Traverse City Economic Forecast Breakfast | Plante Moran
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Managing Partner Bill Hermann Speaks on Business Outlook at Traverse City Economic Forecast Breakfast

When the Chamber asked me to speak at today’s event, I was both honored and excited. I was even more excited to learn that they weren’t looking for a straight economic update, because…as you just heard in that intro from BJ… I’m not an economist. I’m a bean counter. Just like all of you, I’m a businessman. And it’s been my privilege to work with hundreds of other business people and witness firsthand, their hopes, their challenges, their struggles, and their successes.

As everyone in this room knows, we’re facing a regional, national, and global economy that’s unlike any other that most of us have seen in our lifetimes.

This isn’t a time when we can sit on our hands and wait to see what happens. Today’s challenges call for strong leadership, and they require tenacity. Some of you may be doing well, and some may have more challenges than you’d like. But I’ll bet that we all have people looking to us for answers.

This morning, I’ll touch briefly on some of the broad economic trends that are affecting business in the region. If you’re expecting a bunch of graphs and charts, sorry. This isn’t that kind of presentation.

We’ll touch on some of our region’s strengths and why we believe, strongly, that Michigan has the wherewithal to emerge from our current doldrums.

My primary focus this morning is to share some of the insights that we’ve gained from working with businesses who seem to have figured it out. Businesses who have found a way to leverage their strengths and stay competitive. We’re calling this model, Geared Up: Sound ideas for New Business Growth.

My guess is that most of us here this morning are part of a middle-market, owner-managed, family-run organization. By the time we leave today, we’ll hopefully have a better framework to look at our environment, take advantage of the opportunities before us, and minimize our challenges.

You might say that today, the “proverbial elephant in the room” is our economy, especially as it relates to Michigan. We all have different opinions and perspectives about the state’s future, and there’s more than enough negativity out there.

Personally, I have a lot of affection for Michigan. I was born and raised here, and I’ve chosen to spend my life here. I believe in the state and in its ability to grow and thrive. Categorize me as a realistic optimist.

No doubt, times are tough. But we’ve weathered these economic storms before.

Since World War II, the nation has experienced a number of recessions, the average of which lasted 10 months. The last two, back in 1990 and 2001, only lasted 8 months.

That said, there’s a fairly broad consensus that the recession we’re in now will be more severe. There’s some dispute about when it began—although most economists point to last November or December—just as there’s no prediction for when it will end. However, there’s evidence that the economy will continue to be soft well into 2009.

The GDP for the third quarter came out a couple of weeks ago. It was negative, no surprises there. What was surprising—and significant—is that consumer spending dropped more than 3 percent. To put that in perspective, there was no quarter during the 2001 recession in which consumer spending ever declined, so people are understandably at a loss. They have no experience dealing with a situation like this.

This speaks to the degree to which consumers are strapped today due to the debt situation, housing problems, job losses, and the decline of their investment portfolios. It also speaks to people’s confidence in the future—their concern going forward.

Another key economic measure — unemployment — continues to rise. Unemployment for the third quarter is up to 6.5 percent—up 2 percent from its low in March 2007. Nationally, we’ve lost jobs every month this year, and there’s no reason to think that won’t continue. After all, unemployment is a lagging indicator of the economy. Even when things inevitably rebound, jobless numbers will likely continue to deteriorate. One bright spot, however…I’m happy to report that Michigan no longer leads the nation in unemployment. At 8.7 percent, we’ve dropped to #2. Thank you, Rhode Island!

Finally, we have to talk about what’s happening with the credit crisis, the bailout of the auto makers, and how that’s affecting businesses of all sizes. Some say that September may have been the worst of it, but we’re still a long way from the liquidity needed to grow our economy. The good news—I hope—is that Congress has acted, but somehow we’re from the government and we’re here to help sticks in my mind. Nevertheless, we’re working through the resulting legislation. To be sure, whatever happens, there will be ramifications for all of us.

While there’s speculation about when the current national recession began, economists will tell you that Michigan has been in a recession for the past few years—maybe as far back as 2005. For awhile we were referred to as the “single-state recession.” There’s no question that our state’s reliance on automotive manufacturing and the tough global competition that industry has faced started our state’s financial distress. Unfortunately, it’s only broadened as the national economic situation weakened.

Now let’s take a moment to talk about the Traverse City area. Over the last few decades, the five-county region of Antrim, Benzie, Grand Traverse, Kalkaska, and Leelanau have experienced extraordinary growth and prosperity and have been somewhat buffered from the pains of the rest of the state until recently. This is due largely to high educational attainment, economic diversity, low labor costs, a mild environment, access to natural resources, niche business opportunities, and a high overall quality of life.

That said, there’s no doubt that the Gold Coast—which I’m defining as Harbor Springs down through Petoskey, Charlevoix, Traverse City, and out to Lake Michigan on the West side—is feeling challenged by the current economic environment. Real estate & construction, in particular, is struggling. While history shows that you tend to be affected by downturns later and recover earlier, we can’t overlook the fact that you’re not immune from the challenges being felt throughout Michigan and the rest of the country.

However, one of your unique strengths in the Gold Coast is best described as “appeal of place.” While other regions in the state struggle to attract and retain businesses, Traverse City consistently appears on lists of the top 5 or 10 best places to live and retire. Companies continue to want to locate here.

And why wouldn’t they? The quality of life is unparalleled. The natural beauty of the region is, in a word, breathtaking. There’s recreation. You’ve got great schools. No wonder people are attracted. Hell, you’ve even got me thinking about moving up here!

And then there’s the tourism and its impact as an economic driver for this region. Traverse City has always been a popular destination. I’m sure that high gas prices had an effect on your economy this summer, but you probably also had some bounce from the fact that many people decided to vacation closer to home. Your great reputation as a fantastic destination is a major strength for all of you.

Bottom line: even though there are challenges, we have reason to be confident. And not just the Gold Coast locations around Traverse City but also Michigan and the Great Lakes Region as a whole.

I’d like to take a moment and wave the flag about all the good things we have going for us. Things that we might take for granted that are a solid foundation for businesses in our region going forward:

  • A body of skilled workers who are recognized for a strong work ethic.
  • A great reputation as a favored place to live, which can help you attract people to a growing economy.
  • Quality of life and cost-of-living advantages over other parts of the country.
  • Access to technology that allows connectivity and integration around the globe.
  • An unexpected concentration of private wealth and investment.
  • Abundant natural resources, perhaps the most important being ample fresh water
  • An infrastructure backbone—road, rail, aviation, power transmission, sewer and water, communications—already in place with capacity for growth.
  • A strong higher education community. Did you know that 19 of the top 100 universities in the world are located in the Midwest? Some of the greatest universities in the country doing breakthrough research and educating talented young people.
  • Growing awareness in the public sector of the need to promote favorable business environments, including tax remediation and incentives.
  • Finally, the wide open opportunities created by an ever-changing world. We have seen dozens of successful business who are using change as an opportunity to create a new equation.

That’s a pretty long list isn’t it?

Earlier this year, Plante & Moran surveyed nearly 350 middle-market organizational leaders in Michigan, Illinois, and Ohio. We asked them how they rated the performance of their companies, the strength of the region, and the “how” and the “what” necessary to foster growth.

More than two-thirds of the business leaders reported that they feel “somewhat” or “very” optimistic about their organization’s growth and success.

Now granted, the level of optimism expressed in March may not reflect the level of optimism now, but think about it…things weren’t perfect then either. There was a lot of negativity out there, yet those middle-market business owners weren’t talking about abandoning the Midwest. They overwhelmingly maintained a positive outlook.

So now what? When I look at companies and people that are doing well in this economy, they have several things in common:

  • Quality people
  • Sound strategy
  • Focus on the customer
  • Good processes
  • The ability to execute better than one’s competitors
  • Shared vision and strong culture within the organization
  • Recognition of the need to diversify and maximize one’s strengths
  • Flexibility and nimbleness

Let me amplify on that last point. Do you know what unique opportunity we have as small and medium-sized businesses compared to the large publicly-owned companies that get so much of the press? We have the ability to be nimble. Because we don’t have quarterly earnings reports hanging over our heads, we can take calculated risks or even “stay the course” if need be. We can be flexible and adaptable…we are able to respond rapidly to market opportunities.

Which brings me to the heart of our message today: a new business engine based on best practices that we’ve seen in our work with some of our region’s most successful and enduring middle-market companies. While it’s brand new in this context, the gears within it are as old as the hills. We are calling it: “Sound Ideas for New Business Growth.

In this Model, there are five gears that, when turning simultaneously, contribute to a well-oiled machine. They are:

  • Strategy & leadership,
  • Growth,
  • Talent management,
  • Client Service, and
  • Operational Excellence which, when working together, lead to,
  • Progress.

Let me reemphasize…these gears must turn together in order to work. If one gear isn’t turning freely…everything could grind to a halt.

Within each gear is a series of business attributes, or best practices that, we believe, contribute to each gear’s ability to function properly.

Let’s begin with strategy & leadership. It’s important to:

  • Set goals and define metrics.
  • Engage the full organization in execution.
  • Communicate often.
  • Reward innovation and embrace change.
  • Know your competition.

This gear is about leading and managing with discipline, based on a sound strategy. It all starts with setting the strategic goals. These goals set the roadmap for the future, define the business case for decision-making, and help to foster intense engagement throughout the organization.

The next attribute is to foster intense engagement in their plan throughout their organization. How? In a couple of ways:

They communicate relentlessly to create alignment with their strategic goals. Up and down, side to side, back and forth…you get the point. And not just the plan but also the vision, hopes, desires, and dreams. And then say “thanks, what do you think” in order to obtain individual buy in.

They also reward innovation and embrace change. Some of the best ideas have come from the most unlikely places. It’s like the elephant we talked about earlier – it’s important to get more than one point of view. Einstein once said that the definition of insanity is doing things the same way over and over yet expecting different results. Organizations that are truly successful in this realm reward innovation and are flexible--nimble, and not afraid to change.

A key to strategy and leadership: know the competition. In today’s global economy, the competition can be next door or across the globe. In the book The Art of War, the author suggests you keep your friends close and your enemies closer. We might find ourselves working with our competitors for our joint good, and sometimes we compete against them—hence the new concept—coopetition.

Our next gear is growth. Businesses that are succeeding at growing:

  • Set goals and identify ways to measure incremental progress.
  • Identify additional needs of current customers.
  • Continually build their customer base.
  • Watch the market for trends that create opportunities.
  • Monitor results.

Growth starts with defining goals and identifying ways to measure success.

Once identified, talk with customers about their needs and challenges. Listen intently. Where are they going? What help do they need? I can think of at least a dozen services that we now offer at Plante & Moran that we developed based solely on client need.

The next attribute for growth is bringing in new business. The point here is that it’s an intentional and deliberate process. It can be as straightforward as identifying, say, 5 new potential customers and committing to pursue them.

The next business attribute is related to what I mentioned earlier about listening to customers, and that’s listening to the market to identify unmet market needs. It’s sometimes called finding “white space,” and it’s is all about finding an area where there are few or no competitors or where a new or unmet need exists.

It’s not always about adapting a product. Service companies are doing this all the time—leveraging their knowledge and applying intelligence in new and creative ways. As a result, they’re likely to leverage their intellectual capital into new products and applications for service.

The final step of course is to monitor results—clear, definable, and understandable goals which are communicated broadly—this then circles back to setting new goals and objectives an starting the process anew.

The third gear is talent management. In a recent article, Lou Glazer, who leads the group Michigan Future, made this point: “instead of focusing on picking the industries of the future, we should be focusing on preparing, retaining, and attracting talent”. While I think we should be focused on what new industries will create jobs and growth in the future, I do support the idea that we must also focus on our staff, our people.

When we surveyed business leaders earlier this year, 65% said that the availability of a skilled workforce is the greatest asset of the Midwest. No surprise there; after all, if you ask most organizations what their number-one asset is, they’re going to say “our people.” That’s why it’s so important to recruit and retain top talent.

The companies we observe who are doing well have figured out how to differentiate themselves through talent. The talent management gear goes like this:

  • Create an environment that will attract staff.
  • Identify and recruit top talent.
  • Develop and train staff.
  • Reward and promote staff.
  • Retain and rerecruit staff.

The key to this plan is creating an environment that will attract staff. For most companies nowadays, that means having four different generations in the workplace: the so-called “Mature” generation, Baby Boomers like me, Gen Xers, and the new kids on the block: the millennials. It’s important to consider the unique attributes of each to optimize their success.

I’d like to spend just a couple of minutes talking about the millennials, as they’re coming into the workforce in waves, and most senior management may not have a clue as to how to best work with them.

Recently, Human Resources Executive magazine listed the 18 best companies for millennials to work for. All these companies are on FORTUNE’s list of the 100 Best Companies to Work For and they included, among others, Starbucks, Google, eBay, Marriott, and we’re happy to say, Plante & Moran. These are some of the things that are important to the newest generation of workers:

  1. Management’s actions match its words.
  2. Management shows appreciation for good work and extra effort.
  3. Management involves people in decisions that affect their jobs or work environment.
  4. Everyone has an opportunity to get special recognition.
  5. I am treated as a full member here regardless of my position.
  6. Promotions go to those who best deserve them.
  7. People avoid politicking and backstabbing as ways to get things done.
  8. People look forward to coming to work here.
  9. There is a “family” or “team” feeling here.
  10. We’re all in this together.

These 10 characteristics are crucial to millennials’ career satisfaction. I might also add, I don’t think they’re unique. Who here wouldn’t like to work in a company that walked that talk?

However, creating the right environment is just the first step. Companies that are using talent as a differentiator must do a great job of recruiting the right people. Success begins with educated, talented people at all levels—executives, floor supervisors, sales staff, technical workers, and others who understand their business and the market.

Successful companies also recruiting for diversity. Why diversity? According to data obtained from the U.S. Department of Commerce, minority-owned businesses in the United States grew by 35 percent between 1997 and 2002, bringing the total number to more than 4 million. Moreover, according to the National Women’s Business Council’s “2004 Annual Report,” women were majority owners in 6.7 million privately owned businesses that year—growing at twice the national average rate. In order to secure this business, organizations must recruit and retain staff that demonstrate the expertise and creativity needed to serve these changing demographics.

Plus there’s the fact that diverse teams outperform homogenous ones. They create a variety of ways to solve a problem; leveraging the input of a diverse staff population helps organizations arrive at better decisions. You can’t underestimate the value of the creativity and ingenuity elicited from a team of varying experience, knowledge, and background.

Back to the talent management gear: We have also listed training and developing, and rewarding and promoting—pretty straightforward stuff. However, at Plante & Moran we also talk about re-recruiting. I’d like for you to think for a moment about your top performers and what those people bring to your organization. The essence of re-recruiting is to envision what you’d do today if that valued staff member were to tell you he or she was leaving…and just do it now. These are the best practices that employers of choice have embraced and executive to stay that way.

The majority of my comments has been about top-line revenue--but you can’t ignore the expense portion of your operation in tough times. Some of us might even go there first. You’re probably already doing many of these, but this final gear, operational excellence is all about executing and managing with discipline.

Best practices that contribute to operational excellence include:

  • Set goals for operational results.
  • Adopt best-in-class processes.
  • Commit to quality.
  • Create a culture of continuous improvement.
  • Benchmark and measure results.

This is an area where the rubber meets the road: execution is generally where businesses succeed or fail. A strategy, a growth plan, and top talent will thrive in an environment where there are world-class processes that ensure high quality, price flexibility, and a platform for continuous improvement.

Companies that embrace operational excellence set goals for cost reduction. They also leverage technology and consider “green” initiatives – for their environmental benefit and because they often take waste out of the process and ultimately save money.

The best-in-class companies that we observe listen to their customers, they manage their growth with discipline, they differentiate through talent, and they put execution first by focusing on the highest standards of quality and continuous improvement.

What’s at the heart of these best practices? What is the business driver and business outcome? The business driver is customer service— delivering the best overall experience for their customers. The business outcome is a strong and valuable customer base.

Here’s the bottom line: when organizations are committed to strategy & leadership, growing with a purpose, managing talent, improving operations, and serving their customers, it becomes a circular and self-fulfilling process that builds upon itself.

Before we wind down here, I’d like to share with you a couple of Plante & Moran icons that relate to these best practices. First and foremost, our “Wheel of Progress,” which provides the foundation for the goals we developed to achieve our vision. It’s been around for over 50 years. It goes like this: Good staff who do good work attract good clients who are able to pay good fees, which allows us to pay good wages, which then allows us to retain good staff who do good work, and the wheel continues.

We’ve also combined the old and the new, in recognition of the linkages between a strong culture, focus on people, and the inevitable outcome: good client service. Our “Thrive” wheel epitomizes what Plante & Moran is all about. It is, to us, what “Just Do It” is to Nike. It’s what we wish for our clients and our staff. These are more than just iconic images…they’re time tested, and they work. We’ve got nearly 85 years of success to prove it.

In my role, I get the opportunity to spend time with our clients and other firm partners to learn about the challenges and successes that the clients we serve are experiencing. I gotta tell you, it’s been heartening to hear about what IS working for businesses in the region, and I’ve been happy to share that with you today. These are people who do NOT fear the future. They know we have a storm to weather, and that there are some things which they can NOT control. But for those items within their control, they’ve got a firm hand on the gears and control over their own destinies.

In closing, yes, these are tough times. We can either let them overwhelm us, or we can change our strategy, stay positive, and begin climbing out. The decision is ours. Let’s all focus and make the right one.

Thanks for listening, and have a great day.

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