How to really start cutting small business costs

Overall this is a decent case study article on controlling costs at a small business, and a lot of the advice and actions are sound — things like renegotiating with a major supplier to get a better price.

But this particular step to cut costs for a gourmet ice cream maker seems a bit over the top:

… We also advised them to put an end to the “Do It Yourself” Sundae offered in the stores. Customers were making lavish use of sprinkles and whipped cream, and it was killing the profit on each item sold.

Wow. Those must have been some super-premium sprinkles and whipped cream to significantly put a dent in the bottom line.

Risk-taking and Wall Street

This BusinessWeek article is actually about the demise of risk-taking in Silicon Valley, and it does a great job of identifying some of the players who’ve collectively killed risk in the one-time land of starry-eyed entrepreneurs.

The final culprit — Wall Street — and the indictment against it is interesting, true and really applies across the spectrum of business sectors as a succinct reminder of the myriad problems facing the Street and what has become business as usual. Particularly the point about Sarbox and why entrepreneurs might shy away from IPOs.

From the first link:

WALL STREET

Wall Street hasn’t played as direct a role in Silicon Valley since the late 1990s, when analysts like Mary Meeker and bankers like Frank Quattrone knew as much about new startups in the Valley as the VCs did. That’s part of the problem.

Startups have to want to go public in order to go for the home run. And most entrepreneurs today just don’t. Blame it on bankers and analysts who no longer care about a company with a sub-$500 million capitalization; blame it on Sarbanes-Oxley; blame it on activist hedge funds who don’t give CEOs the leash to innovate; blame it on scars from companies going public in the 1990s that had no business going public and paid the price.

But too many great entrepreneurs sell early not because they’re lazy, not because they want a quick buck, but because the idea of running a company all the while trying to meet quarter-by-quarter Wall Street estimates is antithetical to risk-taking.

Verdict: There’s got to be a reward for all that risk, and until the public markets become a place great entrepreneurs aspire to get to, that risk-reward equation is hopelessly lopsided.

Cloud computing and business

I’ve done plenty of blogging about cloud computing in the past and here are two more links on the topic. First up is a BusinessWeek breakdown on how cloud computing will change business and next is the thoughts of Microsoft’s chief software architect, Ray Ozzie, on cloud computing.

From the BusinessWeek link:

In 1990, in a keynote speech at the Comdex computer conference, Microsoft’s (MSFT) then-chief executive, Bill Gates, bolstered his bona fides as a tech visionary when he declared the PC industry would produce advances within a few years that would put information at people’s fingertips. To get there, Gates said, the world needed three things: a more “personal” personal computer, more powerful communications networks, and easy access to a broad range of information. Sometimes visionaries are right on the vision but off on the timing.

Only now is Gates’ grand vision finally becoming a reality for businesses. While pieces of what he had in mind have been available for years, they typically were expensive and difficult to set up and use. Now that more personal PC is here in the form of smartphones and mini-laptops, and broadband wireless networks make it possible for people to be connected almost anytime and anywhere. At the same time, we’re seeing the rise of cloud computing, the vast array of interconnected machines managing the data and software that used to run on PCs. This combination of mobile and cloud technologies is shaping up to be one of most significant advances in the computing universe in decades. “The big vision: We’re finally getting there,” says Donagh Herlihy, chief information officer of Avon Products (AVP). “Today, wherever you are, you can connect to all the information you need.”

And here’s Microsoft’s Ray Ozzie:

Ray Ozzie, Microsoft’s Chief Software Architect and the guest speaker at last night’s dinner (Techmeme), said the company wasn’t necessarily talking or thinking about the cloud when he came on board as part of the acquisition of his company, called Groove Networks, in 2005. When it came time to start offering a new way of thinking about the cloud and software, the approach came slowly. At the event, he said:

In any large organization, the government, the military, Wal-Mart, Microsoft, change of management is a challenge. You cannot effect change by mandate. You can’t say this is the way it’s gonna be and everyone snaps.

Speaking at any event where the topic has to do with cloud computing means that you inevitably are asked to define cloud computing. Clearly, Ozzie must have given a lot of thought to a definition for the cloud but he actually may have given it too much thought. While not quite as babbling as Sen. Ted Stevens’ explanation of how the Internet works (remember the “series of tubes?”), Ozzie’s definition of cloud computing was definitely worthy of a “huh?” head shake.

…self-service on-demand way of accessing resources with a virtualized abstraction that is relatively homogeneous

Wow. That’s a mouthful. But it also goes to show that even someone like the Chief Software Architect at Microsoft struggles with a way to define the cloud. Still, he spoke highly of the work that Microsoft does in the cloud environment, as well as on the client side, to meet the changing needs of all types of customers, from consumers to large enterprise.

Banks still aren’t lending

Remember that big ‘ole bailout of the financial sector, that little exercise in corporate socialism, that was supposed to thaw the credit freeze and get money flowing freely once again? Like pretty much every move taken by an inept Fed, our tax dollars are sitting in the coffers of banks and not flowing anywhere.

We may be in uncharted waters economically, but the bailout ought to be a public outrage. Our money, really our future, was taken from us forcefully by an incompetent government agency and handed to banks which are now doing nothing more than hoarding the dollars.

Nice.

From the link:

Despite all the government’s best efforts in recent months, big banks still aren’t lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. “Banks are being extremely cautious,” says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities.

The industry is getting flak for hunkering down. After all, the Treasury has injected $187.5 billion into the nation’s largest banks, including Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM). The recipients of taxpayer money, say critics, should be required to open up their coffers. “The bad news [is] Treasury has no way to measure whether taxpayer funds are being used to increase lending,” Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in December. “The much worse news [is that Treasury] does not even have the intention of doing so.”

Banking chiefs defend their position. They argue that the government funds are designed to shore up capital and support lending, but that they have no obligation to make new loans. “It’s not a one-to-one relationship,” says BofA CEO Kenneth D. Lewis. “We don’t write $15 billion in loans because we got $15 billion from the government.”

Right now there’s little financial incentive to make fresh loans. In the current unease, new corporate loans are immediately marked down to between 60¢ and 80¢ on the dollar, forcing banks to take a hit on the debt. It’s more lucrative, then, for them to buy old loans that are discounted already.

Worst financial predictions of 2008

This is one of those articles that just writes itself under these conditions. I’m betting you could take the business section of any paper in the US and find a bad prediction, or two, every single day of the year until the bottom really dropped out.

Here’s one from the outgoing president:

4. “The market is in the process of correcting itself.” —President George W. Bush, in a Mar. 14, 2008 speech

For the rest of the year, the market kept correcting…and correcting…and correcting.

Picking Paulson’s brain

I’d guess it’s a pretty scattered and frightening place at the moment. BusinessWeek interviewed him, and his main points were an “orderly” bankruptcy for troubled automakers might be the best outcome and he now favors oversight of hedge funds and “any institution whose failure could jeopardize the financial system.”

From the link:

Paulson was interviewed by BusinessWeekEditor-in-Chief Stephen Adler as part of the 10-year-old Captains of Industry series, which features leading newsmakers.

Among other points, Paulson said:

• An economic downturn remains much more of a risk than inflation from the money that’s now flooding the system. “That’ll be a high-class problem when we can start worrying about growth and inflation again,” Paulson said, adding: “The real cost would be to not do enough and then have the economy go into a free fall.”

• Banks that took U.S. funding should lend more, but he defended the Treasury’s emphasis on getting them money right away without strings. “Our first priority was always, and we were clear from the day we went to Congress, to prevent the collapse of the financial system.” He said, “There was literally a wave, just a string of financial institution failures or near-failures.” Paulson added: “They need to lend more. We don’t want them hoarding, we want them lending.” However, he also said, “It is not in my judgment practical or prudent to have government…saying ‘Make this loan, don’t make this loan.'”

• He defended the amount of disclosure by Treasury on the Troubled Asset Relief Program, or TARP. Paulson said, “We have been moving with lightning speed,” and added, “We’re building this organization as we’re going.”

• “The No. 1 thing we need to do is stem the housing correction.”

• The government lacked the authority to prevent the failure of Lehman Brothers, the investment bank that went under in September. But he said that Lehman’s failure was “in my judgment a symptom, not a cause” of the financial turmoil.

• President Bush “is very current and he’s on top of everything we’ve done.” He said, “I know that’s not conventional wisdom among some people but it’s absolutely true.”

• China and the U.S. should be good partners. “We won’t always have the same view, but engagement in my view is exceptionally important.”

Adler’s final question to Paulson was what advice he would give his successor, Timothy Geithner, who is now president of the Federal Reserve Bank of New York. Paulson said Geithner doesn’t need his advice, but added, “It’s important when you’re going through a time like this to define your job expansively.”

Credit remains tight

I hate to be so doom-and-gloom on the economic picture today, but the news is bad, very bad and worse. The little exercise in corporate socialism known as the “bailout.” Let’s call that one a failure so far since the entire purpose was to open inter-bank credit to help prop up ailing financial institutions.

How did that turn out?

The title from the link:

U.S. Banks Still Aren’t Lending

Despite the federal government’s best efforts, banks are hoarding cash. It may be 2010 before the credit climate improves

And from further into the article:

The defensive crouch that Dorner and other bank executives have adopted is creating a quandary for Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and other Washington policymakers who are trying to get credit flowing freely across the economy. The government is reaching deep into its pockets to stimulate the credit markets, most recently with a plan to inject $250 billion into big banks. But while there are small signs of improvement—notably a modest drop in the rate banks charge one another to borrow money—the initiatives are being blunted by banks’ reluctance to loosen their purse strings. Right now the modest uptick in lending is coming mostly from panicked companies drawing down existing lines of credit rather than new loans.

Simply put, banks are hoarding cash, and the influx of government money won’t necessarily change their plans. That’s the case with Citigroup (C), which has shrunk the size of its balance sheet by 13% over the past year and plans to cut even further. “We’re not going to treat [the money from the government] like a windfall and back off of the measures that we have under way to get the company fit,” Citigroup Chief Financial Officer Gary Crittenden told analysts recently.

The industry may be hunkering down for a while. In a recent survey by data firm Reuters LPC, 40% of lenders and loan investors said they didn’t expect the credit climate to improve significantly until 2010, after the worst of the recession has passed. “Lending won’t start until everyone agrees the bottom has been reached,” Richard M. Kovacevich, chairman of San Francisco-based Wells Fargo (WFC) told BusinessWeek in an interview with Maria Bartiromo.

Possible merger for Washington Mutual and Morgan Stanley

I think that would be something like making an omelet with two rotten eggs.

From the link:

It wasn’t too many years ago that some federal regulators fretted about the dangers of letting commercial banks merge with the big investment houses on Wall Street. But in the current financial crisis, those mergers might be the only thing that saves some of Wall Street’s most storied firms, such as Morgan Stanley (MS) and a troubled lender like Washington Mutual (WM).

Update — the Wall Street Journal is reporting a possible deal between Morgan Stanley and Wachovia.

From the link:

A Wachovia deal would unite two large American financial companies and potentially placate investors who believe investment banks need to be joined with deposit-taking institutions. But Wachovia’s own mortgage exposure could be a sticking point in completing a deal, and some analysts have questioned whether Wachovia is the right partner for Morgan Stanley.

Morgan Stanley’s Mr. Mack appeared at the regularly scheduled quarterly town hall meeting at 8:30 a.m., speaking to a packed audience at the company’s Times Square headquarters. The CEO, joined by Chief Financial Officer Colm Kelleher and fellow co-presidents Walid Chammah and James Gorman said the company is exploring many options including the Chinese investment and a Wachovia tie-up.

Sounds like Morgan Stanley is really in deep. Parts of the article not excerpted covered potential deals with Citigroup and China Investment Group. Mack is in contact with the SEC and the White House to try and stop shorting of Morgan Stanley stock. I think we’re getting to a point where some these collapsing companies need to be allowed to crater.

Here’s another list of potential partners for the failing investment bank:

Morgan Stanley has other potential international and domestic partners, including HSBC Holdings PLC of the U.K., Banco Santander SA of Spain, Japan’s Nomura Holdings Inc. or Bank of New York Mellon Corp.