Category Archives: Recession

Get used to high inflation!

Posted on 25 February 10 | 3 Comments
Assorted international currency notes.
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There’s something missing from all the talk of whether or not the economic bailouts have saved the world from a depression – as opposed to a severe recession – and that’s how the massive spending by governments around the world is going to be paid for.

Perhaps it’s the “party effect.” After all, when you’re having fun at a party, nobody wants to think about the hangover that will be with you tomorrow. Not that we’re all having fun in the current recession, of course, although it could have been a lot worse. But the hangover is sure to follow.

The problem is that governments around the world have realised they are easily able to spend money they don’t have, and the recourse – if it comes at all – will come on somebody else’s watch: generally the opposition party that comes in after them. It’s nice to have your political foe lumbered with your mess…

However, the facts are clear – public debt (i.e. what governments owe) has grown at an alarming rate. Let’s look at a few examples among the world’s larger economies, showing public debt as a percentage of GDP for each country at the end of 2009 (using estimates from the CIA World Fact Book):

  • USA                       83.4%
  • Japan                    192.1%
  • Germany              77.2%
  • France                  79.7%
  • UK                         68.5%
  • Italy                      115.2%

What these huge percentages mean is that, firstly, government is over-spending dramatically and secondly, that the percentage of government income (read: taxes!) that go just on interest payments on this debt has grown to become one of the largest single budgetary items.

In fact, the International Monetary Fund (IMF) recently estimated that Japan and the UK would need to reduce government spending by 13% and the US by nearly 9% just to “restore stability” over the next decade. How can they do this with such massive bills to pay? Oh, and it’s worth noting that the public debt does NOT include provisions for future expenditure on pensions, medical assistance and other state commitments – this is only the current debt!

So, what can governments do?

Reducing government spending to any meaningful degree is often seen as political suicide – especially as elections get closer.

Raising taxes is even worse…

There are only two, linked, things they can do to get the public debt as a percentage of GDP down in a reasonable time: keep interest rates artificially low to reduce interest payments and allow inflation into the system to increase GDP and their own revenue as a result.

A 10% inflation rate over five years will reduce the percentage of public debt by close to half, assuming the GDP growth matches or exceeds the inflation rate (e.g. grows in real terms). The other benefit of this is that government revenues will increase accordingly – higher sales means more sales tax/VAT, salaries rising around inflation rate will mean more tax income (the tax decreases are always lower than the extra amount paid through “bracket creep”), and so on.

My guess is governments won’t allow 10% as it’s psychologically too high, but I expect to see inflation moving quite quickly to the high single-digit range, say, 9%. We’ll need to tighten our belts and adjust our business plans accordingly – the ride for the next decade will be somewhat rough.

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Are Layoffs Bad For Business?

Posted on 16 February 10 | 5 Comments
View of Wall Street, Manhattan.
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“Downsizing is killing workers, the economy – and even the bottom line.”

This direct quote from an article in Newsweek of 15th February entitled “Layoff the Layoffs” rather forcefully makes the point that contrary to conventional business wisdom, the constant cycle of cutting headcount as a primary means of cutting costs is tantamount to long-term economic suicide – not to mention the effects on the health of people.

According to the article, research clearly shows a link between layoffs and lower stock prices, with the negative impact on the stock prices worsening with the size and permanence of these layoffs – in spite of the widely-held view that layoffs will boost stock prices through showing effective cost management.

Another debunked issue is that of productivity – in fact productivity per employee does not rise, no doubt due to morale issues – while a study of companies in the S&P 500 showed clearly that companies that downsize remain less profitable than those that don’t.

Adding to the profitability falls, of course, are the costs of laying off staff – both direct (severance pay, etc.) and indirect (morale, rehiring costs when things pick up, and so on). These are always woefully underestimated, as is the extent to which companies embarking on wholesale layoff programs have to rehire – at inflated cost – key staff who elected to “take the package.”

In fact, McKinsey studies over the years have shown that company executives believe that less than 40% of corporate transformations in their businesses are “mostly” or “completely” successful.
Conversely, companies that choose to find ways to weather the periodic storms are the first to recover, and do so far more strongly that those that have made significant across-the-board cuts.

Of course, there will always be times when cutting staff is unavoidable in a business – it may even be the thing that will save it from total collapse. But when this time does come, all the experts agree that it should be done in a transparent, open manner, with cuts being made in defined areas, rather than simply across the board – the all-too-frequent approach of an uninvolved management team. Getting everybody from the CEO down personally involved will get the best results, as happened with the well documented case of Malaysia Airlines a few years ago.

Hopefully this message of transparency, involvement and engagement will start to get through to company leaders as well as to the stock market and investment analysts that so many company leaders are guided by. As I mentioned in my blog post, “Leadership for the New Business World,” a new set of skills are necessary for the successful business of the future – skills that will rebuild the faith of communities in their leaders. In fact, it’s interesting to see how many of the top-rated companies in Fortune’s “Top 100 Companies to Work For” list this year have weathered the storm without across the board layoffs, with many showing positive growth in staff and even in their businesses, too.

Certainly, companies that retain their staff, and take the opportunity to hire key new ones, retain all the critical “institutional intelligence” and are best positioned for the economic upswing, as I mentioned in my blog post, “Will your business survive the upswing?“

There’s no doubt – Layoffs are bad for your business, especially when handled without due care, attention and precision. Conversely, a covenant with your staff to be open, fair and honest with them at all times will go a long way to securing the long-term, profitable future of your business.

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What’s the Future of Banking?

Posted on 15 December 09 | 2 Comments

One significant side-effect of the global financial crisis has to be a major overhaul of the world’s banking systems. They’ve been shown to be badly broken.

 After all, what is the current state of play with banks in general, when looking at their supposed core competencies?

  • Lending – very little lending activity going on, and only to those that don’t really need it (the very credit worthy);
  • Deposit-taking – although this continues, albeit at a lower rate due to the general economic woes, it’s done with caution and concern as the public no longer believes in the security of banks (the old adage about being as safe as a bank just doesn’t apply today);
  • Investment advice – does anyone trust the investment advice of banks any longer?

 And then there are peripheral activities such as credit cards – banks lowering limits, and now even looking at penalising the credit-worthy that pay up their credit card bills on time: surely a brilliant way to chase away customers…

Talking of customers: the issue of customer service is still something that few banks understand – they’re not open when customers want them to be, and are seldom found where they’re wanted. Fortunately, technology in the shape of Internet and Telephone banking is allowing us to work around these limitations.

And yet, the self-same group that precipitated the economic disaster of the past couple of years through the sale of very dubious investment instruments apparently repackaged to hide their source, believes that they continue to deserve multi-million dollar bonuses “to retain talent.”

What talent, and why should it be retained, considering the mess the world is in as a result of their activities?

Now that so many banks have been shown to have an extremely dubious business model, isn’t it time to relook the very essence of what they should be doing?   

Let’s see a complete separation of activities, so that banks focus on banking and investment houses focus on investment consulting – it’s clear that the “Chinese Walls” in financial institutions were full of holes.

Banking needs to be about rendering a service to the community – after all, a prosperous and stable community base is good for the bank’s business, and a prosperous and stable bank is good for the community. Banks need to focus on the business of taking deposits and making these funds available for loans to build businesses, put people in homes and generally provide a secure growth engine for the longer term. The short-term focus that we came to see in so many businesses (see: The Perils of Quarteritis) is just not acceptable.

And this model need not necessarily result in low returns for depositors – look at the success of microfinancing from Grameen Bank (and, now, others), both for the bank and the community. As with everything, there will be some elements that give lower returns, while others give higher returns. With careful, skilled management, depositors should be able to see appropriate returns while borrowers can secure appropriate loans.

It’s time for financial institutions to rebuild the trust that they’ve lost, and return to being of service to their communities again, rather than simply serving the bankers’ own interests.

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Leadership for the New Business World

Posted on 17 November 09 | 4 Comments

The worst economic recession for generations has caused a re-evaluation of business practices in many areas, and a call for greater corporate governance and oversight. Now that we’re officially reaching the end of the recession with many countries in Asia and the whole of the Eurozone, amongst others, officially out of it, it’s also time to look closely at leadership practices in business.

One thing’s certain – many changes need to be made, and recent surveys showing a significant majority of employees are planning to change jobs as soon as hiring picks up make this an urgent necessity if companies are to avoid the upheaval and cost increases associated with high staff turnover.

There are many reasons for this level of unhappiness, among them:

  • Severe stress at work – as companies cut costs and staff, those that remained found their workloads growing, often to a point of near-unsustainability;
  • Severe stress at home – really an extension of the added stress at work, compounded by longer working hours, and often less pay;
  • Lack of appreciation – many, if not most, companies overlooked the stress factors and showed no appreciation for the additional efforts of their staff, a situation worsened by cost-cutting which impacted the staff “welfare” programmes already in place;
  • Do as I say, not as I do – as the recession bit ever deeper, many executives seemed oblivious, continuing with executive perks, parties and benefits even as they were making deep cuts in employment and other areas (look at the scandals surrounding many of the bailed-out businesses for example);
  • Lack of direction – as companies cut, often in several waves, many seemed to have lost their direction. Although, as I pointed out in an earlier article, 93% of companies had updated their strategies and priorities to address the slowdown, the fact is that much of this work was done well into the recession and they were floundering for a good time (only half have a strategy in place for the upturn!).

As a result of these and other issues many have lost faith in their business leadership and this is the reason for the potential dramatic increase in staff turnover.

A recent survey by McKinsey, “Leadership through the crisis and after” points to the way forward. What’s interesting is that the top criteria for leadership during the crisis are the same as those for after it, with only minor changes to relative importance. In essence, leaders are expected to be:

  • Inspiring, creating a vision for all to see and aim for, and doing so convincingly and clearly;
  • Unambiguous, defining expectations and rewarding people appropriately for this;
  • Challenging, through encouraging people to challenge assumptions and take risks;
  • Participative, involving others in the decision-making process;
  • Above Reproach, acting as a role model, mentoring and teaching;

These are very much in line with what’s being said elsewhere and with what executives perceive as the most important criteria for organisations going forward: Leadership, Innovation, Clear Direction and an External (Customer, Supplier, etc.,) Orientation being seen as the top success factors.

It may not be too late. Employment typically lags an upturn by several months, so leaders still have a little time to restore the faith of their workforce. However, they cannot afford to delay any longer to address these issues of concern and need to clearly demonstrate that they understand the way forward for success. Failure to do so will almost certainly cost companies dearly.

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Postscript: Was pointed to an excellent presentation by Dr Tommy Weir on CEO Shift demonstrating how leaders will need to shift their thinking in 5 key areas related to talent. Well worth watching! See it at http://tommyweir.com/Video.aspx

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Will your business survive the upswing?

Posted on 15 October 09 | 6 Comments

An article I saw today in SmartPlanet.com confirmed what I’ve been feeling for some time: businesses have over-done the cost-cutting and are poorly placed for the economic upswing.

The fact that leading economists and business leaders around the world have declared an end to the recession is great news. However, even though nobody is talking about a ‘V-shaped recovery’ or quick upswing, the Forbes study of 200 large companies cited in the article showed that leading executives believe the level of cost cutting undertaken will severely restrict their future growth prospects.

As I posted a few weeks ago, short-term business thinking has done enormous damage – and unfortunately this thinking carried through the recession with companies cutting costs as hard and fast as they could with little thought for the future.

While I don’t have the statistics to hand that the Forbes study has, my own observations indicate that perhaps the report is conservative: it showed 22% of executives believing their recruiting/retention policies were not aligned with their strategic goals, while a quarter indicated their training and development programs were similarly misaligned. My observations indicate this figure to be significantly higher – here in the Middle East, training and recruitment all but ground to a complete halt for the first 3 quarters of this year, right at the time when forward-looking companies should have been upskilling and upgrading their staff.

This really points to the core of the issue – the study showing that nearly all (93%) companies had updated their strategies and priorities to address the slowdown, but only 51% admitted to having a plan in place to guide strategy once the economy turns. Granted, the almost all rest said they were working on a plan, but is it not too late?

Certainly it seems that companies around the globe have missed great opportunities to position themselves strongly for the upturn and this is sure to lead to many failures as those that have done so take new leadership positions – as has been the case following every previous recession. The difference this time being, of course, that the recession was far deeper than any we’ve seen in a couple of generations, so the post-recession fall-out is likely to be worse, too.

Perhaps some companies can still save themselves by moving quickly to position for the upswing – taking on top-performing staff, embarking on aggressive training and taking advantage of the opportunities for mergers and acquisitions – but they can’t afford to wait any longer. Investors, too, are likely to severely punish those companies they see as being unprepared for the upswing.

The question now is whether your company will be one of the new leaders or will fail to survive?

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