How's the government doing on job creation?

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Everyone is talking about the stimulus package and job creation. Depending on which side of the political fence you’re on it’s either a great success or a total flop.

Unemployment is at 9.5%, some say it’s higher than that but somewhere in the neighborhood of 1 million folks have simply stopped looking. At any rate was the stimulus needed and is it working?

Well as to the first question there is no doubt it was and is needed. That only leaves one question did we spend the money wisely, or in my simple business outlook did we get an adequate return on investment?

Well if you look at the money allocated, $787 billion dollars, that seemed to me a significant amount of money to invest. Of that total about 57% of the money of $453 billion has been used. It seems a simple math step would be to simply divide the amount used by the number of jobs created and you could get a feel for it’s success.

That unfortunately is where it gets murky. The Congressional Budget Office has estimated the package to date has created 800,000 to 2.4 million jobs. Not a confidence building estimate was it. Obama said in February it will create 1.5 million to 2 million more. More than what? OK based on these two figures we have a range of cost per job. If we take the low estimate it cost the government $453 billion to create 800,000 jobs or about  $566,250 per job. If we take the highest possible estimate it breaks down to about $188,000 per job.

Most of these jobs were created repairing infrastructure, we’ve all seen the signs on the highway, “Project funded by the American Recovery and Reinvestment Act”. Most of these we can assume are worthwhile projects. However they are projects, they’ll be completed and the jobs will go away. We’ve spent somewhere over $453 billion and created no lasting value, or worse yet no lasting employment.

To me that’s a short-term patch and no lasting impact. I read in a newspaper a few weeks ago that the total budget shortfall for all 50 states in healthcare and education is a combined $55 billion dollars. Wouldn’t it have made sense to put some of that money into hiring teachers and improving education at the state level?

Investment in quality education is the only lasting way to create jobs. Now I realize that’s a long term look and we need jobs today. Are highway paving projects the highest thing on our priority list?

What about manufacturing, medicine, research? Funding projects that create value and good paying long term employment.

I guess is you sum it up the stimulus is sorely needed, but like everything else driven by Washington it was lost in the execution. Congress and Obama were more interested in getting job numbers up quickly to make a positive impact in time for elections.. Like American big business, government is making short-term decisions for quick fixes and further mortgaging our future.

So you tell me, did the $453 billion provide an adequate return on investment?

Like so many other things nobody knows.

Where should you use a return on investment criteria?

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When most executives think about return on investment they think about a formal justification for a large capital investment. Usually in a large company it’s expenditure over a preset limit of say $25,000.

My experience has taught me that much more money is spent everyday with little or no accountability and without thought to return on investment (ROI).

Business executives must demand a return on investment for every resource in their organization.

As a business leader, you have a responsibility to ensure that the assets of your company are used in ways that provide the highest possible return to stakeholders. That applies to all assets, including your human resources. 

I have seen numerous managers over the years that pride themselves on being frugal. Sometimes they go so far as to refuse to purchase something that may aid productivity on the pretense of financial responsibility. Yet, many of these same managers continue to compensate underachieving subordinates without saying a word. They don't seem to understand that employees are critical and expensive resources. When I question them about the obvious disparity, most are unable to see the connection.

When you tolerate poor employee performance, you violate the trust placed in you as a business leader to generate maximum return on investment. You place an unfair burden on other employees who must pick up the slack, or even worse, must correct the errors and deficiencies in poorly completed work. As an effective leader, you must expect excellence. Tolerating mediocrity is toxic to your organization.

The cost of poor performance can be staggering when you consider poor quality, returned goods, rework, overtime to make up lost production, and the negative impact is has on other employees. Many executives fail these dollars as an investment and they treat the cost symptoms rather than the root cause.

To realize a return you must first invest. Leadership development and training your people  is an investment opportunity.

Unfortunately, most companies don't see it that way. They'll invest in new equipment long before they'll invest in their people.

Not infrequently these companies will promote people from the technical and production ranks to roles as supervisors and first level managers without any additional training. Some of the good traits that set these individuals apart, such as dedication and work ethic, are directly transferrable to their new roles. But other needed skills in the area of leadership may be new and foreign to them.

As a result, many upper management initiatives are not effectively transmitted from the boardroom to the shop floor. And much valuable information from the production floor is incorrectly filtered before it reaches upper management.

As wages and health care costs continue to rise, management must invest ever more wisely, consistently, and generously in human resources. Investing in effective leadership development and communications programs pays big dividends in terms of  –

·     Higher productivity.

·     Lower employee turnover.

·     Better quality products.

·     Customer loyalty and satisfaction.

 Be prudent about where you put your time and money. Invest in employees who have demonstrated a willingness to learn and grow.  

Do you get a return on investment on your sales dollars?

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Do you even measure return on investment for sales or other normal business functions?  Many companies only look at ROI on capital expenditures and other large dollar investments. The bulk of the money companies spend are spent on normal daily activities, but few look at justifying ROI on anything other than one-time major investments.

Why should you worry about ROI on normal expenses, doesn’t your P & L cover that? The real answer is the P & L will tell you many things but it’s telling you about them after they occur. In my recent book I gave the example of using the P & L as a problem solving tool is like steering a huge ship by looking at the wake. What you see has already happened, and corrections take time.

So how do you measure ROI on sales, and why bother?

Let’s take a hypothetical company as an example. You run a $10MM dollar manufacturing company, sales are flat and margins are declining. You have a current net margin of 2% and high fixed costs. You feel you need additional sales to offset the high fixed costs, and improve margins.

You are currently making $200,000 annually, (2% of $10MM), and you want to double your net margin to 4% in order to attract new capital. How much do you need to increase sales and how much can you afford to invest to get those sales?

Well first you need to understand what return you get from a $1.00 sales increase. At 2% net margin you are only getting .02 cents. That is before any additional costs are added to increase sales.  Based on an assumption that you can’t grow sales at your present level since they are declining, let’s assume you need to invest $100,000 dollars to increase grow the business and margins to where you want to be. How much new business would you need to get in order to accomplish your goal?

Adding 100K in new cost has effectively cut your current margin in half to 1%, so you are already starting in the hole.

Let’s further assume fixed cost are $2.8MM annually. The chart below shows if all support and production functions remained the same you would need to grow sales by $1.1MM in order to achieve your goal of a 300K net profit increase.

So an investment of 100K in sales would get you an increase of 319K in net profit assuming you were able to execute.

You would need to increase sales by about 400K just to cover the cost of the additional sales expenses.

Initially the return looks great, invest 100k and get 319K back in profits, the question becomes one of time and execution. The longer it takes to develop the needed sales increase the lower the ROI.

Understanding the numbers makes it easier to make a decision initially, but it also makes it easier to understand the costs of delay and nonperformance.

Do airline mergers alone produce better bottom line results?

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The news today reports a pending merger between United Airlines and Continental to be completed with a 3 billion dollar stock swap. The combined company will result in the world’s largest airline. The pending deal will surpass the recent Delta/ Northwest merger that  I believe, then created the world’s largest airline.

The real question is do airline mergers add value and increase bottom line profits?

The intent is to merge routes, cut redundant flights and service providers, and reduce costs. The real world result is often different.

Cost reduction gained by reducing headcount is often eliminated by higher wages and benefits given to labor to support the merger the subsequent loss of jobs and changes in work rules. About a year ago I wrote an article for an investment banking newsletter about mergers and acquisitions. The article was entitled “Can Acquisitions Work”?

Research for that article cited a study done by KPMG in 1999 that showed that “83% of mergers were unsuccessful in producing any business benefits regarding shareholder value” (Feldman & Pratt 1999).

The reasons given were loss of productivity of up to 50% for 4 to 8 months following a deal, as well as difficulty in merging systems, cultures, and work rules.

If we apply those findings to any airline merger the potential of adding value and providing better bottom line results is even more questionable.

Is any industry more tied up in regulations and work rules than the airline industry? Government regulations, union agreements, agreements with lenders all put pressure on airline profits. Not to mention fuel costs, inability to quickly reduce unprofitable flights, difficulty reducing workers, or the difficulty in merging reservations systems, call centers, and ticket outlets.

The hope of both companies behind a deal like this is to combine services, cut costs, and keep all of the revenue that both companies have today. The thinking is that passengers at a given city are captive since many cities are only served by one or two airlines.

I think what makes this strategy risky today is the willingness of the flying public to accept more service interruptions and inconveniences is greatly deteriorating. Looking at it from a passenger standpoint and not as an airline industry analyst flying just isn’t a great experience.

Speaking for myself as a former frequent flyer with over 2 million miles on two major airlines, I’d rather do nearly anything than take a commercial flight. Increased security and long lines at airports, poor customer service, flight consolidations and delays, tighter seating, smaller planes make what used to be a tolerable experience a dreaded chore.

I think until airlines realize that they are a customer service provider that provides transportation, not a freight carrier dealing in numbers the public will continue to look for ways to minimize air travel. The recent recession has caused companies to reduce travel due to cost concerns. New technology such as affordable teleconferencing has made some non-critical travel easier to eliminate.

There will always be a need to have face to face contact with customers, but companies are looking for ways to minimize the frequency.

Smaller more nimble carriers such as Jet Blue and Southwest are working hard to gain market share. That market share has to come from somewhere and that somewhere is the large carriers. Bigger is not automatically better, unless the combined entity can increase performance, develop a loyal customer base and maintain sales at current levels or better, this merger will join a long list of those losing value for the shareholders.