Selling from the Front Porch : Listening

“The good Lord gave you two ears and only one mouth.  That should be a lesson for you to listen twice as much as you talk,” said my Aunt Lil after I had butted in and tried to butt into the conversation when I was on the front porch.  Strawberries were being passed around with the homemade vanilla ice cream.  I wanted to talk so much and was not concerned with what others were saying that evening.  My impatience was showing.

Aunt Barbara, the school teacher, commented, “You can never learn while you have your gums constantly flapping.  You have to listen.”  This began another leadership lesson from the front porch on listening.  Now you may think this is an easy one to master, but I still have the problem of using these skills from time to time.  Even earlier today, my wife commented that I was too interested in saying what I wanted to say than allowing her to articulate her thoughts.  I am ashamed to say that I do not have this lesson mastered, and I bet if you were honest, you would have the same failing from time to time.  Sometimes, I half-listen till the other person catches a breath and I can then speak my point that I have been dying to say.

In an earlier post I mentioned Jim, the travelling encyclopedia salesman, who took time to build a relationship with my family members before he was asked for information about his product.  He did not just ask questions to uncover the motivating factors, the hot buttons that would make the prospect buy.  In fact, he started by treating the prospect not as a prospect, but as a person, a friend.  He used his natural curiosity and care for others to guide him into getting to know me and my family.

So how do we go from listening to pick up the hot buttons to make the sale (which I would call “me-centered conversation”) to just listening?  I think you first have to move away from any focus on the sale and spend time hearing what the other person is saying.  Try to avoid the temptation to fix their problem right away; allow them to spend time sharing their life with you.  This is a huge temptation for most guys who seem to be wired to fix things quickly.  Eventually, the time will come when they want your help. 

Asking great questions, ones that bring out more of a response than just a yes or no, can also provide more opportunity for the other person to talk.  Many of these can lead to uncover the emotions and motives of the talker and can be worded in a way to appear that you are not putting the person on the psychiatrist’s couch.  An example is to take, “what scares you?” into “what keeps you awake at night?”  Another may be to turn “what makes you happy?” into “what are the greatest accomplishments in your business?”  These questions help uncover the deep motivating factors in a person’s life.

Eliminating preset agendas from your mind is essential.  One of these may be to sell your product or service or to convince someone of your position on a certain issue.  These all tend to make the listening focused on you, instead of focusing on the person you are listening to.  A preset agenda may also steer your listening to gain the opposite conclusions from what is being said.  One time, on the porch, a salesman came by to sell some cleaning products.  Buying the product would also buy some sort of automatic drop ship for more and a membership into a multi-leveled marketing company where the consumer could earn residuals on other people’s purchases. 

My Aunt Barbara asked, “Is this like Amway?” 

The salesman stiffened, “No, it is nothing like Amway,” he replied.  Clearly the company was set up like Amway and had similar products.  But Amway was getting a bad reputation at the time and was not as popular.

Barbara stated, “That’s too bad.  I like Amway and their products.”  The salesman had a preset agenda in his mind as to the response my aunt would have.  He listened to her through a filter and in doing so, lost a potential sale.

Listening requires a focused attention on the other person.  It requires that you are building a friendship rather than just making a sale.  It requires receiving their words and then serving up the conversation back to them.  It also requires remembering what they said and acting on it at a later date. 

In short, it may not get you the immediate sale, but it can help build the relationship for the long term business relationship.  In my field, sales cycles can extend for years from the time of the introduction to the closing of the first deal.  If the deal is delayed, listening will help make your life richer because of the friends you have made.

Now Interviewing : What Kind of Job Candidate Are You?

My wife and I recently had an interesting overlapping situation with our jobs. My company has been interviewing to fill a position, and my wife had to attend a career fair to represent her company. It probably isn’t surprising we had similar things to talk about, but what was surprising is that we both noticed that job candidates always seemed to fall into the same categories.

The category, which should probably be dreaded the most, is the “I just need a job” category. They really aren’t sure what you do, or what they are even doing there. Really, they are just looking for a way to get paid 9 to 5, and that is their only concern. The interview or conversation almost feels like a speed date. While there isn’t any hurry, it feels like the candidate is there to collect some basic info and is probably trying to weigh it apples to apples to other places they have interviewed or plan on talking to. Towards the end of the interview, they typically announce, “I think I can probably do that.” And, they probably can. But is the bare minimum all they would do?

The second category is the “dine and dash!” Admittedly, I was once in this category. These are typically (but not always) fresh graduates, who are smart and ready to work hard. What is wrong with these candidates? There is a concern that their “five year plan” may not exactly include your company. They are trying to build a skill set, which will give them greater career opportunities in the future. Hopefully, your company can provide those career opportunities, but we all know how the grass always seems greener on the other side. These people can provide years of meaningful contribution to your organization, but can they show enough long-term commitment if a big investment is made in them?

The last category is the “diamond in the rough.” The most rare of the candidates, they are the people you wouldn’t have normally considered for the job, but who surprised you with a set of skills and reasoning that could be retooled or polished up to fit well into your organization. Because you weren’t originally considering their skill set, you likely wanted to interview this person because their personality seemed like it could be a fit. The fact that they have skills that could also be used after a little orientation seems like the icing on the cake.

And lastly, regardless of what category you may find yourself, please keep in mind good manners. Treat your interviewer with respect. Come prepared with a desire to know more about the job, and some examples of how your last position might reflect your ability to do your new job. Wasting your interviewer’s time by not being prepared is not going to leave a good impression. And, follow up by thanking your interviewer for their time. Not only is this common courtesy, but it reminds them you exist and have a genuine interest in the job.

Selling from the Front Porch, an Introduction

“How do you do it?”  asked a branch manager of a regional bank I worked for.  As a commercial field lender, we were to make joint calls with business clients the managers had drummed up.  We had just finished visiting with a business owner who was planning to move his accounts to our bank. 

“Do what?” I asked.

“How do you talk so naturally to business people and get them to tell you everything you want and more?  You also get them to want to move their business,” she asked. 

My mind flashed back several years to my wife who made a comment that she sometimes will cringe at a social event because of the questions I was asking.  “They seem so personal, but for some reason, he gets answers and even more of what he has asked.  He is kind of like a financial priest.”

Now I am nowhere near that good, but I do have the ability to get folks to open up and talk about their business.  I began to wonder where I learned these skills.  It was not until a trip back to my home town in Missouri, that I realized where I began to learn sales skills and leadership.

It was on the front porch!

I had several relatives who had large front porches, back decks, or flat areas outside of their house where they would gather to visit.  My folks would often take me out in the country to one of my kinfolks’ houses in the summer.  We would pick beans or corn from the garden, go inside for supper, and retire outside to snap beans or shuck corn.  We would plop down in some of the finest metal and mesh lawn chairs known to man.  If you were lucky, you could get on the porch swing and play with the dogs.  Cold iced tea and homemade ice cream were usually present.  We would watch the lightening bugs come up and share life together.  As I grew older, I added fine BBQ and other beverages to these events. 

The lessons I learned on the front porch formed the basis for all my leadership training.  I just never realized it at the time. 

As we sat outside on the porch or the cool grass surrounding it, we would often have neighbors drive up and stop to visit.  In those days, we would also have traveling salesmen who would come over to sell gasoline for the tractors, crop insurance, cleaning products, Girl Scout cookies, and Boy Scout popcorn.  The majority of the time, with the exception of the kids, the salesmen walked away empty handed after they had used their entire lung capacity to fill our ears with the benefits of their product for a half hour or so. 

There was one salesman who stood out among the rest, Jim.  Jim sold encyclopedias.  This was a very expensive investment, but an important one to my aunt, the school teacher, who had a very smart son.  I remember the day he pulled up his car into Uncle Allen’s driveway and sauntered up to the porch where we were working through a big batch of peas and green beans.  Jim came up with nothing in his hands, something rare for a salesman.  “Mind if I help?” he asked. 

“Sure,” my aunt Barbara replied, “plop down in that chair.”  And from the rest of the afternoon till darkness set in he helped the rest of us with our vegetables, enjoyed some tea and ice cream, and listened.  We also learned that Jim was new to the area, what his family was like, and how he was out to meet folks and make some new friends.  It was a good hour or more into the conversation when Allen asked Jim what he did for a living and we learned Jim sold books and encyclopedias.  Jim gave enough information to answer the question and then skillfully served the discussion back up to the others on the porch.  After three hours or so, when it was getting dark, Jim excused himself and drove off.  He never once got out one of the volumes of the encyclopedias or discussed features and prices.  He just came up on the porch and shared life.

He continued to do that off and on.  It was not until the 3rd or 4th meeting that Aunt Barbara asked to see the encyclopedias.  Jim continued to stop by the porch and visit.  Eventually at the end of the summer, my cousin Ken had a big set of encyclopedias with a ten-year subscription to the annual update.  Not only that, but several other neighbors purchased sets for their kids as well.   These were other people who had dropped by the porch from time to time or people who my aunt and uncle had recommended their friend Jim to drop by and see. 

So what was Jim’s keys to success?  He took a genuine interest in people.  His questions were not just aimed at figuring out the hot button the prospect had and then just pushing it.  He asked questions and then listened.  My wife always tells our kids, “People don’t care how much you know, until they know how much you care.”

Jim also made friends and not just for the sake of the sale.  He continued to drop by occasionally and would receive introductions into other folks and recommendations for his product.  He built a network of friends over time.  Jeffrey Gitomer says, “Your ability to build a successful network is tied to your determination and dedication to take whatever time is necessary to build quality relationships.  And you’re lucky—the outcome of your success if totally self-determined.” 

Jim also followed the Golden Rule, “Treat others the way you want to be treated.”  One time, way after the initial sale was made, he was asked why he was different than the high pressured salesman we so typically saw.  “I just stopped and thought how I would want to be treated if I were the buyer.  Then I treat folks that way,” he replied.

This was one of the basis of leadership and sales, which involve the same skill of influencing someone.  So if you want to learn more, come up to the front porch with me.

Why We Don't Audit the Fed

For those who are not aware, we have a central bank in the US, which we call the Federal Reserve System. The central bank in any country is primarily charged with regulating currency, the money supply, and interest rates. Our Federal Reserve System (or simply known as “the Fed”) has the specific objective to carryout policies to promote maximum sustainable employment and price stability. That is fancy talk for keeping unemployment low and controlling inflation.

Libertarians like Rand Paul constantly call for auditing the Fed. While it sounds unbelievable that we don’t audit our central bank, you need to step back and consider what is meant by the word audit. First of all, the financial statements of the Fed are audited! An independent accounting firm does sample accounts, make sure the books balance, and make sure proper division of control is in place.

So what does Paul mean when he suggests the Fed isn’t being audited? An audit can be more than simply bookkeeping and internal controls. An audit can also be done on a bank or credit union’s policies. If you have a policy to limit loan-to-value to 75%, then that policy can be checked to make sure your loans are not exceeding 75% of appraised value. But what policies does Paul want to audit?

Paul is not quite clear on what he wants audited, but it is presumed to be the policies of controlling inflation and keeping unemployment low. The challenge is, who other than the Fed is in a position to say whether the Fed is doing a good job with this? The effectiveness of the policies are not clear cut, and they aren’t as easy to check as say, a loan-to-value policy.

The independence of the Fed is of far greater concern. Politicians will always want to see unemployment as low as possible at any cost. A principle you should understand in macroeconomics is unemployment and inflation are inversely related. In other words, it is tough to have very low unemployment without having high inflation. The Fed needs to balance the two opposing forces. If the Fed isn’t left alone to balance the scale, the fear is the politicians will always be pushing down too hard on unemployment, at the cost of hard-to-control inflation in the future.

Furthermore, our entire money supply and economy will then be at the mercy of whichever party is in power. The objective of the Fed would likely be different, depending on whether Democrats or Republicans control significant parts of government. Our fiscal policy is already a mess, because these two parties cannot effectively work together. Could you imagine if our monetary policy and money supply were subjected to the same gridlock and tampering?

While auditing the Fed sounds logical in theory, it is important to keep in mind that it already is audited! The financial statements and internal controls are audited! The suggestion that the Fed is not audited comes from the opinion that the Fed’s actions and behaviors should have greater government oversight. Presently, the Fed can make decisions about interest rates and controlling inflation without Congress looking over their shoulder, and many argue this independence is what makes the Fed a stable and trusted institution.

Preparing Future Leaders

I just finished a trip visiting several credit unions in western North Dakota and eastern Montana.  My travels had me in communities all the way north at the Canadian border and all the way south to the Montana-Wyoming state line.  All of these small towns are rural.  When you are in one town in particular, you are the farthest away from a Starbucks that you can get, but the local coffee shop was great! 

Most of the counties are experiencing a drop in population.  There are some larger communities and also some areas closer to the Bakken Oil Formation that do have more people.  But all institutions are challenged with attracting, training, and retaining good people.  This leads to yet another challenge, building good leaders for the future growth of the institution.

It was encouraging at one credit union in particular, to find a very capable CEO in her 30s.  Most did have other key people in leadership positions and some on their board who are younger.  But I could also see some who seem to be run almost entirely by those who are older.  Now don’t get me wrong here.  I think there is a wealth of learning that can be gained from those who are older and they must play an important role in the leadership of your CU.  At the same time, you must be developing young leaders who will lead your institution into the future. 

I am reminded of a call I received over two years ago from a board chair of a rural institution.  The gentleman was in a real pickle, the institution had relied upon one individual and now that person could not lead due to some sudden health complications.  The business had not trained up leaders to replace him.  Eventually, the CU merged with another one.  In order to avoid this at your business, it requires the constant development of new leaders.  This requires three things.

First, existing leaders need to identify future leaders and recognize leadership characteristics that they currently have and need to develop.  Leadership is not a destination, it is a daily journey.  Letting the younger folks know that you see them as leaders will go miles for their self-image and also begin to give them an attitude of ownership for your company.  I always say the best employees are those who do not really work for you, they work for themselves.  Those people will always carry out their duties with a higher standard of care as they have ownership of their work.

Next, invest constantly in future leaders.  Find out what qualities the young person needs to be able to sit in your chair in the future.  Some of this will involve technical knowledge.  In our field, this would involve everything from analyzing a loan request, preparing and closing a loan, and finally, servicing that credit through its life.  But technical items may only make up 15-20% at best of what needs to be taught.  Invest time in teaching leadership, attitude, sales skills, and working with people.  These skills are needed most to succeed.  They are also the most overlooked. 

Allow your future leader to influence your organization in areas.  Influence is leadership.  Let them begin to lead in smaller projects and tasks.  Also, if they have great ideas that will make your CU to grow positively, allow them to provide leadership for your culture.  As they see they are actually making a difference, it will prepare them for future leadership at your shop.

As a leader, are you showing them an example of the daily discipline necessary to develop your leadership?  Remember leadership is still a journey, never a destination.  You will always have to learn.  It’s like my Aunt Lil said, “Once you think you have ripened, the next step is you begin to rot!”  If you think you are sitting in the chair of leadership and have nothing else to learn, think again!

Carryover Debt in Agriculture

Business lending is an activity that requires thorough training and experience, and in this process, lenders will learn each lending type carries with it a different set of best practices. Simply put, you cannot hold a hotel operator to the same performance measures as say a farmer, rancher, or a car dealership.

Agricultural loans are probably some of the most complicated lending to take-up.  The asset conversion cycle for agriculture varies greatly, depending on the operation in question. Winter wheat is planted in the fall and harvested in the spring. Spring wheat is planted in the spring and harvested in the fall. A rancher will have calves birth in the spring and may sell them in the fall. He may not sell all those calves, keeping some back to feed until a heavier weight to sell at a later date, or he may keep some cattle to build his herd.

How are lenders supposed to get their arms around these requests? Communication is key. A good ag loan file will have detailed notes, explaining what each operating draw was for, and what each operator’s plan is going forward. The importance of this cannot be overstated, because an operator may see it in their best interest not to sell their harvest or cattle when you may expect. They may find it beneficial to wait until market conditions improve, or they may have other plans.

When a farmer or rancher has borrowed money to fund their operation, but they delay selling their crops or livestock, they will find themselves in a position of having carryover debt. Unlike other lending types, this is generally permissible. While this may seem unusual, we must consider the nature of the assets and credit administration in agriculture.

Crop inventory does not become obsolete. While its market value is constantly changing, it can be delivered to market years after it has been harvested. Cattle arguably have the same qualities if they are used for breeding, but must be delivered to market after a certain period if they will not be used for breeding. Still, cattle share another important quality with crops, which is they are a liquid asset. For these reasons, it is acceptable if carryover debt exists, so long as regular farm inspections are completed and communication is kept current, demonstrating the assets are still on hand and being appropriately managed.

While not desirable, a producer and his/her lender may find themselves in a position where they have carryover debt, but lack adequate amounts of crops and cattle to pay the debt off immediately. In this case, it is necessary to term out the debt. If fixed assets, like machinery and breeding livestock, are used as collateral, then the debt should probably be termed out between 3-7 years. If farm ground is used as collateral, then mortgage financing could justify terming the debt out 20 years like any mortgage debt.

The key idea is carryover debt should not immediately be classified as substandard credit. If collateral exists and leverage is not out of control, it is simply working capital that needs to be regularly inspected or termed out. Again, this is unique to agriculture. This is not like financing inventory and finding yourself in a situation where the inventory is useless, or like financing a contractor who manages to collect receivables but not payoff his line of credit. The financed assets are different and credit administration is different, indicating a different approach to risk management is necessary.

In Order to Fail at Sales, Start (and Stay) with a Script

I took a call on my cell the other day, when I was at work, from a salesman informing me of some new opportunities in the silver market.  After my, “Hello, this is Phil,” I tried three times to end the conversation within the first several minutes without being rude.  The salesman just kept reading from his script at breakneck speed.  I had other things to do so I just set the phone down and quietly went on working on the computer.  After about 5 minutes of constant talking with very few breaths (this guy had the lung capacity of a professional swimmer) he finally asked for a response from me.  His query was greeted with silence from me.  After several, “Phil, are you there,” he hung up.

Last week, I had a fellow in financial services ask what I use as a script.  My initial comment was, “Nothing!”  The immediate response from the seeker was a puzzled and dejected look.  You see, he wanted to find the magic script, the silver bullet, the Hail Mary of all sales that would transform him from struggling salesman to successful solicitor.

The question caused me to think.  In my varied carrier in banking, insurance, and credit unions, several times I have had to start with a very small or no book of business at all.  Sometimes this occurred in new communities where I knew no one.  In each case, with the exception of one, I was able to build the largest portfolio, the largest outstate branch, or the most successful group of clients over time.  The one time I followed a script to a “T,” I failed in an epic manner. 

This happened with a short stint that I did at Metropolitan Life.  It was short, because I found I enjoyed simple “pleasures” in life like eating and paying the rent and I wasn’t earning a paycheck to pay for those things.  At Met, I did both phone calls and customer calls for insurance products.  Met had a strong group of scripts.  I had a cold calling phone script, new business owner script, retirement planning script, new baby script, newlywed script, overcome-the-initial rejection script, college savings script, power of whole life insurance script, win over the client script, and finally the script to win over the most ardent rejection. 

You know what?  I sold NOTHING!  Heck, I couldn’t even sell anything to my friends and family.  Met taught that if you went through the scripts, you would eventually get sales.  The problem I had, and another 90%+ of agents had, was we did not have an eternity of time on earth to actually see the results.  The position was quite painful for me, I would rather have dental surgery than doing that again.

I left that position and took a leadership role at a branch of a savings and loan.  I had not yet given up the script thing, but developed them to help cross sell other items with loans and deposit accounts like credit life and disability insurance.  One day, I had a wise person who referred a customer to me for a car loan.  He told me that this gent did not want to hear the script for the other products, but would just want the loan.  Since I was struggling to grow the branch, I decided to take his advice.

The meeting was eye-opening to me.  We went over the loan terms quickly and then just visited.  After 15 minutes we had talked about his life, hobbies, and family.  I wondered if this was a waste of time, but then he asked about house loans.  Eventually, he did several mortgages with me and referred several of his friends to me.

Imagine that!  I followed no script, did not go over the checklist of items to sell, did not ask for referrals from others, or do any of the strategies that I did at Met Life. Yet, I got more than what I ever thought.  It wasn’t long before I got rid of scripts forever.

So, why are scripts ineffective for long-term sales success?  First, the script is focused on you and getting your message out instead of listening to the customer.  Remember, people hate to be sold, but they love to buy (Jeffery Gitomer).  In order to get people to buy, you have to first shut up and genuinely listen to them.  Following a script, prevents the salesman from learning about the customer and puts the focus on those few items in the script.  There may be a place for this in some low level boiler room sales, but if you desire to build real, lasting relationships that will actually bring you more and repeat business, can the script.

The script is not set up to sell benefits, only features.  Even the best of them cannot sell benefits.  People buy benefits that matter to them, they do not buy product features.  The reason a script can’t do this is that the script would have to be infinitely long to handle the different benefit that each client has.

Scripts become an excuse to not learn the products you have, but to only learn the script.  So, in many ways, the script will hinder deep product knowledge you desire your staff to obtain. 

Scripts prevent a relationship from developing.  If I am only concerned with my list of items to go over, I will not be listening to the person on the other end of my desk.  When is the last time you went on a date and took a script with you?  Did you go through the list of items, checking them off, one by one, as you completed them?  No, you just spent time developing the relationship. 

Scripts prevent you from being genuine.  Where are scripts used?  In acting!  Everything there is playing a part or make believe.  How can you be authentic when you are acting a part?

While there may be some available areas where scripts are helpful, I do not see them useful from a long-term relationship building prospective.  On your next sales call, I suggest you can the script and go make a friend.

Becoming Relevant

This past week I had a call from two borrowers who asked if I had an interest in a new project to finance for them.  When this happens, you have reached the a place of sales paradise when people believe so much that they are better when they are doing business with you, they will actively seek out you.  Each time I visited with the client, I had to smile because I know MWBS is relevant to them.

We attended the legislative social put on by the Credit Union Association of the Dakotas.  By the way, these hard-working folks put on a first rate event.  While I was there, I was asked by several credit unions who do business with us for additional help, they want us to help in more ways, to provide education for their loan committee on how to determine good and bad credits.  Again, another incident that we relevant to them.  Note you never are relevant to another person until they put you in that place.

The only higher place is when your clients will give testimony of what you do to others.  We also had people who have done business with us tell about how we are making a difference in their institutions, how we are helping them do deals that they could not do before, and how we are helping them expand their reach in the community.  When you get to that place, you are really relevant.  You are in a place where people bring business to you.  This is the ultimate Eden of Sales, a paradise all in sales should seek to find.

So how do you reach sales paradise?  I will first look at several paths that do not take you to the fine sandy beaches to watch the customer ships come into your harbor.  You can’t get there by criticizing competitors or others around you.  It is an easy trap to fall into, and we all have a little “one-ups-man-ship” inside us.  But you will never reach stratospheric heights while you are pressing down on the shoulders of others.

You don’t reach it by quoting a scripted list of all the features of your institution.  Product features are not relevant to the customer unless they fully understand the direct benefit to them. 

A listing of your resume’ or accomplishments may help begin to make you relevant in the client’s mind but it will not get you fully to sales paradise.  The client must actually experience that they are better with you.  They may be inclined to learn more, but being a constant megaphone of yourself will not get people to follow you.

The first step toward sales paradise begins with a strong belief.  Remember you are creating something, a sales relationship, out of nothing, and this begins in your mind.  You have to believe that your company and product is the best for your client.  You have to believe that you are the best and when your client comes to you, you will make a real positive difference in his life.  This is not an arrogance, far from it.  It is a quiet confidence that wells up inside you which is a huge attraction to others. 

The next step comes with a positive attitude.  Let’s face it, we all have a lot of crap that we have to deal with each day.  It is easy to get down and attitude makes all the difference.  I once heard of a man with two sons.  One was a Positive Pete, the other was Negative Neil.  One Christmas, the gentlemen decided to try an experiment.  He bought all the expensive toys, game systems, and bikes for Neil but for Pete, he filled his room with horse manure.

A few hours after all the gifts were open, he checked on his sons.  Neil had all these cool toys and gifts around, but was still unhappy.  The games were too hard, some things did not work, and others were not what he wanted.

Pete, on the other hand, was busy up in his room singing as he shoveled manure.  His dad asked him, “Son, how can you be so happy with all this manure in your room?”

“Dad, with all this poop, there has to be a pony in here somewhere!” was his reply.  Now here is an example of a positive attitude!

The third item is to have a genuine interest in the client.  Ask questions, shut up, and listen to the answers.  What motivates them?  What are their hopes, fears, and goals?  What makes a difference to them?  This has to be an authentic interest, for people will pick up what is phony.  Your influence will begin with others when you consistently place other people’s interests ahead of your own.  My wife always says, “People don’t care how much you know until they know how much you care.”

Finally, lead by giving value.  Note that nowhere here have I mentioned anything about closing a sale.  You have to give before you are ready to receive the closed sale.  Seek to find a way to give to enrich their business, their family, and their very life.  If you have a sales quota that you are a long way from meeting, you must find a way to give a lot of value.  If you have to meet the quota quickly, you have to give value quickly.  Not only do you have to give value, you also have to give more in value than you receive in compensation.  If a person is proud that they have bought what they consider to be a bargain, they will constantly come back for more.

When you do these things and moreover, become these things—someone who has quiet confidence, a positive attitude, is genuinely interested in others, and initially seeks to give value—you become relevant in the eyes and hearts of others.  They will begin to think of you when they, or others around them, have a need.

EQ vs. IQ : Emotional Intelligence

We have all heard about doctors who lack “bedside manner.” Clearly, you must be intelligent to become a doctor, but what separates successful doctors from the rest is their ability to account for their patients’ emotions. This is called emotional intelligence.

Emotional intelligence plays a big role in any organization, and the world of finance is no exception. I had a coworker once who was very abrasive with others when she would review business loan requests. She would berate the loan officer over deficiencies she saw in the loan structure, and she would embarrass underwriters for not providing strong arguments or lacking details. Everybody in the company hated this person! I could see she was clearly smart, and I tried to learn as much from her as I could, but it was very challenging to maintain a basic friendship with her. I had never met someone who lacked so much emotional intelligence!

Ultimately, anyone with emotional intelligence will likely have a competitive advantage over their peers, and emotional intelligence can be learned and gained through maturity. However, emotional intelligence can also be innate, and we can all think of examples of people who appear to manage relationships naturally and seemingly effortlessly.

In commercial lending, relationship managers must have well-developed emotional intelligence, since their livelihood is largely based on their ability to maintain relationships with their business clients. Underwriters, on the other hand, are discouraged from becoming emotionally attached to a project or clients. That means the less emotional intelligence an underwriter has, the better he or she will function in their role, right? Wrong!

Underwriters and analysts need to have emotional intelligence to be successful too! Just think about the doctor with bedside manner. It is not enough to identify potential issues, but the issues must be communicated with tact and respect for all parties involved. Likewise, relationship managers may exhibit great emotional intelligence with their clients, but the most successful ones show the same qualities in dealing with underwriters internally when issues arise. Some lenders can show great disdain towards underwriters and feel it is their job to protect their clients from them!

I think mutual understanding tends to be the best conduit of emotional intelligence. In finance, I think this works best when we all agree we just want to advance our careers, and we need every person around us to help with that goal. The more people that contribute to scoring a big win results in more people who felt they have won something.  There is an advantage to being part of a team and having a wide base of stakeholders.

Those who are obsessed with winning alone rarely get very far, and it is not hard to see why. A desire to go it alone usually results from lack of emotional intelligence, which means others don’t want to be around you.

Having a high IQ is not enough in any profession. It is your emotional quotient (EQ) that will also be key to your success. Intelligent people can dream and design big ideas, but it takes teams of people to execute big projects, which means having emotional intelligence is critical if you truly want to have a hand in making the world go round.

Profit and Loss : Understanding the Income Statement

When I first started in finance, I was overwhelmed with all the information we have to use to make decisions. However, I learned over the years that there are patterns and predictable systems for the way most financial statements work, and financials that don’t follow any rhyme or reason may indicate a disaster is afoot.

Virtually, all businesses have the same standard income statement, which can be a very powerful tool when you know how the system works. Each income statement has three principal components, which I will label as 1) Gross Profit, 2) Operating Expenses and 3) Other Income and Expenses.

The Gross Profit section describes what should be the beginning of the income statement. It looks at the gross revenue generated from a business’ principal activity, and it also looks at the cost of engaging in that principal activity. Consider a widget factory, where the gross revenue is the money collected from the sale of widgets, and then there will be a direct cost of the materials in the widget (or cost of goods sold). The difference between the revenue and the cost of inputs is the gross profit, and it tells us directly whether the principal activity of the company is viable.

Next comes the Operating Expenses. These are all the costs that cannot be directly allocated to the cost of making each widget. This will include the cost of utilities, the cost of administrative labor (like the HR manager and IT people), advertising, etc. If the gross profit can pay for all operating expenses, then there will be an operating profit available to the company. If the gross profit cannot pay operating expenses, then gross profit must be increased or operating expenses must be decreased.

Lastly, we have to examine Other Income and Expenses. These are sources of incomes and expenses generally not considered the principal activity of the company, and they may not be recurring. This might include the sale of an asset for a profit, or the one-time write-down of an asset due to an unexpected event like a fire. The operating profit remaining, after other income and expenses are accounted for, is called the Net Profit (or think of it as the FINAL PROFIT!)

Even financial institutions follow this pattern in their income statement. Interest income is the gross revenue, and interest expense is your cost of goods sold. The Net Interest Margin (NIM) is your gross profit. Operating expenses are straightforward and include employee wages and salaries, utilities, advertising, etc. Other income and expenses include origination fees and loan charge-offs.  An institution’s overall profitability is typically evaluated as Return On Assets (ROA), which is Net Profit divided by Total Assets.

If an institution wants to increase their ROA, they can simply consider their income statement basics: increase gross profit by growing interest income or reducing interest expense, lowering operating expenses, which can also help, and lastly, trying to boost other income sources (such as origination fees) and control other expenses (like loan charge-offs).

If It Ain't Broke, Fix It Anyway.

Tom Peters, one of the foremost gurus on business leadership, wrote this years ago.  The actual quote is, “There are no excellent companies.   The old saw ‘If it ain’t broke, don’t fix it’ needs revision.  I propose: ‘If it ain’t broke, you just haven’t looked hard enough.’  Fix it anyway.”  Now I started in college as an engineering student.  This flies directly in the face of an engineer.  Most would have no desire to fix items that are not broke.  After all, there are enough broken things in the world to fix; why bother with those which seem to work well?

This quote speaks about the importance of continual improvement.  Everything that is man-made can be improved upon.  Think of how our world would be if we were satisfied with items like the horse and buggy, the whale-oil lamp, or the UNIX computer.  Again, on this principle, I go back to my gardening Aunt Lil.  She used to say, as she looked at her tomatoes, “Always stay a little green in life.  Because if you have ripened the next step is for you to rot!” 

I also believe Peter’s quote also speaks about perception.  It is easy when we are on the inside of an organization to believe that things are working well.  Maybe we have created work-arounds, cheat sheets, and shortcuts to get the job done.  But do your members and customers have those same pieces of information?  And furthermore, why would they bother with it?  Imagine if you had a page of steps to work around core system flaws posted on your on-line banking page.  Who would want to use it?  Most would just find another institution that does not offer the same hassle in exchange of their services.

Now I understand that changing major systems and processes involve substantial investments of time and money and I am not saying that we have to all run and do that right away.  But we must be willing to step outside of our world and see how we look to others who are on the outside.  This should be done with each department and each product or service we offer.

I once used the on-line banking services of a financial institution.  I am a busy person and I tend to sit down once a month and schedule bills to be paid over that month.  I sat down and scheduled to pay a plumber 29 days in the future.  The institution took the money from my account immediately, and I encountered an overdraft fee.  I don’t know if they ever fixed their system (it was explained to me at the time this was how their system worked and I would have to live with it), but I have not used their on-line banking since. 

I have also called up some financial institutions and get dropped into the perpetual computerized phone answering system hell.  You have to push buttons to answer questions until you can finally leave an answer for someone named Mabel, who is not the person you wanted to speak to in the first place.  I may be a little old-fashioned, but I like talking to a person when I pick up the phone.

I know this concept will wreck some of you.  It will also challenge you to release the sacred cows you hold onto.  Some of you may find meaning in the work-arounds, without realizing how hard you make it for others to do business with you on the outside.  Sacred cows make great steaks!

I say to fire up the grill, bring on the sacred cows, and be willing to look at any internal or external process, program, or system in light of efficiency for those within and ease of use for those outside the organization. 

Participations: A Tool for Asset-Liability Management and Fee Income

When someone mentions a loan participation, you probably don’t realize how narrow of a definition you are creating in your mind. You are probably thinking about a new loan, in which you must sell some off to a credit union or purchase from another credit union. You are probably thinking this is necessary, because a credit union is faced with a limit on the amount of loans to one borrower. While the above may be a reason to engage in participating, it is only the tip of the iceberg.

While participations were likely started to manage around lending caps, sophisticated institutions have learned they play a more important role. These institutions are using participations to diversify their loan portfolio for the sake of spreading out industry risk and geographic risk. An institution may not be near their limit to one borrower, but perhaps that borrower brings additional commercial real estate exposure that adds to a mounting concentration in the same community. In this circumstance, an institution can sell off part of this loan to limit their exposure, and purchase a different loan in an unrelated industry in a different community to balance the risk.

The very fact that loans can be bought and sold present another significant balance sheet tool. Loans can be sold to free up liquidity, or loans can be readily purchased to invest excess liquidity. I have read several Funds Management policies, which suggest that loans could be sold as part of generating contingent liquidity, yet these institutions never bought or sold loans. For this tool to be effective, you need to identify partner organizations who can assist with this, such as a CUSO that manages participations.

Some institutions actively seek to participate loans as a way to generate additional income. An institution can make money through participating by collecting servicing fees and collecting origination fees. The servicing fee is collected out of interest income, and it is for the ongoing need to monitor and keep current documentation on the loan. This is a large responsibility, and will affect the credit quality of all loan participants, so purchasing institutions are hesitant to jump into bed with a seller, unless they are really trusting of the institution leading on the loan.

As you already know with origination fees, they are paid simply for the time and effort put into getting the loan approved and funded.  Participating helps rack up greater origination fees. Say your limit in lending to one borrower is $1 million. Say you make a $1 million loan and collect a 1% origination fee, so you will collect $10,000 for your hard work. And, you can’t lend to that person any more.

Now instead, assume you originate a $1 million loan and participate out 90% of it, meaning you only hold onto $100,000. You still originated a $1 million loan, charged a 1% origination fee and collected $10,000. That is $10,000 in fee income for holding onto a $100,000 loan. Not bad! In fact, you only are required to hold onto 10% of any participation loan, so you can make 10 loans for $1 million to the same borrower. That would allow you to generate $100,000 in origination fees for having the same $1 million exposure to the same borrower.

Harkening back to balance sheet management, an institution may participate out an existing loan so it may make a new loan to the same borrower. Not all loan participations need to be new loans, and there is a market for seasoned performing loans that have already been booked. You can book your limit to one borrower with one transaction, but then later sell out some of that loan to make room for a new project with the same borrower.

Now, we see that loan participations are a powerful tool for a number of reasons, and not simply a means to manage around a lending limit. They help diversify risk, create liquidity, create investment opportunity, and offer good fee income too!

Lessons from the Packer's Loss

The previous weekend’s NFC Championship game featured a tremendous and sometimes unexplainable victory by the Seattle Seahawks over the Green Bay Packers.  It was truly one that Seattle barely won and it was shown by the post-game reaction of the team.  This was a game that the Packers snatched defeat from the jaws of victory.

I began following the Packers when I was completing my graduate work in Wisconsin.  That makes the loss even more disheartening to me as I sat in stunned disbelief on Sunday.  I even have friends who were distraught for days after the horrible game.  But as the week is wearing on, I am realizing there are lessons to be learned from the game that apply to life and leadership.

Don’t compromise on the overall objective.  The objective of the game is to win and not just to win but to dominate, to impose your will on your opponent.  As the Packers built up a lead in the first half and as the Seahawks struggled, the objective for the game was compromised from winning the game, to not losing the game.  The objective change was shown late in the game when only an additional first down or two would have ended Seattle’s hopes.  Once you have a solid objective for your organization, compromise should not be a possibility.  When Hernan Cortes landed in Mexico in 1519, after a series of impassioned speeches on the shore, he commanded that the boats be burned.  Now the Spaniards had no choice but to be conquer Mexico or to die.  This provided the motivation to succeed.

Winning requires great courage.  Early in the game, the Packers had a 4th and goal on with only one foot to go for a touchdown.  At that point no one had scored and the Packers elected to kick a field goal rather than go for a touchdown.  A little later, the Packers had another 4th and goal on the 2 yard line.  Again, another field goal.  The choice of two field goals compared to two touchdowns cost the Pack 8 points and set the tone that there was a bit of fear for the other team.  Tacitus the Roman Historian said, “The desire for safety stands against every great and noble enterprise.”  Babe Ruth put it best when he said, “Never let the fear of striking out get in your way.”  Any time we rise above mediocrity, we will have to take a great risk.

Don’t let off when you see the finish line.  Too many of us tend to start great on a job or a project, only to peter out in the end.  Often when the finish line is in sight, there is a tendency among some to ease up and trot to victory.  The finish line should be motivation to sprint harder and to not ease up.  It requires us to be persistent.  Calvin Coolidge said, “Nothing in the world can take the place of persistence.  Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb.  Education will not; the world is filled with educated derelicts.  Persistence and determination alone are omnipotent.  The slogan “Press On” has solved and will solve all the problems of the human race.” 

Look realistically at the obstacles in front of you.  I was watching the game with a rabid Seahawks fan who was completely depressed after the Pack took a 16-0 lead into halftime.  When the Pack came out in the second half, they seemed to play as if they had a lead and not continue to press as they had before the half.  Some may say that they underestimated their opponent at that time.  Early in the game when the respected the vaunted Seattle D to the point of choosing field goals, they may have overestimated them.  Good leadership requires the vision and ability to gaze at the items in front of you and adequately size them up.

So, as we enter the end of another football season and look at the new hope for the off-season, it is often good to see the lessons that can apply to life from sports and have great hope for next year.  It is that passionate hope that can keep us pressing forward into the future.  But to ignore the lessons before us today can be to our detriment. 

Debt Service Coverage Ratio

If you have dealt with business loans, you have probably heard of the term debt service coverage ratio, or DSCR for short. This is the total cash flow of the borrower divided by their debt service for the same period. If the ratio is equal to 1.00, then cash flow is equal to the debt service. Ideally, the ratio should be larger than 1.00 so the borrower can handle some changes in their business, such as reduced revenue or higher expenses, but still be capable of paying their debt service effectively.

While the DSCR is widely known and used, there is not an agreed upon way on how it should be calculated, nor is there a uniform DSCR calculation for each loan request. For example, cash flow may be calculated to mean earnings before interest, taxes, depreciation and amortization (EBITDA) or earnings before interest, depreciation and amortization after taxes (EBIDA). Sometimes, capital expenditures (CAPEX) are subtracted from cash flow. Cash flow may also have need to subtract out realized and unrealized gains from capital gains sales and add back realized losses or unrealized losses. All of these variations can impact the cash flow numerator.

And then there is debt service in the denominator. Debt service can be the individual loan in question, or all loans of the borrower. The debt service may include interest only payments and balloon payments, or it may only include regular installment payments. Debt service might include capital lease payments. Sometimes the debt service could be a hypothetical obligation, which doesn’t represent the actual terms of any loan the borrower currently has.

How DSCR should be calculated will all depend on the nature of the credit requested. Commercial real estate will typically have the most straightforward calculation. This will simply require you take the net operating income (NOI) as cash flow, which is net income plus interest, depreciation, and amortization. You then divide that by the installment payment due over the same period. This assumes there is no other debt in play. CAPEX should generally be subtracted from cash flow if the property is owner-occupied, so the DSCR can be assessed after the need to make capitalized repairs and improvements.

For commercial and industrial loans, DSCR can be complex, depending on the nature of the operation. Generally speaking, EBIDA subtracting out capital gains and adding back capital losses will be your best measure of recurring cash flow in the numerator. CAPEX should also be researched and subtracted out of cash flow. Debt service should include any and all installment payments, interest only payments, and capital lease payments over the same period.

What your target debt service should be all depends on the risk of the operation. Stable and predictable income, like that from residential rental real estate, may only require a DSCR of 1.15x. Whereas, the DSCR from a casino may be 1.50x or higher.

The important concept to keep in mind is DSCR isn’t uniform. Just like all things in commercial finance, it depends. The type of transaction you are analyzing will drive how you calculate both cash flow and debt service, and what the target DSCR should be.

Lessons Learned at Wells Fargo

A couple of Saturdays ago, I visited a local Wells Fargo Bank with my oldest son.  My son is taking a trip to China and he needed to exchange some US Dollars into Chinese Yuan, Wells was the only financial institution we knew of that would do the currency exchange.  Our trip gave us several lessons into new trends in banking.  Note that in this post I am only commenting on the experience we had at the institution on this particular day.

As we entered into the facility, we were greeted by two ladies in Wells Fargo casual attire holding clipboards and coffee cups.  I assume their dress is casual on Saturdays.  We were offered coffee as we entered and asked what brought us into the bank that day.  I found it interesting that the ladies stood out in the open, without the safety of a desk to hide behind.  It seems the bank is hoping the customers have an experience with their staff that seems to have some of the barriers between banker and customer, taken down.

We were instructed to a specific teller who could help us and were greeted within 10 seconds of reaching the end of the teller line.  The gentleman acknowledged our request and then returned to the back where he sent up the international teller to handle our request. 

It seemed to take a bit for that teller to come to the line and serve us.  While we were waiting, we were acknowledged by the other two tellers who were on the line and even struck up a conversation with them as we did not have anyone in line behind us.  It was a smart move to make us relaxed as we seemed to wait for a spell as the teller checked the current exchange rates.

The teller finally arrived, explained the exchange rates, and asked us several questions about what we were planning to do with the Yuan.  The questions were very open and unassuming, like a conversation you may have with a friend on your back deck.  The lady found out when my son was going to China, how often he plans to travel outside the country, how long he would be there, and why the need for Yuan compared to other methods of paying.  She then brought up issues of security of carrying the cash while traveling. 

She also answered questions about how we could order the foreign money at a Wells branch that is closer to my son’s college as he is on the east side of the state.  Another teller gave us an address, branch directions, and a direct number to the foreign currency teller at that branch.  I was grateful for that as Wells main phone system, like a lot of financial institutions, is a messy web of pushing buttons, saying answers to questions, to eventually lead someone to leaving a message on someone’s recorder that may never get answered. 

So what was right about our encounter at the bank and what can we learn from it.  First, the contact with Wells staff.  We talked to seven different employees in the space of our visit.  We were greeted upon coming into the branch and also acknowledged when we left.  Folks were open and unassuming, chatting with us as you would a friend.

Second the staff did a great job in uncovering needs specific to our situation and offering other Wells solutions to those needs that would even go beyond our immediate need.  We were shown the benefits for my son to have a Wells account by having lower fees for foreign currency exchanges, security while traveling, and convenience of multiple branches both at home and at his college.  So we came in needing some Yuan and were shown the benefit of banking there.

All in all, it was a pleasant experience.  I write this not to tout Wells, but to call your attention to what was done with our visit that was right and show an example of how successful cross-selling can and must be done.  I know that many out there will bristle at the very thought of selling financial products for your institution.  Many feel that this is imposing to the customer and a nuisance.  I will tell you two things, first you already sell every day of your life.  This is done whenever you recommend a movie, restaurant, or store to a friend, so why not your financial institution.  Second, if you don’t sell, you will not survive.

News came out today that the Bank of Tokyo Mitsubishi will be using 23 inch tall robots named NAO to greet customers and ask most basic custom service questions.  The robot can answer questions in 19 languages and analyze customers’ facial expressions and behavior.  NAO can also take video of the customer to help the bank develop new financial services in the future.  The robot only costs around $8,000.

Cross-selling is essential to people having so many services at your credit union that they can’t leave.  It is also a way to show more value and become a trusted financial advisor to your members.  It is easy to forget about an institution if you have only one account there.  If you have 5-10 or more it is much harder.  Your goal is to be good.  Steve Martin once said, “Be so good they can’t ignore you.”

Every contact you have with a customer is a golden opportunity that comes less and less as more transactions are done online and outside of your facility.  What are you doing to make the most of those contacts?

Tax Credit Voodoo: Demystifying a Great Development Tool

When I first came across tax credit finance at my previous job, I was suspicious. This is a natural tendency when you encounter an idea which you have never been exposed too. But, after educating myself and walking through the underwriting process, I found that tax credit equity solves a lot of unique problems.

So how does this work? First of all, we need to understand what a tax credit is, which of course is a tax break. Say you made $1 million, and you had to pay a 35% income tax on that income. This will mean you have to pay $350,000 to the government! Now, say you went out and bought $350,000 in tax credits so you don’t have to pay taxes at all on the $350,000. This makes sense, so long as your tax credits cost you less than $350,000. So, if you paid $200,000 to buy the tax credits, you now have saved yourself from paying $150,000 in taxes!

Now we understand how tax credits work, but why do we use them in development? Tax credits can be awarded or allocated to projects, so their developers can sell them to raise equity investment. Therefore, the money from the sale of the tax credits is used as an equity injection into the project that had been awarded the tax credits.

Tax credits come in an assorted variety. Historic tax credits (HTCs) are probably the most commonly available. They are awarded in tandem by a state historic preservation office and the National Parks Service. The tax credits are awarded for improving a historic structure, with the caveat that certain historic features must be preserved.

Low income housing tax credits (LIHTCs) are another widely used development tool. Each state’s housing authority is granted the ability to allocate a specified number of LIHTCs each year to develop housing that will serve low income residents.

New market tax credits (NMTCs) are used to support and develop businesses in areas designated as low income. In this respect, they are effectively available to anyone, so long as their project is not primarily residential. Because of this, receiving an NMTC allocation is highly competitive, with demand exceeding supply by a ratio of 10:1.

Various states also have their own tax credit programs too. The tax credits apply to state income taxes and will mimic programs like HTC, LIHTC, and NMTC. There are also tax credits for the development of renewable energy, constructing schools, etc. And the great part about tax credits is, anyone can buy them.  It can either be the project developer, or a large faceless corporation faced with a tax liability.

Many lenders shy away from projects that have tax credit equity, because they have trouble understanding how it works. In reality, it may affect some aspect of the loan and foreclosure process, but those issues have solutions that usually don’t affect credit quality substantially.

In the end, if it were easy to understand and execute, everyone would do it. And in a world of growing competition, having a niche that doesn’t come with much measurable risk is always a good advantage to have.

What if the Fed Does Not Raise Rates in 2015?

As we embark on a new year, the consensus of economic forecasters seem to believe that the Federal Reserve will begin to raise interest rates in 2015.  They point to the Fed ending the stimulus Quantitative Easing Program and the fact that interest rates have been so low for so long combined with the strength of the US economy as sure signs that rates will increase this year.  Consensus seems to tell us if economic growth stays above 3% (currently around 5%) and core inflation rises above 2% (currently at 1.8%), the Fed will act to slow down the economy by raising rates.

Several items point to continued strength in the US economy.  The Leading Economic Indicators and Purchasing Managers Index are both very positive.  Housing starts, though not great, are quite a ways above the post-crash numbers.  A lot of economic news is much better than things were in the last recession.

But have you ever stopped to ask, “What if they don’t raise rates?  What signs point to the possibility of that not happening?”  The Fed walks a tightrope with a long bar, balancing low unemployment on one side and price stability on the other.  By price stability I mean low inflation.  The Fed wants some inflation, but wants to keep it manageable.  One of the worst issues a central bank could face is deflation, the state where prices of assets are going down.  It makes it harder to pay off debt and also requires assets to be re-margined as their values fall compared to their debt. 

The average person would say that the low unemployment rate of 5.6% in December, combined with an upward revision of the November payroll, points to us reaching a “full employment” stage that would set the Fed for raising rates.  But a closer view of the numbers is warranted, which shows that while more people had jobs, they were making less money.  Average hourly earnings fell by 2/10%, indicating that many of the jobs added are low-wage positions.  A broader measure of unemployment, U-6, includes the unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.  This rate is falling but sits at 11.2% at the end of December. 

The following chart from Agora Financial show the drop in unemployment since the recession has been accompanied by an increase in part time workers and a decrease in full time workers.  Full time workers are down a good 2% since 2008, and part time workers are up the same amount.  So as the unemployment rate goes down, a greater percentage of the employed are part time compared to where our country historically has been.

This is impacting wage growth as is shown in the following chart from the Bureau of Labor Statistics.

So more people are employed, but are under-employed or are in lower wage jobs.  This is coupled with decreases in commodity prices we have seen in the last half of 2014.  Oil, obviously gains the largest headline here, but other building materials like copper and lumber have also followed suit.  Part of this seems to be the end of a commodity super-cycle.  There are also indicators of a slowing demand from Europe and Japan.  Emerging nations are seeing less economic growth, with half of them already in recession and the other half slowing down, Even China, is looking at growth rates half of what they have been used to in the last decade. The other factor present here is the strong US Dollar.  As our dollar is stronger, we can buy more stuff.  The strong dollar does make it harder to sell our exports, which could retard growth. 

So in many ways, the US is like the best looking house in a bad neighborhood, in spite of the underlying weaknesses in our economy.  But if the Fed raises rates, it will slow down the economy further.  This may throw the economy back into a recession since deflationary pressures are strong.  One item the central bankers like to avoid is deflation.  Throwing us into a recession will also have a horrid impact on other nations that are teetering on the edge of one now.

Watch the Fed in the first quarter along with trends in core inflation, commodity prices, and the economic performance.  Watch our economic growth but also look for clues that may uncover further weakness hiding below the surface.  At the end of this year, we may once again talk about how the Fed left interest rates alone.

Community Development Corporations

Everyone likes a safe and vibrant community. We know, however, the safety, security and economics of each community is different. Some communities go through tough times for a variety of reasons, and challenged neighborhoods may get neglected and blighted. The solution, or so it would seem, is often thought to be more direct government intervention. Residents will demand more police presence to keep a troubled area safe, or they might demand tax funds be spent cleaning up abandon properties.

The issue with this type of government involvement is it is an ongoing cost and a temporary band-aide. And sometimes the government simply doesn’t have the funding to begin to fix the problem, so it is left with no other option but to ignore a deteriorating neighborhood.

Citizens tired of waiting for a government solution have found a successful way to take redevelopment efforts into their own hands and bring new life into tired districts. The non-profit world has found a win-win solution by creating community development corporations, or CDCs for short. The concept is to marry a community’s needs for services with the community’s need for redevelopment.

Low income housing tends to be the most prominent example of this. The CDC will buy blighted properties, renovate them into desirable properties, and then rent the properties to low income people after construction. The CDC may obtain a business loan for the renovation, which it will pay back using the rents it collects once the property is operating. In this way, lower income residents see an improved quality of life, the neighborhood gets an improved look that attracts future investment, and the CDC stands to benefit from a cash flowing asset. The CDC, as a non-profit, uses any surplus cash flow to fund any CDC operating costs or invest further in additional projects. This same model has been repeated in different ways, which may include investing in shopping centers, grocery stores, theaters, etc.

How does a CDC initially get capitalized so it may purchase property or get a business loan? It can be tricky, but there are ways. If property development is the aim, a deal may be struck with the current property owner to provide seller financing. There also may be government grants, or tax credit equity available. In this case, it can be a successful way to partner with donors or the government by demonstrating the need should only be a one-time occurrence, and thereafter the operating property can pay for itself.

After a CDC has taken the first step by rehabilitating some properties in a neighborhood, for-profit developers take notice and see an opportunity to benefit from investing early in a neighborhood being turned around. They are often the next ones to purchase blighted properties and redevelop them for their own personal gain. The combined efforts of the CDC and for-profit developers can result in a cleaned up neighborhood which is once again attracting residents. This, in turn, tends to alleviate the conditions that draw in criminal elements. This is how a CDC achieves its mission.

The Cubs Win the World Series?

As we embark upon a new year, it is often filled with various prognosticators who pretend to know what will occur in the next year.  Perhaps nowhere else is this evident than in the financial markets.  The year is not yet even a week old and I have seen predictions of the stock market continuing to reach new highs vs. the market crashing to half of its present level.  Hyperinflation is on the way with all the Quantitative Easing the Federal Reserve has done vs. we are in a deflationary time with falling commodity prices.  A great economic recovery is right around the future vs. the US will face financial ruin. 

It is impossible to know what will actually happen, but is often fun to see the predictions and who is actually right.  In the spirit of this, I am testing the one of the greatest predictors of future events—Hollywood.  The prophet in focus with this blog is the movie Back to the Future II. 

For those of you who live under a rock and are not familiar with this classic, Marty McFly has to travel 30 years into the future from 1985 to 2015, to save his kids from ruin.  This was a fun example of what the ‘80s Hollywood thought may occur in 2015.  Now I do realize the year has just started and some of these items that have not come true yet could.  But we first explore what the movie predicted that has happened.

>>Handless and wireless video games.  The Wii and Xbox Kinect are great examples of these.  In the movie, Marty shows some kids how awesome games were in the ‘80s by playing on some old western shoot-‘em-up game one would find outside of a Wal Mart at that time.  One of the brats claims games that require you to use your hands are totally stupid.

>>3D movies and sequels.  Almost every movie that comes out now has a 3D option.  The grandeur the view and action, the more likely 3D will be available.  Now in the movie they had Jaws 19 in 3D.  Even though we have not seen a Jaws 19, one can’t argue that most hit movies do have a lot of sequels.

>>Handheld tablet computers.  Enter the IPad, Microsoft Surface, Samsung Galaxy, to name a few.  Now these items are outselling traditional desktop computers and some are even using these to replace the desktop.

>>Professional baseball in Florida.  At the time of the movie, there were none.  Now we have the Miami Marlins and Tampa Bay Rays.

>>Video conferencing.  Tonight, my oldest son was skyping with a friend he has in China.  You can now have entire relationships established and never have physically laid eyes on the person.

>>Wall-mounted TVs with multiple channels.  If the TV is not suitable for wall mounting, why even think about buying it?  As for the channels, it still amazes me how you can have hundreds of them and still not have anything to watch.

>>Personal electronics dominate people’s lives.  In the movie, a family dinner had each individual member consumed with wearing TV glasses instead of interacting with each other.   Google Glass is one of the newest versions of wearable technology on the market.  But even if you do not have one of these, many of us are still consumed with our smartphones and tablets when we should be engaging in each other’s lives.

Now for some items from the movie that are in the works but are not commonplace...

>>Compost fuel.  This does exist and is know as biogas.  It is used in some large scale methods such as harvesting methane from landfills.  But the ability to rummage through the trash to pick up a few items to power the flux capacitors has not become widespread.

>>Flying cars.  Now this is not commonplace but there is a company called Terrafugia that converts to a small airplane.  Google their website and be amazed!  The car cannot hover and take off in a small area like the one in the movie, but it is a start.

>>Hoverboards.  A company called Hendo Hoverboards has a prototype and met their initial goal for funding through the website KickStarter in December 2014.  Watch out, this could be common in the future.

Now a few items that have not come true that are in the show…

>>Cubs sweeping the World Series in 5.  The World Series is the best of 7 so to sweep in 5 would require the fall classic to be 9 games long.  I doubt an expansion of the series will happen anytime soon.  If baseball season goes any longer, we will be watching it over Thanksgiving.  And of course, the Cubbies actually winning? What is with that?

>>Fax machines are the preferred method of communication.  Robert Zemeckis’ movie asserts that sending information by fax is by far the most efficient way to communicate in 2015.  I suppose the script writer did not see email or IM in the future as most faxes have gone the way of the rotary telephone.

>>Pontiac dealerships are still around.  In one of the hoverboard scenes, there is a Pontiac dealership in the background.  For this to happen in 2015, GM would have to resurrect the brand.

>>Double ties are an acceptable look.  Several male characters in Back to the Future II are sporting double ties.   Thankfully, this fashion statement is only found in the movie.  I have enough problem with a single tie!

So I suggest to keep some prospective after you listen to the prophets on the financial channels is to download Back to the Future II from Netflix. It will help put the forecasters in place as no human will get it right.  For me, I hope hoverboards will become popular, would be content if all fax machines went away, and am happy if the Cubs stay in the cellar (as I am a lifelong Cardinal fan).  Anyway, if the Cubbies actually won, I would expect it to be an omen for the end of the world.

The Forgotten 70%

Jack Welch, the legendary CEO of General Electric had an interesting philosophy regarding employees.  He believed that each year, you should take the lowest 10% of the performers in the organization and replace them.  He thought this strategy would bring the highest performers to GE, while weeding out the weaker ones. 

I know of organizations that have 10% of their staff that they classify as “VIPs”.  They feel these people bring high return to the organization and will spend lots of time, money, and resources in developing them. This group will receive the most opportunities and rewards.  Often they do bring in a lot of return to the company.  They are the Peyton Mannings and Tom Bradys of the corporate world.

 I also know of some companies that have 10% of the employees as constantly unhappy.  These folks are professional bellyachers and due to a tight labor market or the uncertainty of obtaining and training another employee, they work to keep them on staff and “quiet”. 

So if your company is like many others, you may have 10% of the staff you need to replace, 10% that are always unhappy no matter what you do, and 10% absolute stars.  It is easy to see how these 30% of employees can consume 100% of the leaders’ time.  But what about the remaining 70%?

If all of your staff has contact with clients, there is a 7 out of 10 chance the remaining 70% will be the ones that are working with the member or customer.  With all the time spent on the stars and problems, the forgotten majority are the ones that put the face on the organization.  A lack of any focus on them often can lead to discouragement and may lead to turnover.  It also can overlook people who are in the 70% but who can turn out to be an absolute star.  They also can actually enhance the performance of the stars.  After all, Peyton is much more effective if the offensive line gives him 7 seconds to decide where to throw the ball.

The question becomes, what do we do to develop our staff to the fullest?  The first step for the leader is to treat each person as if they are (whether they are or not) a “10”.  If you have an employee who is a 5 and you treat them like a 5, they will never rise above that level in your organization.  Each follower deserves the very best from the leader.  Treating people the way you want them to be will help elevate them to that level.

Next, as much as possible, work to minimize the bad attitudes in the organization.  These people are cancerous, and can spread throughout the group to ruin even the best folk.  Find people who will seek to find solutions to the problems and take initiative and ownership.  You want everyone to have the attitude of Truett Cathy, founder of Chick-fil-A, “If it’s meant to be, it’s up to me.”

For those who are not cutting the mustard, perhaps the problem is they have great value to the organization but are in the wrong seat on the bus.  A change of position that plays to their strengths may enhance their performance.  Also, treating these folks like they can be will also help them to grow. 

Development is a long term process and it begins with discovering each person’s dreams and desires. Former Commander Michael Abrashoff, took the worst performing ship in the US Navy to one of the best.  One of the first things he did was to personally meet with each of the 3,500 sailors and find out where they were from, why they joined the navy, and what their future goals were.  This opened up a dialogue where they became free to share problems about the ship that Abershoff was able to implement positive changes.  Without starting the relationship, none of this would have happened.  My wife sums this up when she says, “People don’t care what you know, until they know that you care.”

This relational leadership also requires that you lead everyone differently; coming down to their level.  The strategies that are used to lead one person may not work on a different co-worker.  As this happens, you begin to help them know themselves more and to develop in ways they never thought were possible. 

As you lead all your staff instead of the forgotten 70%, you will begin to find some that you never expected rise to levels of leadership, themselves, and begin to take your organization to new heights.