In the current economic climate it is all too easy to focus just on the short-term. The risk is that in the eventual recovery we are caught flat-footed. Forward thinking companies are always on the lookout for the long-term trends that will impact their company and their industry. They proactively seek first to understand, then to define and execute strategies to capitalize on the opportunities.

Here are four trends we’ve been thinking about at M Squared Consulting. I encourage you to think about them during the “quiet” week between Christmas and the New Year. They each provide an opportunity to create value today, and into the future.

Customer Value

No matter what industry or geography your business operates in, the people who buy your products or services are undoubtedly focused on controlling costs, reducing risk, and streamlining their operations. To the degree that you can show how your business fits into this agenda, you’ll be more relevant.

Your best customer is one who has already purchased from you. Get closer to your customers and your market. Communicate with them. Demonstrate how your business uniquely provides the best value (the overall maximization of the price/service/quality equation.)

Forward thinking companies are already thinking about the eventual economic recovery. Can you help them in their planning? Can you provide products or services that will enable them to capitalize on new opportunities and grow their market share?

Economic shift

The U.S. economy is transitioning from a knowledge economy (where value is added to data or analysis) to a conceptual economy (where original ideas are developed to address problems through specialization and networking.)

Businesses like M Squared Consulting, that provide access to specialized expertise, will be the enablers for this economic shift.

How does your business fit into this trend?

Free agency

Let’s put aside for a moment the immediate trend of increasing unemployment. Once the economy recovers the U.S. will face an unprecedented war for talent.

The statistic that is not being mentioned during the downturn is that the growth of the U.S. workforce continues to drop. In the 1970s, it was 2.6%, in 1990s, it was 1.1%, and since 2000, it has averaged 0.4%. In addition, the U.S. birth rate continues to decline (even with the net positive effect of immigration) and highly-skilled workers continue to be in short supply (we’re simply not educating enough engineers, scientists, and other professionals). When the economy enters recovery mode, the war for talent will quickly accelerate as these macro trends take effect.

A natural outcome of this trend, particularly at the professional level, will be the growth of the flexible workforce. Many knowledge workers have made the lifestyle decision to be free agents, recognizing that consulting allows them greater control and flexibility in their careers. Roughly 10% of the U.S. workforce is now self-employed according to the Department of Labor. Now is the time to examine your workforce needs and develop a comprehensive strategy for your company that includes full-time, part-time, and contingent workers.

Multiple Generations in the Workforce

Although the current economic downturn is affecting all four of the generations in the workforce (Traditionalists, Baby Boomers, Generation X, and Generation Y) each generation views work and the workplace differently. Let’s quickly review where we are demographically:

• The Traditionalists have by now almost entirely exited the workforce.
• The Baby Boomers have one foot out the door (although their departure may now be delayed for financial reasons). They are today’s business leaders, and have much knowledge and experience to share.
• Generation X is almost half the size of the Baby Boomers and Generation Y.
• Generation Y is projected to be equivalent in size to the Baby Boomers. They represent tomorrow’s affluent consumers and tomorrow’s business leaders. They are just getting started in their careers. Do you know them well enough?

As a significant part of the U.S. workforce, Gen Y will grow from 16% in 2004 to 37% in 2012. In general, Gen Y believes security comes from community, promotion is based on enthusiasm, their loyalty is to colleagues and respect is earned through authenticity. The concern for companies isn’t just “appealing” to this group of workers, but how to enable all generations (including Baby Boomers and Generation X) on how to successfully work and collaborate with each other. Those who figure it out will be far ahead of their competitors.

Struggling to find enough doctors, nurses and linguists for the war effort in Iraq and Afghanistan, the Pentagon will temporarily recruit foreigners who have been living in the United States on student and work visas, or with refugee or political asylum status.

Defense Secretary Robert Gates recently authorized the Army, Navy, Air Force and Marine Corps to recruit certain legal residents whose critical medical and language skills are “vital to the national interest,” officials said, using for the first time a law passed three years ago.

Though the military previously has taken recruits with green cards seeking permanent residency, Gates’ action enables the services to start a one-year pilot program to find up to 1,000 foreigners who have lived in the states legally for at least two years on certain types of temporary visas.

The new recruits into the armed forces would get accelerated treatment in the process toward becoming U.S. citizens in return for serving in the U.S. military.

What’s the urgent need? The Pentagon’s doctor and nurse corps remain 1,000 short of the numbers needed to treat armed forces patients. It is hoped that the program would fill the gaps. It also needs people with special language and cultural skills for a war on terrorism that has taken the armed forces across the globe.

There is some precedent here. The armed forces have used foreigners since the War of 1812 - over the years some 700,000 have served. There are now 29,000 non-citizens in uniform today. With roughly 8,000 more enlisting every year. The difference is that up until now U.S. citizenship was not part of the equation.

But because of the counterterrorism war begun after the Sept. 11, 2001, attacks on America, President George W. Bush signed an executive order making foreigners who join the military eligible to apply immediately for citizenship. They essentially go to the head of the line among citizenship applicants, having their cases processed in about three years as opposed to the usual five years it takes others.

These benefits, however, do not come without cost to the job-seeker. All recruits will have to pass the same physical, mental and aptitude tests required of all who join the armed forces. In addition, Health care workers will have to meet all medical professional criteria to practice, be proficient in English, and agree to enlist either for three years on active duty or six years as reservists. The linguists/culture experts will have to enlist for four years of active duty service.

As talent agents for some of the most seasoned and experienced professionals in the workforce M Squared Consulting has a unique view into the dynamics of the labor market. Given the current cycle of negative economic news and a steady stream of layoff announcements it seems odd to be talking about the war for talent. The reality is that the U.S. workforce is aging, there are already shortages of skilled labor (particularly in the sciences and professional ranks), and the problem will only grow over time. Today’s negative economic reality is merely masking the problem.

When we enter an economic recovery these problems will once again be brought to the forefront. One can’t help but wonder if the Pentagon’s approach to “importing” skilled labor, with the promise of expedited U.S. citizenship, will be one that we are forced to expand to the private sector.

Time will tell.

In the Western literary tradition, the silver bullet was the only weapon that could destroy certain types of monsters. As a result, it became a metaphor for a singular solution that solves a giant problem.

Many touted the Financial Stability Bill (a.k.a. the $700 billion bailout package) as a silver bullet for the economy. “If Congress would just pass this legislation,” the argument went, “the economy will return to normal.”

It certainly hasn’t quite worked out that way…

Unfortunately, in times of crisis, it’s not just the government that resorts to the faulty thinking represented by this metaphor. Leaders in business and elsewhere are also guilty. Whenever we embark on a quest for a singular solution to our current woes, we are guilty of “silver bullet thinking.”

Some examples of silver bullet thinking might include:

• Trying to develop a new product that will crush the competition;
• Employing a new technology that will provide an overwhelming strategic advantage;
• Buying or merging with a competitor, supplier, or even a customer;
• Reducing staff and operating expenses;
• Reorganizing the company.

Don’t get me wrong. There’s nothing wrong with creating great products, employing new technologies, acquiring companies, or managing a company responsibly.

The problem is in believing the overly simplistic notion that any one of these items can be the “silver bullet” that fixes all your problems.

Success is rarely the result of one singular action or breakthrough. Instead, it is more often the result of hundreds, if not thousands, of incremental improvements over time. There’s generally no quick fix in business or in life.

To succeed in the current business environment, I think four things are required.

1. Be crystal clear about your vision. You can’t alter the past. What has happened has happened. We can learn from our mistakes, but we have to get laser focused on the future we want to create and let that dictate our actions in the present. This is what separates the real leaders from the pretenders in times of crisis. Now is the time to focus on your vision (where you want to go), and your strategy (how you plan to get there).
2. Reaffirm your strategy. In Jim Collins exceptional book, Good to Great, he shares his Hedgehog Concept wherein he compares the hedgehog to the fox. The hedgehog does one thing well. The fox, on the other hand, jumps from strategy to strategy. In the end, the hedgehog wins. This is the time for each of us as leaders to focus on our core strategy, our “Hedgehog Concept.” What is the one thing that your company can be the best in the world at? What will drive your business forward and get you from where you are today to where you want to be in the future?
3. Stay relentlessly focused on your core strategy and competencies. Focus is difficult. It takes courage and discipline. When things are tough, the temptation is to try too many new things in an effort to find the silver bullet. But these opportunistic pursuits are usually a waste of time and corporate resources. They all have a learning curve. There are no easy solutions. It is best to stay focused and do the hard work of executing your core strategy. You should say “no” to everything else.
4. Keep the faith. This is a mark of great companies and of great leaders. It is what Collins calls “The Stockdale Paradox”. Great leaders acknowledge the current realities of their situation and don’t pull any punches. But at the same time, they have an unwavering belief that they will ultimately prevail.

As tempting as it may be to think something or someone will be the answer to all your problems, it is more prudent to work diligently on the fundamentals in your business. Keep focusing on execution. One decision-one action-at a time. In the end, this will get you through the economic turmoil and enable you to succeed.

As always, the staff at M Squared Consulting and the incredible bench of talent found in our Consultant Network are at your service to help you focus and execute.

Last month the Securities & Exchange Commission (SEC) published its “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers”. The release of this proposed Roadmap reaffirms the SEC’s focus on moving towards a single set of high quality global accounting standards.

The key provisions of the proposed Roadmap are fundamentally consistent with those discussed at the SEC meeting on August 27, 2008 when release of the Roadmap was approved. A copy of the proposed roadmap can be found on the SEC’s webste at http://www.sec.gov/rules/proposed/2008/33-8982.pdf.

Following is a brief summary of the significant provisions of the proposed Roadmap:

The SEC will reconvene in 2011 to make a decision on the mandatory use of IFRS by US issuers. In making that decision, the SEC will evaluate progress against several specified milestones. These milestones include:

• Improvements in accounting standards (including progress under the Memorandum of Understanding between the FASB and IASB)
• Accountability and funding of the IASC Foundation, which oversees the IASB
• Improvement in the ability to use interactive data for IFRS reporting (XBRL)
• IFRS education and training in the US (including accountants, investors, regulators, and other financial statement users)
• Experience of eligible IFRS early adopters

Assuming a decision in 2011 to mandate IFRS for US issuers, the proposed Roadmap contemplates a phased transition to IFRS beginning in 2014 for large accelerated filers, 2015 for accelerated filers, and 2016 for remaining public companies. As a result, calendar year-end companies subject to the 2014 mandatory date would have an IFRS transition date of January 1, 2012. Best practice companies will have their internal accounting processes enabled to dual report under both US GAAP and IFRS as of this date.

An issuer that either elects or is required to file IFRS financial statements may only begin reporting using IFRS in an annual report on Form 10-K containing three years of audited financial statements. As currently proposed, an issuer would not be able to file IFRS financial statements with the SEC for the first time in a quarterly report, Securities Act or Exchange Act registration statement, or proxy or information statement. This provision could end up being amended to reduce the requirement to two years of audited IFRS statements so long as the annual report also included three years of US GAAP financials.

The proposed Roadmap provides an opportunity for certain qualifying issuers to adopt IFRS as early as fiscal years ending on or after December 15, 2009. To qualify for this option, a company must be one of the 20 largest companies within its industry (as measured by market capitalization) and IFRS must be used more than any other basis of accounting among those 20 largest companies. Issuers that satisfy both these criteria and wish to early adopt must apply for and receive a ‘Letter of No Objection’ from the SEC.

As part of the SEC’s 2011 evaluation of progress made against the outlined milestones, the SEC may expand the eligibility criteria to allow additional issuers to use IFRS prior to the mandatory transition date.

The proposed Roadmap includes two possible alternatives with respect to the disclosure of US GAAP information by issuers that choose to early adopt IFRS. The SEC is soliciting comment on these alternative proposals.

• Proposal A: Issuers must comply with IFRS 1, First-time Adoption of International Financial Reporting Standards, and include a one-time reconciliation from IFRS to US GAAP in their first set of IFRS financial statements.
• Proposal B: Issuers must comply with IFRS 1, and also disclose on an annual basis certain unaudited supplemental information reconciling IFRS to US GAAP for the three years of financial information included in their Form 10-K.

One outcome of turbulent markets is an increased interest in mergers and acquisitions. While the U.S. government is taking unprecedented market actions on an almost daily basis in an attempt to add stability, a new piece of legislation has now likely made these transactions more complicated.

Financial Accounting Standard 141 R, which becomes effective today (Dec. 15, 2008) will make it more difficult to place a value on acquisitions and could end up adding volatility to the earnings of the buyer, according to many accountants and merger attorneys.

The new rules, which bring U.S. accounting practices more closely in line with international financial reporting standards (IFRS), will affect the planning and execution of merger agreements, and the disclosure of costs and fees related to these deals.

The biggest change requires that any assets and liabilities being acquired must be accounted for at fair market value on the date of acquisition. The current accounting rules call for values to be based on assumptions or estimates. Executives, M&A teams, Boards of Directors, and their advisors, are now in for a lot more work to make a deal happen.

The challenge here is coming up with a realistic valuation. This is complex in the best of situations, in a volatile market environment like we’re in now it becomes extremely challenging. Fair market valuations are a moving target, which could end up adding a lot of time to due diligence and deal negotiations.

For stock transactions, there will be additional challenges. The value of the buyer’s stock to be used in a transaction will now be measured on the closing date, not on the date of a deal’s announcement. This means that any fluctuation in the buyer’s stock price will also change the value of the deal. With the wild weekly swings in many firms’ share prices this presents obvious concerns.

Another major change affects fees paid to bankers, attorneys or accountants. These costs must now be expensed in the quarter in which they occur, even if the costs precede the announcement of a deal. Expensing these fees will weigh on earnings in the quarters they occur. An industry fear is that recording these fees will also signal to shareholders and rivals that a company is involved in deal negotiations.

One final change makes buying companies with heavy research and development budgets more challenging. FAS 141(R) requires the cost of in-process R&D acquired in a merger to be spread over the life of the project. The previous rules let companies book the expected fees up front and write them off as part of the cost of the merger.

An unintended outcome of this new legislation: As companies interpret and react to these new accounting rules, they could end up moving slowly in deal negotiations to make sure they adhere to the new requirements.

While these new rules are onerous, at the end of the day the fundamentals of mergers and acquisitions still apply. Purchasers must be able to finance the deals, and the acquired companies must have solid underlying cash flow.

M Squared Consulting provides clients with a broad level of M&A support services. Over the years we’ve helped clients through all facets of M&A deals, from pre-merger evaluation to due diligence and post-merger integration. Our on-demand consulting model allows clients to stay focused on their daily business while executing on new projects and initiatives, and allows them to effectively deal with unforeseen additional project requirements like those brought on by FAS 141(R).

The Presidential election is now over a month past. We finally have clarity about who is going to lead our country for the next four years.

President-Elect Obama is quickly building a team and creating a plan with the goal of hitting the ground running on Inauguration Day in January. His challenges, both foreign and domestic, are many.

The business environment is still enormously turbulent and it is clear there are many problems in our economy. Every industry and almost every company is facing enormous challenges, many of which are unprecedented in the careers of today’s business leaders.

In times like these, leaders must do two things simultaneously:

1. The must confront the most brutal facts of their current reality, whatever they may be.
2. They must also retain faith that they will prevail in the end, regardless of the challenges. They must then inspire their teams (and their country!) to not lose faith and to take positive action.

Jim Collins, who wrote the book Good to Great, calls this combination the “Stockdale Paradox.” He tells the story of Admiral James Stockdale, who was a prisoner for eight years during the Vietnam War.

After his release, a reporter asked Admiral Stockdale, “How in the world did you survive eight years in a prisoner of war camp?”

He replied, “I never lost faith in the end of the story. I never doubted not only that we would get out, but also that I would prevail in the end and turn the experience into the defining event in my life, which, in retrospect, I would not trade.”

The reporter then asked, “Who didn’t make it out?” Admiral Stockdale replied, “Oh, that’s easy, the optimists. They were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come and go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”

Collins then goes on to state that an attribute of truly great companies (and great leaders) is that they are able to simultaneously embrace the twin truths of their current reality, regardless of how ugly it is, and their ultimate triumph over adversity.

Do you have the same level of clarity and purpose in your business?

As the U.S. economy seeks its path to recovery M Squared consultants are being brought in by company leaders to help assess situations, develop possible solutions, and execute plans. The cost effectiveness and flexibility offered by our leveraged consulting model, combined with targeted industry expertise and experience, allows us to add value on client engagements from day one. In effect, we help companies to confront the reality of their business and also help them take positive action towards overcoming it.

Today I’m going to take a contrarian view on the current economic situation. While it is easy to become consumed by the constant drumbeat of today’s negative news-cycle, the reality is it is largely out of our control.

As business managers and leaders, what we can control is how we react to the situation. So here are 11 benefits of the current recession:

1. It enables you to get closer to your current customers.
2. It forces you to focus on the most important things first, whether they be problems or opportunities. Focus is good.
3. It causes you to get creative and spend more time thinking “outside-the-box”.
4. It forces you to make the tough decisions which you’ve been putting off. Good times have a way of “masking” problems which we can conveniently ignore. Bad times force us to take action.
5. It thins out the competition. The weakest players in each respective market will not survive. This is marketplace survival of the fittest.
6. It makes you realize you can’t take anything for granted.
7. It makes it easier to abandon business-as-usual. Now is the time to critically examine the “sacred cows” in your business and in your industry. As the last downturn proved, new and innovative powerhouses will arise out of the rubble.
8. It brings you back to business basics. Relationships. Revenue. Expenses. Talent. They all matter.
9. It accelerates, and lowers resistance to, change.
10. It causes you to be less wasteful. Now is the time to evaluate every expense and every process in your business. If you build a cost effective business foundation now, you will not only increase the odds of survival, but also emerging stronger in the inevitable upturn.
11. And finally, on that note, it serves as a reminder that the next boom is that much closer!

I’m sure I missed some. What benefits do you see in the recession?

In a macro context this downturn will likely be good for the United States. It’s time for consumers to get back to the basics of living below their means, saving money, and planning for rainy days. Those same principles apply to businesses: strategic organizations are making investments today that will yield positive benefits in the recovery.

According to the most recent Duke University/CFO Global Business Outlook Survey, CFOs are worrying about sputtering consumer demand, stalled credit markets, and the cost of fuel and other commodities.

The finance executives completed this quarter’s survey just before the implosion of Lehman Brothers and the subsequent Wall Street meltdown, but fears about the credit markets and interest rates were already top of mind for these CFOs. Those worries have only deepened as the fallout from the housing-market downturn and the credit crunch continues to sink in.

In subsequent weeks we’ve resolved the U.S. Presidency and fuel costs have begun to fall dramatically, however the economy continues to stagger. Finance chiefs also have great concern about the difficulties of planning in such a volatile market, ranking the ability to forecast as their number-two concern about their own firms.

Top External Concerns (Average Importance Score)

• Consumer demand (1.33)
• Credit markets/interest rates (0.89)
• Cost of fuel (0.75)
• Cost of nonfuel commodities (0.65)
• Housing-market fallout (0.62)
• Upcoming change in U.S. Administration (0.52)
• Value of the dollar (0.34)
• Financial regulation (0.31)
• Foreign competition (0.15)
• International political instability (0.11)

Top Internal Concerns (Average Importance Score)

• Attracting and retaining qualified employees (1.39)
• Ability to forecast results (1.19)
• Cost of health care (0.79)
• Supply chain risk (0.68)
• Managing IT systems (0.64)
• Balance-sheet weakness (0.55)
• Protection of intellectual property (0.24)
• Data security (0.21)

It is interesting to note that finding and retaining talent continues to be CFOs’ top internal problem, although that anxiety may ease in the upcoming quarter if the ranks of the unemployed continues to grow. More than 60 percent of firms directly hit by the credit crunch plan to delay, reduce, or cancel hiring plans. We’re finding that many of our clients have hiring freezes or “pauses” in effect for full-time employees, yet they continue to deploy seasoned consultants to execute mission-critical projects and initiatives. The powerful value proposition of the M Squared talent-on-demand model works equally well in up markets and down markets!

Over the last decade the production of many goods has moved steadily from the United States to Asia. The reasons are familiar: lower wages, a stable global economy, and rapidly growing local markets. These factors combined to make nations such as China and Malaysia favored manufacturing locations. Recently, however, the favorable economic winds that carried offshoring forward have turned turbulent. The new conditions are undermining some of the factors that made manufacturers across many industries, including those in high tech, move production from the U.S.

For executives managing global supply networks, the question now is whether or not conditions are moving toward a tipping point. Is this the moment to consider sharply scaling back offshore production plans and bring manufacturing back or closer to the United States? Is there a more measured response that better suits the new circumstances?

Before executives change their strategies, however, they must determine the total landed cost of each product produced offshore and better understand the shifting trade-offs between cost savings from offshoring (such as lower wages) and rising logistics charges.

Oil prices, and consequently the cost of shipping, have risen to heights few could have foreseen. Since 2003, crude oil has risen dramatically. The economics research institution CIBC World Markets estimates that in 2000, when oil prices were near $20 a barrel, the costs embedded in shipping were equivalent to a 3 percent tariff on imports. Today, that figure is 11 percent-meaning that the cost of shipping has more than tripled since 2000.

The oil spike not only affects exports from Asia but also sharply increases the price its manufacturers pay for raw materials. It now costs about $100 to ship a ton of iron from Brazil to China-more than the cost of the mineral itself. Wage inflation, coupled with a weaker dollar, adds to the challenge: in dollar terms, annual wage inflation in China has averaged 19 percent since 2003. An average production worker, paid $1,740 a year in 2003, makes $4,140 today. In Brazil the rate is 21%, in Malaysia its 8%, Mexico, 5%. By contrast, wage inflation in the United States has averaged only 3 percent. The wage differential between Mexico and China has also narrowed significantly. In 2003, Mexican workers made over twice what their Chinese counterparts did; today that gap has narrowed to 1.15 times. Combined, these trends are reshaping the competitive landscape for offshore manufacturing in a number of locales.

As an interesting side note to this discussion, wage inflation hasn’t been limited to production workers, it has also impacted knowledge workers. This dynamic has dramatically reduced the labor arbitrage benefits many U.S. companies enjoyed for knowledge work being done outside our borders. They can no long rely on cheaper wages overseas to solve their knowledge workforce talent shortages…in fact, many emerging market countries are now experiencing their own talent shortages.

Products that were once profitably made in areas around the world where the local costs were lowest are now moving into near-shoring areas-or in some cases may now be suitable for production in the United States. A midrange server, for example, made profitably in China three years ago, has slipped below the breakeven line because of higher wages and freight costs. The server now could be produced more economically at a plant closer to U.S. consumers (in Mexico, for example, where the mix of logistics and labor costs is much more favorable).

McKinsey Consulting recently studied the total landed cost for a midrange server, comparing scenarios in Asia and the United States. In 2003, manufacturing this product in Asia rather than the United States provided a 60 percent savings in labor costs. They indexed that labor savings to $100. When they calculated total landed costs, however, they found that 36 percent of those labor savings were offset by freight, shipping-related charges, inventory, product returns, and other hidden costs. That gave Asian production a $64 landed-cost advantage. Today, economic conditions have reversed the equation. After factoring in the higher labor and freight costs, McKinsey found that the former offshore savings have turned negative-a burden of an extra $16. The labor savings, $100 in 2003, are now only $45 because of wage inflation. In addition, freight costs have risen by $21 and product returns by an additional $4 because of higher oil prices.

As this example suggests, changing economic conditions may have undermined the supply chain advantage for many companies. This would be a great time to reevaluate the location of manufacturing facilities and overall supply chains. By taking the total landed-cost analysis to the next level of detail a company can determine if bringing some production back home or to near-shore locations will help counteract the higher costs of shipping and freight. At the same time, smart companies are also considering the long-term geographic distribution of demand for their products. In rethinking global supply chains, it is also vital to carefully evaluate the importance of time-to-market, the availability of skilled talent, the potential for further productivity gains, one-time transition costs, and tax implications.

There is no single best solution to this challenge. Each individual company must evaluate their situation to make an intelligent decision. I’ve heard the challenge referred to as “right-shoring” - literally determining the best location to produce your company’s goods or services.

To estimate the trade-offs more precisely, supply chain managers need a true picture of landed costs. These include the cost of raw materials, carrying inventory, managing product returns, and other hidden charges not typically considered in the simple trade-off between offshore wages and logistics described above.

As always, M Squared Consulting is here to help. We have experts in supply chain optimization who can help analyze the situation for our clients and determine the best strategy for moving forward.