Changes in the new landscape

Last week we talked about an economy where we can expect things to stay flat, or at least feel like they are flat, for a long time. The ageing Boomers, a long recovery in real estate and construction, shrinking government spending, weakness in the financial markets and increasing global competition will prevent anything like former fast recoveries for the forseeable future.

What does that mean for the business climate? It’s one thing to say that things will be flat, but another to translate “flat” into day-to-day operating examples. What can we expect to be different in the next few years from what we were accustomed to before 2007?

Integrity and Loyalty

In a recent keynote speech in San Diego, Frank Abagnale , the subject of “Catch Me if You Can” reportedly announced that “Integrity in business is gone.” With 40 years as a consultant on fraud prevention in business, he is probably in a position to know. What does that mean in the course of normal business transactions?

Most business owners, or at least those whose companies are still profitable, have have made some difficult decisions in the past four years. Employees who were merely “good enough” in good times had to be let go. Vendors relationships based on friendship and service were replaced for ones based on price. Customers for whom they went the extra mile “just because we like them” were told that their level of service would be based only on what they paid for.

My friend, and a brilliant consultant now retired, George Dawson once told me something typically smart and insightful. “I stopped helping business owners who were in deep trouble,” he said. “I realized that a desperate owner would stoop to doing anything to anyone to save his business, and that included screwing the guy who was helping him.”

We’ve all become more aware of customers who represent a danger to us. We don’t have the slack to carry them longer, “in case they turn it around.” To the person who dealt with you for years, getting cut off may appear to be a lack on integrity on your part. To you, it is simply about the survival of your business.

I’ve seen several cases lately of businesses that found a way to save their customer a substantial amount of money. They added value by their expertise, only to have the customer take the idea to another vendor who lacked that expertise, but would cut the price even further using the improvements. That certainly seems like an integrity issue to me, but  maybe it didn’t seem that way to the customer.

Many companies, especially larger players who patronize smaller businesses, have used the recession to change terms unilaterally. I know scores of owners who have received notices that account terms of “net 30 days” would now be paid in 60 days, or even 90. Scores more received notices that the prices previously agreed to had to be reduced, or else the relationship would be dropped. Is changing agreed-upon terms a lack of integrity, or just hard-nosed business? The first few times it happens, it seem to be the former. After a while, we start to accept it as the latter.

Whether the changes in business relationships are a matter of a lack of integrity or a lack of trust, the result is the same. If you experience a lack of integrity from several customers or vendors, then new customers and vendors will be approached with less trust. It is self-fulfilling.

Pricing and Profits

I saw a sign in a snack bar last week. It said “We apologize for our price changes due to the cost of beef.” Most people won’t change their habits over a quarter increase in a hamburger, but world demand and monetary policies are inflating raw materials and commodities at an increasing pace.

Yet most small business are reluctant to increase prices. Customers are more inclined than ever to switch vendors. The Internet has given us a worldwide price exchange, available in minutes to anyone. Business owners complain constantly that their customers compare everything online; the “Google Effect.” Their standard response is “Online vendors can’t supply the service that we do.” That may be true, but a customer looking to eke out a few more points of margin this month isn’t looking down the road to long-term benefits.

On the other hand, a substantial minority of our clients had record years for profitability in 2009 and 2010. They watched costs like never before, and focused on customers or markets that maximized their returns. A few were frankly surprised at how much profit was available in their businesses. Those clients aren’t going back to the old ways. They will continue to watch every expense with an eagle eye. Any price increases to them will trigger a review of the entire relationship.

Increased competition from Asia is a factor that is huge, and can’t be fully addressed here. Whether it is outsourcing an executive secretary with an Oxford accent in Mumbai, or fabricating steel without environmental compliance costs in Huangchuan, the world is simply more competitive than it was 10 years ago.

The last factor I need to address in this section is speed of decisions. Customers are simply more reluctant to pull the trigger. When they were booming, it was more important to get what you needed, when you needed it, than it was to pay the very best price. Going back to last week’s column, when things are flat you can see a long way. It’s like driving in the desert. You have a long time to make decisions. (“Giant Ball of String- Only 153 miles!)

Customers have discovered the advantages of waiting. Maybe the price will go down. Maybe a better model will come out. Maybe my business will dip, and I won’t need it anyway. Maybe I should wait until next year. Maybe I should wait until it breaks.

Your sales process will have to be broadened to take timing into consideration. It’s no longer sufficient to explain the features and benefits of using your product. You need to explain the benefits of using it now.

Employees

The third major change has been in employee relationships. For thousands of small business, the old standby “We are like a family- we take care of our employees,” was left as roadkill in the last few years.

Small businesses cut pay, cut benefits, and cut bodies. In a buyer’s market for employment, they found that their people would sit still for a lot more than the owners thought they  would.

Our high unemployment numbers are astonishing, and will remain so for a long time to come. Gallup Polls don’t “adjust” for seasonality, major layoffs or the other things that the Federal government uses to make the numbers more palatable. They simply ask if someone is looking for work, or looking for more work than they are able to find. That number remains at over 18% of the workforce.

But unemployment is also seeing the effects of the Gini Coefficient (see last post) on separation between the highest and lowest segments of the population. Drilling down into the unemployment figures shows that this recession hasn’t impacted the educated, experienced or skilled workers nearly as much as it has those who lack those attributes. It has been brutal on construction workers, white-collar administrators, entry-level service employees, and new graduates.

Employers are accomplishing more with fewer people, but that has a corollary. It means that each person is more important to the business than before. In small companies, cross-training has always been an ideal seldom fully implemented in reality. With less time, and more work, you’ll have structural tension between two forces.

For every new job, you will have more choices of applicants. But every job now requires someone who can perform at a higher level, do more things, and act with less supervision. You can no longer afford to hire three people to do the work of two. In reality, you are looking for one person who can do the work of two. That person is still hard to find.

Good employees will get over the headlines about unemployment soon. They are beginning to realize that they play a bigger role than ever in the company’s success, and that their contributions are worth compensation. Employers will learn that the headlines about how easy it is to find employees don’t mean great employees, they are just body counts.

The New Order

If it sounds like all this makes doing business more difficult, don’t despair. It does make doing business the way you used to do it harder or impossible. It does require new thinking, and a return to some old thinking.

The first three columns in this series were to set the table of expectations. I may be myopic, but I think what I see is, by and large, what our situation looks like. Next week, we start talking about how to win in this brave (and frightening) new environment.