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Montreal, 13 September 2012

The suggestion box is the first response organisations put in place to stimulate innovation within their walls.  It is simple, easy to organize, democratic, cheap and unthreatening to middle managers.  It requires little commitment and literally no change in processes or practices.  In other words, it is safe, and as a matter of fact, who knows what gold nugget we might find inside the box!  There is a widespread belief that creativity, plucking ideas from employees, leads directly to innovation.  Only sometimes, at best.

More often than not the suggestion box looks a lot more like a box of crackerjacks, with lots of small puffy ideas.  The suggestion box traditionally yields a high volume of ideas of small or modest impact.   These mini and small C ideas (C for Creativity) fly in all kinds of directions, as employees look around their immediate work space to tap on what gets on their nerves or what stands as an immediate problem.  These ideas are rarely connected to the customers.

And why would the employees really care?  Most office employees have minimal clues about their company strategy, the competitive landscape or the market priorities.  Not surprisingly they would not even know what to look for and where!  Furthermore, it is not sure for most of them that carrying a good idea forward, is just the right thing to do.  Like a running back on the football field, the employee is likely to face headwind, resistance tackles, and political vetoes.  Fear of an adverse reaction from the boss is an understatement in many organisations.  It all seems a lot better and safer to concentrate on where the next budget cuts will fall upon!

Yet once in a while there is indeed a toy gift in the crackerjack box.  Good enough, there are always a few low hanging fruits ready for the picking.  It shows that at least some employees are listening to cues. Sometimes the suggestion box can be scaled up into a corporate challenge or innovation program.  Brainstorming sessions are added.  New media tools are implemented.  Much good comes out of the effort, such as internal improvements, cost savings, employee participation and the impression of finally being consulted.  But when the focus centers mainly on the suggestion box, most companies feel disappointed.  Because senior management actually hopes to encounter the gold nuggets and magic bullets in the suggestion box.  Yet the really big C ideas that lead to projects with big impact don’t fall off trees.  They are not either in the crackerjack boxes.  No, they usually come from hard, constant and conscious work to search for the best ideas.  In other words, sweat is required.

The really good ideas come from passionate observers with deep knowledge of the industry, markets or cutting edge technology.  Like successful fly fishermen, they pick up on signals, clues and new trends that others don’t see.  They get the first hunch about what is changing out there.  They catch the first whiff of a new opportunity.  Smart entrepreneurs lead this category.  They are on the lookout for their next vision.

Others, and they are few, are particularly astute at keeping conversations with their customers.  Most companies see themselves as client focused, but by-and-large, they mostly mean they are in regular contact with their customers:  Exchanging information on order processing, transaction status,, billing, daily chit-chat, etc.  Real conversation requires time and observation in the field, time for interviews and special conversations where emerging needs are tapped in, habits detected, hidden discontent revealed, ill-defined desires spotted, etc.  It is essentially from those conversations that critical patterns are detected.  These are the gold nuggets, signals of market potential.   They don’t usually sit at the bottom of the suggestion box.

There are not many gold diggers to be found in companies.  Gold diggers need free time and an inherent passion for hunting the nuggets. They excel in open forums, in chats around coffee tables and in wanderings across odd networks.  Once they get a good idea in their hands, they know the idea has to bounce off other viewpoints and criticism.  They know their idea will grow through collisions with other ideas.  They will find missing bits around conversations in meeting rooms.  They will find encouragement and advice when the idea is tested with potential customers.  They may at times benefit from a dip into crowd sourcing, when a tricky problem lingers. Possibly years of incubation may be required to turn a good idea into an attractive proposal or even a commercial object.

Crackerjack boxes are fun.  But the real innovation work is done with customers.  There is no shortcut.


André Du Sault, MBA (LBS), MPA (Harvard)

DS&H teaches innovation as a new competence for leaders.

Forthcoming:  Innovation topic (2)  The transformation of good ideas

Posted in Innovation & organisation, Management ideas.

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FIELD TRIP : ALBERTA’S DRAGONFLIES – the continuous rise of a provincial powerhouse

Montreal, 06 August 2012

Dragonflies are big in Alberta.  They are big enough to challenge your windshield on the TransCanada Highway at high speed.  They come straight at you and manage to veer off at the last second.  Amazingly none smashed in.  They are powerful enough to rule the air in their own decided way.  Just then, you know you are in a robust country.

Large and robust pick-up trucks also rule the roads.  They are increasingly driven by young workers surfing the oil boom.  Alberta pays the highest weekly wages in Canada and has the lowest unemployment rate.  It is on a roll:  Production of crude oil is expected to double to 6 million barrels a day by 2030.

It is also a boon for the rest of Canada.  More than 10,000 workers have come from Newfoundland in the past two years only, far exceeding the 6,000 remaining fishermen in the province.  Equalization payments from Alberta to Ottawa were close to $15 billion last year, of which approximately $7 billion ended in the coffers of Quebec.  It is estimated that about 35,000 new jobs were created by the oil industry  in Alberta.  That is quite a relief for the Eastern provinces struggling with growing health care costs, shaky pension funds, stubborn entitlement programs, budget gimmicks and tepid growth prospects.

Now the dragonflies are moving to British Columbia.  Mining and oil activities have picked up in a province that saw its forest industry dwindle in the last 10 years:  Over 70 lumber mills closed down, shedding some 30,000 forestry jobs.  China’s demand has recently perked up the industry a bit, but then 99% of accessible old growth forest has already fallen to the chainsaws.  Port Alberni, which gave birth to the BC lumber industry just before Victoria was founded 150 years ago, is now a pale self image.  It is struggling.

The stakes are now moving on to the oil pipelines in the province.  The TransMountain pipeline, currently linking Edmonton to Burnaby, will see investments of $4.1 billion in the next few years to increase capacity from 300,000 barrels a day to 750,000 barrels a day.  This means one super oil tanker a day will pass through the harbour of Vancouver, as opposed to merely one a week today.  Local beachgoers are getting a little nervous about this.

On the table of negotiation is the projected Gateway pipeline from Edmonton to Prince Rupert.  This is the next big oil project in the province   Fights about the spoils have recently made the headlines news.  Yet there is a lot of economic momentum behind this project and Greens might just have to compromise and bow to the combined political forces of Alberta and Ottawa.  The rise of Alberta as a major international oil player hinges on those pipelines as they would not only consolidate significantly higher volumes, but also fetch higher international prices!

In the 1970s the rest of Canada did not need Alberta’s might.  This time around, the deck of cards is in their hands.   Oil is taken seriously there: The Oil Sands Review lies next to The Economist and Times magazines in most local newsstands.  The Canadian Petroleum Hall of Fame, created in 1997, is as busy as it could be.

Dragonflies will continue to rule.


André Du Sault, MBA (LBS), MPA (Harvard)

PS: sources  from  the Globe and Mail, Vancouver Sun, BC Business magazine.

Posted in CFO & treasury, Country visits, Strategy & globalisation, World economy.

From cold war to cyber war to technology vacuuming: When elite hackers are having a field day

Montreal, 30 June 2012

When the HIV virus spread in the 1980s, the Red Cross remained rather blind to the threat that was about to upset its established model of collecting and distributing blood samples.    We know the story:  The inability of the organisation to test blood for the virus over several years inevitably led to a widespread scandal of contamination, deaths and legal fines in 2005.  It is rather easy today to fault the governance of the organisation and the inertia of its practices.  But how did it look to directors and managers when the new threat visibly arose and the established system in place could not cope with it?

Interestingly there is another example in the making and the same governance lessons and challenges apply today.  It is not affecting the health of individuals but rather the health of corporations.  And it has stealthily built up in the last 10 years:  cyber hacking that is vacuuming our technology repositories.

Ever since the publication of the book ‘Cyber Wars by Richard Clarke in 2010, articles have multiplied in the Medias about the proliferation of cyber threats: a collection of frauds, thefts, disruptions, malwares, etc.  The Financial Times published last June 1st a special survey on cyber security.  The Montreal conference recently presented a panel of experts on the issue.  The main argument is simple enough:  specialized military units from various nations (USA, China, Russia, North Korea…) have been escalating means and mechanisms of cyber attacks and cyber defenses.  What is now scary is the very large gap existing between these cyber warriors and elite hackers and the IT security capabilities prevailing in most private companies.  Specialist hackers get in and out, with little traceability, if at all.  Not surprisingly foreign agents have been intruding in our private repositories of technology and intellectual property for years.

Most technology companies, research centers, and high tech start-ups are not prepared to adequately defend their technology treasures from the buccaneers, big or small, government linked or not.  Yet the facts are there about the existing threats and we are still turning a blind eye: security breaches are rarely acknowledged and even reported.  Consider the case of Nortel, which suffered a serious and major hacking incident (IP theft) about 10 years before it collapsed.  Not only was the incident not publicly reported, but it then appeared that Nortel did not fix the problem in any meaningful way thereafter.

We are all counting on some technology edge to face competition from China and other challenging nations.  Yet the technology leaps that China has achieved in the past 10 years, has exceeded the most optimistic predictions.  Yes there are plenty of rightful transfers of technology, but security experts suspect that a great deal of unlawful transfers is taking place electronically, under our nose.  We should bear forth an awkward question:  Are we currently feeding our technology edge to our competitors at practically no cost, thereby foregoing our future options on economic growth?  Some informal indicators are disturbing to hear from experts.

Today the virus is there.  We can only hope that directors and governors of technology companies are putting the necessary safeguards in place even if this means some minor budget reallocation and changes in internal practices?   On the three main counts underpinning risk assessment (threat, vulnerability and consequences), cyber hacking of technology scores high. The true cost of letting critical technology slip into foreign hands does not show on today’s balance sheets but will tax our future.

Elite hackers are having a field day.  If you are still unsure, read the book.

André Du Sault

MBA (LBS), MPA (Harvard)


Posted in Governance, Innovation & organisation, Management ideas, Strategy & globalisation.

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Montreal, 01 June 2012

Finance directors are so task loaded that they may overlook practices that are costing them dearly, in the short run, and career wise.  Our coaching and consulting experience has led us to identify 8 areas which all finance directors must inevitably address in order to escape the straight jacket of overheads.  You either do them right, or wrong.  None is individually critical, but bunched together they make a difference over time.   In any event, they are food for thought, and in some instances, a call for change before it is too late.


Career planning is essential, and so is a vision about where you want to be in 5 or 10 years.  Having a vision clarifies the roadmap to acquire the necessary toolset and skills.   A lack of vision makes it difficult to recognize whether a new proposal/offer is a good opportunity or a pitfall, whether it makes sense or not in terms of career progression.   All too often finance professionals make a bad jump for the wrong reason, in the wrong place, because of opportunism as opposed to smart planning.


All CEOs have expectations beyond the production of financial statements.  If it is not crystal clear what is your expected value added role to create a wow performance, you are likely to be confined to a shrinking overhead function.  This is the first stage to set yourself up for failure as a fledging finance director.  Getting rid of the ‘overhead’ tag takes heroic effort.  Prepare and organize for higher tasks.


An average team makes you indispensable, to them.   Fine, but this is unlikely to last.   You might not be indispensable to your boss if you can’t deliver. If you find yourself unable to delegate, you are sure to limit your performance and remain stuck in the ‘overhead’ function:  long hours, overtime, unclear procedures and manifest frustrations.   As the saying goes, you are just as good as your subordinates.  Make sure you build a high performance team, train it, and reward it.


You like your office and your staff.  You hardly spend time on the shop floor or in marketing meetings.  And you might actually not have met a customer for years?!  If this is the case, you are missing out on a lot of things that would help you out craft a strategic role for the company:  business intelligence, in-depth company knowledge, opportunities to develop interpersonal skills, catching out problems early,  etc.   It might be time to spend a day with a salesman and position yourself to win the special projects.  Obviously you need to delegate to venture out of your office.


Your company is growing and is thinking about implementing an ERP?  A dreadful word when the average success rate in ERP implementation is way below 50%.  So far, simple financial accounting systems and multiple excel tables have served you well.  You manage to get the financial statements out, under a reasonable delay.  In today’s world, accounting and reporting are meant to be automated and cleared early after closing.  Actually, a jump to the ERP world is just the spring board for you to create the business intelligence the company needs.  It will fall into your hands first.   Make the system work for you and get out of the “overhead” prison.   If you are unsure about managing an ERP project, jump to point 8.


You actually earn your first wings as Finance Director when you can produce a decent financing strategy for the company.   There can’t be any such strategy without a good cash flow forecast.  And you won’t convince the board, or your banker without one.   Mastery of cash flow puts you in charge of investment and asset allocation.  But I wish you good luck if a financial crisis hits you in the face, unprepared.


This was all right 10 years ago.  The rise of China has shuffled the economic models.  Countries are stretched to make the necessary adjustments.  We are now in a continuous period of turbulence and economic instability.  Financial risks abound and the board and your CEO will rely upon you to spot them ahead.  When a crisis hits the financial markets, you ought to be ready in terms of interest rates, exchange rates, impacts on investments, changes in competitiveness, etc.  Under financial clouds, you will soon find out that availability trumps pricing.  Macroeconomic reading should be a daily task.


You have been doing rather well lately and you are given responsibility for an important special project.  Your reputation and credibility is on the line.  You do well, and you move up.  You screw up, and you will remain in your office.   Now you are also most likely a tight budget manager and you know how to control your expenses.  And sure enough you don’t buy yourself the flashlight that could make the difference between success and failure.  The flashlight is the consultant with the expertise that quickly tells you whether you are on track or not.  The flashlight is not expensive.  The lack of it, is. Learn to work and use consultants.

Experienced CFOs know that these eight practices do make a difference.  Escaping the overhead straitjacket requires that you master the tools and mindset to put you on the fast track to CFO status.  If you recognized those eight points, you are on the right track.  If you would like to work on some of them, give us a call.  If this article really surprised you, you might read it again. 

André Du Sault

MBA (LBS), MPA (Harvard)

514 777-1538

ADS directs the CFO Leadership Program, aiming at building outstanding CFOs.  We  provide individual coaching and programs to improve the value added performance in F&A departments.

Posted in CFO & treasury, Management ideas.

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Montreal, 15 May 2012.

Spring is boarding highway 93 all the way to Boston.  Green shoots in shrubs and trees are blossoming under longer and warmer days.

And so it is in Boston:  Green shoots of recovery.

Retail is still slowly moving on Newbury St and Charles St, both upmarket neighbourhoods. A few closing shops are peppering alleys.  But compared to July 2010 (, restaurants and hotels are witnessing heavy traffic.  Lodging fares make you wonder if there is any trace of an economic downturn in the region.

Endowments at Harvard are picking up again and hiring for administrative positions is tentatively back on the agenda.  Executive courses are again fully subscribed, driven by marketing actions casting the net wider and farther afield.

Boston is well known for its medical and biotech cluster, along with a strong financial service sector.  What is less well known is what is paving road 128:  World class IT companies servicing international manufacturing clients.  Most manufacturing operations are today run with information systems, one way or the other.  That is what we find on Road 128 and investments and jobs are growing up there. This is a smart response to the new global reality in manufacturing.

All in all Boston is an ace in the pocket of the USA: A diversified economy in manufacturing and services, endowed with high quality R&D capabilities.  And on top of that, the city has rebuilt some critical infrastructures.  The Big Dig proved to be rather expensive to build 15 years ago, but then it allowed much new work to be done on the waterfront.  The Boston waterfront now scores an incredible 47 km! 

Book well in advance.

André Du Sault, MPA Harvard.

Posted in Country visits, Strategy & globalisation, World economy.

Europe’s slide widens the cracks in the liberal order

Montreal, 13 April 2012

We have quite taken for granted the liberal order since WW2, built on the foundations of open trade, freedom of seas, the rule of contract and protection of intellectual property and investments.  This post-war international order was tacitly shaped by the three main trading powers of USA, Europe and Japan.  Albeit with limits, the liberal order has provided for the industrialized nations a fair amount of stability and a good deal of prosperity.   Yet two pillars of that system, Japan and Europe, are now shaking, at a time when China appears to be more assertive in its own ways.

Consider Japan, a country that is stagnating under a cloudy outlook:  a slowish economy, a rapidly ageing population, and a string of unstable governments.  In 2002, the country was coming out of a long lost decade, only to fall into a decade of mounting rivalry from China and other grown up tigers like South Korea.  The former tech champions of Japan are not running the roost anymore.  It is not Sony but Samsung that is biting at the heels of Apple.   Alarmingly, GDP per capita has in recent years fallen off a peak.  The trends are ominous and the country is undergoing a bout of reflection on its position and policies in Asia, including allies.

It is Europe that is seriously wobbling under the current financial crisis.   Europe’s ailments are a worrisome bunch:  A volatile Euro, weak banking systems, high sovereign debts, austerity programs biting deeply and declining growth prospects.  The good news is that the Euro has at last stabilized, at least for a while.  In fact, the Euro has shown a remarkable degree of resilience in the face of tremendous pressures.  Other currencies would have collapsed under similar circumstances.  The bail-out funds and the sea of liquidity provided by the ECB have succeeded in building enough firewall around the Euro.  Just enough firewall to witness whether austerity programs will actually or not dig a bigger hole in the growth prospects of some nations.  Too much short term austerity might just slow down growth and compound deficits, a troublesome scenario.  Getting the right dose of austerity remains a tricky call for many European nations.

The country on top of the watching list is Spain, where general unemployment is close to 25%, and youth unemployment nears 50%.  This is reminiscent of past economic crises in Latin America.  Experience tells us that the social cost will be high.  The pack of austerity programs in Europe will test political and social tolerance.   We are in for several years of debates and experiments in Europe and little insight about how it will actually play out.  An excess of austerity will also cut into the people’s willingness to swallow pills of economic reforms.   Yet, reforms to boost productivity and competitiveness in order to pull up growth is just what the doctor is ordering, just as protectionist forces might find enough fertile ground in Europe to blossom.  This trap of austerity and low growth could come to test again the Euro.  In the meantime there is no question that Europe is losing clout and influence in Africa and Asia, while China sees Europe as a land of opportunity for cheap technology deals.

Luckily the natural resilience of America is again at play, notably in the stock exchanges, the showcase of the best companies.  But the overall recovery remains patchy across several economic sectors.  There is little doubt that the financial crisis has created lasting damage in municipal and state services such as education, transport and health.   Deleveraging will take its toll.  The damage is not really visible to observers outside America, but it will sap some of the traditional strengths of America and push the country into a period of mild ‘relative’ decline.   We should expect and desire a rebound in America before the end of this decade for the simple reason that America has been the sturdiest guardian of that liberal system.

The odd factor is now China.  Ever since Nixon went to China in 1972, the Americans have tried to influence China to transit from economic freedom to political freedom.  On the other hand, Deng Xiaoping, the kick-starter of economic reforms in 1978, advocated to conceal capabilities and bide time to end US  dominance in Asia.  No wonder mutual suspicions linger.  The WTO membership was meant to nod China towards the liberal system.  It has not really worked that way.  International trade has filled the coffers of China.  But the record on currency policies, intellectual property theft, and positions in international affairs point to a mixed record at best, towards the liberal system.  The political transition scheduled in China this fall will surely be scrutinized for any sign of a stronger hand by the nationalists, or any sign of a louder voice from reformists.  The stakes are not benign:  Either we move towards a period of relative stability and equilibrium, or else tensions will build up towards some clash of values.   Cracks in the liberal system will either be patched, or widen.

Andre Du Sault.

Posted in CFO & treasury, Governance, Strategy & globalisation, World economy.

Harper in China. Jean qui rit, Jean qui pleure.

Montréal, 15 février 2012

Post WW2, Canada was allowed to join the G7 alliance as a country with strategic reserves that should be kept out of the orbit of communist influence, and kept in as a close ally.   In a single stroke, Harper in China has just rewritten this equation.  Interestingly, there was little murmur in the international press.  The lack of response is a clear indication that the main theater of actions, actions deemed desirable or undesirable, is shifting to Asia.  This is where we will expect rumbles and grumbles about trade, military tension and political collisions to happen.  Surely, Obama will bear regrets about his energy strategy.

Western provinces have thus confirmed China as a buyer of their oil and mineral riches.  Economic, demographic and political fortunes keep rising in western Canada, while they shrink in the Eastern part.  This mirrors the joys and miseries of the winners and losers in this new economic world order:  Higher prices for ores, lower prices for wares.

To quite an extent, but without the unfolding drama, Ontario and Quebec are facing a similar stretch as in Europe:  A worrisome pile of debt and diminishing growth prospect.   This points to some trouble ahead:  The consumer has stretched to the point where governments might now find it easier to cut and squeeze than grow and create jobs.

The real political acts in Canada will therefore not play out at the federal level for a while.  The conservatives have energy on their side.   It is at the provincial level that the critical political debates will roll on:  Roll up the sleeves, or roll back the state.

Andre Du Sault

Posted in Country visits, Strategy & globalisation, World economy.

The year of the dragon begins. More fire on our butt.

27 January 2012

We know we will be stuck with a low growth environment of 1-2% for the major part of this decade.   As a result we can safely predict rounds and rounds of cost restructuring to protect earnings in the face of pricing pressure all around us.  To contain and reduce costs, business leaders will predictably play on a catalogue of measures:  accelerate the digitalization of business processes, increase investments in automation and robotics, discreetly incite the off shoring of white collar activities, further cut overhead and rationalize the sales force, again.   This will fill a fair amount of headlines in the business press for some years to come.

And this is not counting with the dragon puffing at our businesses.   China and other export driven economies have been literally stripping our businesses naked.  Today, price setting is increasingly dependent on the conditions in the Chinese market.   Production and technology are being sucked in China in exchange of market access of elusive mercantile value.  Emerging champions from Asia are taking wings overseas with their cost advantage and are putting margins under severe stress everywhere.   Management, R&D and engineering jobs are being filled in Mumbai or Shanghai with smart counterparts willing to work 50% more hours at a lower pay.   Few business models can claim to be unaffected by the rise of Asia.  That is the nature of the dragon, firing at us.

Our collective response, as we have written in the past, has been rather tepid, just about matching the pace of government programs.   Good, but not just good enough, given the tempo of changes in Asia.  Some executives have succeeded in cracking the Chinese market, or in establishing a footprint in Asia.  They deserve congratulations.   But, our experience suggests that a majority of executives have yet to set a single foot in Asia, nor have they figured out the impact on their work and career.  Many Canadian businessmen improvise on their first visit to Asia, hoping to extend their business offer the same way they have done in the past in Europe and America.   The reality is that Asia is littered with the bones of the unprepared, the unfortunate and the amateurs, from both small and big firms. 

Learning to do business in Asia, on Asian terms, is becoming part of a standard curriculum in business.  For the last five years, my colleague William Polushin and I have been teaching the topic at McGill University.  We keep abreast of major drivers in key Asian countries.  We ask students to study and present cases of emerging champions from Asia, and tell us about how they leverage their cost advantage into other competitive advantages to sustain their international strategy.  Year after year we get surprised by the growing capabilities of these champions.   Frankly it is astounding.  We talk about and invite expert speakers on how to have success in Asia, how to deal with a vastly different culture, to avoid typical negotiation mistakes, and how to conduct business on the ground.  We are now planning to take our teaching experience to the executive level later this year.

Industries, companies and individual careers are increasingly shaped by the continuous rise of Asia.  Most people below 45-50 will come to steer right into the eyes of the dragon.   It is just a matter of time.  While only a minority will actually conduct any business on the ground in Asia, most professional executives have growing personal stakes at play, like it or not.   It is time to hedge your bets.

André Du Sault

Posted in CFO & treasury, Governance, Strategy & globalisation.

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Happy New Year or Good Luck?

Montreal, 09 January 2012

We used to casually wish Happy New Year to friends and acquaintances as if the good times would keep rolling on.  Not anymore.   We are well established into a new economic cycle driven by technology and low costs.  Both are tremendous factors that feed the off shoring of jobs to Asia.  The rise of Asia was also the rise of Wal-Mart and dollar stores, to the delight of the middle classes.   But the rise of Asia is also bearing a constant pressure for cost restructurings in western companies, whether in the office or in the sales force.  Even some white collar jobs are insidiously being shifted to emerging markets through  the covergence of telecoms and IT.  Low growth will see to that.  For many professionals, good luck wishes will be more appropriate for the forthcoming years.  Good luck wishes mean we have to adapt to the new conditions before hell strikes. 

Thus happy new year to the mining sector, growth companies in high technology, and all those in governments.  Good luck to traditional manufacturing, which must combine global fluency and a predisposition to innovate.   They need the best managers but might not be able to attract them.  Good luck to those who have yet to set a single foot in China.  Good luck to owners if your niche is stagnating, and if you pay more attention to your boat.  Happy new year to youngsters, masters of the digital revolution.  Good luck to those still outside the social medias, at home and in the office.   Happy new year to employees in services that require close relationships, and face-to-face contacts.  Good luck if your services are impersonal.   Good luck if you are above 45 and have not renewed your executive skills on international strategy, innovation, managing teams and in reading people.  How to manage productivity AND innovation is now one of the biggest challenges for organisations.  On which side of the equation are you going to be?  Happy new year if you have a smart mentor, acting as a flash light for you.    Good luck if your bank or credit card company calls you.   If you are not sure, happy new year anyway. 

André Du Sault.

Posted in CFO & treasury.

CFO – 4th QUARTER: Europe, in danger of a spark lighting the tinder box


02 December 2011

The crisis in Europe is entering a delicate phase:  Markets are nervous, politicians are trying to solve complex problems in a short span, funds are departing, banks are tightening and the clock is ticking.  In a nutshell, the game is so tight that a simple trigger, such as a bank run or trouble in the non-banking sector, a downgrade in rating, troubles in Eastern Europe, a country calling it quits and leaving the Euro, a political stalemate could just throw the spark into the tinder box.  Out-of-the-box events and miscalculations could horribly conjure a column of falling dominoes, creating a momentum out of reach of the general will to stop it.  Despite the recent call of duty from a string of central banks, we are now at the stage of contingency planning and the need to closely watch a possible eruption.  A break-up of the Euro would create huge vibrations in interest rates, exchange rates and quite a legal tangle.  We know the argument that the stakes are too high for a fumble, but then plenty of advocates have never lived through a real crisis before.  Big events can go wrong.

How in the hell has the European Union got into this predicament?  For two reasons:  Ballooning debt and falling economic growth.

In a matter of about a decade, the balance between acceptable sovereign debt and potential economic growth has moved from good to bad.  From a comfort zone tolerated by economists and financial markets to a situation where the future of the Euro zone is under a big question mark.   The speed of this inflexion point has taken decision makers by surprise.  On the one hand, debt, public and private, built up during the so-called golden age of private equity (2000-2007), or the golden age of leveraging when debt was a cheap currency. Extreme liquidity, speculation, corruption and bad debt have mixed again in the history of finance to inflate and deflate another financial bubble.  Then the financial crisis of 2008-2010 called for additional debt, on top of budget deficits, to bail out and pad the banking systems.  Several countries suddenly hit debt ratios in the range of 80 —100% of GDP, setting warning lights.   All this would under normal circumstances remain within the manageable realm:  A mix of austerity programs, weakened currency, export growth, recapitalisation of affected banks would have done the trick much like in the past.   But another force has been at play in the last decade.

Real prospects for economic growth have simply eroded with time.  A sub-standard level of productivity, an aging population, a lagging performance in technology and R&D, the shocks of low costs from Eastern Europe and subsequently from China and an economy drugged with consumption have combined to form a landscape of mixed competitiveness within the European Union.  The rise of China has been exponential and probably too fast for the comfort of the planning horizon of policy makers.  This drop in economic growth and competitiveness is creating two problems:  the current social democrat system is becoming too expensive and keeps generating deficits, all in the face of a pile of accumulated debt that is reaching saturation.  ‘There is not just enough growth to pay for all this’ is what financial markets are now saying.  Investments and their growth options have moved to Asia and other BRIC nations, with expanding populations and middle classes.  In Europe, we are now dealing with middle income countries stung with liquidity issues (Spain, Ireland, Portugal), solvency issues (Greece) and near solvency issues (Italy). 

As much as Asia is on an upswing reinforcement cycle fuelling economic growth, as much as Europe is on the edge of a dragging down cycle: austerity, mild recession, tighter credit, growing debt, rising bond yields, creeping unemployment, weakened demand, social tension, falling confidence index, and more austerity.   Stabilizing the sovereign debt problem and the Euro is the urgent priority.  It will most likely require external help, from the IMF and other central banks.  Yet some thorny issues will remain outstanding for a while:  under what shape can a fiscal union take place, how to restructure debt without crippling banks, etc. The lack of progress on the finance side is exposing the second weakness:  Where will the new growth come from?  Investments, exports, productivity, innovation, lower wages, protectionism?  Politicians and policy makers are not used to producing smart economic growth strategies.  Most have honed their craft under the affluent society of the past century, before the rise of China came to challenge the world order in trade and investments.   Beyond the infrastructure stimuli, most options for growth will require toil and sweat.  Inevitably austerity will bite the middle classes.  With unemployment sticking up and bleak economic prospects ahead, no wonder those middle classes are throwing out politicians and parties that reigned under that damaging decade.  The next couple of weeks will be crucial in Europe, as France and Germany will tango in their efforts to finally establish that firewall around the Euro.

At the end, structural reforms will make a difference, like what Australia did in the last decade:  Along with the Asian boom, they restructured their economy to make it more competitive.  They are happy about it today.  Other countries endowed with natural resources will find some breathing space, just for a while.  But the same fragile balance between  debt & growth is present in a number of American states and Canadian provinces.   They are fortunate to be under the cover of full federal systems, unlike Europe.   But inevitably, deleveraging will take its toll for the rest of the decade. And perhaps beyond.  Astonishingly, consumption as % of GDP is still at 71% in the USA, and 36% in China.  The most fundamental structural imbalance in the world has not moved an iota in the last three years!  The big powers are not moving from their model. 

This is really the crisis of the industrialized nations: Debt and growth.  In the coming years we are going to witness an experiment amongst western nations about how best to solve the three following questions, which will craft their outlook for a generation:

                1. How best to conduct austerity?

                2. What structural reforms will have the best pay-off?

                3. What set of economic policies will work best?

In the meantime, in Europe, lurks one spark, that could burn the recovery  to ashes and make this decade really miserable.  Again CFOs will spend some nervous vacation time at year end. Good luck.

Andre  Du Sault

MBA (LBS), MPA (Harvard)

Posted in CFO & treasury, World economy.