Friday, January 30, 2009

Roubini confirms deep crisis: how will you shield your business?

Nouriel Roubini’s (RGEWikipedia –  Page at NYU Stern) interview on Bloomberg is something you ought to listen carefully (podcast at the end of this post) if you’re a business founder, a manager or an asset owner. It’s not exactly the sort of content that will boost your morale, but I don’t believe the Coué method is the right way to go because it’s much more than a mere crisis of confidence. On the other hand neither denial, nor pessimism are going to take us anywhere.

Rather a pragmatic take on the situation is an essential first step if you’re serious about adapting and being in a position to fully benefit from an eventually recovering economy. This is only one of the reasons why it’s worth getting down to some of the implications of this analysis for business. Today helping business people deal with anxiety and make sense of this chaos is part of my work in different industries, from commodities to tech-innovative sectors, in different areas of Europe. So what does a pragmatic analysis of the situation mean for business? Read on and listen to the podcast.

Economics have seldom been as crucial to business as today. That’s a fact across the board, from young industries enjoying the fat marging allowed by rapid innovation to older highly commoditized sectors. So it only makes sense to be listening to scholars and thought leaders – at least those who have been issuing alerts for the past decade or so: Roubini, Stiglitz, Krugman, Taleb, Bernstein, Bookstaber, Tobin, Thoma…  

Roubini’s assertions – well documented, no doubt – that the top US banks are probably insolvent and that China is probably in recession, not merely “just” growing slowly, are causes for concern. His analysis during the interview with Bloomberg suggests the following:

  1. the massive amounts of money already committed by governments and central banks may not be enough to take the world economy out of the crisis within an acceptable number of quarters. In fact we may be looking at a period of several years of slow and painful economic growth

  2. it’s probably going to take more than government stimulus measures to clean-up the mess created by years of recklessness in government, greed and lack of integrity in financial services and shameful collusion between those who were supposed to control and assess (audit firms, rating agencies, regulators) and those who should have been controlled

  3. there is a need to completely review the international financial system and its governance, which was (re)shaped by followers of the infernal Bush-Greenspan duo during the past decade in a way that makes key institutions like the World Bank, the IMF, the Bank for International Settlements and even a number of programs of the United Nations (UNDP, International Conference on financing for development…), useless or powerless. This adds to the concerns of those of us who doubt the viability of a global economic and financial system working in a wicked way as "poor" nations in effect lend to "rich" nations. At the end of the day, globalization can be extremely beneficial, but should be reviewed, in particular when it comes to global trade liberalization, which has been artificially disconnected from labor, social and other human development issues: if international trade is based on markets playing freely, then how can the lower cost of producing in countries without any form of welfare state not lower global standards of human development?
    Yet another ill effect of failing to build multilateral support and a clear indication that the world governance cannot remain unchanged if peace, progress and prosperity are goals we want to pursue.

The picture Roubini paints is pretty grim and scary, but factually speaking he’s probably right and we need to acknowledge and take stock of the situation as it is right not, not by discovering ugly bits and nasty pieces of the big picture in a seemingly unending stream of randomly chosen snapshots. Nothing is more damaging to business confidence than the constantly disproval of previously accepted opinions as to the scope and depth of the crisis.

With most economies in a state of frozen shock,  difficult access to cash and several assets fast becoming almost illiquid, the degree of anxiety is high in business, for owners, managers and employees alike. The principal cause is not the crisis itself, but the uncertainty about its real nature, its consequences and its true extent as well as the often unspoken lack of confidence that governments know how to solve this one.

So considering the work I do with customers in Europe, the most important implications for business are as follows:

For established businesses

Despite government’s efforts to pump cash into the economy, banks seem completely upset, fearful and paralyzed to the point of actually failing to making funds available even to established and fundamentally healthy businesses. So, if you’re managing an established business, perhaps a family owned business that cannot rely on access to global money markets, you need to consider the following:

  1. make sure you reduce the amount of cash you business needs to operate by pulling all levers from operational efficiency to customer relationships and supplier relationships management. In one of the businesses I’m advising negotating with supplliers to reduce the volume of raw materials purchased and kept in inventory, made a measurable impact on net working capital

  2. secure the stability and reliability of any short-term funding and credit lines you’ve arranged to get from your banks. Banks are always willing to lend you an umbrella when it’s not raining and when it’s raining on them things can get pretty shaky. To achieve this goal you need to communicate on a regular basis in as open a manner as you can with your bank. At another company we’ve gone the extra mile to discuss the business plan with the bank, especially as it contained a forecast for the cash situation of end 2008

  3. consider reviewing core processes that can be improved to use less cash. Now, that’s a great area in which to consider better use of information technology whether to achieve a more efficient link between inputs and outputs, getting closer to demand-driven production or to improve logistics and customer service. Being a user of some of the latest stuff I’m utterly amazed at how slow adoption is in most established businesses. This is a great time to adopt, especially when you adopt tools and methods that make you more efficient, more effective and faster. Just a hint: consider Salesforce, the Zoho suite of applications and Basecamp

  4. adopt cheaper means for communicating and spending time with customers: voice over IP exists, so you don’t need to pay these outrageous roaming charges (hint: take a look at Jajah, a company I covered 3 years ago on this blog, and your phone will never look the same again…). Another little something you might want to consider is Cisco’s Webex or telepresence (here’s a video by an employee of the company), to interact with your customers without having to spend precious time and money travelling.

  5. train, train, train and train your people for better expertise on your business, on your industry, on their functional areas. Also, train for better customer service. It’s amazing how few customer facing professionals know how to actively listen to customers and get down to what they really need, cutting through what they say.

For more recent going concerns

For more recent going concerns, the issues highlighted above for older and more established companies
are valid and should be considered although one may assume that in many
cases younger going concerns have better patterns of adoption of new
tools and methods. In your case, you need to be concerned with your
customer portfolio because unlike older more established companies you
are likelier to be more exposed to commercial and customer credit risk.
One of my customers is in this situation and we know full well that it
is crucial to keep close contact with all key customers and to go the
extra mile to share a bit of the burden of going through this storm.
Something that’s been possible in this case was to agree on a
schedule for payments such that the immediate pressure on key
customers’ cash situation is reduced by 10% to 15% and those customers
commit to a longer term supplier relationship with my client. Factors to be considered with special care include

  1. the concentration of business with a smaller set of customers that increases the business and financial risk if those customers require less of what you’re offering

  2. the nature of these customers and where tey are in terms of life-cycle: startups, growth stage, recent going-concern or established company. Beware this parameter though because many business pros tend to have a bias for it in their decision making: if there’s something we should learn from the collapse of “blue chips” like Enron, Bear Sterns and Fortis, that’s the fact that one cannot assume a large and old company to be better, safer or more reliable than a younger and smaller player

  3. the industry in which your customers operate because you’re likely to see some domino effect if you’re working a lot with financial institutions or car companies for example. Same thing if you’re serving companies that sell products and services that are not essential, “must have” items.

For start-ups and companies at growth stage

For startups and companies looking to finance growth, I know for a fact that there are good businesses out there with healthy commercial situations and well-performing operations that nevertheless find themselves under financial pressure. As long as there will be such situations investors who have cash to invest are likelier to acquire distressed assets than new businesses or growing businesses without long track records or whose industry is too unstable. So, if you own or manage an early-stage or growth-stage business, especially if you are considering to raise money, you need to consider the following:

  1. consider what happens if your don’t raise a dime and identify where your pragmatic opportunities actually are

  2. get back to the drawing board and drop every
    single activity, service, offering that does not give you paying
    customers or financiallly quantifiable results within 3–6 months

  3. reconsider funding strategy to use all the tips and ticks of bootstrapping (here’s a great resource from Inc magazine and here are inspirations
    from companies that started on less than 1,000 euros) in order to be
    able to provide service to customers even if your product is not

    the time when you could say you had a company
    without having a business model are over for some time at least. I’ve
    always been extremely skeptical about how adequate it is for people to
    venture without a business model (see post of 2006 here)

Enjoy Roubini’s interview and visit his RGE site.


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