Is Lean Manufacturing the Answer to Outsourcing?

by Micheal O Callarain on / 1 Comment

Category: Economy, Human Resources

There has been a lot of push on the future of outsourcing lately, mostly looking at where it will stop or more importantly what happens when there is no more cheaper alternative for the global searcher. We have all seen it, product moves to country X, then as the standard of living rises there it moves to the next country that has a lower wage, and once it is done there it moves on. But once this phenomenon has swept around the globe what happens to a company that has not leaned out its process and was relying solely on the cheaper labor rate to make their product? The answer is they become extinct and the business goes to those companies with the more effective process. 

Lean manufacturing is the answer to outsourcing because while your competition is spending 10 million in capital investment to save 0.30 on each part in labor, your organization has avoided the 10 million expenditure, placed it into R&D and is still seeing a 0.30 savings as a result of driving the waste out of the part. This philosophy also makes good sense in terms of plant efficiency, efficiency rates in a green field operation usually are not up to the existing plant process standards until 18-24 months following the operation’s opening ( which can be years in construction), and subsequently if you can keep a high efficiency rate in addition to the same piece price cost then your savings is actually greater. This of course does not address the decision by an organization to outsource for market penetration as a strategic move, but the costs associated with the move become exponentially higher if the domestic operational unit has a good solid lean culture in place. 

In the end reliance on labor as a competitive advantage is a losing proposition for any organization, you will either fall victim to the slow bleed of inflation, the moving target of global currency fluctuation or may experience a major upset in the event of political instability within the region (volatile regions are those more prone to having lower labor rates). A continuous improvement culture is a sustainable cornerstone of your operational management strategy because innovation drives high profit, not replication of the same old idea. Outsourcing is all about cost reduction, if it wasn’t they would just open sales offices in the countries a business wants to move into. As a manufacturing unit the innovation in your processes will continue to make your operation a continued profit center, and no company will willingly close a high profit producing facility in favor of a potential green field operation that is several years behind an existing powerhouse. 

While The Irish Economy Struggles…

by Micheal O Callarain on / No Comment

Category: Economy

…it’s Ambercrombie to the rescue. 

For months and months now we have been watching from afar as the political drama present in the government played out. First the banks lent to unqualified borrowers, driving up home prices, and then as the interest rates rose and unemployment began to ascend, defaults became the order of the day. Currently powerhouses like AIB fell in to the hands of nationalization and the recapitalization of the banking industry has officially begun. 

However recently a white horse has come to the rescue of the ailing Irish economy to alleviate it of its excess cash reserves…enter Ambercrombie. Ambercrombie as an American brand has approximately 1,100 outlets sprawled across America and currently has 4 distinct brands in its portfolio…and now it eyes Dublin. Ambercrombie is set to announce next week that it will be taking over approximately 3 floors at 34 College Green as part of its European expansion into Paris, Brussels, Madrid and Dusseldorf. The question though that the public needs to ask itself however is whether or not this sort of premium retail outlet is the sort of investment that Ireland needs at this point and time. 

Abercrombie has chosen this location allegedly due to strong tourist base, young population demographic and brand recognition. The real business story in their expansion is why after import fees the clothing retailer (who is already at a premium within their demographic) will be selling the same clothing in Dublin that they are selling in the states for double the price! Has the country not been paying attention to the fact that the economic system is on the brink of disaster, has no one seen that the infrastructure of the country is crumbling due to the lack of higher paying jobs?

While the country does actively court foreign investment the fleecing of the population due to import fees is extremely counterproductive during a time of recession. And quite frankly the anticipation of a premium retailer in a time of nationalization leads to questions of priorities for the country’s population as well as the distribution of wealth within the country. With an proposed rent of 75,000 there is no question that there will be a flurry of activity around the retailer as well as ringing cash registers, but the more long term question is whether the ringing of the registers is actually going to be the flushing of Ireland’s recovery due to a poor saving rate toward long term stability. 

From the Micro to the Macro

by Micheal O Callarain on / No Comment

Category: Economy

How corporate structure can teach the European Union a thing or two about structure.

For months now we have been seeing the news casts talk of woes and troubles relating to Ireland’s failing banking industry. We have sat by watching the nationalization of AIB and others as talk of “protecting the shareholders” has given way to “looks like you are going to lose your investment”. We have seen faulty home loans removed from bank books and given over the NAMA and we have seen the IMF step in to help recapitalize the ailing banks. But what we have not seen is the plans to really fix the structure of the system following the latest “hiccup” which stems from a structural issue. If the EU is really trying to unify and standardize to create a more robust banking system then it must address the areas in which its member countries are radically different. 

As an example in Ireland the corporate tax rate is ridiculously low when compared with its brother nations, while in many other European nations the retirement age is significantly lower. Lending standards and oversight are radically different as well, and we cannot expect stability and cooperation from member countries whose resources are strained to help a country that has practiced a non-standard lending policy. This is in effect like bailing your sibling out that cannot handle their credit card, time and time again. This week it became painfully clear that the unification of the EU must look to corporations for the benchmark in unification and stable systems. Corporations have several brands in various areas in multiple countries, however they are all governed by a relatively consistent standard that is spread across all divisions. 

A corporation has strict rules for accounting and lending practices regarding credit with its vendors and capital expenditure, as well as unified standards for those other key pillars of financial stability. While they operate as autonomous units and divisions they are governed by unified standards that keep any single unit from thrusting the rest of the corporation into chaos. We have seen the symptom fixes, we have heard the recapitalization strategy, but more important is what we have not seen. We have not seen any member nations give an inch on concessions that would show their support in getting the funds that they are demanding, and we have not seen the governing bodies force the changes that they need to make in order to run the union in a profitable manner, and this unification is how corporations stay afloat despite multiple divisions…seem like government can learn from capitalist structure. 

What Ireland Can Learn from Iceland. And About Trading Tomorrow for Today.

by Micheal O Callarain on / No Comment

Category: Economy, Finance, Strategic Change

With Ireland in the grip of an economic meltdown and intense nationalization it is easy to slip into the lull of “economic bailout is the only way” but if we look back in recent history Iceland went through what was once perceived as the worst economic crisis in history and is now coming out the other side stronger than when they went in. So how did they do it, the simple answer is they let the banks fail, agreed not to bail out investors and then devalued their currency to take advantage of the status of being a “low cost country”. In effect Iceland created a simple arbitrage situation and in effect created the crisis to lure in investors with an attractive opportunity. Iceland has turned to face the monster that they had created and went straight through it. This actually led the way to solve their woes through a plan that did not involve adding excessive debt and eroding the financial future of the country through paying interest on a long term loan.

This is a brilliant example of not trading tomorrow for today, something that Ireland is signing up for through the acceptance of EU funds to ease their current short term suffering. As the third world expands and narrows the gap between the “haves” and the “have-nots” the idea of cheap labor and a new frontier will shrink as the standard of living rises and education leads to knowledge work being not just the domain of established developed economies. Iceland’s strategy is a great move for Ireland to begin a new push toward recruiting firms into the country though devaluing their currency similar to a “loss leader” in a supermarket, luring potential investment into the country and then hooking them into doing business through their competitive advantages.

The alternative is to trade tomorrow for today, and face the possibility of a slower economic recovery that erodes the bottom line 5.7% at a time. This means that for generations to come Ireland may be crawling out of the mountain of debt that the current administration has burdened future generations with. An economic recovery will be slower than expected and will also have the businesses struggling for scraps that are left after the EU and the IMF take their shares off the top similar to the garnishment of wages, leaving only enough to make life that much harder to dig yourself out. A country should not trade tomorrow for today, because inevitably there will always be another day, and you will have to face it one way or another.

What Happens When the Money Runs Out?

by Micheal O Callarain on / No Comment

Category: Economy, Finance, Strategic Change

With so many people talking from so many different angles on the Irish banking and financial industry it is hard to tell what all the hype means. This becomes increasingly important going into a year in which some feel the housing market is nearing the bottom of the curve and cash is being injected into the Irish economy like an intravenous drip. With the EU going all in on the heels of Greece’s bailout early this year Ireland is under increasing pressure to cut their deficient to around 3% in the coming years. The question that this raises though is the same for every domestic household in every corner of the world… where is the money going to come from? I every household, in every country you really only have two options to balance the budget, spend less or earn more.

For Ireland this becomes a balancing act of protecting the precious income that comes in from foreign entities attracted by lower than average corporate taxes and protecting the very population that threatens to offer a change of government as early as this March. To complicate this the EU is going to discontinue funding in 2013, leaving Ireland to fix its own capital issues and raise its own money (most notably at a higher and higher rate at each successive bail out from each lender). It has been mentioned more than once that this is not a unique problem, as several monetary funds have been created and there is an expected 24 billion dollars ready to be shelled out to cover short term lending issues. But like any household, where is the money coming from, and who are we going to have to ask when the funds run dry? Many have mentioned that the existence of these “bail out” funds encourages credit heavy wild lending that sets a country up for failure knowing that there is a safety net in the event that they cannot pay.

But where does the bailout end, who must be the “father figure” that exercises financial responsibility that provides a stable base for those that should be taking risks. A business should be allowed to take appropriate risks through access to secure capital. The underlying bank should be taking less risk to assure that they can be a bedrock for the appropriate businesses that can drive the economic engine. If the EU stops providing the fiscally responsible access to capital and the national banks have not more discretion than a start-up then what happens when the money runs out? As a company grows , so does a government and the higher levels of the organization have a responsibility to provide for those at the lower levels to go after the big gains.

Ireland Gets Bailed Out by the Rest of the Club…But At What Cost?

by Micheal O Callarain on / No Comment

Category: Economy, Finance

 This week European ministers reached an agreement to provide a failing Irish banking economy with a huge eighty five billion euro bailout. While it was unanimously agreed upon by the ministers of the Eurozone, it was far from a good natured unanimous vote, with UK Chancellor George Osborne agreeing to loan only if they are excluded from all future bail out agreements as of 2013. This sort of tenuous relationship points to the stress caused by another bail-out coming in the heels of Greece’s bailout earlier. Everything from the interest rate charged to the use of the Euros were criticized and compared relative to the bailout of Greece in early 2010. The Eurozone has a right however to be upset, as the use of the Euros was largely left undefined and “up in the air”.

Only 10 billion of the borrowed funds are required for “recapitalization”, when a majority of the issue facing the banks is a lack of solvency that is directly impacting the access to capital and that in turn is making it difficult for businesses to hire or make any real meaningful long term expansion plans. These plans will be key if the Irish business economy is going to make its substantial rebound without raising its coveted 12.5% corporate tax rate. This tax rate is closely ties into the recovery plans to utilize foreign companies to support an export driven strategy to move the country forward.

In addition to the 10 billion mentioned above there is an ambiguous “debt mechanism” that requires the EU to avoid the use of the rescue fund that is set to run out in 2013. However what was lost and make this ambiguous is that there are no real plans to define the “how” the measures are actually going to work. The general rule however is that the mechanism should force losses on private investors "only on a case by case basis", exactly what that means remains to be seen. It has been mentioned that it will look similar to Iceland’s approach to let banks fail and investors fall, only to come back after the currency is devalued stronger than before. It is interesting however that if the banks are publicly owned then the losses associated with economic downturn should be passé on to those who were not minding the store closely enough. This will be compounded by the required austerity plan that will cut public services for those unemployed at the greatest time of crisis. The requirement for the bailout is the requirement that the government reduce its excessive debt by 2015 to less than 3%.

Where Are Businesses Turning for Credit in a Strapped Economy?

by Micheal O Callarain on / 1 Comment

Category: Economy, Finance, Sales & Marketing, Strategic Change

 In the current economic market I have more than once mentioned that the real road toward financial stability for Ireland is for SME (Small to Medium Enterprises) to hire. As a general rule there should be around 1 employee per 1 million dollars U.S. in revenue (this is of course an estimate and not a hard/ fast rule). SMEs make up a majority of the business machine in Ireland, and as a result they have to expand and have to hire. Where should they get the confidence in the current environment, where do they turn to in a crunch for capital or the ever popular overdraft to float them through capital fluctuation? A recent study has revealed that in a survey by the CBI and ACCA (Association of Chartered Certified Accountants) 380 UK firms showed that they are increasingly turning away from traditional forms of bank financing and are looking to other sources for their needs.

So where are businesses turning instead of the banking industry, the most common answer is supplier financing from the supply base. The businesses are negotiating alternative terms with their creditors for trade credit in exchange for their goods and services. The only issue with however is that the creditor has now slowed down their accounts receivable cycle and impacted their cash flow. This brings me back to the idea that the strongest businesses with the strongest cash position will come out incrementally stronger following the economic meltdown in Ireland.

To complicate this negotiating terms and negatively impacting your creditor’s accounts receivable cycle carries with it a higher cost of capital. This increased cost of capital must then be passed on to someone to compensate and protect the gross margin of the companies. This cycle is how inflation begins to spiral out of control and prices rise at rates higher than the ideal rate. In short the alternative finance arrangements caused by the reluctance of the SMEs to approach banks leads only to higher prices for the consumer, who coincidentally is the employee of the firm that reached up and raised prices to protect it/s margin . It seems counter intuitive and according the study companies that have operations in Great Britain are faring better with higher success rates on overdraft acceptance when compared to those exclusively doing business in Northern Ireland.

In order to correct the imbalance and avoid another input for an inflationary period the banks need to court these SMEs and return terms that support hiring and job creation in return for solid financing. The financial issue is only the manifestation of the underlying problems with the business market; the real root is a lack of confidence and stability in the business environment. The lack of SMEs seeking financing is proof that the issue is deeper that just the access to capital, but rather access to their government.

The Incredible Shrinking Banking Industry

by Harley Murphy on / 14 Comments

Category: Economy, Finance, Strategic Change

SPECIAL GUEST BLOG By Harley Murphy, Strategic Change Mentor, Mentors.ie

The headline above was the title of a paper in October 2007 by Carl Tannenbaum, of the Chicago Federal Reserve Board, in Business Economics. It was sub-titled “ fewer players in a riskier, more complex game.” In referring to Ireland’s banking industry the main title could remain unchanged but the sub-title should become ‘ fewer players in a less profitable, more traditional game.’

The inflating of the Irish Banking Industry

The charts below, based on Central Bank figures, featured in Morgan Kelly’s paper – “The Irish Credit Bubble” capture in graphic form the bubble inflating. The chart on the left shows bank lending to non-financials in 1997(red) and in 2008 (blue) for Ireland, UK and other Eurozone countries. The right chart shows the growth in mortgages and loan to developers.


How to deal with the rupture ?

McKinsey, in their July 2004 Quarterly, write about their considerable experience in consulting to ailing banks, identified three broad areas critical to banks’ survival after a financial crisis:

1. Managing liquidity
The highest priority for Irish banks at this time must be the restoration of depositor confidence. This will allow them to reduce over time their dependence on ECB funding (euro 97.3 billion: Nov10) and focus on the all important traditional banking ratio of deposits to lending. This ratio will and must be their ‘health’ barometer over the next decade.

2. Reducing the number of high-risk loans; and
NAMA has certainly done the banks no favours in its severe discounting of purchased high-risk loans.

3. Adding fresh capital
With the exception of Bank of Ireland this is being provided by taxpayers. In all cases the required 12% capital ratio will have a severe drag on bank profitability.

What happens next ?

The following are some of the key areas the Irish banks need to focus on over 2011:

  • Staffing – Shrinking assets and profits must also result in shrinking personnel numbers. In order to understand the possible scale of these cuts we can look at earlier severe banking crisis in other countries and McKinsey here refer to the 1998 South Korean economic crisis, where more than 30 percent of the country’s banking employees lost their jobs. This will be tempered somewhat in the short term by the NAMA loan transfers, however, in the medium term we are looking at significantly lower numbers of staff in the Irish banks. Based on my own experience, the way the banks handle these staff reductions will have a crucial bearing on the progress of the banks in once more becoming successful institutions.
  • Corporate Governance – the Central Bank recently introduced a ‘Corporate Governance Code for Credit Institutions and Insurance Undertakings’. This obliges the banks and insurance companies to take governance much more seriously and gives the Financial Regulator strong powers to ensure Boards are knowledgeable and include truly independent non-executive directors. The banks and insurance companies have until June 2011 to put their ‘governance’ house in order and consign to history the cronyism that prevailed for so long in their boardrooms.
  • New Management Teams – a lot has been done here but more change is needed at senior levels in the banks to ensure those who created the conditions for ‘bust’ have no say in the necessary transformation.
  • Cultural Change – related to all three of the above bullet points is the complex issue of changing culture within the banking industry and I will deal with this specifically in the next blog on banking.
  • Restructured Business Models – ‘back to the future’ is probably the best way to describe the business model the banks now need to embrace. A model which has at its core organic growth driven by strong customer loyalty must be the way forward. The chart below highlights the choices and combinations bank management must consider in developing this ‘new’ way:

  • Wholesale revamping of their credit & risk management procedures – this is an obvious area of focus and one that will require significant reengineering given the past failures and the changed business model. Once the loan books are ‘cleansed’ and classified and the staff re-skilled, the banks need to move to a more decentralized model to reflect the inevitable increased emphasis on SME business.
  • Reduce costs & outsource non-critical activities – in the new environment the banks must relentlessly prune any unproductive activities and become as efficient as the best companies in other sectors. For non-core activities outsourcing is a proven approach in translating variable costs into a lower fixed overhead. This process, however, must be tightly managed.

Ultimately, execution of these activities becomes the determining factor in success.

Interestingly in their July 2004 report McKinsey used the example of my former employer, Mellon Bank, as an example of a bank that successfully executed a turnaround in its fortunes after uncovering major problems in its loan portfolio in the late eighties, a few years ahead of the general US banking crisis.

“We are at an extraordinary period of history.
It is a time of crisis and unprecedented uncertainty,
even fear; but it is also a time of opportunity for
change and profound transformation.”
Klaus Schwab, Chairman, World
Economic Forum 2009

Value Added Proposition for Foreign Investment. Where’s the Upside?

by Micheal O Callarain on / 1 Comment

Category: Economy, Investment, Strategic Change

 With Ireland’s banking sector largely nationalized and the lending standards raised to stop the excessive bank losses fewer and fewer businesses are able to find the funding that they need to stay afloat in the worst recession in recent history for the country. With access to capital cut, and the income from failed home loans strangled through the rise in foreclosures how can the emerald jewel hang in there until the massive, explosive turn around that the government is forecasting here in a few years? The short answer, raise the corporate tax rate that has attracted so many foreign companies to set up shop in the country. Last week the esteemed Sir Michael Smurfit hinted that a temporary hike in corporate interest rate may be right in line as part of a strategy to bring the country up to a level of financial stability. This however was not without its share of doubters who fear that this policy may actually force companies to leave the country once the rate is hiked, thus making the policy counterproductive.

Smurfit however hinted that the proper application of policy would be a temporary hike, possibly for a time as short as four years. So the question now is whether or not a temporary tax hike will be enough (even in the short term) to persuade foreign companies to leave Ireland in search of greener pastures? While companies like Citibank are adding jobs and putting down deeper roots in the country, less established companies may very well decide that the loss of the advantage is not worth their continued operation in the country. It is widely hoped that the export market is going to drive the economic recovery and foreign based firms will be key in driving those export relationships. If this is the important factor then where is the value proposition for the foreign companies that are going to lose their tax advantages? With education on the chopping block there is doubt as to whether or not the country can compete on the basis of the educated workforce, so that will provide very little negotiating power for a country on the brink.

Secondly the natural resources of Ireland are mostly in mining opportunities and farm outputs, and as a result access to materials is not a source of competitive advantage either. So where is the value proposition to foreign firms, where is that reason that says “I should do business in Ireland because…”? Ireland as a whole needs to put themselves in a position of the foreign firm and decide that after the potentially short term interest rate hike how do you get them to entrench their business farther so that coming out the other side the firm is positioned with a sustainable advantage going in the far future. Perhaps that is giving the preferential treatment to shares in the banking system following the end of the nationalization, thus assuring a potential easier time securing capital. It is no secret that Ireland is looking far and wide for partners and buyers in the recently nationalized banks. Much like a relationship Ireland will have to convince its foreign clients that short term bumps are worth the long term relationship.

Signs of a Cyclical, Non-Sustainable Model

by Micheal O Callarain on / No Comment

Category: Economy, Finance

In Q3 last year the average hourly wage paid to was down and at the same time unemployment was also down, how does this happen? This sort of short term hiring for low wages and reduced hours cannot lead a business to long term profitability, because the workers that accept these terms will always be looking for greener pastures. The philosophy of “I will hire, and just pay less” leads to short term cyclical employment as job hunters seek out security in a climate where prices are rising and life is getting harder just to barely get by. A more sustainable hiring model in a struggling economy should be a model in which the pay for performance was high and the world ran on a contractor model. This would allow businesses to avoid the overhead associated with the expenses of employment tax and fringe benefits while still allowing the workers to accept a decent wage based on a certain set of tasks.

While a sign that unemployment dropped in Q3 of FY10, the idea that the number of hours worked and the wages associated with that work also decreased points to a non-sustainable model where the economy may well suffer from people finding “any” job, instead of finding the “right “ job. The sharpest decrease was in the administrative sector where employers chose to utilize those non-essential functions less often or perhaps devalued their position within the company when they brought them on. The new contractor model is ideal for an economy where they need more entrepreneurs, more risk takers and more self starters to drive innovation, support of this model will drive the mindset required to create sustainable change!

The change from an employee based model to a contractor model means that the business can focus on its core competency while making those functions that it is not good at nearly seamless regardless of the labor performing the tasks. As a generally accepted principle the resignation of an employee can be one of the most significant unplanned expenditures a company may face, this is another reason to utilize a contractor model as an alternative to traditional hiring practices.

Lastly as a country grows and knowledge work and non physical labor become more the norm in Ireland it will be essential that the business hire individuals that are managers of one, and believe in their individual brands. This confidence breeds innovation, and innovation drives results, and results are essential for success and a healthy bottom line. The new model is not unique to Ireland, but it is essential to looking down the road a decade once all of the prices have stabilized and the world is no longer divided by cheap labor and knowledge work in developed countries. Because in the new model the intellectual property in your contractors will make all the difference once the machines are common across all cultures. 

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