet my current financial obligations. What inventory can I turn into cash to pay the expenses of my operation. That is it! Granted, in normal business operations cash flow has peaks and troughs. However over the course of a year the cash position should be net positive. If not, the firm is undercapitalized. Likewise, an increasing surplus of cash is suggestive of an overcapitalized position.

Excluding risk, market verticals, taxation, etcetera organizations should strive to have a statistically net positive cash position at some point in their fiscal year, and have it for a certain period of time. A great rule of thumb would be at least one financial quarter. For those periods where cash flows are more in the trough, the use of operating lines of credit help as a flattening agent. However, at some time in the year the operating loan should be repaid and the firm should be in a statistically net positive cash situation. If not, the firm is undercapitalized.

Getting the right capitalization has many components, however the simplest of which is budgeting for the next year. The organization needs to examine what their goals are for the upcoming year and the costs incurred in reaching their goals. A manufacturing organization that may be faced with heavy retooling costs to achieve a 12% growth of the coming 3-5 years would require a heavy capital injection. Without adding tremendous complexity, this would be best served through a public offering of sorts. However, a professional services organization seeking to bring a few new partners on board would have the incoming partners contribute capital to meet the new capital requirements of the organization. Conversely, a firm seeking to grow its market presence in different cities would need to solicit increased capitalization of all the existing and new partners.

There are a whole host reasons why organizations are becoming statistics of the economic crisis. The survivors will be the ones that are reading the market indicators and acting, also the ones who are adequately capitalized.

The best rule I have heard was, use short term money to pay short term commitments and get long term money for long term commitments. Managing the organization’s capitalization is essentially balancing the firm’s self-investment portfolio to smooth out the up and downs.