President Obama presented last week further details of the US budget 2010. This budget of Team Obama has been developed in the financial context of the urgent need for revival of the US economy and reduction in budget deficit and in the political context of commitment to reduce social inequality, to carry out healthcare reforms and towards greater US action against global warming.

While this budget, perhaps trying to bring socialism into America, is in line with his political commitments, the trillion dollar question is whether financially the budget will deliver on its promises.

I would argue that some of the budget initiatives will be counterproductive and the desired economic goals are unlikely to be reached following these policies, though only time will be able to prove Team Obama’s financial acumen or otherwise.

Let us quickly review some of the key features of Obama $ 3.5 trillion budget for 2010 -
(a) Increase in tax rates for the rich,
(b) Tax breaks for lower income groups,
(c) Withdrawal of tax exemptions on overseas business earnings by US corporations
(d) Investment in health-care reforms in order to reduce healthcare costs in the future
(e) Price on carbon emission by corporations
(f) Defence spending at $ 666 billion at 19% of total budget
(g) Budget deficit $1.1 trillion at 8% of GDP

The budget documents show the effect of the budget proposals for the next 10 years till 2019. The real GDP growth rate for 2010 has been projected at 3.2%, assuming a turn-around in the economy from the negative growth of 1.2% in 2009. The growth rate increases to 4.0% in 2011 and to 4.6% in 2012, in the final year of the current presidential term.

Some of the long terms effects presented in the documents are -
a) Budget deficit reduces from 2009 level of 12% of GDP to 8% in 2010 and tapers off to remain at around 3% from 2012 onwards
b) Defence budget stays at $ 600-670 billion range over the 10 year period and reduces in percentage of total budget from 19% to 13% over this period. This includes “overseas contingency operations” (war chest) of $ 130 b in 2010 and $ 50 b every year thereafter.
c) Net public debt almost doubles from $ 6.9 trillion in 2009 to $13.8 trillion in 2019 and interest payouts increase four-fold from $ 164 b to $ 622 b during the same period.

There are three major problems with the financials of the budget.
The GDP growth rate assumption seems ambitious, given the budget proposes to tax the drivers of the economy, the entrepreneurs and the multinational corporations. US multinationals have dominated the markets in the world, but current policies will push them to a cost disadvantage in their overseas operations, which will be counter productive to the revival of the US economy.

The budget does not carry out any significant cut backs on the largest expenditure head in the government outlay plan. Defence expenditure continue to remain at high levels and more significantly, continue to provide for war chests for overseas operations. There seems to be hardly any justification, neither political nor economic, for spending such large sums on defence and in building war chests of $ 50 billion every year for the next 10 years.

The budget fails to provide any relief to the burgeoning public debt, which doubles during the 10 year period and creates a vicious cycle of increasing interest payments, budget deficit and further debt.

It appears that Team Obama is just praying that the economy revives quickly, despite the adverse tax measures, and that the bulging public debt does not bring it down to its knees once again. We will all join in this prayer.

A radical change has occurred in the world of marketing. Just five short years ago, most companies utilized only traditional forms of advertising including: TV ads, radio ads, magazine ads, newspaper ads, etc.

As a result, most marketing consisted of advertising that interrupted whatever the individual was doing. TV commercials are a perfect example of this advertising concept. As you watch your favorite Thursday night program, suddenly a commercial breaks onto the scene and interrupts you. Thus, the term “interruption marketing” was born!

Obviously, consumers began to rebel against interruptive advertising, because, let’s face it, no one likes to be rudely interrupted.

According to Kirby and Marsden (authors of Connected Marketing), 90% of people who can skip TV ads, do skip TV ads. In addition, 65% of people believe that they are constantly bombarded with too much advertising. So, as a marketer, the first question that you must ask yourself is, “How effective is interruptive advertising?” The answer should be blatantly obvious!

As consumers pulled away and began to distrust directive forms of marketing, marketers were forced to make a change. No longer could marketers engage in the traditional, forceful ways of old; consumers were just too savvy for that.

As a result, interactional marketing was born! Developing relationships with your customers before they do business with you is an integral part of a successful marketing plan. No matter what business you are in, your motto should be: relationships first, sales second.

As a marketer what can you do to begin to develop relationships with today’s consumer? Here is a quick list to ensure that you are heading in the right direction:

1) Engage Your Client Through Real Conversations. Today’s clients desperately want personal relationships with those they choose to do business with. As a business owner this is relatively simple to accomplish through some of the popular social media sites: Facebook, Twitter, LinkedIn, YouTube, etc.

2) Interact With Your Client. Ask questions, answer questions and provide helpful suggestions to your clients on a regular basis. Marketing is not a one-way street. Today’s consumer wants to build a relationship with you.

3) Focus On the Needs Of Your Clients. As a marketer you need to determine what problems your client needs solved; then work at providing the solution! Marketers must take the focus off of themselves and their business and instead, target the needs of their prospective clients.

4) Share Information. Offer your clients information about yourself and your company. Give them a taste of what they can expect if they develop a business relationship with you. You can accomplish this by giving away free reports, free ebooks, free product samples, etc.

5) Use The 80/20 Rule. No matter what platforms you use to interact with your consumers, always follow the 80/20 Rule (better known as the Pareto Principle). You should spend 80% of your time providing useful content, offering helpful suggestions and developing relationships and only 20% of your time promoting your company, landing pages, websites, etc.

Again, today’s consumers are extremely distrustful of interruptive and directive forms of advertising. Instead, they are interested in developing a relationship with their business partners. So, provide your prospective clients with plenty of ways to interact, connect and get to know you. Your business will thank you!

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Jessica Swanson, “The Shoestring Marketer,” has helped entrepreneurs, all over the world, explode their businesses using cutting-edge, proven, NO-COST internet marketing strategies. To receive your FREE Marketing Kit, which has helped thousands of entrepreneurs, just like you, learn the exact techniques for marketing their businesses for NO-COST, visit: http://www.ShoestringMarketingKit.com/

Recession is trying time for businesses. Revenues drop, costs seem to be unmanageable and the bottom-line becomes a bottomless pit. This is when the Finance guys, the ‘bean-counters’, are brought in to take charge and manage costs. Headcount is pink-slipped, travel budget is reduced, long distance calls are banned, stationery supply is curtailed and the free cups of tea are stopped.

Is cost management critical only during troubled times like recession? Is cost management less important during periods of high growth and prosperity? My experience shows that business leaders tend to focus on revenue growth during normal and boom times and allow costs to inflate beyond necessity. Then, during slowdown period and recession they switch back focus to cost management by letting loose the bean-counters, who then begin to cut back costs on an ad hoc and opportunistic basis.

This is a wrong approach to cost management. In a business organisation, which intends to run efficiently, costs need to be managed (not necessarily reduced) all the time – both prosperous and troubled times – and not with a stop-start approach. It cannot allow unhealthy accumulation of fat in any segment or type of cost at any time.

Let me now take you through my recommendations for cost management with a three-pronged approach. During recession period there will be a fourth point to consider as well. The three prongs are (a) Investment approach, (b) Variable Cost approach and (c) Opportunistic Savings approach. During recession period I will also consider Capacity Reduction approach.

Investment Approach

All costs are viewed as investments and not as expenses. Therefore for every cost item, we need to evaluate the returns generated by that spend (with no distinction between capital and revenue expenditure). Returns generated from payouts on rent, utilities, travel, marketing spends etc will be evaluated. Yes, it will be difficult to evaluate returns on several types of spends. The alternative criterion in such cases will be the opportunity cost of that item – that is, the additional costs/losses likely to incurred, if we do not spend on that particular item. Avoidance of the opportunity cost can be considered to be the return on such spends.

There can be two types of investment in costs. Strategic investments are those where the returns happen over a longer term, where as in case of Normal investments the returns are quickly seen. Let’s take the case of Training – this is a strategic investment and the returns are not easily visible in the short term. Even in the long term, the returns from Training may not be easily measurable. But its strategic importance in creating an employee development culture might be critical to the business.

Variable Cost approach

In this approach the objective is to convert some part of the fixed costs into variable costs. When sales volumes are down, variable costs will go down. When volumes are growing these costs will increase, but the affordability will also increase with higher sales and consequent higher cash generation.

A popular example of this approach is the variable pay component in the salary package. It is not a piece rate system, but a performance based incentive system where at low volumes/profits the amount payable is small, but with higher volumes/profits the amount payable goes up. Another example is advertising agency remuneration where the agency can be paid a bonus based on sales performance of the business

Apart from payroll and agency remuneration, this approach can be applied to other costs of fixed nature as well, through innovative negotiations with vendors.

A word of caution – the approach can boomerang during periods of growth if used extensively. Costs will continue to increase for the business with growing volumes, where as competitors with costs of fixed nature will gain a cost advantage with decreasing fixed costs as percentage of revenue.

Opportunistic Savings Approach

This is the approach that most bean-counters follow normally. There is not much planning usually behind this approach, opportunistic short term savings are sought here. This will comprise mainly arbitrary budget cuts under most expense heads, essentially to take away part of the cushion that was allowed to be built into budgets in the first place.

We could follow in this approach a simple method of 3 Rs, for evaluating and managing costs – Reduce, Reuse and Recycle.

The positive side of this opportunistic savings approach is that short term savings can be quickly generated by this method. The negative side is that the arbitrariness generates demotivation within the system which can have a long term negative impact beyond the recession period.

Capacity Reduction

Fixed costs are called capacity costs, because they are of fixed nature for a given level of capacity of production/sales. When capacity to do work or to produce/sell by a business organisation increases, fixed costs also increase but in steps. Variable costs on the other hand increase directly in proportion to increase in volumes.

During recession when sales volumes drop substantially, management might consider reducing capacity. Capacity reduction will mean giving up people, space, plant etc. If that is neither possible nor desirable then the excess items/space can be isolated as idle capacity, so that expenditure on related maintenance and utilities are not incurred.

Capacity reduction is not a short term opportunistic decision; it is at least a medium term decision of minimum 2 to 3 years. Rebuilding capacity once volumes pick up again will certainly be more expensive in the future. If the downturn is viewed to be of 6 to 12 months duration, capacity reduction will end up incurring more costs overall than what can be saved over that period, apart from significant impact in morale and client perception. This however remains a favourite method of most multinationals.

Why do we have a recession now? No, I am not asking why and how recession began. My question is why it is continuing even today.

Our minds, whether at individual or at corporate level, have receded into postponement of spends, whether capital expenditure or revenue. This is because of the losses we say or think we have incurred in the recent market crash. This postponement of spends at individual levels has caused reduction of aggregate demand. It is thus the fear psychosis leading to recession today.

The remedy therefore lies in reversing the situation. If our minds are rejuvenated, this in turn will ultimately regenerate demand and re-energise the economy. No, we do not necessarily need to wait only for Government spending to revive the economy, as is said in the Keynesian theory. The revival of the economy can be made by aggregation of micro demands of individual persons and organisations.

Most of us say that we have lost money in the stock market, in mutual funds, in real estate etc. in the recent market crash. But you will agree that these were really paper money that we have lost, in most cases. Have we been adversely affected in our cash flows because of the market collapsing?

Banks created asset bubbles through hyping up the real estate market and through structured derivative products. They loaned money based on these bubbles and then lost money when the market collapsed. But this money, created by smart bankers, was something they never had in the first place. The losses are mostly in paper and thus notional. Unless it has affected cash flows adversely, we cannot say that the losses are real.

The impact on personal lives, however, has been severe and real. Thousands have lost their jobs and thus lost real earnings and suffered in cash flow terms. There is no denying this harsh truth.

Banks have stopped lending because they apprehend that more they lend the more they will lose (this has always been true). This has created a shortage of fund availability in the market. Industries have been forced to cut back on production on account of lower funds as well as lower perceived demand. The cycle has been completed with resultant job cuts and loss of employment and the vicious spiral is still growing. But it all started in the mind with fear in the market place.

Banks have to lend money to survive, that is their business. Industries need to grow to survive, they cannot hold back on production for ever. If they do, they will perish. We individuals need to live our lives normally (not recklessly though). For example, I need to replace my old car and not postpone the decision because running an old car is more expensive.

We need to spend normally to survive and this will allow the economy to function normally. This is true for banks, industries, government and individuals. When we remove fear and negative thoughts from our minds and carry out our economic and social functions in the usual course, aggregation of these individual micro-demands will rejuvenate the economy and recession will be on the run. Hakuna Matata.

The Four Obsessions of an Extraordinary Executive is one of my two favourite books written by Patrick Lencioni. Patrick who runs a management consulting firm called the Table Group in the US, has authored several bestselling books on management soft skills development. In a previous post I had covered his other book The Five Temptations of a CEO.

The Four Obsessions of an Extraordinary Executive has been written in Patrick’s typical fable format and in a lucid easy reading style. Post story telling, Patrick turns into an executive coach and goes on to analyse these obsessions and gives advice on how to carry out self-assessment and on implementation of these disciplines in an obsessive manner. Unlike the “Five Temptations..” where you are advised to avoid temptations, here Patrick turns the issues around and focuses on the positive actions required to improve organisational health, which is the only long term competitive advantage that you can build for your organisation.

According to Patrick, extraordinary executives obsessively pursue the four disciplines of (a) Be Cohesive, (b) Be Clear, (c) Over-Communicate and (d) Reinforce through Human systems.

The first discipline of “building and maintaining a cohesive team” will counter some of the temptations mentioned in the other book. A cohesive team will know each member’s strengths and weaknesses and trust will prevail over invulnerability. They will openly engage in productive conflict and not choose harmony, and will hold each other accountable in choosing accountability over popularity and fully commit themselves to group decisions.

The next discipline is where you “create organisational clarity“. This is the opposite of choosing certainty over clarity (if you recall the third temptation). Team members must know why the organisation exist, what business it is in, who are the competitors, what behaviour values are fundamental, what are the long term and short term goals and of course, the specific tasks and responsibilities of each member.

After this, you not just communicate but “Over-communicate organisational clarity“, which is repeated often and cascaded across the organisation over multiple formats, delivered in simple language.

Finally you “Reinforce organisational clarity through Human systems” – all of the above need to be built into the organisation ethos and this will be ensured by relevant and consistent policy and practice of hiring, of performance management, rewards and recognition and employee separation.

Business coaches say that to be a good executive you need soft skills rather than technical skills and also that application of soft skills is “simple in theory but difficult to put in practice”. In schools, colleges, universities and business schools, we are taught to solve complex problems and the rigors of technical and scientific analysis. Simple soft skills are hardly taught in formal sessions any where. We therefore find it difficult and uncomfortable to implement such simple skills. On the other hand, we really enjoy dealing with complex problems of marketing, technical or finance. As a result we fall prey to the five temptations and do not learn the basic four disciplines of managing teams and improving organisation health.