Cautious optimism is opening the wallets of consumers again as we celebrate the slow rise out of a two year recession. November month end results were buoyed by Thanksgiving weekend sales, with surprise increases online both Black Friday and Cyber Monday, indications that early discounting and great offers by Amazon, Wal-Mart and Sears worked. Brick-and-mortar stores didn’t fare as well, with sharp declines for many teen and luxury retailers, while discounters like Costco, Wal-Mart and TJ Maxx had increases over last year, both in sales and foot traffic. The message was loud and clear from consumers, “Give me a large discount or lose me as a customer”. Traditional Black Friday sales were everywhere, but the retailers that won were discounting far beyond the standard 20%. Those that offered discounts in the 20-25%, like Ann Taylor, Banana Republic and Target, paid dearly for not being more aggressive.

The largest increases came from online purchases on Thanksgiving, Black Friday and Cyber Monday, a trend that will only increase from year to year as technology savvy generations become a larger population of the buying public. It’s no surprise that Monday, November 30th captured the prize for the most online sales since the term Cyber Monday was introduced several years ago, with Amazon increasing 28% , Walmart 22% and Apple 39% yr. over yr. Which begs the question, “Will brick and mortar stores be necessary in the future?”. Too many of the Kohl’s and Borders online shoppers, the answer will be a resounding “YES!” due to the eight online failures that occurred within a 14 hour period on the Kohl’s website and 16 failures on the Borders site, certainly costing them revenue. But consumer behavior is changing and for different reasons. More of the population is technology savvy, but equally as important, they are wiser to costs and prices of products.

Let’s look at who has reason to celebrate results for the month of November 2009 and why. Instead of looking at numbers, we will look at how public sentiment and behaviors are shaping retail now and potentially in the future.

Brick-and-mortar stores still account for the largest percentage (greater than 90%) of consumer purchases, even during the critical Thanksgiving to Christmas timeframe, but not all stores are created equal. Specialty apparel and children’s/teens stores, including Children’s Place (13% decrease) and Abercrombie and Fitch (17% decrease) lost out big time. Even Target, considered on the higher end of discount stores had a 1.5% drop. Is it a sign that parents are unwilling to pay outrageous prices for clothes that will be outgrown in a few months and tank tops/jeans that can be found at discount stores for a fraction of the price? The question of whether these companies will be able to survive even after the recovery is a real concern. When mindsets and behaviors change, there needs to be an overwhelming reason to resort to old ways. The products these stores carry is not differentiated enough to warrant an increase in spending, for the same thing they have been getting for the past 2 years at a lower price. Only time will tell, but with discounters grabbing market share it will be an uphill battle.

It’s not surprising that discount retailers TJMaxx/Marshall’s (8% increase) and Kohl’s (3.3% increase) were winners, picking up market share and loyalty from shoppers eager for a deal. What is surprising is where their sales for the month of November were the strongest…domestics and home furnishings with a 13% increase in that category at TJMaxx/Marshall’s. What does this tell us about the general public? With the majority of consumers tight for money, cutting back on everything including entertainment and eating out is a no brainer. So with more time spent at home, products that create visual pleasure and a feeling of comfort are items that consumers feel are worth the money. Changing bedding, adding a new rug or pillows and spending more time cooking/baking is an easy and practical way to bring us joy. It has been said many times that during times of economic instability, families get closer, probably due to the fact that they are home more often together, so creating the perfect environment is critical to compliment the time being spent with family.

Other products consumers bought heavily were their gadgets…flat screen TV’s, iPods, computers, etc. Stores carrying these items, including Costco (9%), Best Buy (XX) and Wal-Mart(7.5%) had comparable store and online sales increases from last year, with electronics the heavy winner. Creature comforts and the need to have the newest technology are driving forces behind these purchases. New technologies are making small electronics and gadgets obsolete in such short periods of time that upgrades or new purchases are required every year in some cases. Not to mention that they are fun and somewhat prestigious in their own right.

November results don’t necessarily predict what the end of the year will look like, but it is a relevant indication of where the consumer’s mindset is during these tough economic times. The good news is that we are seeing increases in sales, both in stores and online, and that is something to celebrate this holiday season.

With the recent purchase of Burlington Northern Sante Fe (BNSF) by Warren Buffet for $34B, it is a fact that the future of the United States is based on Infrastructure growth. Railroads are not glamorous, but they do what needs to get done for being the biggest distribution channel for the “biggest hauler” of food products, like corn, or energy, like coal for electricity.

This industry grows when an economy is expanding, not typically when an economy is as bad as the one we are in.

But Warren Buffett put a huge bet on the industry. He claims he is looking for an investment that will reap rewards for many years in the future and isn’t too concerned about immediate gains.

This is a great sign of things to come. For Buffet to risk so much, tells me it may not be that risky. As I think about the competencies required for this type of work, it all makes sense why this seems very knowledgeable, and not at all risky.

What If: Buffett invests in technology, and BNSF becomes the first transportation company to execute the fastest train in the world in all aspects: Leisure, Food and Product Transport? Countries may actually BUY the technology and expertise for their own infrastructure projects.

Even more impactful is the number of jobs that would be needed for such an endeavor. Engineers, Mechanics, Customer Service, are all skills required to ensure a success outcome.

What If: The US had a coalition of competency hubs with just these skills?

What is a Competency Hub? Basically it is a Center of Excellence that is centered on one core activity. For the purpose of this point of view, we will focus on Infrastructure as a support to a business: Finance, HR, IT, Sourcing, Engineering, Customer Service, etc. The ideal model is that these are for profit companies with costs subsidized by the government based on the number of new jobs they create in the US. Thresholds would be set for number of jobs produced, and if a company reaches the threshold, they get a “bonus” or “abatement”. The more jobs they produce in the US, the more subsidies they receive.

This may seem unrealistic in this capitalistic world, but it’s just a thought. There are already companies that do these activities overseas, but the goal is to bring them back to the US.

But the real benefit isn’t their financial structure. it’s their value in bringing jobs back to the US that have traditionally been outsourced. The number of outsourcing deals in the last 5 years has soared, showing significant signs of growth in markets with competency hubs like technology in India and manufacturing in China.

Both of those industries are things the US does currently, just not on the scale the emerging markets have exploited. However, Silicon Valley is gaining great traction as the “Innovators” with Apple, Google, Intel, etc. An incredible opportunity to break away from the pack, and make the US “the” place to go for innovation.

You’re thinking, “a competency hub for Innovation? Yep, it’s the most basic thing companies will need in order to succeed, and as it becomes more and more about technology, it will be the vehicle for new product introduction. Learning to innovate is a process, and most companies don’t do it well, if at all. Providing this process at a reasonable rate, allows companies to spend more on investments on core work.

The theory behind a competency hub is that it is an activity that is standard in nature, with standard processes and templates that allow for quick and efficient output at a cost an individual company can’t replicate.

If you think about all the work every single corporation has to perform that is not necessarily their core, it looks like this:
1. Finance: Every company needs to track, and manage financial operations
2. Human Resources: For every corporation, Human Resources is required to manage the workforce
3. Sourcing: All companies buy products or services through a sourcing /purchasing departments
4. Legal: All companies require legal advice and actions
5. Technology: Every corporation uses technology to automate and improve processes
6. Innovation: As the foundation for “everything new”, this competency includes several sub hubs**.
a. Engineering
b. Design
c. Test

**A sub hub is competency that has verticals with different skill sets within.
For example, Engineering represents Technology, Energy, Transportation, etc.

The key is to have career paths for these linked with the university curriculums in order to have pre-trained employees coming out of schools, decreasing the time before a new employee begins to add value to the organization. Or as I call it: the Period of Unproductively. Attached is a chart by Jim Collins on the productivity of a new employee. Imagine the savings and productivity that can be achieved by shorting the curve from 18 months before contributing, to 6 months? The training and on boarding costs alone would decline significantly.

As a healthy, fit US citizen, I am aware of the importance of healthcare reform that is drastically needed. It is going to occur in the next few years, giving hope to many people that our system may finally be "bettered". To think a system as large and uncontrollable as healthcare could reach the goal of being anything better than ok is a dream...an unlikely one. However, an iterative approach, with a well thought out plan may allow us to achieve a system that is always in a state of  "continuous improvement" , thereby delivering over the long haul, a great system. Seems like an easy thing to do. Many companies have this type of mindset in their businesses, and it delivers great results for them. They focus on improving processes, streamlining and automating them for the best efficiency, all for the sake of the customer, delivers a great value proposition.

So, why can't this work for the healthcare system? Because the "company" trying to overhaul it is the government and if you ask a hundred people how well the government is run, they will tell you "poorly".  How then, can the government "fix" the healthcare system if they haven't been able to fix themselves. They can't. Can they make it incrementally better in some areas? Maybe, but the issues are more than just the insurance companies and the doctors and hospitals. The issues also include lobbyists, politicians, party lines, and future elections. Think corporate politics on steroids.

We all know how horrible the result is going to be once bills start to get passed and policies begin to change....frankly, I have nightmares thinking about it. In reality, this is the largest Change Management  project the world will ever see, and it will take a strong Change Management plan, along with Vision, Communication and Metrics to track progress. Let's breakdown how the government might be able to actually make a difference suing a process called DMAIC.  I won't talk about politics, maybe it's because my parents always told me not to discuss politics in public and frankly I hate when people talk about it to me.  Talking won't solve anything, rational action will. 

A Systemic Plan: Define
The first thing in Change Management is a vision, created by stakeholders from all facets, in effort to ensure there is buy in and therefore, the changes will be accepted. To do this, we need to Define what the issues are. It's the first step for the govt, and the American people need to see this draft strategic plan outlining the issues defined, and be given the opportunity to provide feedback. The plan, although in Define, should also be futuristic and show the future state at the end of 10 yrs., because that's how long it will take for real benefit to be realized and appreciated. It should be presented in a simple manner in terms and language everyone can understand. I don't want to see thousands of pages of policy changes until I know how they will integrate together to form change in a holistic systemic manner. Maybe 10 pages at max, with an appendix for areas you want to dig into with facts and data. 

Next, have a website that will allow people to provide feedback. But here's the thing, it can't be people providing feedback in open ended questions, it must be in a survey form that allows them to give "yes'  and "no" answers, or a weighted 1 to 5 point scale from "agree" to "disagree".  The 1 open question would be on Recommendations to solve a problem. To limit the number of rants, make it short, like Twitter.  Someone should be able to get their point across in one short paragraph. If it's a good idea, it will be given to the solutions team to expand upon and get more information on the recommendation.

Based on the input from the survey, the draft plan should morph into a formal plan that incorporates the CUSTOMERS feedback of the healthcare reform. 

Measure and Analyze

Now you have all the input to develop a formal strategic plan, it's time to create the solutions that will drive towards the future state. The problem the government has is they are looking at "fixing" the system, which is not the right approach. There are things that are ok in the system that don't need to be fixed. The goal should be to have an end state that is optimal, but takes several phases to get to. Using processes in Six Sigma (DMAIC, DFSS, Lean, TOC, etc), a prioritization process must take place, and each independent issue must have thorough analysis completed. Define what the measurements are and analyze the root cause issues.  To do this, experts in Six Sigma are required, each with a team of Subject Matter Experts (SME's), and stakeholders like doctors, nurses, administrative types and most of all, customers. Drilling down into the issues and conveying the issues in a scientific way with data, will give the government credibility that it needs to make the change happen. And during this entire time, a communication plan must be in place in order to let the American people know "where" in the process they are and what the "progress" is.  This could be through local politicians, but it would be more accepted if there was a "Network of Change Advocates", everyday people in the local cities who represent their town and are responsible for delivering the updates at weekly town meetings, newspapers or other venues. The government also needs to set up an Internet site completely separate from any other govt site, that is inviting, compelling....cool, not political. It would be great if someone like Google would offer to host it for free and supply resources to help with this, because if the government does it, it's going to be....dull. Now that the issues have been measured and analyzed, and we know what the root causes are, we can begin to look at solutions.

Improve

The hardest part of any change management program is the execution and implementation stage. This is where the rubber hits the road. We have the plan, the analysis and roadmap of the changes to occur. But how will it be executed. Using a PMO (Program Management Office) with standard tools and processes, and a team of subject matter experts(SMEs). Also, Steering Committees, not filled with politicians, rather, the stakeholders, should be formed. The Steering Committee should be for every project, given the size and importance of the decisions that need to be made. One overall Steering Committee can be formed, that the individual Steering Committees report their progress into, or if there are decisions that require their approval, like funding, investments, etc.In general, a cadence must be followed, like any other project, whereby a decision making body guides and is not "held up" by politicians and lobbyists. 

Given the expansive change taking place, the govt needs to have the best talent possible to execute. Pulling people from the private sector is my recommendation. Get the smartest, brightest and hardest working people you can find. The teams should have a cadence similar to those at large corporations when big initiatives are being rolled out.  Implementation is the one thing that will take the longest and is at most risk if things go wrong. The govt should hire professionals to manage the project plans (which there will be many) and the resources. And the teams needs to be formed by conducting interviews, just like the private sector. Appointments should not be an option.  In addition, rewards should be in place for the teams, but only on final execution, not during. Just like corporations, executives don't get bonuses unless they hit their targets (well, most corps, not BofA). 

At the same time the actual improvements team is executing, a Legal/Compliance/Risk team should be managing the policy changes. The new policies need to be simple in nature, versus long, cumbersome language that no one understands and puts you to sleep. Obviously the PMO would manage the changes in policies along with the implementation, knowing there will be interdependency that will need to be managed. The Risk experts should be tracking any risks that arise and develop mitigation or contingency plans in order to be preemptive in nature vs reactive.

Control

Now that they are executing, they need to build a metrics scorecard that will be communicated to the American people on a weekly or monthly basis. Whatever the reporting communication rhythm is, it needs to be focused and tell the people "how the changes are progressing." As I said earlier, a Continuous Improvement mindset must be in place, therefore a Continuous Improvement team must be ever present, and always be improving the system annually. This will become the balanced scorecard once the govt transitions to a another entity that will manage the process going forward. A govt running this does not seem feasible or realistic. It's not their core business, and they can spend time and money doing things that is their core, like protecting me and my family.

As the market reaches 10,000, most investors are feeling good about the future of the economy. But unfortunately, the stock market is not a good indicator of what's really happening in the world. With unemployement at a record high, and no real strategy for developing over seven million jobs that are required to get back to 2006 numbers, from my point of view, the economy is not looking so good.  

In our business, we drive cost out of companies and position them for growth. This is all well and good for revenue, profit and earnings. But in most cases, we aren't creating lots of jobs for the companies, rather we are realigning resources and investments to help companies focus on their core business activites, while streamlining or eliminating the non core activities that don't generate direct revenue.  As companies continue to shed workers, as they reset their baseline on costs, they will show a decent results, but how does this effect the economy? 

If I were a genius, and I'm not, I would advise the government to look at how they can help companies grow, without giving them bailout money. The first thing I would do give companies money to join forces and build competency hubs to support their businesses. Think of it as a shared service for the same competency, but for many companies. This can be for core or non core work. 

For core work, it may be a technology hub. We already have Silicon Valley, but most of our companies outsource the Infrastructure and Application Development overseas. Just the fact that our enviroment and future is driven by technology, should be a good enough reason to give tax breaks to states who house these hubs and provide the jobs. The old saying, "two brains are better than one" holds true for this concept. Imagine the number of jobs the US could bring back  if the work sent to India or China could be managed here. 

For non core work, you can create hubs in all the supportive functions that enable a business to run. Finance, Human Resources, Risk, Legal, Sourcing, can all be provided to companies for a competitive price. Because the vendors who provide this will be using standardized processes, tools and technology, a companies true focus and competitive advantage would becomes their "core products and services".  And initativies like "green" would become an easier process to track and support as well. 

This may sound like only a concept, but it is already a reality for outsourcing firms. The difference is, they are all over the world, and are not united in a coalition. If the government was able to support these types of hubs with benefits like tax rebates, or reasonable health insurance, etc. the prospective vendors could do it for a reasonable price and still make a profit. We just need to bring the concept home, and make it financially viable for vendors building the competency hubs to do business in the US. It's possible, I know it is.

One of the benefits of an economy like the one we are experiencing, is the opportunities it creates. For companies with strong balance sheets and lots of cash, this could mean the opportunity to buy a competitor, or create JV's to build market share and revenue.  But as with anything in business, there are risks, and the key to paying the right price and getting the right ROI is not a numbers game. Rather, it is driven completely by the people in the organization and the leadership that drives the strategy. In a study by KPMG1, 83% of mergers were unsuccessful in producing any business benefits in regards to shareholder value. 

As the VP of Growth for GE Consumer Finance, my team and I were acutely aware of how important a company’s culture, leadership and organization structure was to securing a successful deal. My role was to make sure we captured the synergies from a people perspective, outlining the cost of severance, benefits, pension liabilities, and CIC payouts, as well as assessing the leadership team and cultural fit with GE. Of course there was the financial due diligence that our finance team managed, but it was only one input into the equation.  GE had a very rigid 100 day integration plan that was well documented, and required the purchased company to migrate over to our systems and processes almost immediately.

As in the KPMG study, GE focused on three key areas pre deal to ensure long term success.
1. Synergy evaluation
2. Integration planning
3. Due diligence

CFO’s may overlook the top two areas because their focus is primarily on the balance sheet and the P&L's. But numbers don't make a company successful, the people and organization structure do. So what can you do to ensure you are getting the "right" price and your acquisition will be successful? Well, if you can follow these processes, you will be ahead of the game.
 
1. Perform an Organization Assessment on the organization synergies and structure. Is it optimal? How are they organized against benchmark? How will you re-organize them to reduce costs if they are above benchmark? The answers to these questions will equate to tens of millions of dollars, in most cases. We use a tool called an ODA (Organizational Diagnostic Assessment), that show us the spans of control, number of layers and other important organization metrics. We benchmark against a company’s peers and quantify the savings of building the optimal structure… which usually results in reducing headcount.
 
2.  Conduct a Liabilities Assessment on  the severance, benefits  and pension liabilities. Look 5, 10, 15 and 20 yrs out. What are the change in control payouts in the executive team contracts. Can you convert those to equity? Or renegotiate them? If a company has been doing poorly, then the leadership is to blame, and a CIC is almost a given. Re-negotiate them with equity if they stay. 
 
3. Perform a thorough Executive Talent Assessment. We use a process called a "Heat Chart" which is populated using the Keirsey Assessment test as well as a customized Competency Assessment Tool. However you perform an assessment, use the future strategy you have set for the company as the guide for what skills will be needed now and in the future.  Additionally, "style" will play a big part as you integrate this company into your culture. Are the CEO and leaders non communicators, but entering a culture of transparent communication? Or do they lack rigid performance management standards and are "easy" graders entering a culture of high performers?
 
4. Conduct a Risk Assessent to understand the status of the company. The numbers only tell you one story, but the Risk Assessment tells you the real story of how the business is operating. We use a tool that includes questions on Operations, Finance, Organization, Competitors and their Market. The answers to these questions delivers a Risk Index that can be used to identify where there may be problems hidden and allow for a mitigation plan to remedy any issues.
 
5. Run a survey to get VOC (Voice of Customer) feedback from the employees before, during and after the integration. We use a tool called a "Pulse Survey". It is NOT an engagement survey, rather this survey tests employee morale and sentiment.  Are the employees excited about the new venture, or scared for their jobs? Do they trust the leadership team or feel like they are not being told everything?  A simple, anonymous survey will give you the answers as to how the organization is feeling and allow you to put plans in place to ensure the deal doesn’t result in poor productivity from the employees.
 
6. Layout a 100 Day Integration Plan, and apply cadence to the process. Daily meetings to ensure the retained organization and processes are transitioning smoothly. Training is a big part of an integration, so don't cut that short. If you do, it will show up in the Pulse Survey above.
 
7. Execute the Due Diligence thoroughly, asking detailed questions, analyzing their market and their data, don't just focus on the numbers. There is a story behind those numbers, probe and find it out. Ask lots of questions about "how" or "why" and don't take non data driven answers. 
 
M&A is a great way to gain market share or gain a competency you dont have, but be careful. It's a tricky process and one that needs attention pre and post deal.  Use the processes above and you'll have a better chance of having a long term successful deal.
 
1. KPMG: UNLOCKING SHAREHOLDER VALUE: THE KEYS TO SUCCESS November, 1999
 
For more information on NexGen's M&A/Integration Practice, go to www.nexgenadvisors.com.