I just recently wrote in this space about the housing market’s affect on our broader economy. It appears as if real estate is the Pareto principle at work. Five states (Arizona, California, Florida, Michigan and Nevada) have generated a shocking 46% of the nation’s foreclosures[i].

While there are a number of forces as work, there is one explicit predictor of foreclosure activity. States where judges must approve foreclosures in writing have 260% more activity than in other states.  As homeowners and banks wait for the government to take action, markets spiral downward, only diminishing the value of properties that have positive equity.

In the states where foreclosures are dealt with quickly, the market has already begun to turn.  Each of us can reach our own conclusions about the role of government (this is not the appropriate venue for such a debate).

The broader point is that the U.S. real estate market, like many other markets has vast regional differences and elements within it moving in different directions.  The concept of the “business cycle” is a bit of a misnomer. Traditional cycles have been disrupted and replaced with a series of variables that drive markets very quickly, sometimes without pretense or warning.

The events that created the recent housing bubble created the perfect storm.  The recovery will be another type of storm, with regions and even areas within regions recovering more quickly than others. We see similar phenomena in employment and growth in various industries.

It used to be that selecting the right industry was enough to ensure some level or prosperity. Today, entrepreneurs and investors need to find very specific opportunities and niches where growth and profit are plausible.

Like everything else, choose your real estate carefully.

Businesses constantly struggle with capacity issues. Manufacturers seek access to the ideal manufacturing capacity, and service providers look to employ the optimum number of employees.  Both understand their labor spend is a key component of a company’s profit formula. So how is the entrepreneur to scale in an uncertain economy?

Those who had not experienced rapid market erosion previous to the liquidity crisis learned an important lesson; high fixed costs can be truly catastrophic when demand contracts quickly. Employers must marry labor costs with demand. There are several steps one can take to mitigate labor capacity risk:

Optimize Labor Efficiently- Most entrepreneurs intuitively understand that they should push low value activities down through (or out) of the organization.  Senior managers should aim for “zero administration”, where virtually all of their time is spent improving service or profitability, and not loading paper in the copier.  A good administrative assistant is worth their weight in gold. Similar thinking should apply to all; all work should be allocated to the appropriate staff based on their skill level, experience and cost.

Outsource Low Value Activities Based on Demand- The zeal for outsourcing is far from over. Organizations are not only seeking lower costs, they are looking to move resources outside their organization so that they can scale  their bandwidth quickly. Look for outsourcing partners who have infrastructure that can move, (in real time) with your business. Such organizations typically have an existing core competency in the services provided, including technology and human capital geared towards executing such work.

Increase Weighting of Incentives to Total Cash Compensation-Those who only provide subjective bonuses are actually doing themselves a disservice. Practically the entire Fortune 500 have moved to some type of performance based pay. Part of the rationale is to only pay out incentives when an organization reaches certain performance thresholds.  Failure to have a significant portion of cash compensation in incentives (20% or more) creates fixed costs and puts stress on a business and on employees. Fluctuations in demand require drastic action such as lay offs or furloughs.

Measure Labor Meticulously- Labor KPI’s are amongst the easiest predictive indicators to measure, and directly affect the bottom line. Examples include overtime, labor dollars per unit, direct labor, indirect labor and labor as a percentage of revenue.

Beware of External Demand Indicators- Within virtually every business segment there are external measures that provide context on future demand.  Add external indicators to your scorecard/dashboarding system so that you can stay in tune to the market place. Government websites, trade associations, and private research organizations offer a litany of statistics.  Plot such data  against company revenue to find which numbers correlate with business growth.

There is an old saying in poker; if you can’t see the sucker in the room…it is probably you.  The same can be said of advancements in technology. Forrester’s recently forecasted increases in IT spending of 8% in 2011 and 2012[i]. Recent M&A activity suggests the sector is heating up.

In many industries, market leaders create proprietary technologies and information systems that improve the customer experience directly or indirectly through information flow, efficiency, cycle time, etc.  At the current rate of change, a company either realizes a technological advantage, or is likely at a competitive disadvantage.

We have numerous clients who are either in the midst of ERP implementations, or considering similar upgrades to their systems. At some point the business owner must ask the strategic question; are our technology improvements truly game changers, or only an enhancement to existing ways of doing business?

More than 90% of ERP type systems are delivered late, and their implementations can be taxing to small and mid-market businesses. It is not difficult to spend $1 million+ (in hard and soft costs) in such systems, which is a drop in the bucket compared to the cost of disappointing customers due to errors or missed timelines.  If entrepreneurs are going to expend valuable resources (time and money) on technologies, they had better select the right ones, and prime their organization to implement them seamlessly.

I find there are often two extremes during such implementations.  In some companies, functional department heads (such as sales, engineering, design) lack experience in software integrations and do not become invested in the deliverables until it is too late. Other times, companies become so fascinated with perfection, they lose sight of the objective, and become paralyzed in analysis. If a company’s enterprise system becomes dated because of their inability to act, competitors can seize the upper hand.

If you are considering such upgrades to your technology, it is often sensible to take the aggressive but measured approach. In other words, the strategist is always looking to leverage technology that reshapes the customer experience, improves efficiency or reduces costs in some material way while simplifying or automating processes.  Such decisions should not be left to the technologists, but shared by the leadership team who must be equally responsible for selection, scoping and integration.  Failure is not an option as an unsuccessful project can put a company years behind.

Don’t be the sucker.

One of the bi-products of our caffeine crazed, media blitzed economy is that we have virtually no attention span. It is as if we have a collective form of ADD.

Over time, customers get bored with their vendors, alliance partners and trade associations. Client relationships have a natural tail.

The ability to continuously delight customers is a skill mastered by few. Clients need some type of stimuli that reinforces the value we provide them and it needs to come in different forms at different times. Variety is not just the spice of life; it is the remedy to overcoming the dreaded inevitable customer fatigue.

The problem is exacerbated by the fact that challengers are incented to barrage prospects with new offers and discounts. In relative terms, the incumbent can easily become complacent and offer clients much of the same. As the old adage goes, “if it isn’t broke…”.

Customer fatigue only magnifies themes we have often shared in this space. The number one rule of customer relationship management is to take better care of the customers you already have than new ones you might attract. Offering special discounts to new customers flies in the face of this principle.  Organizations often position their best people as hunters, and lowly customer service agents as the face of the company with current clients. An organization can easily lose sight of its most precious possession, its most profitable customers.

Vendors should track the average length of their relationships and take actions to prolong them. The element of surprise is understood by entertainers and magicians. Similar tactics can be applied from our business gifts, customer reviews, plant tours and the like. Customers should be treated differently based on their lifetime value, and perhaps even receive different benefits based on their tenure. Find a way to shake things up and keep customers coming back for more.