http://ted.com/tedtalks/tedtalksplayer.cfm?key=r_stjohn
Why do people succeed? Because they're smart? Or lucky? How about: Neither. Richard St. John compacts seven years of research on successful people into an unmissable 3-minute slideshow on the real secrets of success (Hint: passion, persistence, and pushy mothers help). Richard St. John is author of Stupid, Ugly, Unlucky and RICH: What really leads to success -- and it's not smarts, looks, or luck. He's also founder of the communications agency, The St John Group. (Recorded February 2005 in Monterey, CA. Duration: 3:40)
Sunday, February 11, 2007
Friday, October 27, 2006
Irrational Exuberance in China
The Enduring Allure of China
By Peter Zeihan
The Industrial and Commercial Bank of China (ICBC) is expected to raise nearly $22 billion in an initial public offering (IPO) -- the largest in history -- after shares are made available to retail investors Oct. 27. The ICBC offering is the latest in a series of IPOs involving Chinese banks, into which Western investment firms have poured billions since 2005. What is surprising about the expectations for the ICBC offering is not only the tremendous amount of cash likely to be raised, but the fact that it comes only months after a number of major global accounting firms began taking note of serious structural weaknesses ("An Inflection Point in China's Banking Problem, http://www.stratfor.com/products/premium/read_article.php?id=267217) in China's financial system. It may be recalled that, in early summer, a series of reports were issued by Ernst & Young, PricewaterhouseCoopers, McKinsey Global Institute and Fitch concerning the problem of nonperforming loans (NPLs) and questioning the long-term stability of the Chinese market. These reports, we noted, aligned with a long-standing Stratfor forecast as well; the structural weaknesses have been apparent and widely discussed in the Chinese press for years. What is curious, then, is not why mainstream accounting firms and consultancies suddenly began to question the prospects of China's economy, but rather why foreign investors are continuing to pile into the state's banking industry regardless. The simple answer, of course, is "irrational exuberance." The shine of a market that services 1.3 billion people -- and a chance to carve out a piece of that for oneself -- is difficult to ignore. But there is more to be considered: China has gone to considerable lengths to generate the impression that the systemic weaknesses are being addressed and to make its banks (and other state industries) appear attractive to foreign investors. It is no accident that a spate of banking IPOs -- Bank of Communications ($1.6 billion raised), China Construction Bank ($8 billion), Bank of China ($11.2 billion), China Merchants Bank ($2.6 billion) -- have been announced since June 2005. It also is no accident that ICBC, one of China's "Big Four," is going public at this time -- as the transition period for full World Trade Organization membership is drawing to a close. Beijing, which long has been aware of the economic weaknesses (not to mention the political and social implications stemming from them), has been pursuing a brilliant strategy that bears some consideration. A Structural Dilemma China long has had a pressing need to address its NPL problem -- and limited means of doing so. The core issue, as has been noted many times, rests in the attitude toward loans and state-driven industries -- with lending practices that differ sharply from those common in the West. For Western lenders, money is viewed as a scarce commodity, and loans are allocated with rates of return and profits in mind. In the Chinese system, capital has been viewed as a political asset, allocated to achieve social aims. Controls over what kinds of collateral could be used, credit histories and sources of income have not been critical considerations. Citizens, therefore, have little choice but to funnel their savings into state-owned banks (remember that legendary Asian savings rate?). Historically, those banks then have parceled out the cash -- at below-market rates -- to projects that contribute to the social good of mass employment. From Beijing's perspective, it does not matter if these projects (which typically have been state-owned) turn profits or even break even financially. A bum project that runs to the red, but keeps many Chinese employed, was considered a success -- and besides, it could always be buoyed up by more loans. Ultimately, projects became mired in massive debt, and the banks were saddled with masses of NPLs. Clearly, this system would lead to instability even in a perfect world -- and China is far from perfect. Among wealthy coastal magnates, local leaders now dabbling in business and the ever-present availability of easy loans, the Communist Party, and the Chinese system in general, is massively shot through with corruption. Former President Jiang Zemin in 1998 attempted to start closing down some of these dud projects -- particularly the redundant and wasteful commercial projects at the local level -- but met with massive backlash from local officials who had no desire either to face hordes of local unemployed or to give up suckling on the mother's milk provided by state banks. As we noted in May 2005 ("China's State-Owned Firms: Problems Deep and Wide"), a destabilizing shock appeared to be all but unavoidable by December 2006, when the transition period for China's WTO accession ends. At that point, foreign banks -- which, unlike their Chinese counterparts, actually charge interest for their loans and pay out interest on deposits -- will be allowed to set up shop throughout China. Odds are that the average depositor would move his money out of the state banks, denying them the resources they need to keep the system running and leading to financial chaos and collapse. Chinese policymakers also could see this problem approaching, and they have no intention of letting the financial system be the state's downfall. Thus, they embarked on a creative strategy. The Cleanup Strategy Again, the U.S. or Western model of cleaning up the system -- a painful purge of corruption and implementation of stringent financial policies -- does not apply. For the Chinese, there is simply too much at stake: As recently as three years ago, the central government, which has a vested interest in lowballing these figures, pegged the total stock of bad loans at 35 percent of gross domestic product. The Chinese could not apply the model used in the United States during the savings and loan crisis of the 1980s. At that time, independent auditors went through the books of suffering S&Ls and chopped up their loan portfolios, ranking the pieces in terms of the chances that debtors ever could pay them off. Those loans were then packaged together, ranked and sold to other -- healthy -- banks. Some of the S&Ls were closed; others faced massive personnel and policy overhauls. Some of the S&L corporate clients went out of business. Some S&L officers went to jail. China, rather than going down such a capital-centered route, has come up with a two-pronged strategy designed to fit its own social needs. First, the Chinese cleaned the banks' books. The government simultaneously has pumped out cash from its now trillion-dollar foreign currency reserve to recapitalize the banks, and transferred the bulk of the NPLs to "asset management corporations." These asset management entities are ostensibly responsible for collecting on the bad loans -- though, because these remain government-owned, Beijing has no intention of forcing compliance on that issue. The asset management firms issue bonds to the banks for the full face value of the loans, making the banks' balance sheets look sparklingly clean indeed. Second, the banks -- drawing on the full authority of the Chinese state -- seek out foreign investors, either through IPOs or strategic capital allocations from foreign corporations. This is a critical step, for four reasons: Foreign corporations know how to run a bank, and can provide the skill sets needed for (new) tasks such as loan evaluation, risk assessment and internal anticorruption checks. For the government, these kinds of processes could be quite troublesome at times, but also can be very handy. It undercuts any competitive instincts the foreign banks might have. By bringing foreign entities to partner with the state banks under the current system, the odds that those so invested would attempt to go solo come December -- when WTO restraints on competition are lifted -- are greatly reduced. And that means less instability stemming from contests over Chinese depositors' savings. Foreign banks have cash -- which, obviously, the Chinese desperately need. Most important, a foreign bank that buys into a Chinese bank gets access to tens (sometimes hundreds) of thousands of local branches. Any way you cut it, that is a sweet asset. Once the foreigners are in, they have a vested interest in working with the Chinese to make the financial system more functional -- which has been the point of the strategy all along. This is the strategy that several Chinese banks already have followed: Bank of Communications drew capital from HSBC; China Construction Bank found an investor in Bank of America; and ICBC, which opened its IPO to institutional investors Oct. 16, lured Goldman Sachs. Conclusion Given the upcoming share sale to retail investors, ICBC's history of action is, of course, particularly worthy of study. Since 2004, it has transferred about $85 billion in bad loans, through asset management company Huarong. Then, in 2005, it received a $15 billion cash injection from Central Huijin Co., the Chinese recapitalization body. Finally, earlier this year, ICBC sold a 5.8 percent stake to a consortium led by Goldman Sachs for $3.7 billion. As a result, the bank, which had an NPL ratio of more than 21 percent at the end of 2004, had (by its own, and therefore questionable, assessment) reduced that number to 4.1 percent as of June. Intriguingly, foreign investors seem not to have noticed how ICBC got from Point A to Point B. Some concerns about the bank's lending practices have been voiced -- most recently, following news in September that ICBC had funded a company, Fuxi Investment, that has been linked to the widening pension funds scandal. However, seemingly no attention has been given to the fact that China has been transferring NPLs from, and providing capital infusions for, state banks -- including ICBC -- for years, without overhauling their corporate decision-making processes or management. Not to mention the short-lived impact of all of those global accounting firm reports ("Global Market Brief: The Ernst & Young Controversy,") in May. But the anomaly in all of this -- the lure of China to Western investors -- remains. Digging up information about the problems in the Chinese system is not difficult; every bit of it is regularly reported in the state-run press. Government statistics are frequently optimistic, but even Beijing's own estimates clearly point to significant structural problems. The Chinese, obviously, have been paying attention and communicating. What is puzzling is why the message does not seem to be getting through. ." The shine of a market that services 1.3 billion people -- and a chance to carve out a piece of that for oneself -- is difficult to ignore. But there is more to be considered: China has gone to considerable lengths to generate the impression that the systemic weaknesses are being addressed and to make its banks (and other state industries) appear attractive to foreign investors. It is no accident that a spate of banking IPOs -- Bank of Communications ($1.6 billion raised), China Construction Bank ($8 billion), Bank of China ($11.2 billion), China Merchants Bank ($2.6 billion) -- have been announced since June 2005. It also is no accident that ICBC, one of China's "Big Four," is going public at this time -- as the transition period for full World Trade Organization membership is drawing to a close. Beijing, which long has been aware of the economic weaknesses (not to mention the political and social implications stemming from them), has been pursuing a brilliant strategy that bears some consideration. A Structural Dilemma China long has had a pressing need to address its NPL problem -- and limited means of doing so. The core issue, as has been noted many times, rests in the attitude toward loans and state-driven industries -- with lending practices that differ sharply from those common in the West. For Western lenders, money is viewed as a scarce commodity, and loans are allocated with rates of return and profits in mind. In the Chinese system, capital has been viewed as a political asset, allocated to achieve social aims. Controls over what kinds of collateral could be used, credit histories and sources of income have not been critical considerations. Citizens, therefore, have little choice but to funnel their savings into state-owned banks (remember that legendary Asian savings rate?). Historically, those banks then have parceled out the cash -- at below-market rates -- to projects that contribute to the social good of mass employment. From Beijing's perspective, it does not matter if these projects (which typically have been state-owned) turn profits or even break even financially. A bum project that runs to the red, but keeps many Chinese employed, was considered a success -- and besides, it could always be buoyed up by more loans. Ultimately, projects became mired in massive debt, and the banks were saddled with masses of NPLs. Clearly, this system would lead to instability even in a perfect world -- and China is far from perfect. Among wealthy coastal magnates, local leaders now dabbling in business and the ever-present availability of easy loans, the Communist Party, and the Chinese system in general, is massively shot through with corruption. Former President Jiang Zemin in 1998 attempted to start closing down some of these dud projects -- particularly the redundant and wasteful commercial projects at the local level -- but met with massive backlash from local officials who had no desire either to face hordes of local unemployed or to give up suckling on the mother's milk provided by state banks. As we noted in May 2005 ("China's State-Owned Firms: Problems Deep and Wide"), a destabilizing shock appeared to be all but unavoidable by December 2006, when the transition period for China's WTO accession ends. At that point, foreign banks -- which, unlike their Chinese counterparts, actually charge interest for their loans and pay out interest on deposits -- will be allowed to set up shop throughout China. Odds are that the average depositor would move his money out of the state banks, denying them the resources they need to keep the system running and leading to financial chaos and collapse. Chinese policymakers also could see this problem approaching, and they have no intention of letting the financial system be the state's downfall. Thus, they embarked on a creative strategy. The Cleanup Strategy Again, the U.S. or Western model of cleaning up the system -- a painful purge of corruption and implementation of stringent financial policies -- does not apply. For the Chinese, there is simply too much at stake: As recently as three years ago, the central government, which has a vested interest in lowballing these figures, pegged the total stock of bad loans at 35 percent of gross domestic product. The Chinese could not apply the model used in the United States during the savings and loan crisis of the 1980s. At that time, independent auditors went through the books of suffering S&Ls and chopped up their loan portfolios, ranking the pieces in terms of the chances that debtors ever could pay them off. Those loans were then packaged together, ranked and sold to other -- healthy -- banks. Some of the S&Ls were closed; others faced massive personnel and policy overhauls. Some of the S&L corporate clients went out of business. Some S&L officers went to jail. China, rather than going down such a capital-centered route, has come up with a two-pronged strategy designed to fit its own social needs. First, the Chinese cleaned the banks' books. The government simultaneously has pumped out cash from its now trillion-dollar foreign currency reserve to recapitalize the banks, and transferred the bulk of the NPLs to "asset management corporations." These asset management entities are ostensibly responsible for collecting on the bad loans -- though, because these remain government-owned, Beijing has no intention of forcing compliance on that issue. The asset management firms issue bonds to the banks for the full face value of the loans, making the banks' balance sheets look sparklingly clean indeed. Second, the banks -- drawing on the full authority of the Chinese state -- seek out foreign investors, either through IPOs or strategic capital allocations from foreign corporations. This is a critical step, for four reasons: Foreign corporations know how to run a bank, and can provide the skill sets needed for (new) tasks such as loan evaluation, risk assessment and internal anticorruption checks. For the government, these kinds of processes could be quite troublesome at times, but also can be very handy. It undercuts any competitive instincts the foreign banks might have. By bringing foreign entities to partner with the state banks under the current system, the odds that those so invested would attempt to go solo come December -- when WTO restraints on competition are lifted -- are greatly reduced. And that means less instability stemming from contests over Chinese depositors' savings. Foreign banks have cash -- which, obviously, the Chinese desperately need. Most important, a foreign bank that buys into a Chinese bank gets access to tens (sometimes hundreds) of thousands of local branches. Any way you cut it, that is a sweet asset. Once the foreigners are in, they have a vested interest in working with the Chinese to make the financial system more functional -- which has been the point of the strategy all along. This is the strategy that several Chinese banks already have followed: Bank of Communications drew capital from HSBC; China Construction Bank found an investor in Bank of America; and ICBC, which opened its IPO to institutional investors Oct. 16, lured Goldman Sachs. Conclusion Given the upcoming share sale to retail investors, ICBC's history of action is, of course, particularly worthy of study. Since 2004, it has transferred about $85 billion in bad loans, through asset management company Huarong. Then, in 2005, it received a $15 billion cash injection from Central Huijin Co., the Chinese recapitalization body. Finally, earlier this year, ICBC sold a 5.8 percent stake to a consortium led by Goldman Sachs for $3.7 billion. As a result, the bank, which had an NPL ratio of more than 21 percent at the end of 2004, had (by its own, and therefore questionable, assessment) reduced that number to 4.1 percent as of June. Intriguingly, foreign investors seem not to have noticed how ICBC got from Point A to Point B. Some concerns about the bank's lending practices have been voiced -- most recently, following news in September that ICBC had funded a company, Fuxi Investment, that has been linked to the widening pension funds scandal. However, seemingly no attention has been given to the fact that China has been transferring NPLs from, and providing capital infusions for, state banks -- including ICBC -- for years, without overhauling their corporate decision-making processes or management. Not to mention the short-lived impact of all of those global accounting firm reports ("Global Market Brief: The Ernst & Young Controversy,") in May. But the anomaly in all of this -- the lure of China to Western investors -- remains. Digging up information about the problems in the Chinese system is not difficult; every bit of it is regularly reported in the state-run press. Government statistics are frequently optimistic, but even Beijing's own estimates clearly point to significant structural problems. The Chinese, obviously, have been paying attention and communicating. What is puzzling is why the message does not seem to be getting through.
johnmauldin@investorsinsight.com
By Peter Zeihan
The Industrial and Commercial Bank of China (ICBC) is expected to raise nearly $22 billion in an initial public offering (IPO) -- the largest in history -- after shares are made available to retail investors Oct. 27. The ICBC offering is the latest in a series of IPOs involving Chinese banks, into which Western investment firms have poured billions since 2005. What is surprising about the expectations for the ICBC offering is not only the tremendous amount of cash likely to be raised, but the fact that it comes only months after a number of major global accounting firms began taking note of serious structural weaknesses ("An Inflection Point in China's Banking Problem, http://www.stratfor.com/products/premium/read_article.php?id=267217) in China's financial system. It may be recalled that, in early summer, a series of reports were issued by Ernst & Young, PricewaterhouseCoopers, McKinsey Global Institute and Fitch concerning the problem of nonperforming loans (NPLs) and questioning the long-term stability of the Chinese market. These reports, we noted, aligned with a long-standing Stratfor forecast as well; the structural weaknesses have been apparent and widely discussed in the Chinese press for years. What is curious, then, is not why mainstream accounting firms and consultancies suddenly began to question the prospects of China's economy, but rather why foreign investors are continuing to pile into the state's banking industry regardless. The simple answer, of course, is "irrational exuberance." The shine of a market that services 1.3 billion people -- and a chance to carve out a piece of that for oneself -- is difficult to ignore. But there is more to be considered: China has gone to considerable lengths to generate the impression that the systemic weaknesses are being addressed and to make its banks (and other state industries) appear attractive to foreign investors. It is no accident that a spate of banking IPOs -- Bank of Communications ($1.6 billion raised), China Construction Bank ($8 billion), Bank of China ($11.2 billion), China Merchants Bank ($2.6 billion) -- have been announced since June 2005. It also is no accident that ICBC, one of China's "Big Four," is going public at this time -- as the transition period for full World Trade Organization membership is drawing to a close. Beijing, which long has been aware of the economic weaknesses (not to mention the political and social implications stemming from them), has been pursuing a brilliant strategy that bears some consideration. A Structural Dilemma China long has had a pressing need to address its NPL problem -- and limited means of doing so. The core issue, as has been noted many times, rests in the attitude toward loans and state-driven industries -- with lending practices that differ sharply from those common in the West. For Western lenders, money is viewed as a scarce commodity, and loans are allocated with rates of return and profits in mind. In the Chinese system, capital has been viewed as a political asset, allocated to achieve social aims. Controls over what kinds of collateral could be used, credit histories and sources of income have not been critical considerations. Citizens, therefore, have little choice but to funnel their savings into state-owned banks (remember that legendary Asian savings rate?). Historically, those banks then have parceled out the cash -- at below-market rates -- to projects that contribute to the social good of mass employment. From Beijing's perspective, it does not matter if these projects (which typically have been state-owned) turn profits or even break even financially. A bum project that runs to the red, but keeps many Chinese employed, was considered a success -- and besides, it could always be buoyed up by more loans. Ultimately, projects became mired in massive debt, and the banks were saddled with masses of NPLs. Clearly, this system would lead to instability even in a perfect world -- and China is far from perfect. Among wealthy coastal magnates, local leaders now dabbling in business and the ever-present availability of easy loans, the Communist Party, and the Chinese system in general, is massively shot through with corruption. Former President Jiang Zemin in 1998 attempted to start closing down some of these dud projects -- particularly the redundant and wasteful commercial projects at the local level -- but met with massive backlash from local officials who had no desire either to face hordes of local unemployed or to give up suckling on the mother's milk provided by state banks. As we noted in May 2005 ("China's State-Owned Firms: Problems Deep and Wide"), a destabilizing shock appeared to be all but unavoidable by December 2006, when the transition period for China's WTO accession ends. At that point, foreign banks -- which, unlike their Chinese counterparts, actually charge interest for their loans and pay out interest on deposits -- will be allowed to set up shop throughout China. Odds are that the average depositor would move his money out of the state banks, denying them the resources they need to keep the system running and leading to financial chaos and collapse. Chinese policymakers also could see this problem approaching, and they have no intention of letting the financial system be the state's downfall. Thus, they embarked on a creative strategy. The Cleanup Strategy Again, the U.S. or Western model of cleaning up the system -- a painful purge of corruption and implementation of stringent financial policies -- does not apply. For the Chinese, there is simply too much at stake: As recently as three years ago, the central government, which has a vested interest in lowballing these figures, pegged the total stock of bad loans at 35 percent of gross domestic product. The Chinese could not apply the model used in the United States during the savings and loan crisis of the 1980s. At that time, independent auditors went through the books of suffering S&Ls and chopped up their loan portfolios, ranking the pieces in terms of the chances that debtors ever could pay them off. Those loans were then packaged together, ranked and sold to other -- healthy -- banks. Some of the S&Ls were closed; others faced massive personnel and policy overhauls. Some of the S&L corporate clients went out of business. Some S&L officers went to jail. China, rather than going down such a capital-centered route, has come up with a two-pronged strategy designed to fit its own social needs. First, the Chinese cleaned the banks' books. The government simultaneously has pumped out cash from its now trillion-dollar foreign currency reserve to recapitalize the banks, and transferred the bulk of the NPLs to "asset management corporations." These asset management entities are ostensibly responsible for collecting on the bad loans -- though, because these remain government-owned, Beijing has no intention of forcing compliance on that issue. The asset management firms issue bonds to the banks for the full face value of the loans, making the banks' balance sheets look sparklingly clean indeed. Second, the banks -- drawing on the full authority of the Chinese state -- seek out foreign investors, either through IPOs or strategic capital allocations from foreign corporations. This is a critical step, for four reasons: Foreign corporations know how to run a bank, and can provide the skill sets needed for (new) tasks such as loan evaluation, risk assessment and internal anticorruption checks. For the government, these kinds of processes could be quite troublesome at times, but also can be very handy. It undercuts any competitive instincts the foreign banks might have. By bringing foreign entities to partner with the state banks under the current system, the odds that those so invested would attempt to go solo come December -- when WTO restraints on competition are lifted -- are greatly reduced. And that means less instability stemming from contests over Chinese depositors' savings. Foreign banks have cash -- which, obviously, the Chinese desperately need. Most important, a foreign bank that buys into a Chinese bank gets access to tens (sometimes hundreds) of thousands of local branches. Any way you cut it, that is a sweet asset. Once the foreigners are in, they have a vested interest in working with the Chinese to make the financial system more functional -- which has been the point of the strategy all along. This is the strategy that several Chinese banks already have followed: Bank of Communications drew capital from HSBC; China Construction Bank found an investor in Bank of America; and ICBC, which opened its IPO to institutional investors Oct. 16, lured Goldman Sachs. Conclusion Given the upcoming share sale to retail investors, ICBC's history of action is, of course, particularly worthy of study. Since 2004, it has transferred about $85 billion in bad loans, through asset management company Huarong. Then, in 2005, it received a $15 billion cash injection from Central Huijin Co., the Chinese recapitalization body. Finally, earlier this year, ICBC sold a 5.8 percent stake to a consortium led by Goldman Sachs for $3.7 billion. As a result, the bank, which had an NPL ratio of more than 21 percent at the end of 2004, had (by its own, and therefore questionable, assessment) reduced that number to 4.1 percent as of June. Intriguingly, foreign investors seem not to have noticed how ICBC got from Point A to Point B. Some concerns about the bank's lending practices have been voiced -- most recently, following news in September that ICBC had funded a company, Fuxi Investment, that has been linked to the widening pension funds scandal. However, seemingly no attention has been given to the fact that China has been transferring NPLs from, and providing capital infusions for, state banks -- including ICBC -- for years, without overhauling their corporate decision-making processes or management. Not to mention the short-lived impact of all of those global accounting firm reports ("Global Market Brief: The Ernst & Young Controversy,") in May. But the anomaly in all of this -- the lure of China to Western investors -- remains. Digging up information about the problems in the Chinese system is not difficult; every bit of it is regularly reported in the state-run press. Government statistics are frequently optimistic, but even Beijing's own estimates clearly point to significant structural problems. The Chinese, obviously, have been paying attention and communicating. What is puzzling is why the message does not seem to be getting through. ." The shine of a market that services 1.3 billion people -- and a chance to carve out a piece of that for oneself -- is difficult to ignore. But there is more to be considered: China has gone to considerable lengths to generate the impression that the systemic weaknesses are being addressed and to make its banks (and other state industries) appear attractive to foreign investors. It is no accident that a spate of banking IPOs -- Bank of Communications ($1.6 billion raised), China Construction Bank ($8 billion), Bank of China ($11.2 billion), China Merchants Bank ($2.6 billion) -- have been announced since June 2005. It also is no accident that ICBC, one of China's "Big Four," is going public at this time -- as the transition period for full World Trade Organization membership is drawing to a close. Beijing, which long has been aware of the economic weaknesses (not to mention the political and social implications stemming from them), has been pursuing a brilliant strategy that bears some consideration. A Structural Dilemma China long has had a pressing need to address its NPL problem -- and limited means of doing so. The core issue, as has been noted many times, rests in the attitude toward loans and state-driven industries -- with lending practices that differ sharply from those common in the West. For Western lenders, money is viewed as a scarce commodity, and loans are allocated with rates of return and profits in mind. In the Chinese system, capital has been viewed as a political asset, allocated to achieve social aims. Controls over what kinds of collateral could be used, credit histories and sources of income have not been critical considerations. Citizens, therefore, have little choice but to funnel their savings into state-owned banks (remember that legendary Asian savings rate?). Historically, those banks then have parceled out the cash -- at below-market rates -- to projects that contribute to the social good of mass employment. From Beijing's perspective, it does not matter if these projects (which typically have been state-owned) turn profits or even break even financially. A bum project that runs to the red, but keeps many Chinese employed, was considered a success -- and besides, it could always be buoyed up by more loans. Ultimately, projects became mired in massive debt, and the banks were saddled with masses of NPLs. Clearly, this system would lead to instability even in a perfect world -- and China is far from perfect. Among wealthy coastal magnates, local leaders now dabbling in business and the ever-present availability of easy loans, the Communist Party, and the Chinese system in general, is massively shot through with corruption. Former President Jiang Zemin in 1998 attempted to start closing down some of these dud projects -- particularly the redundant and wasteful commercial projects at the local level -- but met with massive backlash from local officials who had no desire either to face hordes of local unemployed or to give up suckling on the mother's milk provided by state banks. As we noted in May 2005 ("China's State-Owned Firms: Problems Deep and Wide"), a destabilizing shock appeared to be all but unavoidable by December 2006, when the transition period for China's WTO accession ends. At that point, foreign banks -- which, unlike their Chinese counterparts, actually charge interest for their loans and pay out interest on deposits -- will be allowed to set up shop throughout China. Odds are that the average depositor would move his money out of the state banks, denying them the resources they need to keep the system running and leading to financial chaos and collapse. Chinese policymakers also could see this problem approaching, and they have no intention of letting the financial system be the state's downfall. Thus, they embarked on a creative strategy. The Cleanup Strategy Again, the U.S. or Western model of cleaning up the system -- a painful purge of corruption and implementation of stringent financial policies -- does not apply. For the Chinese, there is simply too much at stake: As recently as three years ago, the central government, which has a vested interest in lowballing these figures, pegged the total stock of bad loans at 35 percent of gross domestic product. The Chinese could not apply the model used in the United States during the savings and loan crisis of the 1980s. At that time, independent auditors went through the books of suffering S&Ls and chopped up their loan portfolios, ranking the pieces in terms of the chances that debtors ever could pay them off. Those loans were then packaged together, ranked and sold to other -- healthy -- banks. Some of the S&Ls were closed; others faced massive personnel and policy overhauls. Some of the S&L corporate clients went out of business. Some S&L officers went to jail. China, rather than going down such a capital-centered route, has come up with a two-pronged strategy designed to fit its own social needs. First, the Chinese cleaned the banks' books. The government simultaneously has pumped out cash from its now trillion-dollar foreign currency reserve to recapitalize the banks, and transferred the bulk of the NPLs to "asset management corporations." These asset management entities are ostensibly responsible for collecting on the bad loans -- though, because these remain government-owned, Beijing has no intention of forcing compliance on that issue. The asset management firms issue bonds to the banks for the full face value of the loans, making the banks' balance sheets look sparklingly clean indeed. Second, the banks -- drawing on the full authority of the Chinese state -- seek out foreign investors, either through IPOs or strategic capital allocations from foreign corporations. This is a critical step, for four reasons: Foreign corporations know how to run a bank, and can provide the skill sets needed for (new) tasks such as loan evaluation, risk assessment and internal anticorruption checks. For the government, these kinds of processes could be quite troublesome at times, but also can be very handy. It undercuts any competitive instincts the foreign banks might have. By bringing foreign entities to partner with the state banks under the current system, the odds that those so invested would attempt to go solo come December -- when WTO restraints on competition are lifted -- are greatly reduced. And that means less instability stemming from contests over Chinese depositors' savings. Foreign banks have cash -- which, obviously, the Chinese desperately need. Most important, a foreign bank that buys into a Chinese bank gets access to tens (sometimes hundreds) of thousands of local branches. Any way you cut it, that is a sweet asset. Once the foreigners are in, they have a vested interest in working with the Chinese to make the financial system more functional -- which has been the point of the strategy all along. This is the strategy that several Chinese banks already have followed: Bank of Communications drew capital from HSBC; China Construction Bank found an investor in Bank of America; and ICBC, which opened its IPO to institutional investors Oct. 16, lured Goldman Sachs. Conclusion Given the upcoming share sale to retail investors, ICBC's history of action is, of course, particularly worthy of study. Since 2004, it has transferred about $85 billion in bad loans, through asset management company Huarong. Then, in 2005, it received a $15 billion cash injection from Central Huijin Co., the Chinese recapitalization body. Finally, earlier this year, ICBC sold a 5.8 percent stake to a consortium led by Goldman Sachs for $3.7 billion. As a result, the bank, which had an NPL ratio of more than 21 percent at the end of 2004, had (by its own, and therefore questionable, assessment) reduced that number to 4.1 percent as of June. Intriguingly, foreign investors seem not to have noticed how ICBC got from Point A to Point B. Some concerns about the bank's lending practices have been voiced -- most recently, following news in September that ICBC had funded a company, Fuxi Investment, that has been linked to the widening pension funds scandal. However, seemingly no attention has been given to the fact that China has been transferring NPLs from, and providing capital infusions for, state banks -- including ICBC -- for years, without overhauling their corporate decision-making processes or management. Not to mention the short-lived impact of all of those global accounting firm reports ("Global Market Brief: The Ernst & Young Controversy,") in May. But the anomaly in all of this -- the lure of China to Western investors -- remains. Digging up information about the problems in the Chinese system is not difficult; every bit of it is regularly reported in the state-run press. Government statistics are frequently optimistic, but even Beijing's own estimates clearly point to significant structural problems. The Chinese, obviously, have been paying attention and communicating. What is puzzling is why the message does not seem to be getting through.
johnmauldin@investorsinsight.com
Wednesday, July 12, 2006
The Art of Bootstrapping
The Art of Bootstrapping by Guy Kawasaki
Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.
Let's say that you can't raise money for whatever reason: You're not a “proven” team with “proven” technology in a “proven” market. Or, your company may simply not be a “VC deal”--that is, something that will go public or be acquired for a zillion dollars. Finally, your organization may be a not-for-product with a cause like the ministry or the environment. Does this mean you should give up? Not at all.
I could build a case that too much money is worse too little for most organizations--not that I wouldn't like to run a Super Bowl commercial someday. Until that day comes, the key to success is bootstrapping. The term comes from the German legend of Baron Münchhausen pulling himself out of the sea by pulling on his own bootstraps. Here is the art of bootstrapping.
Focus on cash flow, not profitability. The theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue. It means passing up the big sale that take twelve months to close, deliver, and collect. Cash is not only king, it's queen and prince too for a bootstrapper.
Forecast from the bottom up. Most entrepreneurs do a top-down forecast: “There are 150 million cars in America. It sure seems reasonable that we can get a mere 1% of car owners to install our satellite radio systems. That's 1.5 million systems in the first year.” The bottom-up forecast goes like this: “We can open up ten installation facilities in the first year. On an average day, they can install ten systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems. 24,000 is a long way from the conservative 1.5 million systems in the top-down approach. Guess which number is more likely to happen.
Ship, then test. I can feel the comments coming in already: How can you recommend shipping stuff that isn't perfect? Blah blah blah. ”Perfect“ is the enemy of ”good enough.“ When your product or service is ”good enough,“ get it out because cash flows when you start shipping. Besides perfection doesn't necessarily come with time--more unwanted features do. By shipping, you'll also learn what your customers truly want you to fix. It's definitely a tradeoff: your reputation versus cash flow, so you can't ship pure crap. But you can't wait for perfection either. (Nota bene: life science companies, please ignore this recommendation.)
Forget the ”proven“ team. Proven teams are over-rated--especially when most people define proven teams as people who worked for a billion dollar company for the past ten years. These folks are accustomed to a certain lifestyle, and it's not the bootstrapping lifestyle. Hire young, cheap, and hungry people. People with fast chips, but not necessarily a fully functional instruction set. Once you achieve significant cash flow, you can hire adult supervision. Until then, hire what you can afford and make them into great employees.
Start as a service business. Let's say that you ultimately want to be a software company: people download your software or you send them CDs, and they pay you. That's a nice, clean business with a proven business model. However, until you finish the software, you could provide consulting and services based on your work-in-process software. This has two advantages: immediate revenue and true customer testing of your software. Once the software is field-tested and battle-hardened, flip the switch and become a product company.
Focus on function, not form. Mea culpa: I love good ”form.“ MacBooks. Audis. Graf skates. Bauer sticks. Breitling watches. You name it. But bootstrappers focus on function, not form, when they are buying things. The function is computing, getting from point A to point B, skating, shooting, and knowing the time of day. These functions do not require the more expensive form that I like. All the chair has to do is hold your butt. It doesn't have to look like it belongs in the Museum of Modern Art. Design great stuff, but buy cheap stuff.
Pick your battles. Bootstrappers pick their battles. They don't fight on all fronts because they cannot afford to fight on all fronts. If you were starting a new church, do you really need the $100,000 multimedia audio visual system? Or just a great message from the pulpit? If you're creating a content web site based on the advertising model, do you have to write your own customer ad-serving software? I don't think so.
Understaff. Many entrepreneurs staff up for what could happen, best case. ”Our conservative (albeit top-down) forecast for first year satellite radio sales is 1.5 million units. We'd better create a 24 x 7 customer support center to handle this. Guess what? You sell no where near 1.5 million units, but you do have 200 people hired, trained, and sitting in a 50,000 square foot telemarketing center. Bootstrappers understaff knowing that all hell might break loose. But this would be, as we say in Silicon Valley, a “high quality problem.” Trust me, every venture capitalist fantasizes about an entrepreneur calling up and asking for additional capital because sales are exploding. Also trust me when I tell you that fantasies are fantasies because they seldom happen.
Go direct. The optimal number of mouths (or hands) between a bootstrapper and her customer is zero. Sure, stores provide great customer reach, and wholesalers provide distribution. But God invented ecommerce so that you could sell direct and reap greater margins. And God was doubly smart because She knew that by going direct, you'd also learn more about your customer's needs. Stores and wholesalers fill demand, they don't create it. If you create enough demand, you can always get other organizations to fill it later. If you don't create demand, all the distribution in the world will get you bupkis.
Position against the leader. Don't have the money to explain your story starting from scratch? Then don't try. Instead position against the leader. Toyota introduced Lexus as good as a Mercedes but at half the price--Toyota didn't have to explain what “good as a Mercedes” meant. How much do you think that saved them? “Cheap iPod” and “poor man's Bose noise-cancelling headphones,” would work too.
Take the “red pill.”This refers to the choice that Neo made in The Matrix. The red pill led to learning the whole truth. The blue pill meant waking up wondering if you had a bad dream. Bootstrappers don't have the luxury to take the blue pill. They take the red pill--everyday--to find out how deep the rabbit hole really is. And the deepest rabbit hole for a bootstrapper is a simple calculation: Amount of cash divided by cash burn per month because this will tell you how much longer you can live. And as my friend Craig Johnson likes to say, “The leading cause of failure of startups is death, and death happens when you run out of money.” As long as you have money, you're still in the game.
Written at: Atherton, California.
Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.
Let's say that you can't raise money for whatever reason: You're not a “proven” team with “proven” technology in a “proven” market. Or, your company may simply not be a “VC deal”--that is, something that will go public or be acquired for a zillion dollars. Finally, your organization may be a not-for-product with a cause like the ministry or the environment. Does this mean you should give up? Not at all.
I could build a case that too much money is worse too little for most organizations--not that I wouldn't like to run a Super Bowl commercial someday. Until that day comes, the key to success is bootstrapping. The term comes from the German legend of Baron Münchhausen pulling himself out of the sea by pulling on his own bootstraps. Here is the art of bootstrapping.
Focus on cash flow, not profitability. The theory is that profits are the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue. It means passing up the big sale that take twelve months to close, deliver, and collect. Cash is not only king, it's queen and prince too for a bootstrapper.
Forecast from the bottom up. Most entrepreneurs do a top-down forecast: “There are 150 million cars in America. It sure seems reasonable that we can get a mere 1% of car owners to install our satellite radio systems. That's 1.5 million systems in the first year.” The bottom-up forecast goes like this: “We can open up ten installation facilities in the first year. On an average day, they can install ten systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems. 24,000 is a long way from the conservative 1.5 million systems in the top-down approach. Guess which number is more likely to happen.
Ship, then test. I can feel the comments coming in already: How can you recommend shipping stuff that isn't perfect? Blah blah blah. ”Perfect“ is the enemy of ”good enough.“ When your product or service is ”good enough,“ get it out because cash flows when you start shipping. Besides perfection doesn't necessarily come with time--more unwanted features do. By shipping, you'll also learn what your customers truly want you to fix. It's definitely a tradeoff: your reputation versus cash flow, so you can't ship pure crap. But you can't wait for perfection either. (Nota bene: life science companies, please ignore this recommendation.)
Forget the ”proven“ team. Proven teams are over-rated--especially when most people define proven teams as people who worked for a billion dollar company for the past ten years. These folks are accustomed to a certain lifestyle, and it's not the bootstrapping lifestyle. Hire young, cheap, and hungry people. People with fast chips, but not necessarily a fully functional instruction set. Once you achieve significant cash flow, you can hire adult supervision. Until then, hire what you can afford and make them into great employees.
Start as a service business. Let's say that you ultimately want to be a software company: people download your software or you send them CDs, and they pay you. That's a nice, clean business with a proven business model. However, until you finish the software, you could provide consulting and services based on your work-in-process software. This has two advantages: immediate revenue and true customer testing of your software. Once the software is field-tested and battle-hardened, flip the switch and become a product company.
Focus on function, not form. Mea culpa: I love good ”form.“ MacBooks. Audis. Graf skates. Bauer sticks. Breitling watches. You name it. But bootstrappers focus on function, not form, when they are buying things. The function is computing, getting from point A to point B, skating, shooting, and knowing the time of day. These functions do not require the more expensive form that I like. All the chair has to do is hold your butt. It doesn't have to look like it belongs in the Museum of Modern Art. Design great stuff, but buy cheap stuff.
Pick your battles. Bootstrappers pick their battles. They don't fight on all fronts because they cannot afford to fight on all fronts. If you were starting a new church, do you really need the $100,000 multimedia audio visual system? Or just a great message from the pulpit? If you're creating a content web site based on the advertising model, do you have to write your own customer ad-serving software? I don't think so.
Understaff. Many entrepreneurs staff up for what could happen, best case. ”Our conservative (albeit top-down) forecast for first year satellite radio sales is 1.5 million units. We'd better create a 24 x 7 customer support center to handle this. Guess what? You sell no where near 1.5 million units, but you do have 200 people hired, trained, and sitting in a 50,000 square foot telemarketing center. Bootstrappers understaff knowing that all hell might break loose. But this would be, as we say in Silicon Valley, a “high quality problem.” Trust me, every venture capitalist fantasizes about an entrepreneur calling up and asking for additional capital because sales are exploding. Also trust me when I tell you that fantasies are fantasies because they seldom happen.
Go direct. The optimal number of mouths (or hands) between a bootstrapper and her customer is zero. Sure, stores provide great customer reach, and wholesalers provide distribution. But God invented ecommerce so that you could sell direct and reap greater margins. And God was doubly smart because She knew that by going direct, you'd also learn more about your customer's needs. Stores and wholesalers fill demand, they don't create it. If you create enough demand, you can always get other organizations to fill it later. If you don't create demand, all the distribution in the world will get you bupkis.
Position against the leader. Don't have the money to explain your story starting from scratch? Then don't try. Instead position against the leader. Toyota introduced Lexus as good as a Mercedes but at half the price--Toyota didn't have to explain what “good as a Mercedes” meant. How much do you think that saved them? “Cheap iPod” and “poor man's Bose noise-cancelling headphones,” would work too.
Take the “red pill.”This refers to the choice that Neo made in The Matrix. The red pill led to learning the whole truth. The blue pill meant waking up wondering if you had a bad dream. Bootstrappers don't have the luxury to take the blue pill. They take the red pill--everyday--to find out how deep the rabbit hole really is. And the deepest rabbit hole for a bootstrapper is a simple calculation: Amount of cash divided by cash burn per month because this will tell you how much longer you can live. And as my friend Craig Johnson likes to say, “The leading cause of failure of startups is death, and death happens when you run out of money.” As long as you have money, you're still in the game.
Written at: Atherton, California.
Friday, May 12, 2006
How To EnsureSuccess With CRM
You've heard the statistics - more than 50 percent of Customer Relationship Management (CRM) projects fail to deliver the expected return on investment (ROI). This is unsettling especially if you're in the early phase of a CRM project. As companies evaluate their deployment process and what went wrong, common themes surface. Most CRM deployments fail because companies focus too heavily on technology and data and not enough on the sales process and retaining customers. Also, unclear or unrealistic goals have been cited for many failed CRM projects. Some companies felt that choosing CRM suites based on brand and what the competition was using created a false sense of security and impractical expectations of immediate success.
"Priorities and expectations of what CRM will or should deliver must align with your company's business objectives, and you need to understand how to measure the success of your implementation. By recognizing common implementation mistakes, you can understand how to avoid the common pitfalls of CRM deployment and increase your chances of getting on the winning side of CRM. "
Selecting a CRM suite with complex functionality combined with the wrong delivery model has also created a lot of frustration. By recognizing these common mistakes, you can understand how to avoid the common pitfalls of CRM deployment and increase your chances of getting on the winning side of CRM.
Define Your Business Objectives Priorities and expectations of what CRM will or should deliver must align with your company's business objectives, and you need to understand how to measure the success of your implementation. One reason CRM implementations stall is that companies don't establish specific goals and metrics to measure the success of their CRM efforts. Nor do they make the goals of individuals, especially salespeople, align with the overarching company goals. Also, if you want to be successful with CRM, learn how your company defines success. Is a successful CRM project simply one that gets deployed throughout your entire organization? Will success be based on better pipeline management, tangible ROI, overall Total Cost of Ownership (TCO), and an increase in return customers? Is responding quicker to sales leads your goal? Until you know what your business objectives are and what end results you want to achieve, you lack the appropriate measurements to gauge CRM success.
Set Realistic Goals For Individuals That Align With Your Business ObjectivesOnce you have established your business objectives, examine them closely and realistically, both in terms of scope of the implementation and anticipated results. CRM projects often fail when companies try to solve too many issues with one massive implementation, or when their goals are too ambitious. It's also important to create realistic goals that have a personal impact upon your salespeople. Most CRM/ Sales Force Automation (SFA) deployments stall because salespeople see no clear personal value derived from "keying in" the data. However, if you automate the right business processes, your CRM system can act as a virtual sales coach helping them manage and close more deals.Typically, traditional CRM projects tend to grow in scope and complexity as they unfold. Companies start with little or no insight into their customers, and expect their CRM software to capture a 360-degree view, all in one leap. Or, companies start with a desire to automate sales processes, and end up automating services and marketing as well. Other times company expectations inflate to unrealistic proportions: doubling sales, reducing support head count by 50 percent, or tripling direct mail response rates. The end result is companies spend too much money for too little ROI on a system that takes too long to implement and isn't used by the salespeople. Instead of all-encompassing CRM projects, it's more appropriate for companies to focus on small improvements. Break your goals into manageable chunks, and implement them one at a time. In addition to increasing your chances for CRM success, you'll also reduce business disruption and increase employee buy-in. Employees will be more likely to cooperate with the implementation when they see it will provide real, personal benefits. And, if you have a track record of delivering success, it's a lot easier to ask for - and get - additional funding for your next CRM project.
Focus on the Sales ProcessCurrently, the number of companies who still haven't taken the time to determine their goals and objectives has grown substantially because an amazing number of companies view automation as the panacea. But automation- and data-focused approaches alone will not improve your relationship with your customers or help your sales team sell more effectively. If you want increased effectiveness in reaching your objectives, it's crucial to focus on having the right processes in place with the right infrastructure to institutionalize successful selling behaviors. CRM projects will succeed only when companies automate the right business processes, otherwise results are random. Responding quicker to sales leads may be a definable objective, but not necessarily one that results in more sales - your sales team may be responding faster, but with varying degrees of success. It's vital to ensure that you automate your best business processes in order to ensure predictable and continuous improvement. Applying a powerful technology to flawed business processes will only succeed in ensuring that your team will make the same mistakes repeatedly. When choosing a CRM vendor, look for one that has a dedicated team to help your organization clearly define your best business practices. Or, you can hire an outside consulting team to identify your processes before applying a technology fix.
Choose The Right Technology Once you have defined your business objectives, grounded your expectations, and at least addressed the issues of identifying your best practices, it's time to begin your due diligence process to select the right CRM application for your business needs. This phase can be difficult and confusing. CEOs tend to request new technology based on stories in computer magazines while CIOs struggle to find the time to adequately evaluate products. You'll get mixed messages from your executive team and you'll feel pressured to make a decision, especially when aggressive CRM sales reps use closing tactics aimed at having you to believe that if you don't select their CRM application your company is doomed to failure.Companies often buy technology just because their competition has bought it. This is known as The IBM Syndrome ("No one ever got fired for buying IBM.") However, responsible companies must look beyond brand name when considering CRM vendors. It's important that a CRM vendor has strong customer testimonials and experience in deploying to companies such as yours. If you have global users, make sure that scalability and bandwidth will not be a problem. And don't overbuy on features. It's not uncommon for companies to choose CRM packages with the belief that more is better. While it's true that many packages with lots of widgets can offer long-term benefits, the time required to implement them will negate the benefits by delaying the return on investment. There are too many complex CRM suites available today with bloated initial costs and inflated total cost of ownership (TCO), which bog down the implementation, complicate the deployment process, and often lead to low user compliance. What good will lots of features be when your CRM application can't deliver accurate pipeline forecasting and real-time pipeline analysis because your users refuse to use it? Remember, garbage in equals garbage out, and your CRM system is only beneficial if your users enjoy working and selling with it and derive personal value from it.Choosing the right vendor means focusing on what delivery model will work best for your business. If time and money are of no concern, begin by seeking out the traditional CRM/SFA vendors. But if you need real-time data available in an intuitive and easy-to-use application, then a Web-based CRM/SFA deployment is the right way to go. A Web-based application will ensure a low TCO and easy customization to fit your unique business and selling environment without any of the burden of traditional software packages. Web-based CRM/SFA applications also offer quicker ROI. Client/server models can take anywhere from six to 18 months to fully implement, while Web-based applications offer a fast deployment to get your users up and running within weeks or a few months, depending on the size of your organization. Choosing a technology and delivery model that meets your business requirements is vital to ensuring your company's success with a CRM deployment.
ConclusionIf your company has yet to begin its CRM initiative, following the recommendations in this article will help you avoid failure. If your company is in the middle of an implementation, it's not too late to stop and reevaluate. Many stalled CRM implementations have the potential for success if companies make the switch to a Web-based SFA/CRM solution.When you identify your business objectives, set realistic goals, and establish your best business practices, it becomes easier to select and implement the appropriate CRM/SFA solution and gain a very high percentage of user acceptance. Don't feel you have to make the decision yourself - pull in internal resources from your company, especially members of the sales and marketing teams. It's important that you hear the opinions, recommendations, and concerns of all those who will be using the new CRM system. And, if everyone feels like they have a voice in the initiative, gaining user acceptance becomes an easier goal to achieve. Once the right solution and the right model is in place, you'll find yourself where you want to be -- on the winning side of CRM.
"Priorities and expectations of what CRM will or should deliver must align with your company's business objectives, and you need to understand how to measure the success of your implementation. By recognizing common implementation mistakes, you can understand how to avoid the common pitfalls of CRM deployment and increase your chances of getting on the winning side of CRM. "
Selecting a CRM suite with complex functionality combined with the wrong delivery model has also created a lot of frustration. By recognizing these common mistakes, you can understand how to avoid the common pitfalls of CRM deployment and increase your chances of getting on the winning side of CRM.
Define Your Business Objectives Priorities and expectations of what CRM will or should deliver must align with your company's business objectives, and you need to understand how to measure the success of your implementation. One reason CRM implementations stall is that companies don't establish specific goals and metrics to measure the success of their CRM efforts. Nor do they make the goals of individuals, especially salespeople, align with the overarching company goals. Also, if you want to be successful with CRM, learn how your company defines success. Is a successful CRM project simply one that gets deployed throughout your entire organization? Will success be based on better pipeline management, tangible ROI, overall Total Cost of Ownership (TCO), and an increase in return customers? Is responding quicker to sales leads your goal? Until you know what your business objectives are and what end results you want to achieve, you lack the appropriate measurements to gauge CRM success.
Set Realistic Goals For Individuals That Align With Your Business ObjectivesOnce you have established your business objectives, examine them closely and realistically, both in terms of scope of the implementation and anticipated results. CRM projects often fail when companies try to solve too many issues with one massive implementation, or when their goals are too ambitious. It's also important to create realistic goals that have a personal impact upon your salespeople. Most CRM/ Sales Force Automation (SFA) deployments stall because salespeople see no clear personal value derived from "keying in" the data. However, if you automate the right business processes, your CRM system can act as a virtual sales coach helping them manage and close more deals.Typically, traditional CRM projects tend to grow in scope and complexity as they unfold. Companies start with little or no insight into their customers, and expect their CRM software to capture a 360-degree view, all in one leap. Or, companies start with a desire to automate sales processes, and end up automating services and marketing as well. Other times company expectations inflate to unrealistic proportions: doubling sales, reducing support head count by 50 percent, or tripling direct mail response rates. The end result is companies spend too much money for too little ROI on a system that takes too long to implement and isn't used by the salespeople. Instead of all-encompassing CRM projects, it's more appropriate for companies to focus on small improvements. Break your goals into manageable chunks, and implement them one at a time. In addition to increasing your chances for CRM success, you'll also reduce business disruption and increase employee buy-in. Employees will be more likely to cooperate with the implementation when they see it will provide real, personal benefits. And, if you have a track record of delivering success, it's a lot easier to ask for - and get - additional funding for your next CRM project.
Focus on the Sales ProcessCurrently, the number of companies who still haven't taken the time to determine their goals and objectives has grown substantially because an amazing number of companies view automation as the panacea. But automation- and data-focused approaches alone will not improve your relationship with your customers or help your sales team sell more effectively. If you want increased effectiveness in reaching your objectives, it's crucial to focus on having the right processes in place with the right infrastructure to institutionalize successful selling behaviors. CRM projects will succeed only when companies automate the right business processes, otherwise results are random. Responding quicker to sales leads may be a definable objective, but not necessarily one that results in more sales - your sales team may be responding faster, but with varying degrees of success. It's vital to ensure that you automate your best business processes in order to ensure predictable and continuous improvement. Applying a powerful technology to flawed business processes will only succeed in ensuring that your team will make the same mistakes repeatedly. When choosing a CRM vendor, look for one that has a dedicated team to help your organization clearly define your best business practices. Or, you can hire an outside consulting team to identify your processes before applying a technology fix.
Choose The Right Technology Once you have defined your business objectives, grounded your expectations, and at least addressed the issues of identifying your best practices, it's time to begin your due diligence process to select the right CRM application for your business needs. This phase can be difficult and confusing. CEOs tend to request new technology based on stories in computer magazines while CIOs struggle to find the time to adequately evaluate products. You'll get mixed messages from your executive team and you'll feel pressured to make a decision, especially when aggressive CRM sales reps use closing tactics aimed at having you to believe that if you don't select their CRM application your company is doomed to failure.Companies often buy technology just because their competition has bought it. This is known as The IBM Syndrome ("No one ever got fired for buying IBM.") However, responsible companies must look beyond brand name when considering CRM vendors. It's important that a CRM vendor has strong customer testimonials and experience in deploying to companies such as yours. If you have global users, make sure that scalability and bandwidth will not be a problem. And don't overbuy on features. It's not uncommon for companies to choose CRM packages with the belief that more is better. While it's true that many packages with lots of widgets can offer long-term benefits, the time required to implement them will negate the benefits by delaying the return on investment. There are too many complex CRM suites available today with bloated initial costs and inflated total cost of ownership (TCO), which bog down the implementation, complicate the deployment process, and often lead to low user compliance. What good will lots of features be when your CRM application can't deliver accurate pipeline forecasting and real-time pipeline analysis because your users refuse to use it? Remember, garbage in equals garbage out, and your CRM system is only beneficial if your users enjoy working and selling with it and derive personal value from it.Choosing the right vendor means focusing on what delivery model will work best for your business. If time and money are of no concern, begin by seeking out the traditional CRM/SFA vendors. But if you need real-time data available in an intuitive and easy-to-use application, then a Web-based CRM/SFA deployment is the right way to go. A Web-based application will ensure a low TCO and easy customization to fit your unique business and selling environment without any of the burden of traditional software packages. Web-based CRM/SFA applications also offer quicker ROI. Client/server models can take anywhere from six to 18 months to fully implement, while Web-based applications offer a fast deployment to get your users up and running within weeks or a few months, depending on the size of your organization. Choosing a technology and delivery model that meets your business requirements is vital to ensuring your company's success with a CRM deployment.
ConclusionIf your company has yet to begin its CRM initiative, following the recommendations in this article will help you avoid failure. If your company is in the middle of an implementation, it's not too late to stop and reevaluate. Many stalled CRM implementations have the potential for success if companies make the switch to a Web-based SFA/CRM solution.When you identify your business objectives, set realistic goals, and establish your best business practices, it becomes easier to select and implement the appropriate CRM/SFA solution and gain a very high percentage of user acceptance. Don't feel you have to make the decision yourself - pull in internal resources from your company, especially members of the sales and marketing teams. It's important that you hear the opinions, recommendations, and concerns of all those who will be using the new CRM system. And, if everyone feels like they have a voice in the initiative, gaining user acceptance becomes an easier goal to achieve. Once the right solution and the right model is in place, you'll find yourself where you want to be -- on the winning side of CRM.
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