The Appearance of Impropriety

The appearance of impropriety is often as damaging to all concerned as is the impropriety itself.

With that in mind I bring to your attention a fascinating front page article in the March 27, 2008 New York Times. It can be read at
http://www.nytimes.com/2008/03/27/world/asia/27ammo.html?_r=1&th&emc=th&oref=slogin.

It is an amazing story of a munitions supplier to Afghanistan. I make no judgment on the article except to say that it is an extraordinary example of the appearance of impropriety among a number of people.

Here is the story of a young man, Efraim E. Diveroli, who in 2003 became president of an apparently inactive corporation, AEY Inc., and immediately began bidding on US government contracts. In January, 2007, AEY won a contract from the US Army that could amount to as much as $300 million to supply ammunition to the Afghan army and other Afghan fighters. According to the story, the ammunition eventually supplied was aged, poorly packaged and boxed. Some of the ammunition was manufactured in China in 1966 (42 years ago) and was acquired from Albania for shipment to Afghanistan. Much of it seems to have been declared obsolete by NATO and the US State Department.

There appear to be multiple intermediaries involved in the transactions, including one company of unclear ownership that was organized to participate as a middleman. Additionally, according the Times article, the contract with the US Army also has the appearance of impropriety in its vague language and limited restrictions.

Through the appearance of impropriety the whole affair blemishes the US Army contracting officers involved, AEY, Inc. and Mr. Diveroli, as well as several others. The most confusing part of this is how it has lasted so long, and that the Army has said it will allow AEY, although now suspended from further government bidding, to complete the current contract. If the facts are as reported, why would the Army want to buy more ammunition from AEY?

One other comment – where is all the money going? Or, should I say, where does it appear all the money is going?

Your comments are invited.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

My Take on the Economy

I have been watching the unfolding events in the economy and have formed an opinion on what to expect. Here’s the way I see it.

With the reduction in the discount rate last week and now the federal funds rate today, interest rates are down to 2005 levels. These moves by the Fed are meant to slow and then stop the recession we have fallen into. Slight additional rate cuts are possible too, even though there is not much room left in the rates.

Unfortunately, with the Fed pumping so much money into the system through the discount window, and our interest rates so low, the dollar will continue to decline in value over the next few months. (Of course, interventions by foreign banks may change this.) This means for us, higher fuel costs and a higher rate of inflation. Because of the high fuel costs, I believe this recession will be a steep one, and a long one. I hope I am wrong.

With cheap dollars US exports will increase because our goods are more competitive worldwide. That is good but the main driver of our economy is consumer spending (almost 70% of total GDP.) Because of high fuel costs, consumer spending will not rebound any time soon, no matter how low interest rates are. So the main driver of the economy will be weak, and the recession will continue. It is a vicious cycle, more interest rate cuts will drive the dollar down even further, fuel will become even more expensive, and consumer spending will not grow.

I believe we are in a bind and I don’t see a way out of it. You may have a different take on the situation – post a comment to let us know what your crystal ball says.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Economic Gloom

The Federal Reserve Bank’s usual treatment for a recession is to lower interest rates. In six months or so the effect of the rate cuts are felt throughout the economy and the recession eases or disappears. It seems to work well, and the Fed has been reasonably successful through the years in dealing with recessions. A few years ago, though, the Fed cut and cut and cut, and when all the cuts were felt we had superheated growth, and inflation jumped up. Inflation is manageable though by raising rates, so the Fed did that and took the heat out of inflation growth.

This time as we enter a recession, however, the process is not so simple. The massive deficits we have had the last few years have driven down the value of the dollar to an alarming extent. The Euro is worth more than $1.50, the British pound is over two dollars, and even the Canadian dollar is worth more than ours. To buy crude oil we now spend about half again what we spent in the past, and the high oil prices are causing us to have high production and transportation costs, leading to high food prices, and more inflation. Normally the Fed raises interest rates to combat inflation, but with the recession staring us in the face, they won’t do that. If the Fed cuts interest rates to fight the recession, the dollar slides down even further, and imported goods, like crude oil, cost even more, and inflation grows as the economy is in recession.

Add to these problems the sub-prime mortgage losses in the credit markets, the potential for more runs on financial institutions like the one on Bear Stearns last week, and the situation gets very precarious.

If you read the current editorials, or follow the financial news closely, you know our economic situation is becoming a nightmare. How we weather this is uncertain and for the astute among you, even terrifying.

I have no advice to give. Hang on and hope is the best I can say.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

The Joy of Management Consulting

It is amazing. I have been a management consultant since 1980, working with several hundred clients, and observing all sorts of business owners and managers. I have seen owners who are risk takers or risk adverse; visionaries, bureaucrats with no vision, or dreamers; driven by sales, technology, or expense management; customer focused or self focused (one regularly referred to customers as “the bastards;” leaders, pushers, autocrats, or those who delegate well; overextended or underutilizing their skills; procrastinators, impulse driven, having analysis paralysis, fear, or hiding in the details; brilliant and not-so-brilliant; great bosses or horrible bosses. And so on.

Yet the amazing thing is that most of their companies earn profits and create wealth for them, the owners. Sometimes I wonder how, other times I am convinced failure is just around the corner. I have seen brilliant people, dreaming and not doing anything, make a little money. I have seen not-so-smart owners get into a fixed pattern and over time grind out a fortune. Each individual is different; their blend of qualities works for them in their circumstance. I have seen fortunes squandered and fortunes made.

The point is, all businesses are different, making the business of management consulting fascinating. It’s our job to figure out who and what we are dealing with and create ways to help seize opportunities and fix problems. It’s an ever changing mosaic providing new challenges and no boredom. It is the joy of management consulting.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Planning for the Future -- Strategy

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

One of the business cards I carry describes me as a Strategic Planning Facilitator. (Not a big deal, almost every consultant carries a similar card these days.)

However, since people think of me as a strategic planning expert, I’m frequently asked just what Strategic Planning means to the ordinary small business owner. Skip to the last paragraph if you want the answer without the full explanation.

I think of it this way. The six elements of strategy are:

1. Knowledge
   
2. Strategic thinking
   
3. Strategic planning
   
4. Tactical planning
   
5. Tactical plan execution
   
6. Monitoring and revising

Knowledge means knowing about your business, your market, your competition, the economy, trends, customer preferences, technology – in other words – knowing about the things important to the future of your business. The more you know, the better chance you have of developing a good strategy. Conversely, the less you know, the poorer chance you have of defining a workable strategy.

Strategic Thinking means thinking about those things that will make a long-term difference to your company. Such things as changing the way you do business, how you compete in your market, the products and markets you want to serve in the future, the resources that you gather for your efforts, etc. In other words, thinking today about those things that will define your company for the future.

Strategic Planning is the process used to convert Strategic Thinking to more practical and executable tasks. It embodies setting objectives, developing strategies and understanding strategic policies.

Tactical Planning is the process used to convert strategies into step-by-step attainable plans with measurable results on a specific timetable. Action plans can be analyzed for cost and benefit, for priorities, and for the risk involved for both the plan and the company.

Tactical Plan Execution is simple. It’s where the rubber meets the road. Your knowledge, strategic thinking, strategic planning and action planning come to a head in action plan execution. Do a poor job here, and all the prior work is wasted. Do a good job here to improve your chance of reaching your strategic objectives.

Monitoring and Revising means just that. Monitor the action plans to ensure desired results be achieved on time and within budget. Revision means that if the action plans are not achieving the desired results, or are off schedule, or require more resources than estimated, then changes to the action plan are made.

Strategic thinking creates vision. Although vision isn’t set in concrete, it’s the one thing that doesn’t change with the ups and downs of daily business. Vision is the guiding star towards which you move your company.

Strategic plans and action plans aren’t fixed. They change from time to time as business conditions, competitive situations, technology and resource availability change. Remember though that your target, your vision, remains steady.

Monitoring tells us how we’re doing. It’s the first place where we observe the result of changing conditions. If conditions don’t change, and we monitor the performance of our action plans, we’ll meet all of the targets set out in the action plans. As conditions change, we’ll be aware that we don’t meet our targets because of those changes. That’s when revision comes into play and we change the action plans, and sometimes the strategic plans, but never revision.

So, after all that, what does Strategic Planning mean to the small business owner? EVERYTHING. It’s the difference between going to work every day to do the same thing for the same people at the same location and with the same result, or creating for yourself something immensely exciting for your future.

In summary, and especially for those that skipped to this last paragraph, strategy elements are the tools that allow you to define how you want your future to look, and then help you create that future as you have defined it.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

The Importance of Commitment

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

Of all the character traits exhibited by people, keeping commitments ranks at the top of the list for importance. Neither business nor personal relationships can exist where people don't keep commitments.

Here's what I mean. Last winter I moved my residence, and since I live simply, I decided to do the moving myself -- with the help of friends. I needed three friends to load the van at the old house and three other friends at the new house on the other side of town. Sounds easy.

After having heard all sorts of responses, from "I'll try to be there" to "I'll do my best to help you," I began to re-think what it means to receive a solid, full commitment versus what I'll call a "half commitment." I realized I couldn't get the van loaded with half commitments, but only by people who committed themselves completely and said, "I'll be there." Anything less meant furniture on the sidewalk, not in the van, or in the van but not in my new space.

Commitment means accepting an obligation, making a pledge, to either do or not do something. It seems simple, either you will or you will not do something. How is it that for some people the concept seems so vague? Making and keeping commitments is the cornerstone of our society. When you make a sale on credit, you are accepting your customer's commitment that in the future the bill will be paid. When you make a purchase with a credit card, it is done because you have made a commitment to the issuer of the card that you will pay the bill. It's plain and simple -- our business world relies on commitments every moment of every day.

Teachers and writers talk about five levels of commitment. Perhaps this will help understand what it means to make a commitment, versus making "half" of one. Here are typical responses for levels one through five.

Level 1 commitment - "I won't do it"

Level 2 commitment - "I'll do it if it's easy"

Level 3 commitment - "I'll try"

Level 4 commitment - "I'll do my best"

Level 5 commitment - "I will do it (provided it is moral, ethical and legal)"

This makes commitment seem easy.

Level 1 is a strong commitment -- not to do something. Level 5 is a strong commitment -- to do something. None of the others commit a person to achieving results, only to an effort (unless the task is easy.)

Level 2 commits a person to an activity provided it is easy. What happens if the task becomes hard? Would you want to rely on someone who gave you a level 2 commitment?

Level 3 - "I'll try" is the biggest cop-out of all. Trying gets you nowhere. It commits you to making an effort, and not necessarily good effort, but does not commit to achieving results.

Level 4 - "I'll do my best" sounds good, and in essence is a strong commitment -- but to an activity and not a result. What happens if "my best" is not good enough? Do you stop there? If you have made a level 4 commitment you do, because you committed to an effort and not to results.

Level 5 - "I will do it" (provided it is moral, ethical and legal) means that within the framework of what is moral, ethical and legal, everything possible will be done. This is a commitment to achieving results. Just like Level 1, there is absolute clarity here about what will happen. There is nothing weak or wishy-washy about Level 5 commitment.

Think of it this way, commitment is for the hard tasks -- you don't need it for the easy ones. Keeping commitments builds personal character, builds business reliability, and builds business relationships.

Remember the vendor who promised to "try" to get your important supplies to you on time, and then didn't. Were you told they would "do their best." Did that keep your machines running, or your copier supplied, or your freezer stocked for tonight's dinner crowd? What about the customer who "does his best" to pay his account with you. Can you spend "his best?" Would you rather receive the promise "I will have money to you by 3:00PM," versus "I'll try to get money to you by 3:00PM."

How many times have you waited to have a carpet cleaned, or a lawn mowed, or a TV fixed, and had to call the company later because no one showed up? Were you told "we're sorry, we tried?" As inconvenient as it is, when US West tells you the service person will be at your house between noon and 6:00PM, you can count on that happening. US West has learned a method of making schedules so that they can keep their commitments. That's better than promising a specific time for the service work and then not keeping the commitment.

Commitment doesn't have to be with others. Commitment to yourself has equal importance. If you set out to do a task, do you commit to it at Level 5, or at some lower level? Do you quit when difficulties arise, or do you use that commitment to get you through the tough times, to expand your thinking and your efforts to achieve a result that otherwise looks impossible. Commitment to a result will create a result. Lack of commitment to a result will create frustration, disappointment, failure.

Is this just semantics? Some people would say so. They are the ones who don't make strong commitments, who try and do their best most of the time. For those who make only those commitments they can keep, and then make sure they keep them, this is not an exercise in semantics.

Do you make commitments? Do you keep your commitments? Think about it the next time you tell a customer, client, vendor (or your children), "I'll try." Think about the words you will use next time you are asked to commit yourself to a task or an appointment. Level 1 or Level 5, or something in between?

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Crisis Management: - - Fixing the Broken Business

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

Sometime, no matter how well you think you manage, your business will face a crisis. Lose a major contract, have a distributorship canceled, be bypassed by emerging technology, run into some plain bad management....

Your business goes into the tank. Crisis looms. Panic sets in. Fear dominates thought processes, causing tunnel vision and a sense of despair. People “hunker down."

In spite of all the bad signs, usually these situations can be fixed. If the business has an economic reason for existing, and has not waited too long before seeking help, it can be made to work again.

Here’s what was done in a recent crisis in a small business.

First, remember that cash is the ruler.

It was necessary to insure we had enough cash to operate the business. Projected cash receipts were examined and measured against cash needs; and and then a plan was made to fill the gap. In most of these situations there isn’t enough cash for everything. If not enough cash, tough decisions are required. In this case it was decided to pay only those bills that would keep the doors open, the lights on, the phones working, insurance in force, vehicles running, raw material flowing and wages paid. Nothing else was paid.

In addition to conserving cash at every turn, as much new cash as possible was raised by aggressively collecting old receivables and selling off unused assets.

Then creditors were advised they would not be paid for a while. Management asked their forbearance while a plan was developed to get out of trouble. As we communicated with creditors -- openly and honestly -- most of them were cooperative. Naturally, some were not, but the plan remained the same. Conserve cash to turn the business around -- then start paying the old bills.

Once the “keeping the doors open” crisis passed, rebuilding the company into a profitable one began. Four big problems emerged.

1. Low gross margin. The company sold product for only slightly more than its cost -- creating not nearly enough margin to cover the overhead expenses. So, up went prices. That’s hard to do, especially in the face of existing contracts and stiff competition. Perseverance, hard work, good selling and the passage of several months, though, have led to improving margin. Remember, many customers would rather have you remain in business than go out, even if you charge higher (but reasonable) prices while providing good products and good service.
2. Excessive costs. Costs were cut to the bone. Nothing was sacred. Salaries, perks, expenses of all types -- all fell under scrutiny. Every expenditure was justified, and then re-justified. Only those that stood up to the test of immediate need remained. Unfortunately, the work required several painful decisions about restructuring both the work force and executive group, and layoffs resulted.
3. Disorganized management. A leaner organization emerged, with clearly defined areas of activity and responsibility. Decision making became crisper. Leaders emerged who are willing to make solid commitments to achieving needed results. Positive thinking and teamwork slowly returned as people saw the business could be saved.
   
4. Lagging sales. In some products sales were far below needed levels. Focus, emphasis, new programs, and aggressiveness are turning the problem around.

With increased sales, increased margin, reduced cost and crisp management -- a future began to emerge. As a result, a new lending institution came on board. This was a life-saver. More money, at lower rates, became available. Raw material flow eased and sales increased even more.

Now, many months later, business is on the upswing. Enthusiasm is growing. Tunnel vision has diminished. People have a spring in their steps, smiles on their faces. Much hard work remains, but the crisis is manageable.

This business will survive.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Key Results - How Well Are You Doing?

Copyright 2008 by Charles R. Schaul, Boulder, CO. All rights reserved.

Other than Sales and Profit, do you know how you’re doing in your business? How often do you get the information? How long after the fact? Do you know how your business performed last week?

The old adage in business is, “what you measure is what you get.” For one company the only report regularly prepared was the monthly financial statement. Don’t get me wrong, financial statements are fine, and provide lots of information about your company’s finances. But there’s much, much more to operating a business than finances. The financial statement is the “report card” that gives you a grade. High profit is an “A”, severe loss an “F”.

The big problem with financial statements is that they don’t give you much information about operations performance. They don’t tell you that deep down in your company something is amiss, or that somewhere else in your company something is going well.

One retailer’s financial statement showed gross profit was going down. Total sales were growing rapidly, but margin lagging. Monthly sales data, available three weeks after the end of the month, showed too late that the product mix was changing -- declining sales of high margin products and increasing sales of low margin products. Finally recognizing the problem, management moved into high gear with a program to improve overall gross margin through advertising, promotion and store merchandising changes.

The program included a weekly report. It shows high margin product sales as a percent of total sales. As a result of management efforts the percentage increased. Then it stopped improving. So more changes were made, and the percentage took another step up. In time, and after many revisions to the program, it reached the desired target. The report showed management how they were doing each week, and measured the result of each change. Eventually the monthly financial statement gave management an “A” for gross margin!

In this example, increased ratio of sales of high margin products was a KEY RESULT the company sought. The weekly report was a KEY RESULT REPORT.

Another example -- one company tied together employee training and key results reporting. Sales personnel were trained to recognize “related sales” opportunities, and to ask for the order. The key result measure of averages sales dollar per invoice showed the result. In this case, focusing attention and training on a specific area, and then measuring and reporting the results, produced the desired result while showing the effectiveness of the training.

What are other key results? Think about it -- what are the things that happen in your business that are most important to your business operating well? Here are some that show up in many companies.

• Revenue and profit (naturally)
  
• New leads (measures the effectiveness of advertising and promotion, or word of mouth)
  
• Number of new customers (measures the ability to convert prospects to customers)
  
• Labor hours per transaction or other service operation
  
• Dollars per transaction (Are our people selling or just taking orders?)
  
• Revenue per labor hour (great measure for all businesses -- retail, distribution, manufacturing and service)
• Employee turnover (the trend is an important indicator of employee satisfaction and hiring effectiveness)
  
• Inventory level and turns (low turns mean too much inventory)
  
• Lost sales (high lost sales means too little inventory)
  
• Labor efficiency (hours billed versus hours paid)

So, there’s good reason for saying, “what you measure is what you get.” Think about it. Do you know if you’re getting the results you want, or does your report card give you a “C”? Implement key results reporting. You’ll be amazed at how easy it is to get an “A”.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Trust - Either You Do or You Don't

Did you ever stop to think why American Express, Master Card or Visa are willing to give you a credit card? If you do take a moment to think about it, and get deeper into the underlying reasoning, you will come eventually to the thought that you are issued a card because the issuer TRUSTS you. That’s right, it’s a matter of TRUST. They know that you can be trusted to pay your obligations.

You might say it’s a matter of keeping your commitments. Your commitment to pay the card issuer for the amounts you have charged.

That’s one form of trust.

Another is the trust between people in organizations, whether it’s a business, non-profit, school, family, club or whatever. Just like the credit card, trust between peoples depends largely on keeping commitments.

Have you ever waited and waited and waited for a service person to arrive at your house or your office? And after waiting for hours, you get a call that says they won’t be there for another day? After one or two experiences like that, do you still trust them? Probably not. It’s very hard to trust people who don’t keep their commitments to you. Years ago a youngster asked what he could do in the summer between school sessions. I suggested getting a lawn mower, and cutting grass. Then came my advice to him: “Be reliable. If you say you’re going to do something -- do it. And do it well.”

It must have been good advice. By summer’s end he had 100 customers and nine employees, and a successful new business was born.

Back to the issue of trust.

Can you trust someone who frequently tells lies? Or half truths? Of course not. Think of such a person as a snake -- and when you deal with them think of yourself as a snake handler. But you don’t trust them. They won't keep a commitment to telling the truth.

The same applies to someone who is inconsistent. One time they react one way and another time another way. It’s hard to know what they’re going to do. So be careful -- don’t give them your trust.

In business it’s the same. We trust people who keep commitments, who tell the truth, who are consistent. And we also watch out for hidden agendas. Perhaps that’s a subset of honesty. They're not being honest about their agenda.

Other things that build a culture of trust include:

• Sticking to the established policies. Regularly bending rules leads to inconsistency and eventually to a lack of trust.
• Communication. Telling people what is going on.
• Minimizing surprises.
• Having a vision and sticking to the path toward it. It’s hard to trust someone who bounces from wall to wall, an opportunist who stands for nothing. Where will they be next?
• Integrity. If a person cheats others, might not you be on the list?
• Honesty. One client lied to me on a regular basis. It didn’t take long before I had no trust for them, and ended the engagement.
• Making but not keeping promises. It’s the old commitment thing again.
• Not keeping to yourself those things told you in confidence.
• Building trust is not magic. Avoid doing the things that cause you not to trust others. You’ll find that people begin to trust you. With trust, anything can be done. Without it, nothing can be done.

If being trusted is important to you, practice the above. Trust builds superior organizations. You can trust me on this.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.