Is the Cunning Leader to be Admired?

The word “cunning” is often used as a complimentary term in regards to businessmen. Often popular business profiles describe the glory of the cunning CEO who negotiated the upper hand in a business deal to great fanfare. Ben Franklin thought differently of the description however. Ben described cunning as a vice that is purely personal and cannot be practiced amongst free assemblies.  “A cunning man is obliged to hunt his game alone and to live in the dark. He is incapable of counsel and advice because his dishonest purpose dies upon discovery.” He continued, “Cunning therefore is the wisdom of a fool; one who has designs that he dare not own.” Certainly then, the cunning man could never have true friends anymore than he could be one.

On the other hand, a virtuous and honorable man is able to bear a conference of free debate. He is able to benefit from the law of attraction as his purpose becomes known. Reputation precedes him and works for him.  Wisdom and business savvy are surely to be held in high esteem.  However, the craftiness and deception which are commonly associated with cunning I would argue are a far cry from being admirable.  In fact, I would say that those who would resort to stacking the deck are the very same who cannot play the game.  The practices are short sighted and breed suspicion.  Be careful of those who shower you in affection for it’s often a means to disguise intention.  For the honorable, they recognize virtue is an equivalent of wisdom.   

Is Bloomberg still a Capitalist?

Is Mayor Bloomberg asking us, the general public, if we are smart enough to care for ourselves?”  It’s so odd to me that a capitalist worth 22 billion from the founding of his own company is proposing legislation to ban sugary drinks over 16 ounces in size. I’ll assume the best intentions in Mayor Bloomberg but, in doing so, I’m still left with a disturbing feeling. For instance, do I really want our system of laws and enforcement used to make a statement or, do I want our legal system held in reverence?  Or, is the proposed ban truly the best solution and the reality I must accept is that people are so dumb that they won’t figure out a way to get their sugary fix?  By the way, the proposed law doesn’t apply to free refills.

Perplexed by this story, I could immediately think of several ways to legislate the issue in a way a capitalist and most certainly a politician might prefer.

Idea 1:  Affirmative Sugar Action – Create requirements for low calorie/sugar drinks to be served as options in restaurants and grocers. Enforce a sort of affirmative action policy with punitive damages that ensures the big soda guys aren’t monopolizing distribution.

Idea 2:  Green Sugar Subsidies - Create tax breaks for start-up companies trying to break into the category of healthy, taste-good beverages. We could have a Sodalyndra scandal to boot.

Idea 3: Bloomberg Care – Allow insurers to raise premiums on the self inflicted morbidly obese and offer counseling services to address potential underlying psychological issues.

Idea 4: Free 16 oz Markets – Let some whippersnapper entrepreneur allow his restaurant patrons to order any dish/drink combo with a selected maximum sugar/calorie content. They can then make a billion dollars with the restaurant chain and run for Mayor.

Idea 5: Soda Wars - Well, if all else fails we can try prohibition again. Sure it didn’t work out so great last time but, AIG is getting back into insuring subprime synthetic CDOs so I say…..what could go wrong?

After reveling in my solutions that any capitalist or politician would love, I then thought to myself, why wouldn’t a self-made billionaire Mayor think of similar possibilities?  Well, maybe my ideas are worse than his or,…..maybe I just don’t understand what the distracting headline grabbing proposal is meant to draw my attention away from. 

In other news, there is finally a company making headlines by offering common sense small business loans. Shearson Capital has financing options that require no collateral, tax returns, or debt service coverage ratios and they may accept as low as a 500 FICO. This is great news for small companies that have been shut out of the capital markets. The merchant cash advance in los angeles has been all the rage for cash strapped businesses coming out of the Great Recession. 

The Power of Action

Everyday I will do my best to preach God's example, and if necessary......I'll use words.

How to Confront Your Boss - Conflict Resolution Tool - LCS

Ever have the urge to disagree with your boss without being disagreeable? Here’s a simple tool with an easy to remember three letter acronym that works great when you’re put on the spot. The acronym is L.C.S which stands for Like, Concern, and Suggestion. Here’s how to use it.

Like:  People respond well to acknowledgement and compliments.  The challenge is to think of something sincere to compliment your boss on when you disagree with them.  Fortunately, this is easily resolved by complimenting them on general aspects that you genuinely do appreciate such as, their tenacity, creativity, or your opportunity to be involved.  Here’s an example of this approach put in practice:

o   Example:  “I like your interest in this project and the passion that you’re putting behind it…”

Concern:  By simply sharing what concerns you rather than saying what’s wrong; it’s more likely that your boss will not be put on the defense.  It’s also more likely you’ll communicate using the “I” word rather than the potentially offensive “you” word.  Sharing your concern is constructive. Conveying the context to any suggestions you may have is important; otherwise the significance of your proposal may be lost. This would be a shame as you could potentially short change your boss by not providing the basis to make optimal decisions. You could also limit your personal rewards and the organization’s ability to benefit from your unique talents and insights.

o   Example:  “my concern is that if I take the proposed action, I won’t be able to fulfill your expectations because…”

Suggestion:  If you’re successful in your delivery; your boss should now be more receptive to your input.   Make a suggestion and be sure to relate it to your boss’ needs.  Remember, many bosses ask for your input as means to soundboard or merely to validate their own ideas.  With this in mind, it’s wise to anchor your suggestions to their priorities.

o   Example: “My suggestion is that we… this way we can meet your timeline and come in under budget”. 

Enjoy the LCS tool and put it to good use anytime you have the need to confront someone. Happy Holidays. 

Please don’t take away my Turkey Day!

Is it just me or have the retailers just skipped over Thanksgiving this year? In a struggling economy, is there not enough monetary value for Thanksgiving to be recognized? I noticed Christmas trinkets were put out immediately following Halloween this year.  Thanksgiving is my favorite Holiday so; I’d hate to see its promotion drowned out between the screams of Halloween and the silver bells of Christmas. Is there just not enough Thanksgiving stuff for stores to sell and promote?

I love Thanksgiving for a host of reasons. First, Thanksgiving happens at a time of year when the weather changes and my family starts feeling the mood to be a little cozier. The light of the day in this season carries a little more white light and vivid colors than the sun drenched yellow hues of summer. Secondly, it’s a Holiday without the distractions and pretence of getting people stuff. Thanksgiving to me is the simplicity of enjoying a warm meal on a crisp day while engaging others in thoughtful conversation. As a tradition adopted from a friend; my family reflects on what we’ve been grateful for throughout the year. We also open our home to those who have family out of town or don’t have someone to celebrate with. In some years, we’ll even host a separate “Friend’s Thanksgiving” (though raising a family has put this on hiatus). Now don’t get me wrong, presents are nice, and the real significance of Christmas is wonderful but, what other holiday focuses on the simple joy of getting to know new people or knowing the one’s you care about just a bit better?

Turkey figurines and harvest satchels may not fly off the shelves like Santa’s village or the latest Pixar toy collection. But, it’s a worthy quiet before the consumer driven shopping storm. And, believe it or not, retailers are missing out on some great marketing. Kudos to the furniture store selling tables and dishware so Thanksgiving hosts can better accommodate their guests. Congratulations to the peddlers of 20 lb frozen turkeys, deep fryers, and the firemen that respond to those who try the combination without thawing the birds first. And, special recognition to the hawkers of canned cranberries and pumpkin for which, if not for Thanksgiving, there would be very little use. So, I say you to you retailers, you can wait a few weeks or, be a little more creative in cashing in on Thanksgiving’s unique values. Until then, please don’t take away my Turkey Day!

PS I’ve been doing some personal reflection through a leadership course which has put an amazing writer’s block on my normal “best practices” writings. But, I have a cadre of new material to espouse my two cents on in the New Year. 

A Better Way to Tax

I have some thoughts for a few guiding principles that we could use to do a better job taxing ourselves. For context, I began with two perspectives presently playing out in the battle between conservatives and liberals locked in debate over raising the Nation’s debt limit. With this context in mind, I then cover three ideas to improve our federal income tax system.

I heard of some conservative university students conducting an experiment to make a point regarding taxation and the redistribution of wealth. These students approached other students on their campus and proposed that those with a 4.0 GPA should consider giving up a few points to those with lower GPAs to help their disadvantaged colleagues prosper as well. Naturally, those with high GPAs were reticent to give up something they worked so hard for. The GPA, like money, represented a measure of achievement and reward. To the high GPA students, it didn’t seem fair to have it redistributed to those who may have been less diligent in their studies. The experiment is a great example of Republican and Libertarian views on taxation and the injustice of taxing the wealthy more than those less well off.

Conversely, some liberals might point to the parable of the Good Samaritan (the Samaritan helped a beaten Jew on the side of the road as others just passed by) as a cornerstone to the values that our laws and nation should exemplify.  As a moral people and values based society, much of our Country feels that the wealthy shouldn’t squander money on excessively material objects. Instead, this excessive wealth should help the needy and that such a redistribution serves the long-term social interests of a productive society.

Both conservative and liberal views are compelling and logical. Thus Boehner and Obama have been rather deadlocked. However, as Ben Franklin suggested, when one thinks they are stuck between two options, there often exists a third just out of view which likely proves the best alternative. Along these lines, I think there are three elements missing from the debate. One is the utility of the dollar, the second is the joy of giving, and the third is the pride of citizenship.

Utility of the dollar basically states that the satisfaction of a starving person eating a fast food hamburger is exponentially more than a well fed person eating their fifth $35 burger for the evening.  More so than a GPA, fixed to a 4 point scale, money can have a much wider degree of variability. For example, someone making 1 million dollars may have limited gratification if they are already worth 50 billion.  A flat tax of 20% on $5,000 or $20,000 of monthly income may appear fair as everyone pays the same percent.   On paper, one might think that since they are both at 20% the burden is the same because the person with less income is correspondingly paying less in total dollars.  However in practice, if a gallon of milk and pound of steak cost the same for both tax payers than it’s easy to figure out that one will have more discretionary income after the basic cost of living than the other one.  Each of us has a basic cost of food, shelter, clothing, etc that we can’t get around. Above the cost of survival; utility starts decreasing in a broad sense.  Add to this, the possibility that the tax payer with the $5,000 income may have less in savings, more kids, an expensive congenital disorder, etc. then clearly the lower income person has a substantially greater burden paying the same 20% rate than the wealthier person or, vice a versa in some cases. My thought is that taxation could be based off a flat rate that is then adjusted by a capacity to pay determined from a combination of discretionary income (above a basic household size cost of living) and aggregate savings. The premise is to acknowledge the utility of the dollar and a basic cost of survival which is really a more effective flat tax then an arbitrary percentage universally applied.

My second idea, the joy of giving, centers on all of the social programs that proponents of redistribution of wealth hold dear. As an overarching theme, my personal belief is that government, where possible, should orchestrate initiatives rather than administer programs due to its track record of mismanagement and overspending.  However, that aside, I want to see people in our society helped. I want to know that those who seek help can find options.  I know that available aid and a good store shelter leads to a safer and more empathetic society without the perils brought on by desperation that we can see in third world countries.  But, why have a system that penalizes citizens by taking money from the wealthy to give to the poor?  Why let government thru a punitive tax system steal the joy and education to be found in voluntarily giving to others? Redistribution is not inherently bad – after all it’s what charity is. What seems unjust is to force charity from high income earners (but not necessarily high net worth) to give to an irresponsible government and then deny society the experience and personal responsibility of giving.  So, why not make a system so wonderfully incentivized that any truly wealthy person would be simply foolish not contribute? Let’s suppose the income tax (utility adjusted as proposed) on a billionaire making 20 million a year in income was 60%. Next, let’s say the billionaire through a combined donation to a qualified venture philanthropy fund and entrepreneurial start-up investment would get them down to a 20% effective tax rate.  And, for making the wise decision to cut taxes, let’s say this individual was overwhelmed with ceremony and recognition by public figures for their good deeds.  I’d bet that billionaire would exhibit wise behavior and even enjoy it. And, the government wouldn't have to step in with its own administered “stimulus”. If we want the wealthy to behave with empathy and charity than we can encourage it or, just take the money – but, which one would you think is likely to have a sustained and exponentially positive effect? 

My third idea is that pride in citizenship be used as a means to growing our tax revenue. Ben Franklin was said to have been opposed to making voting available for everyone – he wanted just property owners to have the right. I suppose the thought was based on concern of “rule by mob” (or those who were not stakeholders); the reason we have a Republic and not just a Democracy in America.  I’m not sure I agree with Ben’s solution regarding property owners but, I do think there is merit to having to earn citizenship and voting rights.  We have the greatest Country on Earth, yet those of us born here often take our membership for granted.  And, those not born here often see the “city on a shining hill” with a big locked gate and “do not enter” sign.  I think there should be some degree of “membership” in society for those born here, nothing drastic but, I don’t want some active and repeat criminal to have the same rights and benefits as the responsible members of society. Maybe a call to serve (military, science, social, etc) as a rite of passage would be a good idea.  Having something to aspire to and work for creates value.  For those not born here, why would we not create a system to import inexpensive and fairly treated labor here (vs. jobs going to overseas) that could earn their way to citizenship? Why would we not take the wealthy, the business owners, and the educated that could afford citizenship and charge a good amount for it (in addition to service)?  We have the best product in the world and we don’t seem to want to “promote” it.  Yet, we need growth, we need competitive labor, we need a system to stop costly and dangerous illegal immigration, and we need our national pride back.  Idealistically, we should cut the check to pay our taxes ourselves with a smile because we know the great value we’re getting for our money.  We may not get that far but, to get a step closer I propose that we obtain labor and money from a truly first class expedient immigration system, that we get engaged “stakeholders” as citizens, and that we cut government spending (without breaking promises to Social Security etc. where the elderly wouldn’t be able to adjust).  Most importantly, as a strategy to really grow tax revenues without raising an arbitrary percentage that reduces supply of capital and incentive, we should focus on growing GNP thru expanding our competitive workforce with an immigration mix of low-cost labor and highly educated and/or wealthy stakeholders; all of which also happen to be consumers that need housing.

Thank you for your kind and thoughtful consideration of the concepts of utility of the dollar, the joy of giving, and the and the pride of citizenship. I share these ideas for no other reason than to make a contribution. Please share, promote, and debate the ideas to evolve the dialogue.

What can a Chief of Staff do for you?

The Chief of Staff role is not as familiar in today's "lean" organizational structure. However, the role if optimized, can be quite powerful. Perhaps in fatter times the role may have become an entourage of "yes" men. However, when properly implemented it is a fertile platform for mentoring, a way to expand the availability of the CEO, and a tremendous backstop for the organization. The video and description below illustrates how this role can be a powerful extension of the Chief Executive's Office. 

Chief of Staff Overview:

To increase the bandwidth and velocity of the CEO or unit leader in such a way as to concentrate his or her time, effort and priorities on strategic initiatives.

Responsibilities:

• Executive project oversight: Acts on the authority of the office of the CEO to oversee strategic projects with a primary focus on initiatives affecting the value chain that typically require cross functional resource allocation.
• Facilitates the process of project solicitation, selection, prioritization, implementation, and monitoring.
• Ad-hoc analysis and decision support
• Disseminates information and communicates ideas on behalf of the CEO
• Designee to originate areas of opportunity internally and externally
• Maintains the Strategic Plan and facilitates the annual process
• “Executive-on-demand” for backstopping vacancies providing bench strength
• Operates a reporting system and dashboard
• Serves as a first alert system
• Oversees a central data repository for capturing, cataloging, analyzing and disseminating key lessons and resources
• “Ambassador” for the CEO, buffering communication with other members of the strategic team in cases where there are sensitive issues.  Takes initial meetings with outside parties for screening purposes or as a representative of the CEO’s office for greater accessibility.

SOFT SKILLS:

• Introvert and Extrovert capabilities
• Unimpeachable integrity
• Selflessness
• Emotional intelligence
• The ability to give and receive constructive criticism
• Diplomacy skills
• Keen judgment
• Entrepreneurial
• Discerning ability to recognize salient business issues that “move the needle”
• Finely honed communication skills
• Upwards to the CEO
• Laterally to others on the executive team
• Downward throughout the organizational chart

HARD SKILLS:

• A multi-faceted lattice work of mental models and case study to draw upon
• Project management
• Organization
• Sensitivity and orientation to identify systemic issues
• Multi-tasking
• Time management
• Benchmarking
• Trouble shooting and creative system orientated solutions
• Professional reporting methodologies
• Information gathering and analysis
• A keen mind and multi-focal intelligence

Flattery and Great Leaders

Be mindful of those who would kneel so easily for you; for it may just be the corner of the rug they are reaching for. 

RPC: A New Way to Finance Your Business

Is debt or equity the only two options for capitalization or is there something else you can look into?  Debt financing, if you can even qualify for it, requires inflexible payments calculated off of historical cash flows. The bank is often the quintessential fair weathered friend when your cash flow dips and you’re up for renewal on your small business loan. Naturally this adds to the pro-cyclical nature of senior lending so, if you’re a start-up or were recently affected by the financial crisis – good luck. Equity financing on the other hand may not require payments but does require an agreement on valuation and a potential loss of control in the business.  Also, the future value of the equity is typically uncapped, associated future dividends are given up, and the investor wants ample compensation for taking on all the risks of ownership.  With equity, the more successful your business is; the more your cost of capital becomes. Is there a way to have your cake and eat it too?

Enter the RPC; short for Revenue Participation Certificate. In an RPC, a company sells an agreed upon percentage of its revenues to an investor for a lump sum. The investor in turn receives an agreed upon rate of return and principal from future royalty payments. For added investor security, the company may offer to run all revenues through a third party trust company which distributes revenues accordingly to the company and investor. It’s also not uncommon for a company to put additional collateral or IP into the trust which it then leases back for its use. Should performance go unmet; the investor receives the collateral without incident or a foreclosure process. The investor also doesn’t have to worry about irrational expenses found under a profit sharing arrangement, the ownership liability of equity, or the requirement to agree on valuation of the business. Instead, the investor creates and retains an asset much like a note that can theoretically be sold to another party.  In return, the entrepreneur has the flexibility to focus on a longterm strategic plan without investors second guessing minute monthly expenses.

So what if revenues fall and the company ends up in a short term cash crunch? An RPC does not require a fixed interest rate or payment. The royalty will decrease in line with lower revenues and the percent of revenues itself can be negotiated to go up or down based on performance. The structure is focused around a rate of return for the investor. Therefore, if the royalty drops, it will have to be paid back over a longer period of time and possibly increased when revenues recover to achieve the threshold ROI for the investor. Alternatively, if the royalty goes up with soaring revenues the investor can get a higher yield (and potentially an increased asset value of the certificate) allowing them to share in the upside. But, the business may negotiate a ceiling ROI such that, once achieved, any excess may be applied to retire the certificate early. In this way the RPC can be cash flow friendly for the business and less risky for the investor. It’s a bit of a hybrid and the concept is easy to understand and negotiate. Selling an RPC does take a knowledgeable accountant (familiar with how to carry it on the balance sheet and disclose in the footnotes) and the terms can get pretty complicated so it’s advised to seek good council as well.

Assuming traditional debt is cheaper; wouldn’t I be better off with it if I qualify?  While the rate on senior debt is often cheaper, on a risk adjusted basis, it may not be as attractive as one might think. Senior lending today typically requires a minimum of 1.25 debt service coverage, 2:1 liquidity, a UCC-1 filing, a multiple of global adjusted tangible net-worth, and an unlimited personal guarantee. That’s a lot of risk for the business owner.  In return the interest rate can be as low as 3% and up to 8% (or more) depending on the size of your company, industry, line or term, etc. As an alternative, Mezzanine debt can range from 12% to 18% and may have warrants or other uncapped kickers. The challenge with this financing is that if you didn’t qualify for senior lending, you often won’t qualify for the increased rates with mezzanine financing unless you have material growth or an acquisition lined up.  Mez debt also typically goes behind senior lending (for a lower overall blended rate) so the previously mentioned senior debt risks are still in place. An RPC’s effective cost of capital can range from 8% to 20% or more depending on loan size, company size, CAGR, years in business, collateral, etc. However, the trade off for an RPC is flexibility, dependability (no renewal worries), no loss of equity, and the potential to qualify for more capital. The downside is that banks do not offer RPCs and there’s a learning curve as a result of their comparatively newer place in the capital markets. However, the RPC is gaining in popularity and its worth looking in to for both owners and investors looking to make a win-win deal in a tough economy. 


I want to acknowledge Arthur Lipper the III who first sat me down to tell me about the RPC. 

Pepperdine Talk

Had a great time giving a talk to the Entrepreneurship class at Pepperdine last night. A big thanks to Dr. Larry Cox and Giuseppe Nespoli. Shared my story focused around creative start-up financing and spotting opportunity.

UCLA Talk

I had a blast speaking at UCLA last night. I talked about the interpretation of financial statements from the perspective of an owner, banker, investor, and the IRS. A big thanks to Gary Krausz and a wonderful class with great questions. 

How to Find Business Opportunities in Strange Places

I’m going to share three cases of how increased sensitivity to seemingly trivial and unrelated thoughts spurred great ideas.  In a bit of a biography, I’ll cover the examples of how I got into the mortgage market as an entrepreneur in 2002 before it took off, how I grew the company, and how I got out in 2005 before it all crashed. We can sometimes find clues in the most innocuous places. If we tune in; these clues can be the catalyst that leads to tremendous opportunity.

For proper context, I need to state my limitations. I don’t think I can time markets nor do I think I can do anything too spectacular in areas beyond my core competency. A good idea requires thorough due diligence. As always, a rising tide lifts all ships. Now, how might someone come up with the idea to board the ship? Let’s begin…

In 1999 I was a 23 year old kid with long hair starting a job as a Loan Officer. I read a career book and the idea of getting paid to loan money seemed pretty appealing. A family friend got me a job at North American Mortgage. Being precocious, I thought I could do a better job than the branch manager I worked for. But, that would have to wait. I first left to take a salary job at AIG SunAmerica in the annuity business. As I would drive to work or night school afterwards, I kept hearing radio advertisements for mortgage companies. These ads often used a “rule of thumb” for when a person should consider refinancing. For instance, the ads would state “if your interest rate is 2% more than our rate, it makes sense to look at refinancing” to cover the fees.  What I noticed over time was that the “2%” figure kept dropping down. First to 1.5%, then 1%, and at the height of the market “no points, no fees” was the norm. This was my first clue. From my job at North American, I also knew borrowers were becoming more accepting of short term loans with two year fixed interest rate periods, after which they would refinance. I thought even in a flat interest rate environment, a borrower is going to be more prone keep their current loan a shorter duration than they historically did because of these two influences. This “churning”, as it was called in the annuity industry, spelled opportunity for me because new loans were going to happen. I was fortunate enough to have been well positioned and prepared to take advantage of the opportunity and I stepped out of my secure job on January 2002 with short hair and a little more wisdom.

By 2004 I had grown a mortgage brokerage to about 40 people riding the unexpected tide of low interest rates. However, the market cooled off a bit from 2003. I wanted to take my business to the next level and become a banker but it would be harder to do in a contracting market and, we had used most of our cash to grow the company and a separate escrow business. I felt a bit stuck until I saw a show on the history channel. It was the biography of Charlie “Lucky” Luciano. While a show on a mobster would seem to conjure up many unsavory ideas, there was one particular item that stood out to me. This guy organized a group of powerful notorious competitors into one large advantageous force with common interests. Considering the company he kept, that seemed an amazing feat. This was my second clue. I paired the idea of organizing competitors with the knowledge that mortgage banking is largely driven by loan volume. So, I organized my own syndicate of competing mortgage brokers funding over a half a billion a year. I represented my group’s aggregate loan production and made a deal to merge my company with a local mortgage bank while providing access to my group’s business. I devised a quality incentive plan that enabled my syndicate to receive privileges and additional compensation with great results. I was also now in the position to grow our new wholesale division as a banker. Like Charlie, there was a lot of luck involved but I wouldn’t have tuned in to it if I wasn’t sensitive to ideas from strange places.

In 2005 I was having concerns regarding the mortgage business; internally and externally. I had zero visibility into the things AIG, the regulators, the unscrupulous lenders, rating agencies, and investment bankers were doing. But, I did notice more and more of the “car salesman” atmosphere in the industry. The culture didn’t fit with my identity and I found myself wishing there were more entry barriers to the business. Soon enough, I was at a party when a friend introduced me to his date; a girl he met on Myspace.com. Not to be judgmental, but I had a very strong suspicion this young lady might just be a dancer of the exotic persuasion. Well, before I could jest with my friend on whether Myspace had a new service I wasn’t aware of, his date dropped a bombshell on me; she was a wholesale account executive at one of the large subprime mortgage shops.  She may have noticed my jaw hit the floor as the conversation abruptly ended.  This was clue three. I was quickly reminded of the story I read about Joe Kennedy getting a shoe shine when the shine-boy gave him a stock tip. Joe credited this event to leading him to sell all of his stock before the crash of 1929. My event also became a turning point. I could have chalked it off as just a one-off meeting but, I was sensitive that my industry was leaving my comfort zone and I was diligent in looking deeper. The event was merely a catalyst and required much more homework but, it put me on the right track to make a difficult business decision that was best for me; it was time to get off the ship.

Management Decision Assistance Tools

Thank you. I had an overwhelming response to the article I wrote on inversion as a method of testing proposed solutions prior to implementation. I was asked to elaborate on the subject so I put together a few more tools for your management war chest that can aid in your decision process. I hope you get as much out of these tools as I have over the years.

Short to Ground: I learned this one from Bill Swanson, CEO of Raytheon when I spent half a day with him while getting my MBA. Bill has an engineering background so, in thinking in terms of circuit design, it’s often helpful to find the quickest path to ground to test the circuit. Applying this line of thinking to drawn-out problems, Bill suggests you “short them to ground” as follows. “If you sense that your organization is spending more time on the bureaucracy of solving a problem than on the actual solution, you need to simplify the problem-solving process.  Shorting issues to ground means finding the quickest path – from problem to solution – avoiding non-value-added procedures and delays.” 

Substitution: I love Bill’s phrase “non-value added” because I’ve so often heard the phrase, “I think there’s value in this” as a justification for a process or project’s ongoing existence in large companies. If the test of an action’s validity is merely “whether or not there’s value” rather than “what’s the highest and best use of resources”, then that company can expect a good dose of mediocrity. To find out the highest and best use of resources, one must consider the various substitutions for the proposed action. As an example, I’ve personally used this to evaluate buying a small business. If I were willing to pay a million dollars to purchase a business, I should also ask myself if I could build the business with less risk for a million dollars. I would then use my answer as a go/no-go decision tool or as a way to gauge if there’s a premium or discount to the asking price.  

Probability: Leaders are often required to make decisions with incomplete information. Decisions in this environment are similar to gambling; you don’t know the exact cards the dealer is holding but you can use probabilities to increase your advantage over time.  Therefore, getting a good handle on how to apply probabilities to real life scenarios is an essential tool. Just like in gambling, the professional players that systematically calculate the odds have a huge advantage over rookies who just wing it. I recommend the book Against the Gods as a good resource to learn about probabilities and their history (which were rooted in gambling and discovered over a series of letters between Pascal and Fermat).

Cumulative Probabilities: If you’re strong with basic probabilities than move up to cumulative probabilities. The ramifications of cumulative odds were famously highlighted in the space shuttle Challenger disaster. The infamous O-rings were used in combination with other O-rings which were suppose to create a system of redundancy and further protection if any one ring should fail. The thought was: more is better. In reality, the redundancy in cold weather created cumulative probabilities in the failure rate that led to an eventuality of failure. For fun, read the article Winning vs. Not Losing to see how cumulative probabilities can be used in investment decisions; the results may surprise you.

The Probability of You: If you’ve mastered the odds, there’s still one very important lesson to learn that comes from the field of logic. If a doctor tells you that you have only a one-in-a-million chance of dying during a surgery you’re going under; you’d probably feel a great sense of relief. However, logic teaches us to question broadly applied probabilities in favor of personal application. In other words, under the same odds of one-in-a-million, you can have a one hundred percent probability that you will be the one person out of a million to die on the operating table.  There may be a set of factors such as heart disease, high blood pressure, or allergies that when taken into consideration, completely changes the odds when applied to your specific situation. For instance, I’ve read that the odds of getting caught shoplifting are something like 1 in 10. But, what are the odds if you’re Lindsay Lohan shoplifting? With a questionable IQ, the media all over you, and people ready to throw you under the bus for their own gain; I’d bet the odds of getting caught are as close to a sure thing as you can get!

Perspectives: To avoid surprises in proposed solutions, it helps to step back and run through a checklist of multiple perspectives to ensure alignment. For example, how might we consider an idea to speed up a sales order by implementing a new point of sale system? Management thinks this will be a great way to reduce AR and get more cash in the business. First, we could ask ourselves who the stakeholders are.  Maybe it’s the customer, investors, purchasing, sales, the finance team, etc.  Next, we can ask what concerns they might they have. Through this process we may uncover that speeding up the sales process may require the customer to pay quicker than they are prepared for. This could lead more customers to purchase on terms, which could lead the finance department to misstate projections, which could throw off the headcount for AR, which could lead management to assume there would be more free capital for expansion, which could disappoint investors who thought that capital should have been held in reserve to begin with! With careful consideration of the many involved perspectives, prepared project roll-out can be implemented with fewer unpleasant surprises.

What’s Missing: It’s easy to focus on what’s in front of you and it’s rare to see what’s missing. The next time someone presents to you, ask yourself what’s missing. This holds especially valuable when someone has been referred to you and your guard may down. I should note, this is all a mental process and is not something a mature leader needs to confront a person on causing them to lose face. But, as a mental exercise, you may ask yourself things like what’s the source of data, have the assumptions been validated and how, what are the credentials of the presenter and their motivations, or why haven’t I heard of this before. This practice seems obvious but the discipline in purposefully applying it can be elusive. To demonstrate the practical and helpful nature of this practice, I merely have to mention the name: Bernie Madoff. 

Mentors Needed

"When you take the elevator to the top, it's your responsibility to send it back down.” - Jack Lemmon 

Inverse; Always Inverse!

Pick up a fantastic new tool for your management tool box by reading this fascinating case study. I’m going to walk you through a familiar scenario found in Corporate America to demonstrate how well intended actions of leadership can go bad! If you've ever encounteered ivory tower syndrome and cynical employees, this is a must read.  Upon conclusion of this thought-provoking case, you’ll have an awakening to a new tool, the power of inversion, which will enable you to unleash the internal motivations of your employee base.

Scenario: A new leadership team is tasked with revitalizing sales for a division that suffered severe setbacks because of the recent challenged economy. As a result of the economy, the vast majority of employees are not presently qualifying for earning commission.  Taking the pulse of employees, leadership finds that the sales staff is unmotivated due to an unsatisfactory incentive program. The key short comings the employees identify are that the plan is too complex, that commissions are limited due to caps, and there is a limited group of products sold by staff that is considered eligible for commission.

Leadership’s Response: The leadership team takes the employee concerns to heart and quickly addresses concerns by developing a rough concept of a revised incentive plan. The cornerstone of the new plan is to pay commissions on a percentage of revenue generated by new sales on a wide variety of products. The plan is simple, transparent, and has higher caps. However, because budgets have been compressed due to the industry’s environment, leadership made some minor provisions by increasing the threshold to qualify for commissions. In short, employees can earn more, but they are required to bring in more. Leadership assumes this modification is a reasonable necessity to conserve margins. Excited to share the plan to quickly improve morale, management prepares a presentation and calls together an all staff meeting to share how the plan will come together.  The leadership team took on the core issues, came up with a perfectly linear logical solution, and announced the new plan with the expectations that it would be very well received. As such, leadership congratulates themselves on a job well done.

The Problem:  The plan was not well received. Salespeople were further discouraged and viewed new leadership as being aloof to their needs and concerns. What went wrong? Management was responsive, quick, and well intentioned. Faced with the pushback from employees, the leadership team questions whether or not they have the right employee base. Employees think management couldn’t manage to find their butt in the dark with two hands and a flashlight. Thus, the ivory tower syndrome is reinforced.

The Solution:  How could this predicament have been prevented by leadership? As Charlie Munger says, “Inverse; Always Inverse!”  Linear thought will only get you so far. In this case leadership asked, “What can we do to make employees happy?” Inversion works by asking, “What can we do to upset our employees?”

Application of Inversion:  Had leadership asked “What can we do to upset our employees?” they might of come up with some of the following:

• We can increase quotas against the backdrop of a challenged industry environment.
• We can approach the incentive plan in isolation rather than evaluating a global and comprehensive set of solutions anchored to the realities of the competitive landscape.
• We can neglect to offer promotions, advertising, or other required marketing support to assist in meeting the increased quotas.
• Through newly offered transparency – we can show employees that their new increased threshold to qualify for commission is four times their annual base salary without any due consideration to how it may be perceived.
• We can neglect to pay employees any commission unless their threshold is met. In other words, we will have employees sell products without so much as a $10 Starbucks gift card for a closed deal. We will also offer no certainly that any commission will be paid for any products sold until they start selling products beyond their threshold - near the end of the sales period. (A demonstrated ignorance of Pavlovian response and basic human psychology)
• We can announce a new incentive plan by presentation prior to having any official written documentation available for employee review, critique, and implementation.
• We can assume that the plan will be well received and only offer to answer clarifying questions on the plan while neglecting to offer any feedback loop for concerns or creative input.
• We can come up with incentive solutions benchmarked to our competitor’s offerings while not applying appropriate weighting to competitor market dominance, marketing support, or value proposition.

With proper leadership brainstorming and employee engagement in the process, an inversion exercise as above can be quite revealing. The main premise of inversion and its core power of rooting out false assumptions are rather apparent when distilled to a simple logical expression as below:

All dogs are named “Spot”.  Is “Spot” a Dog?   Answer:   No, not all “Spot”s are dogs.

When inversion is expressed this way, it’s easy to see how assumptions are avoided from its practical application.  Many things in life are a matter of perspective; and those perspectives often have assumptions built in. A person can be viewed by others as a procrastinator while in their view, they think they are quite productive as they mutter to themselves, “I’m fascinated by my work – I can stare at it all day!”  Joking aside, if leadership in this hypothetical scenario used inversion in their process, they could have proactively avoided many missteps and set up the appropriate systems to deal with any unforeseen consequences of their actions.

Inversion; a Cornerstone of Leadership:  When leading others, it is very easy to get caught up in our objectives and timelines. As leaders, we push ahead -we execute -we get results. Consider what constitutes a skillful politician - staying on point and communicating their agenda; a linear objective. President Obama is a masterful politician but, both parties have accused him of being stoic and of losing some of his charisma as of late. What if he practiced inversion and asked himself, “What can I say to upset my audience?” Or, “What can I omit to disenchant my supporters?”  Perhaps such questions could have guided President Obama in the 2011 State of Union address to have been more effective in instilling a sense of confidence and security into demoralized citizens in search of leadership. Political affiliations aside, look at how President Ronald Reagan could unite a nation and make an unarmed man with an adversary’s gun to his head feel like he he’s the one with the advantage in this statement:  “Above all, we must realize that no arsenal, or no weapon in the arsenals of the world, is so formidable as the will and moral courage of free men and women. It is a weapon our adversaries in today's world do not have.” I don’t know if President Reagan used inversion per say; but he certainly set time for reflection. Become an inspiration to others and adopt the practice of inversion.

How to Increase Sales for 2011!

Prepare yourself for a mind treat!  Click on How to Increase Sales for a fascinating read that challenges the notion that merging two companies should be used merely as a means to even out earnings. This article suggests that two unique P&Ls can instead be used to put your sales on steroids for 2011!  The Revenue Amplification Theory is pushing the envelope in the professional management discipline.

Independent Thought; It’s Okay to Think Differently

Mimicking the herd only invites regression to the mean while above average performance requires independence of thought.  Therefore, having other people agree or disagree with you doesn’t make you right or wrong - what is critical is to possess correct analysis and judgment. Feel free to be you.

If interested in improving independent thought; consider the following. To increase analytical accuracy, it helps to approach a complex problem as a gestalt, meaning a configuration or pattern that has specific properties that cannot be derived from the mere summation of its component parts. In other words, objective judgment of a dynamic and complex problem requires more than a checklist in linear mentality; it instead requires the following three cornerstones.

1. A holistic cognitive perception to view the whole problem and its many facets
2. A  lattice work of multidisciplinary mental models to apply optimal solutions
3. A deep awareness of one’s id, bias, assumptions, and beliefs so as to become as objective as possible by applying appropriate filters

These three items can be summarized by saying - you can have a wisdom that defines you above those who merely have book smarts, experience, or public recognition. But, don’t be discouraged should you find that your independence of thought has you at odds with all those of mere conventional wisdom. Happy Thinking.

Ben Franklin on Management

If you would not be forgotten as soon as you are dead and rotten, either write something worth reading or do things worth the writing. - Ben Franklin: America's Original Entrepreneur

How to Interview

So You Think You’re Making Your Hiring Decisions? Hiring managers may be surprised to find out that they often take the role of “auditor” rather than “decision maker” in hiring employees.  Many hiring managers audit a checklist to see if job candidates “match up” but they unwittingly end up relegating real hiring decisions to their competition; the applicant's last employer.

Here’s how some hiring managers evaluate a prospective employee: Ten years experience in a similar role at a competing firm we envy – check, Ivy League graduate – check, lives close by – check,  they seemed like a nice person in the interview – check; and hired. I challenge this thinking. A lot of middle managers and recruiters hire this way because it’s “safe” for them. However, it does little on its own to identify raw talent or to uncover the type of personalities that would best match what their company stands for vs. the competition.

So what if a candidate worked at Goldman Sachs and went to Harvard? So what if they had the exact role at a competitor for the last 10 years? These can be great accomplishments but, if managers make hiring decisions based on where someone previously worked or their tenure in the exact role, then they aren’t really the one making hiring decisions. Instead they are allowing the hiring manager from the candidate’s previous company to decide for them. Who’s to say the present hiring manager would have hired the candidate 10 years ago at that other company when the candidate didn’t have the 10 years experience?  Besides, there are plenty of people that got ahead in the past due to economic tailwinds and connections rather than from their own abilities. The point is, an interviewer must not lose their objectivity if they truly desire to uncover talent rather than just put cheeks in seats.

If you’re in a position to hire people, how do you know you’re doing a good job? Have you studied how to conduct interviews or is it something you just picked up along the way? Have you articulated the criteria you’re looking for? What assumptions led you to believe that your criterion is best for your organization?

I compiled a few tips that you may find useful in identifying talent.  For simplicity, I assume a hiring manager is not accidentally screening out qualified candidates due to limited resume keyword searches or due to outsourced recruiters with possibly different incentives than that of the company’s.

Interview Structure: Most professional interviews could use a dose of behavioral, functional, and case study interview styles. It’s important to not only hire for the role you’re trying to fill but to also inventory talent and skills for later use by the organization and to uncover the next generation of leadership. It can be good to encourage the candidate to evaluate the employer and vice a versa. Often interviewers want the prospect to “sell them” when it can be much more useful to search for an alignment of personal and organizational interests without the pretense.  Many prospects will try to “sell” the employer in today’s job market but they likely won’t stay around when a more aligned employment opportunity comes up in the future.

Sophisticated Questions: A lot of interviewers take only the resume to the interview and wing-it with their questions without a written agenda. Others have generic questions handed down to them by HR that were drafted by someone with no experience in the role being evaluated. These interviewers often fall back on canned questions such as, “What’s your weakness?” and thereby get canned responses. Here’s an example of how an astute interviewer can improve their questions and efficiency by asking one question and evaluating many deeper indications of talent:

What is the most common misperception your friends, family, or colleagues have about you? 

-Element of Truth: Typically there is an element of truth to how people are perceived. Often this question gets a candidate to unwittingly volunteer a more authentic response of a potential weakness.

-Think: Can the candidate creatively think of a response to a hard question quickly? Are they rattled when they don’t have an answer readily at hand? Are they in tune with their weaknesses?

-Articulate: Can the candidate put their response into a succinct framework that showcases their organizational abilities?

-Opportunity to Highlight: Has the candidate gone the extra mile to show how the misperception has been used to their advantage, or overcome, and how the experience has prepared them for the role being offered?

Ask it Again: Assuming the interviewer is well versed in Active Listening, the next level of interviewing uses sophisticated questions, in a series, related to core required attributes. For some reason, in verbal communication, the real picture seems to emerge after a few questions are asked.  The following example identifies a critical element of a job opening and has corresponding questions:

Identified Critical Skill for a Sales Role: The ability to determine how the customer vendor selection process is made and the ability to develop and communicate value propositions accordingly.

-Question 1: Once you uncover the need for your client, how do you supply your solution to meet their needs? (Price, product, speed, service, selection, etc)

-Question 2: Can you detail the elements of your solution and explain why they were selected? (Depth of knowledge, customer value creation)

-Question 3: If you were speaking with a new prospect right now, would you please list the four top reasons why they should work with you?  (Are the answers compelling and differentiated from competitors?)

-Question 4: On your last sale, how did the customer decide to go with you and who at their company was most directly responsible? (Depth of experience and communication)

Role Articulation: It’s my firm belief that if the employer can’t articulate how success on the job will be defined and rewarded for both achieving goals and exceeding them; then they haven’t done their job as the employer. Being successful in a role comes from more than a job description. It requires an alignment of expectations and the incentive to break past mediocrity into meritocracy. Similarly, a prospective employee needs to do their part by evaluating the opportunity and making sure they have a match in three critical areas:  1.) the right boss, 2.) the right job, and, 3.) the right company for them personally. A good interviewer will help encourage this part of the process.

Read and Forget the Resume: Hiring Managers would do well to show professional courtesy by studying the resume of the candidate prior to meeting with them.  Time in the interview should be spent purposely evaluating ability without overspending time on reviewing an already communicated career track.  A lot of interviewers go through a historical rehash of a person’s career whether the job was relevant to the open role or not. I’ve seen interviewers ask all kinds of operational questions for a sales position because that was the candidate’s last role so they thought they should talk about it.  So here’s the big tip, when done studying the resume; FORGET IT.  Take what you need and apply it to your agenda without getting caught up in an hour long biography. What abilities and skills are you trying to uncover in the next 60 minutes and how does the candidate measure up now and potentially in the future?

Personality Fit:  Are you really screening out people that don’t fit the culture? It’s quite common to recruit a key salesperson or key employee from a competitor and look past behavior alignment. A good practice is to articulate the values desired in a candidate and to have questions designed as a litmus test for identifying these espoused values.  For example, if interviewing a sales manager you might ask what they would do if their top salesperson consistently, after warnings, broke a value that is held dear to the hiring company.  You know if the interviewee would not suggest that they would eventually terminate this top salesperson, the company’s values may be in jeopardy of becoming mere platitudes if this person were hired. 

Check your Assumptions:  Do you screen out people that are really needed to diversify a myopic culture?  If you’re not paying attention, your subconscious mind will guide you to preconceived notions of people and you’ll naturally be drawn to what is familiar and comfortable for you. Even if you are in tune with your own biases, it’s so easy to get into a routine or formula of personality types that has worked out before. Be mindful of this. As someone who’s hired multiple cultures, personalities, and skills sets, I can tell you that you’re missing out if you try to put people in a box. Some of my best people were total surprises to me.  One vivid example was an awkward and kind of introverted person interviewing for a sales role. I had my hesitations but this person was very articulate about where and how they could succeed. It turned out; their authentic personality was the perfect match for the professional referral sources they called on who were tired of the flashy extrovert types. Breakthrough doesn’t usually come from what you expect or you probably would have done it already.

Set Expectations:  Setting expectations is critical. I think most would agree that if they took a job they were told would be a horrible experience but with a little more pay; they’d be inclined to stick-it-out since they accepted the trade-off. However, if you were told you’d have a great experience and really good compensation, and it turned out to a be horrible experience, you’d probably be placing a lot of blame as you became aware of your disappointment and would look for the first exit.  Accurately setting expectations places accountability on the person accepting the role and most people will live up to their word. It’s therefore better to under promise and over deliver when describing an open position.

So you can hire by audit and be safe but, if you really want to maximize the resources you put into every chair in your office, consider some of these tips. Talent is the one thing you can leverage in abundance without undue risk but, one must be masterful to first uncover it. 


For more tips on how to interview employees, click here. 

Managing Through Adversity

It is wise to remember that a securely grounded kite rises against the winds of adversity.