Born: Tyler, Minn.
Education: Bachelor of science, San Jose State University
What’s the best business lesson you’ve learned?
It’s really about people and getting the power of the people working for the organization. Let’s say you acquire two companies, and one is entirely made of robots with a central program, and one is made of people which integration is harder? The one with the people is harder, but also if you get those people aligned, they are going to outperform a set of robots, so it really is a difference in a company is people.
What’s your favorite board game and why?
My favorite game is probably Risk. It’s a kind of battle strategy game, and you have multiple opponents, but aside from the strategy, there’s always the luck of the dice in it, so it’s a good challenging game.
I grew up in the central-northern part of the Black Hills of South Dakota, so we would have long blizzards, and when I was young, we wouldn’t have school for days, and we would get together and play Risk, and you’d have games that would go on for days to bide the time.
What was your first job?
I was working on a construction crew building houses at age 15 or 16.
Whom do you admire most in business and why?
Andy Grove. A lot of it is because I was at Intel as an engineer when he was leading the company, and his clarity of vision and communicating to people and the methods Intel developed under his leadership is a lot of what I do today. I enjoy some of his books because some of the things he talks about in having been an engineer down on the front lines you can tie where I was mentally versus where he was in leading the company.
After the first set of case studies detailing the missteps of the banking industry prior to the recent avalanche of problems, there’s already one key lesson from the in-depth reviews of the industry’s sales management practices that should gain the immediate attention of all CEOs, says Scott Barton, Senior Consultant for the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Barton’s top observation: Don’t wait until revenue growth stalls to review the ROI of your sales force.
“When the banking industry was in the midst of an unprecedented growth cycle, there just wasn’t much attention paid to sales force effectiveness,” he says. “Management was adding people and not caring about the return it was getting for its compensation expenditures, until net income plummeted. Now, there’s renewed interest in looking at what caused the disconnect between revenue and compensation expenditures.”
Smart Business spoke with Barton about learning from the banking industry’s renewed rigor around sales force effectiveness.
What was the first problem you found?
The first issues that created sub-par sales performance in the banking industry were poorly defined sales roles and a general lack of discipline in reviewing how the sales team was spending its time. We know from our research that top performing sales teams spend 20 percent more time in new business generation activities when compared to the time spent by average performing teams. This produces a much greater return for the associated compensation expenditure when compared with the cost for client maintenance or administrative duties. Management should review the sales staff’s time allocation between hunting and farming activities and make certain that variable compensation is calibrated to reward more generously for growth, and limit the staff’s activities that don’t directly correlate to new customer development and revenue growth.
Did adjusting the sales structure help?
Some banks are now breaking out their sales positions into roles that are strictly dedicated to either new business development or customer maintenance. What they found is that one person can handle larger volumes of existing customers, so the company achieves better revenue leverage for the allocated expenditure. Banking executives also found they could hire for specific attributes when hiring strictly for hunters or farmers, instead of hiring for a composite profile for blended roles, and they achieved better results from dedicated business development and customer maintenance personnel simply because of increased focus. This type of functional realignment also affords management greater visibility into the disparate cost detail and performance of the two groups.
Was there sufficient accountability for profitable business generation?
Many organizations wind up with a poor sales compensation ROI because the basis for variable compensation is business that does not contribute to profitable growth. Last year was a tough one for many commercial lending organizations, but you wouldn’t have known it by looking at some of their relationship managers’ pay checks. Relatively high base salaries and incentive metrics tied to overall asset volume meant a portfolio could be flat and unprofitable, but the relationship manager made good money. Similarly, new business development officers were paid on new loans, many of which ended up being bad bets for the bank. Management should ensure each sales person carries a goal that covers a portion of the company’s revenue or margin objectives. Commission-only plans, based purely on volume, are appropriate in some instances. But too often we see this disconnect between company objectives and sales rep pay, where goal-based plans at the rep level would have closed the gap.
What’s the best way to align sales compensation with company profitability?
Start by understanding how each sales role impacts revenue or margin. Establish individual goals based on these measures. For example, if a business development rep has considerable influence over revenue volume in an assigned territory, base the goal on revenue volume and the forecast of growth for the territory. Setting the goal on measures that do not impact revenue or margin, or financial measures over which the rep has little influence, won’t help the bottom line. Similarly, setting the goal too high, or providing only limited variable compensation opportunity, won’t sufficiently motivate the rep.
Does sales turnover impact profitability?
Some critical client-facing employee groups still churn at an alarming rate, which in turn creates customer churn. Low pay often results in poor morale and disengaged staff; we know from our research that profitable revenue growth is a function of having engaged and skilled staff. Develop and maintain an effective communication strategy that reinforces the alignment of business change with changes in customer preferences; offer junior-level employees career development and training to foster a longer-term perspective. Also, calculate the cost of lost customers and review your sales compensation levels to make certain it’s adequate for your exposure. It can be very expensive if a sales person leaves, taking a customer with him.
SCOTT BARTON is a Senior Consultant in the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Reach him at (415) 733-4263 or email@example.com.
Education: Bachelor’s degree in physics and chemistry from Dartmouth College; master’s degree and Ph.D. in electrical engineering from Stanford University
What is the greatest business lesson you’ve learned?
Always strive to bring value to the marketplace, and you exist as a company only to serve your customers. If you want to think of a company that failed to do this, think Xerox.
What is the greatest business challenge you’ve faced, and how did you overcome it?
I’ve faced two crises, and they were both of equal magnitude. The first was in 1992, which was the first time the company had a revenue downturn resulting in layoffs, and the second crisis was the dot-com crash, and we just recovered from that this year. The first was a crisis really of our own making, and I learned that you must always maintain your identify in the market and your purpose in order to succeed. During the second crisis, we knew who we were, but we were impacted by the country’s financial crisis. We survived by reinventing ourselves, and I’ve learned to never let the company become a one-trick pony.
Whom have you admired most in business and why?
I think out of everyone, I’ve admired Jack Welch the most because he inherited a sick giant and restored it to a high standard of performance.
Accolades for T.J. Rodgers and Cypress have included:
- Encore Award from Stanford University Business School as entrepreneurial company of the year in 1988
- Entrepreneur of the Year award from Ernst & Young in 1991
- CEO of the year in 1996 as named by Financial World Magazine
- Inducted into the Silicon Valley Engineering Council Hall of Fame in 2006?’
Health care cost increases are rising at twice the rate of inflation for many companies, but not all. Watson Wyatt’s 13th Annual National Business Group on Health Study regarding employer-sponsored health care benefit programs reveals that the median two-year health care cost increase (for 2007 and expected for 2008) for all 453 surveyed employers in 2007 is 6.2 percent. While the poorest performing companies have a cost increase of 10 percent among the survey’s participants, the best performing companies experienced a two-year median cost increase of only 1 percent. What’s their secret? Consumer-directed health plans (CDHP) and programs that encourage employees to take control of their health.
“Employers can sustain a low cost increase trend by combining programs such as CDHPs with effective employee communication and appropriate financial incentives,” says Moji Saavedra, consultant for the Group and Health Care Practice at Watson Wyatt Worldwide. “Our research definitely shows that skeptics who are standing by on the sidelines and not adopting these strategies are missing out on significant cost savings.”
Smart Business spoke with Saavedra about how companies can benefit by adopting a consumer-oriented health care model.
What are other key findings from the survey?
What makes the survey results so significant is that the data continue to reinforce the findings from prior studies and the results are pretty compelling in terms of documented cost increase stabilization. The information shows that both CDHP adoption and enrollment rates are increasing; 47 percent of companies will offer a CDHP in 2008, which is up from 39 percent in 2007, and 42 percent of the companies offering a CDHP now have at least 20 percent of their employees enrolled in the plan. This trend is producing more stability in cost increases. In addition, the best performing companies are offering employees lower premiums for choosing CDHP plans, which is driving increased enrollment.
Why are CDHPs so effective?
A CDHP usually features a high deductible, such as $1,200 for employee-only coverage, along with a personal savings account that can be used to pay a portion of the medical expenses not covered by the plan. But, it’s not just the higher deductible that’s generating the cost increase control; the key is that the plans encourage employees to take responsibility for their own health and become better health care consumers by scrutinizing the treatment proposed by providers and making better informed choices. Many employers provide 100 percent coverage for preventive care before deductibles are met and go even further to offer financial incentives that encourage employees to proactively manage their health.
Are there compatible resources that drive CDHP effectiveness?
If employers want to realize the savings from a CDHP, it’s vital that they provide employees with the tools they need to be accountable for their own well-being. Offering a high deductible plan without the other components just isn’t as effective it’s like giving someone with no driving experience a car but no driving lessons.
Your first goal is to have employees maintain their health, and your second goal is to have those with chronic diseases manage their conditions. CDHP companies offer high-performance networks or tiered provider networks, based on price and quality, and online quality comparison tools that direct employees to high-quality providers. One of the interesting findings in this year’s survey was the increase in employers that offer on-site health centers, which help coordinate care and promote greater productivity.
The bow that ties up the consumer-directed package is effective communication. The best performing companies are clearly communicating goals, benefits, program information and educational resources to their employees through an ongoing communications program that uses multiple mediums.
Are financial incentives effective?
All incentives are effective, and they are a vital component to a results-driven consumer-oriented health care model. Consider offering incentives for smoking cessation and weight management programs or cholesterol reduction plans. The incentives can be customized to fit the culture of each company, so whether you structure the incentive as a contest or offer cash or gift cards for everyone who achieves his or her goal, there is data to show that they are all effective.
What else do you suggest?
Use data to document your return on investment. Certainly, you want to begin by measuring your internal rate of return as you migrate toward a consumer-oriented health model, but also consider benchmarking against other companies by sourcing information from data warehouses. You’ll be able to compare your company’s key metrics, such as CDHP employee adoption rates, and expose where your savings opportunities might lie. The data now exist to prove that consumers can effectively manage their own health care when given the right tools and incentives. So CEOs should pay attention to the results because this might just be the long awaited health care cost management tool they’ve been seeking.
MOJI SAAVEDRA is a consultant for the Group and Health Care Practice at Watson Wyatt Worldwide, San Francisco. Reach her at (415) 733-4210 or firstname.lastname@example.org.
While audit and tax work are clearly the most recognizable services provided in the public accounting profession, CPA firms provide many more specialty services. In fact, a CPA should be a business’s most trusted adviser, according to Maureen Lucey Mihelich, a partner in the Consulting Group at Burr Pilger Mayer.
“Every business, no matter its size, needs the expertise normally provided by a full-fledged accounting and finance group,” she says. “The problem for many companies is that they don’t need all these skills on a full-time basis. What many companies don’t realize is that they have the option of bringing in an accounting team or CFO on a temporary basis.”
Client accounting services encompass many service areas, including budgeting, forecasting and cash flow management services to help businesses benchmark their progress. They can aid in expansion or even restructure plans. A qualified provider can research, select and implement accounting or record-keeping systems for everything from general ledgers to inventory management. Many CPA firms also offer a virtual accounting department to tackle tasks from financial and management reporting to meeting regulatory compliance requirements.
“The inability to obtain and utilize timely financial and operational data could hinder a growing company’s ability to react to changes in its industry.”
Smart Business spoke to Maureen Lucey Mihelich about how businesses can benefit from the many skill sets a CPA can offer.
In what types of industries are your clients?
My clients run the gamut from professional service firms to businesses in the manufacturing and hospitality industries. I find that, though these business owners and operators are experts in their specialty area or industry, they lack the critical eye of a financial expert to meet the financial management requirements of their growing business.
What do management advisory services entail?
Every type of business needs financial services expertise, but how much varies from business to business. If you have a business with 100 employees, it is not likely there will be a 10-person accounting department. You may only need a controller or CFO a few days a month, or you might need a team of people at the end of the year for peak projects, such as preparing for a year-end audit.
Using your CPA firm to provide these client accounting and/or management advisory services can fill these needs without hiring a team of employees. A CPA can be utilized to assist a business owner with major decisions, such as expanding a business or offering a new product line. We often assist clients in determining important financing options. For example, should the existing owners make additional investments in their business or seek funding via bank financing or outside investors?
In some cases, the challenge is how to assist a client when the business isn’t succeeding. What does it need to consider to restructure or, perhaps, change focus? The goal of client accounting and management advisory services is to assist clients by helping them run their business more efficiently and effectively. Sometimes, the best resource a CPA can provide is to play the role of devil’s advocate or to be that fresh set of eyes that looks at their situation from an objective, long-term point of view.
What other services can a CPA offer?
By providing client accounting services, a CPA can outsource the entire accounting and finance team for a client in a consistent and cost-effective manner. Family Office Services, also provided by many CPA firms, provide similar financial record-keeping and investment management services for individuals and families.
The beauty of looking to your CPA to provide these services is that you can hire only what you need, when you need it. Many clients already have a certain level of accounting personnel and use their CPA firm to fill in the pieces they don’t have. Other clients count on their CPA firm to provide recurring assistance just for specialty projects, such as quarterly reporting to their venture partners or other investors. When the business grows to the right level, they can then bring in full-time accounting and finance employees to meet the next phase of their business.
What should I look for when hiring an expert to perform client accounting services?
When meeting with a firm, have the CPA suggest some possible plans of action for your situation. The right CPA firm is going to know your industry and its challenges and opportunities. It will be able to help you establish the best practices needed to operate efficiently within that industry. Your CPA firm should assist you to see what lies ahead for you as your business expands and position you to be ready to meet that growth.
So use your accounting dollars wisely, hire the right level of internal staff to meet your current business requirements, and then bring in your CPA firm to provide periodic additional expertise during the times of your business year that make the most sense.
MAUREEN LUCEY MIHELICH is a partner in the Consulting Group at Burr Pilger Mayer. Reach her at email@example.com or (415) 421-5757.
Focusing his energy on turning the company around, he made a list of core priorities centered on two-way communication and transparency, letting his 600-plus employees know where the company was going and why changes had to be made. In return for that honesty, they helped him pinpoint problems and create a greater focus on personalized employee incentives. As a result, Saba posted fiscal 2007 revenue of nearly $100 million, up from $71 million in fiscal 2006.
Smart Business spoke with Yazdani about how transparency ignites your staff and why empathy is job No. 1 for a new generation of leaders.
Maintain organizational transparency.
I fundamentally believe that everyone needs to understand the challenges you are facing, and they need to have complete transparency of what the leaders in the company are thinking all the time and what the priorities are.
A leader needs to have a clear sense of transparency in the organization. There needs to be a sense of integrity in a place people work. People have to have a strong sense that there is a great deal of integrity in their leaders because that’s the people that they work for.
Transparency creates a level of integrity where people get engaged better. Whether it’s easy or hard, whether it’s challenging or if there are opportunities, they will be more engaged. An engaged employee base deals in significantly higher quality work.
You have to be enthusiastic; you have to have that energy and enthusiasm. Transparency automatically leads to a level of enthusiasm. I get a lot of energy by having a transparent relationship with my employees and our community here because when they trust you, you learn from them and get an opportunity to share that energy with them.
Take the time to be empathetic.
Empathy is the No. 1 skill a leader should have. For the new generation of leaders, empathy is a skill set we need more than ever in leadership and that’s so we listen and learn.
It’s extremely key to try to understand where people are coming from, and that yields a level of humility. The days of the celebrity leaders are numbered those things don’t have the kind of appeal they used to have; that’s why I don’t believe in leaders in corner offices.
Create a personal connection with your staff. As leaders, we have a tendency to know it all, and it’s amazing the wealth of information that comes from people that are closer to the problem.
Creating an environment where there is a forum, where leaders can listen, that’s where your management system really enables. We have a very stringent review process where we review our business, and everyone gets to hear everyone else. Through that transparent environment, we can listen and learn by reviewing the details, and there comes from that a lot of good data about the core issues at hand.
I report back to our employee base every 90 days. I get in front of them, and they get to ask me any questions they want. ...
... It’s my job at these key events to get in front of the employees and make myself available. It really comes down to personal connection. I want to increase the opportunity to have that personal connection and get an opportunity to learn from them. I learn from employees by just being with them and hearing about their observations and they’re learning from the customers in the marketplace. Relationship building is at the core of it, and personally following through on that creates a training opportunity for both of us.
Tie performance to personalized incentives. There is an approach that we have that is essentially a rating of the performance that yields incentive pay.
The core benefits themselves are crucial, but we want to be able to offer even more benefits to high-performing employees, so the top 50 percent of our company gets acknowledged quite a bit not just through the management assessment process, but they also get acknowledged with an employee reward program. Employees nominate other employees, we announce that on a quarterly basis and that leads to elevating people that, at times, you don’t necessarily see, people who go above and beyond in helping other people.
I get to present it to the employees, and we show all the nominees and color why the nominee is up there. It’s really a community-based ranking, and there is a gift that we give them, and they really enjoy it.
Focus on core changes. When you are in a turnaround situation, there is a tendency to try to do too many things. You have to pick up two or three strategic initiatives and be consistently focusing on those things and stay on the message to make sure people understand the priorities and the importance of them.
The top priority for us was transparency. It goes back to very basic things: A business has to be profitable; [it] has to be focused on a few categories that you want to excel at. Leadership is always a challenge, so make sure that leaders are always engaged and keeping a consistent culture for those supporting the turnaround.
HOW TO REACH: Saba Software Inc., (650) 581-2500 or www.saba.com
Born: Mt. Vernon, N.Y.
Education: Bachelor’s degree, finance and accounting, Fordham University; he also is a CPA.
What is the greatest business challenge you have faced, and how did you overcome it?
That would have to be my current position as CEO of Ariba. What made it a challenge was the combination of so many things that needed to be addressed all at once, such as the need to reposition the organization, the need to right size and the need for a new product line. If there’s been one thing I’ve learned from this, it’s that in order to be successful as a CEO, you have to be realistic about the business. That means you have to accept the realities of what you need to change and deal with them properly.
Whom have you admired most in business and why?
That would have to be Jerry York who was the CFO that Lou Gerstner hired to turn IBM around in 1992. What I know I learned from him because he expected a CFO to act as chief operating officer, overseeing everything in the organization.
What is the greatest business lesson you have learned?
CEOs should have a realistic view. When times are challenging, management can be criticized for being too slow to act, and you just have to accept it for what it is. Only later, with the benefit of hindsight, will you know if you’ve been slow to act or to deal with the problems.
Ariba Inc. trades on the NASDAQ under the symbol ARBA.
Just once has Maryles Casto hired someone on her own and she’ll never do it again. Casto, founder, chairman and CEO of Casto Travel Inc., has long trusted others in her 200-employee, full-service travel management firm to help her hire. But when she found a young woman who embodied the many things she thought she wanted in an employee a graduate degree and a shining resume Casto ignored those who said she wouldn’t fit in and hired her anyway. After just six months, she realized she couldn’t ignore how poorly the woman blended in with the culture and had to make a change. Lessons like that have helped Casto learn that success is a result of the culture at her travel company, which had 2007 revenue of about $150 million, and that comes directly from who she hires.
Smart Business spoke with Casto about why you have to hire first and then grow, and how consistent kindness keeps employees happy.
Take the time to hire right. The most important thing you can do for your company is bring in the right team, and you have to make the time. If I’m interviewing someone, I won’t just slot 10 minutes, I will slot probably an hour and a half.
I walk them around, I introduce them to everybody, and I’m watching how they interact. You’re watching them, and they’re also watching you.
I want them to interview me. I want them to know that this is going to be their home and take the time to get to know the company. It takes awhile, but how much you put in is what you get out of it.
You need to feel that you belong in the company, and it takes a little while for both parties to really feel that blend. Very rarely have we made a mistake. Sometimes it will take two months before we will hire somebody, but we make sure that we interview everybody, and they come back a few times.
One person told me, ‘I’ve never been interviewed this way,’ and I said, ‘Well, you’re getting to interview us, as well.’
If you can’t take the time to interview the person that is joining your firm and is going to be part of the future, then you’re not worth working for.
Slow growth to meet quality. I was here when the valley was just exploding and had to make a very quick choice that I wanted to be part of the explosion. I had a very small window, so I started hiring people just to fill bodies because of the growth.
That was a big mistake because I couldn’t service the explosive growth and finally had to say, ‘No more business.’ I had to stop growing until I could refocus and get the right people because I wasn’t taking the time and effort in interviewing and hiring, I was just hiring.
I learned I can’t do that not if what I say is that quality is important, and we’re the best at this and that. I learned that if you say you are going to do something the right way, stick with it.
Be consistently kind. The most important thing in leadership is ethics and kindness. You have to be kind to everybody and communicate with them. It’s not when we’re doing well, it’s when something happens to employees that we really show we are a different company by taking care of them and that builds loyalty.
You show your kindness in how you deal with people daily, and people respect that and respond to it. It’s not one day you are this and the other day you are not; that confuses people, and it’s very hard on them.
But if you consistently make your decisions with compassion, people understand that. They trust that you’ll guide this company, and that this company is the most important thing, and then you get them to buy in.
Make your word count. If you have to choose between integrity and the easiest way to do something, you have to really look at it and say, ‘How should we be doing this based on who we are?’
My father used to always say, ‘Your word is your honor,’ and I really believe that. If I give my word, that’s the way it should be, and you can’t do anything otherwise. You know what’s right and what’s wrong, and you have to do what you feel is right.
If you take pride in what your name is, you take pride in what you do. That should be your guideline.
Let employees leave with dignity. I’ve had to let people go, and I make sure I personally do it because it has to be done in a way that takes into consideration who they are and what they’ve done for the company. I make them understand that it’s not about them, it had to be done.
Help them in any other way you can in trying to secure another job or giving them a good recommendation. Don’t just cut them off because they left.
After they’ve gone, I’ve called and said, ‘How are you doing, and what can I do to help you?’ I’ve had people who left and who are still really good friends and have called us and come back and visit.
HOW TO REACH: Casto Travel Inc., (800) 832-3445 or www.casto.com
If it’s the day before a three-day weekend, the employees of Kelmoore Investment Co. Inc. will be getting out of work early. Chairman Ralph Kelmon allows them to leave early to show that he cares about them and that he realizes how important they are to the company.
“If they are going someplace, they can get a head start and they can not be in the thick of traffic,” Kelmon says.
Kelmon says his company, a licensed general securities broker/dealer with $250 million in assets under management, does everything it can to accommodate a family-comes-first mentality.
Smart Business spoke with Kelmon about how a family atmosphere helps Kelmoore succeed and how he deals with bad decisions.
Q. How has the family atmosphere benefited the company?
We’re small, so it would be nice if all work were linear. There are times I need something extra, so they will all pull together to make sure we get projects that we promised out on time.
They will stay extra and do extra things because I’ve made an investment in extra, if you will. It all comes back. Basically, because I’ve made a heartfelt gesture toward them, they make heartfelt gestures toward me as well as providing the work they can. There is an aura of they actually want to please me, and they want to please the company.
Q. How do you handle bad decisions?
As soon as I think we’re wrong, I open up discussions of what we ought to do. ‘What do you think? If this isn’t working, what do we need to do?’ Get contributions from people. Basically, tell them that the blame goes to me.
Leadership means you take the blame. Leadership also means that when there is credit, the credit goes to everyone.
Human nature is that people are afraid that the risk/rewards, in some businesses I have been in, in the past, if you were to blame, you certainly would not be anxious to contribute again.
For us, I need my whole 20-cylinder engine pumping and not being afraid that when I walk down there, I’m going to go, ‘Well, you missed this.’ If anyone missed it, I missed it. If it is working well, then we were very successful in doing what we do.
Q. How do you communicate your message?
I manage by walking around. I do have an office, but it is not the kind of executive office where I call people in. I actually go to each one of their stations, talk to them and ask them how they are doing.
I will ask salespeople what the messages on the phones are. I will ask the performance people, ‘Are you having a good day; what do the numbers look like?’ Basically, I try to lead by saying, ‘Is there anything I can do to help you? Is there anything I can do to make your job easier?’ If, in fact, the best thing I can do is get out of your way, then I will get out of your way.
Q. Why is walking around more productive than sitting in your office?
They can see in my voice and in my heart that I want this to be a successful operation, and I want the success not only for me but for them, and that the big effort is a ‘we’ effort. We can make it happen I can’t make it happen by myself and how important they are to me.
They have direct access to me, so whatever they’d like to talk about, it’s not going to be they have to wait for their yearly review or whatever to talk. I look to see if people have something bothering them. I try to keep as few secrets as possible, so they are used to dealing with confidential information what I am trying to accomplish and what the goals are and how we are doing on them, I think they ought to know that daily if I could do that.
Q. Has being open been a drawback at your company?
If you try to keep secrets, there’s a human nature around it where people want to know stuff. Part of leading people is to keep them as productive as possible. There is no productivity in the currency known as gossip. There is no allowing people to think that they have some kind of edge on information.
Do I keep what I pay people a secret? Yes, I do that. That is a privacy deal between the company and them. Other than that, what we are trying to accomplish or what is facing us, most good, intelligent employees kind of know what is going on.
The more you keep them in the know, the more time they can be productive and keep the machine going.
HOW TO REACH: Kelmoore Investment Co. Inc., (877) 285-1026 or www.kelmoore.com
Burdened by weaknesses in the real estate sector, the economic outlook for the first half of 2008 is sluggish.
The housing sector, however, is expected to rebound later in the year, providing a boost to the economy as a whole.
One of the factors behind the recent real estate slump was the widespread availability of subprime mortgages. These types of loans will be harder and harder to come by in the future, says Comerica’s chief economist Dana Johnson.
“We’re not going to go back to a sub-prime mortgage market that was as wide open and that allowed a lot of reckless behavior on the part of both borrowers and lenders,” he explains. “There is going to be more of a continuing restraint on the purchases of homes.”
Smart Business spoke with Johnson about his economic outlook for 2008, the impact of the subprime mortgage industry and the overall strength of California’s economy.
What is your economic forecast for 2008?
I’m expecting the economy to grow sluggishly this winter and then accelerate over the course of 2008. I’m projecting growth over this winter the fourth quarter of 2007 and the first quarter of 2008 to be around 1.5 percent at an annual rate and then accelerate by the end of the year to about a 2.5 percent rate of growth.
The credit crunch has already extended and intensified the recession in housing, and housing is going to be a big drag this winter. All of the turmoil in the credit market will also be a constraint on the economy. For these reasons I think we’re going to have a pretty sluggish pace of growth for a while.
The drag from housing, however, will slow, and we’ll find a bottom sometime in the spring or early summer, and then things will level off or perhaps gradually improve a bit.
How will the meltdown of the subprime mortgage industry affect the economy?
It’s had a very clear and direct impact already in reducing the ability for people to buy houses, which has intensified the pullback in homebuilding and accelerated the decline in home prices. The key issue beyond that is whether the decline in home prices is going to cause consumers to spend more cautiously. So far, there is not much evidence of a big spillover to consumer spending. With consumer spending holding up OK, it looks like the spillover effect has been limited, and this is one of the reasons that I think the overall economy is going to avoid recession.
Foreclosure rates have been especially high in California. Do you believe the housing market will rebound in the upcoming year?
No, I don’t. House prices in California have begun to fall but are still far higher relative to income than anywhere else in the country. It looks to me like there are a lot more adjustments that have to be made in the price of houses in California relative to incomes in California relative to houses elsewhere. California has relied more than any other state on the subprime mortgage market, which is not going to fully recover for years. The adjustments in home sales and prices are going to continue to be very difficult in California all through 2008. We’re talking multiyear adjustments where house prices will not hold up as well in California as they do in other states.
In what ways does the California economy differ from other regions of the country?
The California economy is in many ways a microcosm of the U.S. economy. The distribution of jobs by industry in California looks very similar to the national averages in many respects. There are two areas, however, that look different: It has a leading position in various knowledge-based sectors as well as the life sciences industry.
How important is the health of California’s economy to the United States’ as a whole?
California’s economy makes up approximately one-eighth of the overall U.S. economy, so its health is vital. The California economy is intimately integrated into the rest of the economy; we don’t tend to see the sharp regional differences that we once had. The U.S. economy’s performance is going to look like California’s, and California’s performance will look like that of the U.S. California doesn’t move in lockstep with the U.S. economy but, given its size, its diversity and the fact that the distribution of jobs is so similar to the distribution of jobs by industry in the rest of the economy, what happens in California tends to happen nationally and vice versa.
DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 828-5970 or through the bank’s Web site, www.comerica.com.