Six Lessons We Should Have Learned Already

Nov 11, 2008

 

Alright I admit it - the Financial Meltdown is all my fault. I could have prevented it, but I sat back and let it happen.

Let me explain.. In my life's journey from English childhood in Manchester, England to my present life as a B2B CFO partner in Atlanta I spent a number of years in Lower Manhattan.

While there, I became a member of the "Englishmen in New York" club - a very exclusive society that only met once a year to celebrate Christmas - typically in very boozy fashion. Most of the members were, of course, Brits, and in insurance, and many of them were from AIG .

Perhaps if I had had more insight into the future, I could have nudged one or two of them in a different direction (under a car/ into academia?) - a la the Butterfly's Wing - and twenty five years later saved the world from Credit Default Swaps (or is it Credit Swap Defaults? - guess it doesn't really make a difference).

So with hindsight what can we learn from the meltdown that seems upon us. An article on the Harvard Business Online site made for thoughtful reading, and I think has some pointers for companies at the lower end of the scale.

1. It doesn't work to let dealmakers make all their money up front. Whether it's lenders hawking mortgages, bankers pushing bonds, or salespeople closing contracts before the end of the quarter, dealmakers have to have responsibility for the health of those decisions years down the road. Where possible, the individuals who make the deals should also have their compensation depend on the long-term performance of those deals. And sales commissions should be based on collected cash not receivables.

2. Risks may correlate more than you think. In other words, a single problem can take you down if it's severe enough. In even other words, don't put all your eggs in one basket - and don't let one customer provide 80% of your revenue.

3. In a crisis, liquidity can disappear overnight. So make sure someone competent projects out cash flow, and maintain solid relationships with several banks.

4. It's incredibly dangerous to buy a business unless you understand it in excruciating detail. And just as dangerous to operate without adequate and timely financial information.

5. Whenever anyone says they've managed to do away with risk, head for the hills. Can never be said too much, along with free lunches, if it sounds too good to be true...

6. Perhaps the greatest lesson of all is that bad strategies can happen to great companies and smart people. Which means you have to plan for the worst, and find a sounding board to constantly reality-check your strategies.

The next generation of great leaders will be the ones who absorb these lessons. Everyone else is doomed to repeat the same mistakes. In other words...it will be deja-vu all over again.

 

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