Monthly Archive for October, 2008

Alternatives to Layoffs

Published
by
Michael McKay
on 8 October 2008
in Business Planning, Financing, Information Technology, Management and Virtual Corporate Desktops
. 0 Comments

If you are preparing for the downturn by cutting costs, consider the advice of Mike Elgan. In his article on “Three Ways SMBs can Survive the Economic Meltdown“, Mike highlights three alternatives to layoffs that can help reduce the overhead costs of running a business:

  1. Send people home. Companies often consider transport and associated costs as included in employee pay. Consider cutting a portion of this pay and let employees work from home.
  2. Use all the on-line tools to travel virtually and collaborate without actually leaving home.
  3. At the extreme, consider closing your office and becoming a Bedouin organization.

I like these ideas but I have to ask, why wait for a downturn?

Remember the Dollar?

Published
by
Michael McKay
on 8 October 2008
in Business Planning, Financing and Management
. 0 Comments

It wasn’t long ago that the strength of the Canadian dollar compared to the USD was a source of major concern for Canadian manufacturers. With the recent turmoil in the markets, the Canadian dollar is weakening again as traders speculate that the recession will reduce demand for the commodities, oil in particular, that are the backbone of the Canadian economy.

USD/CAD currency exchange prices over the last few years.

USD/CAD currency exchange prices over the last few years.

I’m sure many in the manufacturing sector are torn between the impacts of the recession and the benefits they will get from the weakening dollar. To survive the plunge in the US dollar from the heights of 2002 when it was trading at over $1.50 CAD to the lows in November 2007 when it hit nearly $0.90 CAD, manufacturers that sold into the US economy had to become very efficient. It was essential to manage Canadian dollar costs to ensure profitability. If goods were sold in US dollars, there was a double impact of falling revenue in Canadian dollars. Many were forced to raise the prices of the goods they sold into the US. A strengthening of the US dollar will reverse these impacts and the now efficient firms will benefit.

For most of 2008, the dollar has been trading near par but it has risen nearly 10% to $1.10 in the last three months. [Update: As of the 10th October, the USD/CAD rate had increased to over $1.18] That has to be a relief to manufacturers that sell into the US. It represents free revenue in foreign exchange as well as the opportunity now to reduce US prices in the face of a recession.

The question is whether the recession will have more of an impact than the dollar. My own guess is that the coming year will be a bad one and that the Canadian economy will again start to look good compared to the US which will reverse the trend in the dollar. So enjoy the bump while it lasts but don’t depend on it. More belt tightening will be required in the future.

Buffett’s Law and Cloud Computing

Published
by
Michael McKay
on 6 October 2008
in Financing, Information Technology, Management and Virtual Corporate Desktops
. 0 Comments

In an interesting post on the future of Cloud Computing, Jake Smith says that one of several antecedents of wide-spread cloud computing is the impact of “Buffett’s Law”. Basically, the law states that Warren Buffett, the billionaire investor is driving change in the business world through the principles of value investing in ways that promote conservative innovation as opposed to radical or flamboyant visionary creation. “The value of an enterprise is a direct correlation of it’s ability to deliver consistent return on invested capital, regardless of market conditions.” What does this mean?

Return on Invested Capital (ROIC) is a measure of the ability of a company to generate EBIT or earnings before interest and taxes compared to the amount of investment in long term debt or equity. To maximize the ROIC, the company must do two things: first, maximize its operating profit which translates to maximizing sales, minimizing the cost of good sold, minimizing the overhead involved and working with a low tax rate; second, the company must minimize the debt and investment required which translates into minimizing the working capital requirements and the non-current assets.

The first part is about efficiency of operations. The second part is about business models. Efficiency of operations is the realm of lean manufacturing - a philosophy of organizational efficiency that can be applied to just about any process. Business models relate to how you make money and the decisions about what you do and what you outsource. Take the decision to outsource PCB assembly rather than purchase the equipment and build the components in house. If the cost of goods remains the same, out-sourcing is preferred since it lowers the non-current assets which will result in a better ROIC. To make the purchase of the PCB assembly line attractive, the cost of goods would have to drop significantly compared to what could be produced through outsourcing in order to generate the same ROIC.

How does this apply to cloud computing? Cloud computing is essentially an outsourced IT model comparable to the outsourcing of PCB assembly. The cloud offers lower infrastructure for similar performance which means that, even if the cloud is just as expensive as tradition IT, it will be a preferred simply because it lowers the ROIC - hence the impact of Buffett’s Law.

For more on the trends in cloud computing read Jake’s article here or my own take on the changes in IT here.

MJM Consulting - Helping companies grow.

Quintessential Canadian Experience

Published
by
Michael McKay
on 5 October 2008
in Uncategorized
. 0 Comments

Today, I had a very Canadian experience: portaging a canoe through downtown Ottawa. Portaging (carrying the canoe on ones shoulders) is typically done in the woods, between lakes or around rapids that are too dangerous to traverse, hidden by trees. In the city, it is a different experience, both for me and for the people I passed. It was a short trip from my house to the Ottawa River - probably a few hundred yards - yet I managed to pass in front of a tour group and a number of other people on the street. Thanks to the Frantics, the Rideau Canal and the Ottawa River , it is not unusual to see someone walking down the street of the nation’s capital with an 18 foot canoe on their head. Still I hope the tourists enjoyed the sight as they bought some Maple Syrup candies.

Between the portages from and to home, my wife and our youngest daughter spent several hours on the Ottawa River seeing the sights, the ducks and swans and the leaves which are just about to peak with the autumn colors. With the rocking of the canoe, my daughter only lasted a short while before she was snoring in the bottom of the boat, leaving my wife and I to talk.

It was a great day.

Pragmatism Always Wins

Published
by
Michael McKay
on 3 October 2008
in Business Planning and Management
. 0 Comments

Pick your niche and stick to it. Focus focus focus. Stand for something. Don’t waiver. Stay on message. Stay on target. Damn the torpedoes. And while you’re at it, go down with the ship.

Following the tech crash in 2001, Sun Microsystems did not change its strategy. It continued to invest heavily in R&D at a rate nearly twice as large as its competitors. It did not adapt its product lines to meet the customer demands for cheap off-the shelf products. They stuck to their strategy but they lost their competitive advantage.

Now consider the Republican move to shore up the financial system. (Shore-up is a much better description than bailout, don’t you think?) This is a clear departure from their message. It is a socialist move that is not consistent with Republican values. Does that make it wrong or is it more likely that these extraordinary times do not fit nicely with the policies of any political party. New thinking is required because sticking to the message in times like these does not make sense.

Being dogmatic about your strategy in the face of external changes that affect your business is wrong. Predict, plan, adapt is better advice. There are things that happen to businesses that require you to change. Being stuborn and dogmatic about it won’t help you. In these cases, pragmatism always wins.

Thanks to Seth Godin for getting me on the soap box.

Open Source Software: an Inferior Good

Published
by
Michael McKay
on 2 October 2008
in Financing, Information Technology and Virtual Corporate Desktops
. 0 Comments
Image from “Romance gets a market correction”Please have a read of Steven Vaughan-Nichols’ blog Lets Talk Cheap Software. The comments are especially good.His point is that, in these turbulent times, expensive software licenses and contracts are not the place to put your money. If cash is now king (but hasn’t it always been?) it is better to trade effort for a product than cash. With open-source software, their is little cash outlay but you do have to spend the time to learn how to use it.

Like most inferior goods (I’m using inferior in the economic sense - see wikipedia definition here), open source software may not be seen as an attractive option when times are good. When you feel rich, you have options. It is easy to throw money at a problem and buy the expensive stuff and the consultants to install it. On the other hand, when times are bad, throwing money may not be an option and is likely a dumb move in any case. Its in the bad times that open source software is an especially attractive choice.

This doesn’t mean that you have to put up with something less, just something different. An attitude adjustment is required. Like in the article in The Globe And Mail today “Romance gets a market correction“, don’t worry that because you can’t afford expensive dinners any more, your marriage will suffer. If you think back to when you were young and at the beginning of your relationship, those were happy times. “You were pretty close to broke, but you were having fun.”

Network Governance: Sharing the load of decision making

Published
by
Michael McKay
on 1 October 2008
in Business Planning and Management
. 0 Comments

Can a single board of directors, informed by a single CEO effectively manage a corporation and avoid ethical risks? According to Dr. Shann Trunbull, a Principal and the International Center for Self Governance in Australia, the answer is no. Firstly, with only one board and with only one source of information, the board is both overloaded with information and poorly informed - despite the best efforts of the CEO - leading to a situation where decision making is fraught with risk. In addition, the single line of oversight can lead to conflicts of interest that are incredibly hard to resolve without a separation of operations and oversight.

Dr. Turnbull suggests changes to the governance structures that will enforce this separation by creating multiple boards and ensuring multiple sources of information feeding into the boards as well as the CEO. The different boards would have various roles aimed at the decomposition of decision making labour, the reduction in information overload, increased quality of decisions, and a reduction in conflicts.

The governance model is not that different from the model being used by several open source communities.

His full paper can be downloaded here. All his papers can be found here.