Article written for www.annarborbusinessmagazine.com

The housing market appears to be on the mend. Sales are up, foreclosures are down, inventory has shrunk, interest rates are lower, and buyers are out looking for purchases.

While this is good news, some concerns still persist, particularly with hesitant home sellers and tighter loan qualifications for prospective home buyers. Sellers are tepid, not sure if now is the right time to sell. And a number of buyers are finding it difficult to get a loan, due to higher loan thresholds and increased attention to the process of verifying the supporting financial documents.

Reasons for Optimism

First the good news. Last month, the National Association of REALTOR®s reported existing-home sales “continued on an uptrend in December.” For 2011, existing-home sales rose 1.7 percent to 4.26 million homes, up from 4.19 million in 2010. And total housing inventory of existing homes dropped 9.2 to 3.4 million homes. In real-estate-speak, this represents a 6.2-month supply, down from a 7.2-month supply in November.

The market also looks positive for new housing starts. The National Association of Home Builders (NAHB) reports that Single-Family Housing Starts Rise 4.4 Percent in December, and its housing market index rose to 25 from 21 in December, hitting its highest level since mid-2007. And according to NAHB, 2011 “ended on a positive note with economic activity continuing to expand at a moderate rate and the housing sector finally gaining some positive momentum after bouncing along the bottom for most of the year.”

This positive uptick for the national housing market seems to be reflected in the Ann Arbor area as well. Rick Taylor has been a REALTOR® with Charles Reinhart Company for 10 years. Taylor is active in the Ann Arbor area market, selling 24 homes last year and 26 homes in 2010. As a result, Taylor is a President’s Club Member, a standing achieved by only 10% of REALTOR®s throughout the U.S.

Taylor is bullish on the housing market in 2011. “We are just inundated with business right now,” says Taylor. “Believe me when I tell you. I know that sounds self-serving, but I can objectively tell you that we are very busy.”

“When Pfizer left,” Taylor continues, “I can’t tell you how many dozens of people I moved into this area and then we had to move them out. Pfizer was just the kiss of death for us when they left, and we really hit hard times long before the recession hit. We were all really suffering 5-6 years ago; 2007 was really a dark time for us. But now the market has stabilized. Those homes are now off the books, so to speak, and our market is coming back.”

Taylor underscores the point that this increased housing activity is not necessarily evenly distributed in the region. Ann Arbor and the surrounding area tends to maintain a stronger market, while the housing market for the areas farther out may not be as strong.

“Ann Arbor and Washtenaw County is an island in it of itself. We have the University of Michigan, we have the University of Michigan Hospital, and we have Eastern Michigan University, which, by the way, doesn’t get the credit it deserves for bringing in a lot of money. We also have startup companies and intellectual companies. Our market is probably, if not the strongest in the state, at least one of the strongest in the state. We have a very, very strong real estate market here. That news just doesn’t get told enough and it needs to get out.”

Not only is activity up, says Taylor, but foreclosures are down. Foreclosures artificially deflate housing pricing, so the drop in foreclosures marks a move toward real market value for homes.

“Foreclosures are slowing down which is a good thing,” notes Taylor. “The banks actually have been pretty smart about not dumping everything they have on the market right away. They knew that the pricing would drastically drop if they put too many on at once so they were pretty good about just putting on a couple here, putting on a couple there, letting them sell before they put more on and that was pretty smart. So my foreclosure business is dwindling and I can tell you that as much as I appreciated the business, I’m glad to seeing it going away for the most part.”

Taylor is not alone in reporting a significant bump in buyer activity. Linda Lombardini is President of the Ann Arbor Area Board of REALTOR®s (AABoR) and a real estate agent with Trillium Real Estate, a 6-member team of real estate agents who focus on the Ann Arbor area market.

Lombardini is as bullish as Taylor, agreeing that buyer activity is up from previous years. “Many of us have painted a pretty rosy picture at this point,” notes Lombardini, “but in the past four or five years, today is rosy in comparison to so much of what’s happened. Being the end of January, we’re busy and we’re very excited about that.”

Lombardini concurs that the general Ann Arbor area is performing a little better than surrounding areas. “Ann Arbor certainly is the core of what we do. Some of the outlying districts are not doing quite as well, but Dexter, Saline and Ann Arbor are really strong.”

“People are calling to list their homes, and buyers are calling to go and see homes. Obviously that’s how we work, so the three areas in the Ann Arbor area have inventory that is really easy to sell and our buyers are buying them, which is just exciting. I just can’t tell you how exciting it is. I think you can probably imagine. We’re getting phone calls every day, which is fabulous for the beginning of the year.”

Lombardini also mirrors Taylor’s view that interest rates are remarkably low. “They are good. I’ve been doing this for 21 years. Interest rates were 19 percent at one point. Now they are 3 or 4 percent. That’s good! It’s amazing!”

Reasons for Caution

But before we get too enthused, there are at least two reasons to be cautious about the Ann Arbor area housing market.

The first reason for caution is that home owners remain hesitant to sell. The large buyer activity should drive up housing prices and encourage home owners to list their homes, but that hasn’t been happening yet in large numbers.

“The biggest problem that we have is the lack of sellers,” explains Taylor. “We have more buyers right now than we do sellers. Sellers are typically afraid, nervous, and afraid to put their toes in the water. It’s unfortunate because we as REALTOR®s kind of have to educate the selling public that the market has recovered in our geographic area. That’s important to know.”

The second reason for caution, and perhaps more concerning than the first, is the tightened loan qualifications. In 2008, the U.S. housing market hit a crisis point due to a combination of loose loan qualifications, sagging home prices, and poorly priced mortgage backed securities (MBS) securitized and guaranteed by Federal National Mortgage Association (Fannie Mae) and purchased on the secondary market by the Federal home Loan Mortgage Corporation (Freddie Mac).

In 2008, roughly $6 trillion of the $12 trillion in U.S. mortgages were either owned or guaranteed by Fannie Mae and Freddie Mac, thus requiring unprecedented financial support to prevent a collapse of the market. Consequently, mortgage loan qualification standards today are strict and are closely scrutinized. While this tightening will help prevent a repeat of the financial crisis, it also presents a barrier to economic recovery.

Jeremy Shaffer is Associate Vice President at Ann Arbor State bank. Shaffer has more than ten years of mortgage lending experience and has worked at several local and regional mortgage lenders in the area and is well acquainted with the Ann Arbor are market.

Shaffer is pointed in his comments that the mortgage loan qualification process is excessive. “The pendulum has now swung the other way,” Shaffer describes. “A few years ago the requirements were loose. Today the process is time consuming and stringent.”

Shaffer goes on to explain that the buyers who have trouble are those with atypical incomes streams. “If you have income that comes from multiple sources or income that is volatile, loan underwriters are very slow and careful with evaluating the buyer’s ability to pay the mortgage loan payments.”

Shaffer recalls a client who applied for a mortgage. His client’s bank statement showed an unusual deposit of roughly $1,000. The underwriter requested further verification of the one-time deposit, presenting his client with the chore of chasing down proposer documentation for that small deposit.

Entrepreneurs and contract workers may have difficulty, since income comes from many sources and the incomes stream is up and down over time. Recent retirees can have difficulty as well. Many applications require a demonstration of two years of retirement income history. A recent retiree does not have that history and would, therefore, likely have some difficulty from the underwriter.

Shaffer is clear that the tight mortgage loan requirements have a negative effect on our economy. “After the high unemployment numbers,” Shaffer emphasizes, “the strict qualification requirements for mortgage lending are the most significant drag on our economy.”

Other Ann Arbor lenders paint the same picture. Kristy Haboian is Vice President & Mortgage Manager at the Bank of Ann Arbor and has over 25 years of retail banking and mortgage lending experience. Haboian notes that the market is generally good, but loan qualification remains an issue.

“Things have sort of slowed down, and there’s a little bit of uncertainty as to what this year will bring. [Interest] rates are very, very good for people who are qualified and able to purchase. And so I’m anticipating another good year, as long as rates remain somewhat low.

“However, qualifying people is a little more challenging with all the new regulations and rules. These rules just make it a little bit harder, a little bit longer to get final approval on loans. There are certainly borrowers that are well qualified. The borrowers that have qualification issues are those who are a little bit out of the box, specifically things like income and assets and where those things are coming from and how they are paid. For these borrowers, it can sometimes be more of a challenge.”

2012: Optimism with Caution

Overall, then, 2012 looks positive and somewhat encouraging. Housing activity is clearly up from 2010, and there are many reasons we can expect that the housing market is finally on the upswing.

It would seem, though, that the 2012 housing market will be fairly modest, as sellers remain uncertain and loans remain relatively difficult to obtain. According to Haboian, “I’d say [obtaining mortgage loans is] probably going to get more difficult. There’s still a lot of concern and uneasiness about what has been done in the past that I think it will be more of a case of like I said more tightening than anything.”

by David Baker and Margaret Baker
www.bakerstrategy.com

Here is a statistic that may surprise you: 1 in 10 people who are employed in the U.S. are employed by a nonprofit organization. The roughly 1.6 million registered nonprofits in the U.S. employ approximately 13.5 million people. As a comparison, this number is higher than the number of people employed in the entire U.S. finance sector, including insurance and real estate.

And while the organizations are nonprofits, they are certainly not non-revenue. With estimated total combined assets of $4.3 trillion, U.S. nonprofits have roughly $750 billion in annual revenue and account for approximately 5.5% of the total U.S. GDP. Add to this number the estimated $170 billion in annual value contributed by over 8.1 billion annual service hours provided by U.S. nonprofit volunteers and you see a nonprofit sector that contributes almost $1 trillion to the U.S. economy.

In Michigan, there are roughly 50,000 nonprofits representing 440,000 employed people (10% of Michigan’s workforce), $16 billion in annual wages, $133 billion in annual revenue, $179 in total assets held, and $108 billion in annual economic activity. The most dominant nonprofit service areas are health, human services, and education.

These well-footnoted numbers are provided by the Independent Sector (www. independentsector.org), a nonpartisan coalition of approximately 600 organizations “committed to advancing the common good in America and around the world.” The numbers reflect not only the critical role that nonprofits play in the U.S. and Michigan economies, but also the importance of nonprofits in delivering the social services for which nonprofits were created to provide.

This vital role that nonprofits play is easy to overlook. While current debates on U.S. fiscal and tax policy tend to focus solely on assistance from federal and state government budgets, often forgotten is the broad and deep social impact that nonprofits have on our country and our state.

Michael Tyson is CEO of NEW (Nonprofit Enterprise at Work Inc.), a nonprofit support organization whose mission is to “help nonprofits succeed by strengthening nonprofit management and offering solutions to issues facing the nonprofit community.” Tyson sees firsthand the importance of nonprofits to our economy and overall wellbeing.

“My guess is there are a lot of people that don’t understand the value that nonprofits bring to the table,” explains Tyson. “Right now you have the government that can help you out to some degree with dollars and cents, and you have various organizations that try to do their part. In my mind, though, if you were to take nonprofits out of the picture and they just all went away, there would be this huge gap, not only from the standpoint of the number of people nonprofits employ and how much business it generates, but also from the standpoint of providing social service, such as feeding the hungry, providing education and training, and generally offering assistance to those who need assistance. These are all things that I think people just take for granted.”

What’s a Nonprofit?

Nonprofits, also referred to as the “independent sector,” are organizations that, by mission, benefit the broad public interest, not just the interests of its members. Nonprofits are entities incorporated under one of two forms: 501(c)(3) or 501(c)(4). 501(c)(3) organizations are public charities, private foundations, and religious congregations. 501(c)(4) organizations are social welfare/advocacy organizations.

Of these two forms, 501(c)(3)s represent almost 90% (1.4 million) of all nonprofits in the U.S. Independent Sector lists 8 major categories of 501(c)(3)s:
1. Arts, culture, and humanities, such as museums, symphonies and orchestras, and community theatres
2. Education and research, such as private colleges and universities, independent elementary and secondary schools, and noncommercial research institutions
3. Environmental and animals, such as zoos, bird sanctuaries, wildlife organizations, and land protection groups
4. Health services, such as hospitals, public clinics, and nursing facilities
5. Human services, such as housing and shelter, organizers of sport and recreation programs, and youth programs
6. International and foreign affairs, such as overseas relief and development assistance
7. Public and societal benefit, such as private and community foundations, civil rights organizations, civic, social, and fraternal organizations
8. Religion, such as houses of worship and their related auxiliary services

Independent Sector also notes that, over the past 10 years, the number of nonprofits has grown by 60%. As the number of nonprofits continues to grow, so also the need for support services for these nonprofits will grow as well. Organizations such as NEW have been providing services to nonprofits and are well-positioned for growth going forward.

The NEW Center

Question: What do you get when you replace an old junkyard on Main Street along the northern entrance to Ann Arbor with an attractive and valuable community resource? Answer: You get a NEW Center.

NEW had its highly symbolic start in 1993 when McKinley Foundation along with other community members acted to clean up the environmental mess at the site and build a new building. Today, the facility holds 13 NEW staff and volunteers along with roughly 23 other nonprofits who take advantage of NEW’s shared services.

Tyson, just into his second year leading NEW, celebrated his one year anniversary at NEW in November. He brings a wealth of experience to his leadership, such as 20 years in the financial sector, 12 years as CEO of a residential building company in Detroit, and a fellowship to Harvard Business School’s Strategic Perspectives in Non Profit Management program. He has also held leadership positions with several nonprofit boards, including the Detroit Advisory Board of the Brownfield Redevelopment Authority, Detroit Symphony Orchestra, Warren Conner Development Coalition, The Parade Company, and Detroit Economic Growth Corporation.

Tyson describes the value the NEW provides to a variety of nonprofits. “If you are nonprofit, you are welcome at NEW. We’re not giving anything away; we’re simply able to use the resources of everyone together to provide a quality solution for nonprofits at a discounted rate. We work with nonprofits across the spectrum—nature, arts, history, music, etc.”

NEW also operates out of a second leased office located on Woodward in Detroit, but their primary focus at this point is on Washtenaw County. According to Tyson, “Roughly 50% of our client base is in Washtenaw County and we continue to service Washtenaw County. There was an effort about three years ago to grow outside of Washtenaw into the city of Detroit and the surrounding areas. That piece of the business is going well, but our strength is here Washtenaw County.”

NEW – Helping Nonprofits Make a Difference

The resources available by NEW to nonprofits are many, and nonprofits should take advantage of the helpful set of support services available through NEW. Currently, NEW operates four key service areas for nonprofits.

1-NEW Center Office Space
Tenancy is the primary service offered by the NEW Center with its 11,000 square foot office building in Ann Arbor dedicated to housing nonprofit organizations. At below-market rates, nonprofits have a handicap-accessible location with office equipment (e.g. fax, mail, and copy machines), conference rooms, a common kitchen area, and free parking. The NEW Center also offers Meeting Space where conference rooms can be rented by any nonprofit (you do not need to be a NEW Center tenant to rent a conference room). And the Affiliate Program offers small 501(c)(3)s use of office equipment, a mailing address, and other convenient services.

“Today,” notes Tyson, “we have a facility that houses roughly 23 non-profit organizations. What we do here is we share the conference room space. We share the kitchen. We share copy machines. We share the postage machines. And all of this is on a commercial level so the individual tenants don’t have to go outside the facility to get these services. So from that standpoint it cuts down on costs, because there is no way any of these nonprofits could find a conference room and all the facilities that we have here at such an affordable price.”

2-ResourceConnect® – Workshops & Resources
This service offers guidance on management best practices and referrals to high impact professional services. The Resource Center Hotline puts you in direct contact with NEW staff. The Grantmaker Database can put you in contact with 98,000 grant makers. The Online Resource Directory provides tools and resources easily accessed online. And the Nonprofit Directory helps you search nonprofits throughout Southeast Michigan.

3-npServ™ – Your nonprofit IT Team
NEW offers a variety of IT support options. Dependable Computers & Servers includes software installs, and equipment selections, data transfer handling, workstation and printer configuration, and ongoing training, maintenance, and unlimited trouble-shooting. Enhanced Email is an affordable open-sourced solution that supports filtering, unlimited data, and shared calendaring. GiftWorks Support is a donor management software for fundraising. Dynamic Social Media provides training and assessment in social media and online communities. And Technology Workshops address technology needs of participating nonprofits.

“With the technology that we offer to nonprofits,” says Tyson, “nonprofit personnel are able to work from anywhere. They have access to all their files. Everything is in a secured environment. They can work from home; they can work from Ann Arbor; they can work from Detroit. This is helpful because depending on wherever their clients are, wherever the discussion has to go, they can be there.”

4-BoardConnect® – Board Leadership
Perhaps the most advance service offered by NEW is BoardConnect®. This service helps nonprofits develop a more effective board, assists individuals in training for board service and matching with an appropriate nonprofit, and enables businesses to prepare employees for board service.

“It’s important for people to know that board members can be of all ages.” notes Tyson. “Typically that’s what we see. We have a monthly workshop that takes place and is called Serving on a Non-Profit Board. It basically gets at the meat and potatoes of you want to serve on a board but you don’t know what it’s all about.”

Tyson explains how this service meets a need in helping individuals serve well on nonprofit boards. According to Tyson, “My career was in the financial industry before starting here. We were asked as an organization to serve on nonprofit boards. We would just go do it but you really didn’t understand your role and it was really necessarily a matching of where is my passion with the passion of the organization.

“Well, that’s what Serving on a Non-Profit Board does. It talks about your fiduciary responsibility of serving on a board. It talks about where your passion is and tries to match your passion with the right organization. So at the end of the day, you’ve got the right energy behind the right organization helping to move them forward. I think that’s really what it’s all about, rather than just, ‘Michael Tyson works for ABC Bank; he’s on your board and never shows up.’ You want more than that. You want somebody that’s really engaged.”

Tyson is quick to acknowledge the talent on his team, and give them credit for the successes of NEW. For BoardConnect® in particular, Tyson gives credit to the strong experience and reputation of Diana Kern, Vice President of Programs at NEW.

“When I go out there and talk about Board Governance,” explains Tyson, “Diana Kern is our lead consultant. I don’t care where I bring that name up. If I mention Diana, everyone raves about the quality of service that she provides an organization and the guidance she gives an organization. To some degree she is the brand of BoardConnect®.”

And, clearly, Tyson, Kern, and the NEW brand are growing and having an impact on the region. “What NEW is all about,” concludes Tyson, “is going out and helping nonprofits complete their mission without having to worry about some of the infrastructure issues. To the degree that we can continue to support nonprofits, we will help make the nonprofits in Washtenaw County strong. That’s what you want. You want nonprofits to be strong and you want them to be around for a while.”

With the help of organizations like NEW, Washtenaw County nonprofits will continue to be the vibrant part of our economy that they are today.

by David Baker and Margaret Baker
www.bakerstrategy.com

Here’s a note from Steve Grigorian, COO of the DEC:

The Detroit Economic Club is committed to being a world-class organization and is
constantly looking for ways to add value and improve the quality of the club. To do that, we need to know what you think.

Please take a few minutes to respond to the following questions. Your feedback will be considered in future plans and initiatives of your Detroit Economic Club.

Follow this link to the Survey:
Take the Survey

To conduct this  survey, we have partnered with Ann Arbor-based Baker Strategy Group, a  management consulting firm and DEC Partner. If you have any questions or  concerns, please contact:

David Baker

Baker Strategy Group

O: (734) 786-3342

C: (734) 355-8232

david@bakerstrategy.com

www.bakerstrategy.com

Thank you in  advance for completing this survey and providing your input.

Best Regards,

Steve  Grigorian

Chief  Operating Officer

Detroit Economic Club

211 West Fort Street, Suite 505

Detroit, MI 48226-3286

Phone: (313) 963-8547 ext. 100

www.econclub.org

Here’s a note from Chuck Hadden, CEO of MMA:

It’s that time of year again — the time when we gather member input on programs and services to ensure that we are meeting our goal to service the needs of Michigan’s vital manufacturing sector.

The Michigan Manufacturing Survey will also help us identify your priorities for 2012 and measure your short- and long-term expectations for the industry. The data, and how it compares to the last three years, will be assessed and made available in a comprehensive report to be released in January.

The survey will take just a few minutes and will provide invaluable insight. Please share your opinions by clicking on the following link:
MMA Annual Outlook Survey.

Please forward this e-mail to others in your company or at other manufacturing firms, colleagues, suppliers and customers. The deadline for survey participation is Friday, December 2. Participants will receive a free summary of the survey results prior to the release of the full report.

Working together, we can do more for Michigan industry.

Sincerely,

Chuck Hadden
President and CEO
Michigan Manufacturers Association
517-487-8541
mma_executiveoffice@mma-net.org

This study draws on insights from the 2011 Thriving Schools program.  As part of the Thriving Schools program, this study looks specifically at feedback from parents of elementary school children who attended a Michigan public school in 2010-2011. The Thriving Schools program gath-ers feedback from various school stakeholders regarding their experience with the school.

Background

The Thriving Schools program began in 2006 with 1 private school in Ann Arbor. As part of a larger strategic planning effort, the school board conducted a survey to gather feedback from school stakeholders (parents, teachers, school board, etc.). This feedback was then incorporated into the school’s strategic planning process with great success. Since then, we have conducted this program for over 100 schools and gathered over 10,000 responses.

In August 2011, we collaborated with Survey Sampling International (SSI) to conduct the Thriving Schools survey to a panel of over 300 parents who had at least one child attend a Michigan public school during the 2010-2011 school year.

We asked these parents to grade their public elementary school on overall satisfaction with the school, the image and reputation of the school, and 75 other measures across the school experience. This report provides the insights and analysis drawn from this informative feedback.

The 7 Drivers of Parent Satisfaction

Through quantitative analytics, we have identified 7 key Drivers of parent satisfaction with their Michigan public school experience. Administrators should focus on these 7 Drivers to effectively boost parent satisfaction.

1. Providing up-to-date resources

Students need facilities and equipment that can provide the learning environment needed, particularly in the classroom. The quality of the facilities provided by the school varies throughout the Michigan public elementary schools. In some districts, parents are looking for very basic improvements, such as air conditioning and facilities that work. In other schools, parents want to refresh an outdated learning environment. Administrators should evaluate school resources and consider which improvements would contribute most to increased parent satisfaction.

2. Maintaining high academic standards

Our public schools are commendable for working to ensure that no child falls through the educational cracks. This emphasis is core to the mission of public schools and is admirable as a societal goal of educating the entire community served by the school. Administrators, however, need to make sure that the schools simultaneously continue to emphasize high academic expectations. Some parents suggested that schools are tempted to lower academic expectations in order to move children through the system. Clearly, administrators and teachers do not support such an approach to education. Administrators, therefore, must act to make sure students and parents see the high academic expectations the schools have for their students.

3. Accommodating students of all levels

In extracurricular activities at the schools, parents want to make sure their child is able to plug in, regardless of his or her abilities. Administrators should engage the difficult task of making extracurricular activities available to novice students while concurrently providing challenging opportunities for more advanced students.

4. Attending to individual learning styles

Each child learns in a unique way. Administrators should encourage teachers to avoid a one-size-fits-all pedagogy and seek new ways to communicate uniquely with each student. High student-to-teacher ratios, challenging subject matter, and a variety of student academic levels can make such an approach difficult to implement. Nevertheless, finding creative methods to reach students pays tremendous dividends in parent satisfaction and their willingness to recommend the schools.

5. Creating a feeling of school community

We all thrive on a healthy school community. Increasingly, parents are looking to be part of a closer school community. Over the last few years, families across Michigan have become fragmented and stretched as we all face difficult economic times. The public elementary school is one of the few public institutions that forms a center of commonality for families of all walks of life. Intentionally cultivating a feeling of community at the school has a high impact on how parents feel about the school and, consequently, how they talk about the school to others.

6. Fostering healthy student-to-student relationships

Related to building a healthy school community are healthy student-to-student relationships. Parents clearly want their children to learn in a safe, friendly, and warm environment. Efforts to eliminate bullying from schools are on the mark. Administrators and teachers should go beyond the campaigns to demonstrate healthy relationships for students and show students how to resolve some conflicts on their own.

7. Being available for meeting with parents or students

Administrators and teachers are busy, with a host of administrative tasks and class preparation duties needed each day. However, administrators must not consider parent requests as intrusions on work. Rather, administrators should consider these requests as central to their work. Parents crave to be heard. Administrators must make a conscious effort to be available to interact with parents. This availability goes a long way toward addressing the other 6 Drivers on this list.

For more explanation of these 7 Drivers of parent satisfaction, download the full study:

Article written for www.annarborbusinessmagazine.com

It’s that time of year again. Company executives pull out the annual budget and begin planning next year’s budget. At its worst, the budgeting process is a tedious process that consumes a good deal of the company’s productive resources creating an updated version of last year’s document that will not be thoroughly reviewed again until the following year.

At its best, though, the budget—and the budgeting process—can be instrumental in crystalizing strategy and sharpening plans for operations and marketing. For the budget to work, say planning experts, it must be connected to the overall strategy and company plans.

The Budget

The most difficult task in budgeting is forecasting top line revenue. Almost all other numbers in the budget—marketing, human resources, operations, etc.—depend on estimated revenues. However, with the weak economy and increased uncertainty, companies are struggling to determine exactly what revenue targets they should set for next year.

Jeff Dolowy is a Partner at Plante & Moran, LLC in the Ann Arbor office. Delowy has been with the firm since 1994 and focuses on auditing and tax work. He works primarily with family-owned and privately held businesses, such as retailers, technology companies, , and several manufacturers. His clients tend to have annual revenues in the range of $2 million to $50 million.

Dolowy argues that estimating sales is the key to determining the budget. “When you think about budgeting,’ says Delowy, “sales drives everything. If sales don’t materialize, further adjustments to your cost structure have to be made. Sales is the key driver to any organization.. You have to have a realistic process in place and get the right people involved. Today, many companies are also looking at new markets to venture into as well.”

Dolowy notes that virtually all of his clients are looking to grow their top line revenue next year, but they struggle with distinguishing from realistic targets compared to aspirational targets.

“Everybody is looking for additional topline revenue for a variety of reasons,” Dolowy explains. “I have a software developer, for example, that wants to grow the top line on a consistent basis so that in two to three years he can sell the company. Oftentimes in the software industry, the multiple with which you set the selling price of the company is based on the top line. So, what my client is looking to do is generate additional revenue for a couple of years to get a nice trend going so that he can execute his exit strategy..”

Other companies, of course, are simply looking for increased revenue to sustain or grow the business. Whatever the reason, companies are focused on the top line growth, so they need to shape their budgets around this targeted growth. The problem they’re having, however, is that they just are not sure where to set the revenue target.

“Companies are focused on growing the top line,” says Dolowy. “The issue is how to do that. Generally speaking, many of my clients are having a hard time getting their sales staff to perform the way that they think they should be performing. So, they’re having hard time getting their head around what the right number is and how to plan for the future.

The Plan

The temptation to avoid in budgeting, then, is to simply assume some percentage increase in top line revenue based on the previous year performance or budget, and then align the rest of the budget to that automatic increase. Even worse, executives may be tempted to simply tally up the operating and investment costs of initiatives they want to implement in the coming year, and then create a revenue growth target that is high enough to make the bottom line show profit.

Both approaches, of course, miss the mark. Companies need to form a careful, coherent plan for exactly what the top line revenue will be and how they plan to achieve the sales targets.

Bing Cao, Bin Jiang, and Tim Koller are consultants with the New York office of McKinsey & Company. In their article in the May 2011 issue of McKinsey Quarterly, the authors warn executives about falling into the trap of setting unrealistic growth targets.

“Many leaders,” say the authors, “set unrealistic growth targets. Often, they don’t properly consider how fast their underlying markets are growing and thus how much market share must be grabbed to meet ambitious goals. Or they ignore the likelihood that their competitors are doing many of the same things to grow. They also underestimate the ongoing need to find new products to replace revenue declines from current offerings as they mature.”

“Although the importance of growth is undeniable,” they conclude, “large companies should have a realistic view of the challenges they face and the implications of aggressive targets.”

Dolowy agrees, and he points to specific client examples where effective planning has worked well. “I’ve got a grocery store client with 13 stores. They are looking at what’s going on within their market and the affect Walmart will have on them, as Walmart moves into 4 of their 13 areas. Obviously, this will affect their business, so somehow they have to account for this in their top line estimates.”

“So, in their budgeting, he continues, “they actually planned on a significant hit to sales and, consequently, looked at their overall cost structure to adjust accordingly. So far, they haven’t seen sales drop as much as they thought they would. It’s been a much better experience than they had thought; they’ve been able to differentiate themselves from the big box retailers and hang on to their customers.”

The Strategy

If the budget comes from the plan, the plan comes from the strategy. Companies face a variety of opportunities and potential growth paths. Deciding which plan to pursue and how to apply company resources is answered by strategy.

Richard Rumelt is the Harry and Elsa Kunin Professor of Business and Society at the UCLA Anderson School of Management. In an article adapted from his recent book Good Strategy/Bad Strategy: The Difference and Why It Matters (Crown Publishing, July 2011), Rumelt discusses why a budget must be developed within the context of a sound strategy.

According to Rumelt, “Like a quarterback whose only advice to his teammates is ‘let’s win,’ bad strategy covers up its failure to guide by embracing the language of broad goals . . . If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have a stretch goal or a budget or a list of things you wish would happen.”

How, then, does a company develop an effective strategy? And how does the strategy relate to the plan and the budget?

Dave Haviland has some experience with strategy. Haviland is the founder of Ann Arbor-based Phimation Strategy Group. Haviland focuses on stage 2 companies, firms that that are in transition from start-up mode into a business that is a going concern. Haviland’s clients include engineering firms, retail companies, catering companies, and several other stage 2 companies in a variety of industries. The principles that apply to a stage 2 company, says Haviland, apply across virtually all industries.”

“Companies usually hit this stage 2 level at around $2 million in revenue,” notes Haviland. “I have some clients who are at $80 million who are still at the mindset of a start-up person. The company is at stage 2, but the leadership is still at stage 1.”

Haviland is adamant that for a business to effectively draft and apply a budget, it must be created within the context of the company strategy.

“One of the profiles that I see in stage 2 companies,” says Haviland, “is that they will use a budget as if that’s their strategic plan. And, of course, the interesting things about financials are almost always the assumptions that are behind the numbers in the financials. The assumptions come from the strategy and the plan. So, if people are just using a budget without a plan behind it, then the budget is really saying we’re going to mostly just do what we did before.

“This can work if the environment is mostly as it was before,” he continues. “But in today’s environment, it’s mostly not like it was before. So, using the budget as a strategic planning tool is actually ineffective. The budget needs to be part of a dance with at least an annual strategy session where you’re looking at what’s happening in the marketplace that you need to respond to, what’s happening in the company that you need to respond to, and how you prioritize initiatives. And part of the prioritizing effort, then, is determining what kind of resources you’re going to apply. That’s where the budget comes in.”

Because strategy, planning, and budgeting are interrelated, Haviland counsels his clients to begin the budgeting process earlier then they typically are accustomed to starting the budget planning process. “I think one of the things that surprise many stage 2 companies,” says Haviland, “is that you actually start the budgeting process in September. There are a lot of companies that tack it on at the end of the year.”

So, where do you begin in the planning? Havilland says it depends on the company. “One of the interesting things I have found is that you always want to start where people are most energized. There are people who are energized around doing a budget. In that case, start with the budget, but then ask the strategy questions. There are other people who are not energized by the budgets. In that case, start with the strategy.

“In the end, though, you need a strategy, a plan, and a budget. So, however you want to get there is good. It’s an iterative process.”

Going forward, executives need to manage the process. You can’t wait an entire year before reviewing the budget. According to Haviland, one of the critical things that a company has to do is develop a strategic management system.

A full planning system should include several pieces. First, you have the an annual planning session that looks out 3-5 years while also considering what you have to do this upcoming year. Then you have a quarterly meeting that reviews the plan and considers whether there are issues that have emerged over the past quarter. Then the monthly meetings and the weekly meetings becomes status checks on the plan. This forms the management system.

“What’s interesting about many companies,” says Haviland, “is that they are always doing some parts of the management system, so they’ll say that they have a planning system. But, if you talk to them about what their pains are, it’s almost always tied to whatever is missing in this management process.”

“So, if a company is doing a weekly meeting with their team, what they’re often missing is a longer-term vision of where they’re going. It’s really hard on a weekly basis to pull yourself out of the muck and look farther. On the other hand, the company may be doing the strategic plan once a year, but then not regularly monitoring their progress on that plan. You need to have a consistent look at strategy in order to be calibrating your budget with reality on an ongoing basis.”

So, feel free to pull out last year’s budget, but don’t neglect your strategy and business planning as part of the process. Be market-focused in developing your top line, and tie it all to a solid strategy.

by David Baker and Margaret Baker
www.bakerstrategy.com

Article written for www.annarborbusinessmagazine.com

On July 1 of this year, Alison Davis-Blake became the new Edward J. Frey Dean of U-M Ross School of Business. Prior to her appointment, Davis-Blake was the dean of the Carlson School of Management at the University of Minnesota, where she was the Investors in Leadership Distinguished Chair in Organizational Behavior. We recently had the chance to talk to Dean Davis-Blake about Ross and its unique approach to action-based learning.

Ross is clearly an excellent school. Year after year it continues to rank among the top ten business schools in the country, regardless of poll or category. Talk a little bit about what makes Ross so unique and remarkable.

I think there are some bedrock things that Ross shares with all the top ten schools, so let’s talk about those and then answer specifically your question about what makes Ross unique and remarkable.

There are a number of bedrock factors that we share with other top schools. We have amazing faculty who are at the top of their game in research and are thought leaders. You don’t get anywhere in any ranking without that. We also have first-rate students who come to us from around the world; a truly global student body. These faculty and students, along with our great staff, together have designed a great curriculum. Of course, we also sit in an amazing facility with great technology and instructional facilities that help deliver that curriculum and provide space for clubs and events. This is all bedrock for a great school.

What makes Ross unique is our approach to education. We take what’s called an action-based approach. A traditional approach to business education is a lecture and discussion approach, supplemented or replaced with a case-based approach. The case approach is the I’m-telling-you-about-something-that-happened-to-somebody-else-so-we-can-discuss-it approach.

We use lectures and cases, of course, but we have supplemented that heavily with an action-based approach. This means that students have direct experience with a real business situation, both good and bad, over an intense period of time. First-year MBA students, for example, spend a quarter of their first year in a Multidisciplinary Action Project working through a live business problem. Students address that business situation and then debrief on what they learned in addressing the situation. Unlike the case method, where you’re trying to get inside somebody else’s head through the written word, students are now living the situation and having to address it. And that’s what makes us truly unique with the action-based approach.

You have spoken before on some of the key changes that are shaping business education today, such as increased globalization, an influx of technology, and new students who bring social responsibility and a team orientation to business. How does action-based learning serve students well for the new challenges we face in the world?

First of all, a lot of our Multidisciplinary Action Projects and the other action-based learning opportunities at Ross happen in the field around the world. There’s really no substitute in global education for experience in the global business environment. Action-based learning allows direct experience with the global business environment, so that’s a primary reason why that is helpful.

Second, because action-based learning is distributed learning—in other words we’re not all in the classroom together at the same time—advanced technology is a necessary part of learning. And since action-based learning is typically done in a team or done in support of a team, it is fundamentally a group experience or group-supported experience.

So, all of those pieces of where we’re headed are touched by action-based learning.

Ross has certainly been a pioneer with the action-based learning approach. You’ve also said that now is the time for a renaissance or innovation with action-based learning. What would you say is the next level or new horizon for action-based learning in business education?

I think that’s something that our faculty are going to have to delve deeply into, but there seem to be a couple of things that point the way forward.

Action-based learning is essentially a cycle of instruction, action, and reflection, with the action being the experience and reflection affecting subsequent instruction. Of the three pieces involved in this cycle, reflection—really taking the time to reflect on what we’re learning— has probably received the least attention. One of the things we know is that if there isn’t adequate reflection, learning isn’t permanent. So, I think better understanding what it really means to reflect on the action and building that into our curriculum is important.

How we enable everyone to have a truly global action-based learning experience is also part of the next step in developing action-based learning. Everyone needs to have some direct global experience and we don’t have that full coverage right now.

These are a couple of items that will be involved in the renaissance of action-based learning, but there will be more as our faculty works on this issue.

The multidisciplinary resources available at the University of Michigan are clearly a significant advantage for Ross. Please talk about the importance of U-M’s departments, institutes, and resources as a learning context for Ross and the role they can play in business education at Ross.

Whether you are going to be excellent personally or excellent institutionally, it’s quite helpful to surround yourself with others who are excellent. There are over 90 departments at the University of Michigan that are ranked in the top ten in their field. These departments can be a tremendous resource for supporting business education.

For example, if someone is interested in entrepreneurial business and how the changing legal landscape might affect opportunities for entrepreneurship, it’s really helpful to have a top-ten law school (U-M Law School) right across the street. If you’re interested in biotechnology and how that might affect bold entrepreneurship and opportunities for mature groups to enter markets, it’s helpful to have a top-ten medical school right here (U-M Medical School). A lot of entrepreneurship stems from science and technology, so it’s helpful to have a top-ten engineering program (U-M College of Engineering).

Business is fundamentally connected to other disciplines, so it’s helpful to have people who are get great training in those fields. There are a number of students from those fields who come to take classes at Ross and be involved in projects. These schools open up their doors to our students as well.

In considering how Ross relates to local businesses and the local Ann Arbor area economy, how do you see this relationship and the benefits that local businesses experience from the presence of Ross being located in our community?

Ross operates, as does the University of Michigan, on two levels. We are, of course, a global business school operating in a global university with a global faculty and student body. With that said, as a business school, just as a medical school needs a teaching hospital to be truly great, a business school needs an experiential laboratory to be truly great. Some of this laboratory we find around the globe, but some of that laboratory we find right at home with local businesses.

And just as with a teaching hospital, it’s not just experimentation for experimentation’s sake. A teaching hospital really hopes and believes—and should measure itself against this—that it is really doing good for the patients. So also, in a business school, part of interacting with our local laboratory is doing good for the local economy. This may be in providing consultative services or projects of various kinds. Or it may be in a pure service learning sense where you’re actually providing service projects, particularly in the nonprofit space.

It certainly is an employment sense. Human capital is the most critical capital for most firms today, so having access to great employees who are familiar with the local region is helpful. Or it may be in an idea, since being close to great faculty or robust thought leaders is helpful for local businesses.

So, even though the medical school is on the frontier in some domains of discovery and research, just as we are, it has a local impact in a teaching hospital. At Ross, we think of the business community in the same way, as being a local laboratory for mutual benefits.

Many companies in this region may not be aware of the breadth and depth of resources available to them through Ross. If a business wants to better understand how they might be able to collaborate with Ross, how do they take that first step?

Contacting the Business Engagement Center (BEC) is a good first step. The BEC exists to help facilitate interaction between U-M and local companies. If a company has a general desire to connect but doesn’t know what resources are available, the BEC can help them sort that through. The BEC is a useful front door to help companies articulate their needs and desires and to connect them to the U-M in the right way.

Once a company is connected with Ross, continuing with these channels for collaboration is appropriate. If, for example, a company is involved in improving its operational processes and they get connected to our Tauber Center (the Tauber Institute for Global Operations is a joint program between the College of Engineering and Ross) and our students do a project with them, the company certainly can reconnect with the Tauber Center.

Thank you for your time, and welcome to the Ann Arbor area.

Thank you. I’m delighted to be here. This is an amazing community on every level; amazing students, amazing faculty, amazing staff. Ross is truly a great resource with great human capital right here in the home town.

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U-M Business Engagement Center
Phone: (734) 647-1000
Email: www.bec.umich.edu
Website: um-bec@umich.edu
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by David Baker and Margaret Baker
www.bakerstrategy.com

Starbucks in Ann Arbor has come up with a creative method for soliciting tips from customers. Instead of the standard tips container, customers are invited to make their voice heard by depositing change into one of two bins and, thereby, voting on the question of the day. The winning answer is the one with the most money at the end of the day.

This simple example highlights a few interesting insights. First, customers are conditioned to expect their voices to be heard in virtually all areas of daily life. Whether it’s choosing to “Like” something on Facebook or simply tossing change in a tip bin, people have grown accustomed to the myriad of source points designed to gather measurements.

Second, while it’s true that this innundation of surveys and feedback requests is overwhelming, people take time to give feedback if it’s easy and they care about the subject. A survey reqesting feedback on your experience with a ball point pen is not likely to garner much response. Our recent study requesting for input from parents about public schools, on the other hand, received terrific input because parents care about their child’s school.

Making the it easy–clicking a button or tossing coins in a jar–is the key to gathering customer feedback. Customers seldom resent you asking for their input. What they do resent, however, is you respect their time. That’s a tip we can all do well to remember.

BSG’s work was coordinated by Ed Karls, Director of the Customer Performance Metrics and Improvement group within the UMHS Quality Improvement (QI) team led by Deb Guglielmo. As part of a 3-month engagement, David Baker of BSG worked with the QI team on delivering programs involving an employee engagement assessment, patient satisfaction studies, and a program measuring satisfaction among physicians who refer patients to UMHS.

“It’s a privilege to be engaged with a team dedicated to ensuring continuous improvement throughout UMHS,” says Baker. “The CEO of U-M Health System, Ora Hirsch Pescovitz, M.D., has emphasized in past presentations that the three core areas of research, education, and clinical medicine combine to form one integrated health system. From our experience, the QI group is in a unique position within the organization to help make ‘One UMHS’ happen.”

The work of the QI group spans across UMHS and some of its key stakeholders, notes Baker. “They send surveys to over 20,000 UMHS employees, gather feedback from a multitude of hospital and clinic patients, and solicit survey responses from referring physicians throughout the state and region. As such, the Quality Improvement group is well-situated as a cohesive force throughout UMHS. BSG is honored to have joined the QI team for this brief period and to help contribute to the QI team’s important role within UMHS.”

Baker Strategy Group (BSG) helps clients make SMART Customer Strategy happen. BSG bridges thought leadership with solid execution to ensure success. Client work is concentrated four main areas: China business development, advanced manufacturing, education, and non-profit organizations.

Article written for www.annarborbusinessmagazine.com

The University of Michigan is an economic powerhouse in the Ann Arbor area community, positively impacting hundreds of thousands of lives every year. With more than 30,000 employees and nineteen academic schools and colleges across three campuses (Ann Arbor, Dearborn, and Flint), U-M engages over 40,000 students and hands out around 11,500 degrees each year.

A major driving force of the University’s impact and success is its vast array of research activity. Each year, U-M spends over $1 billion in research ($1.2 billion in fiscal 2010). In fact, U-M has the largest research portfolio in the country among all public universities.

Dr. Stephen R. Forrest is Vice President for Research at the University of Michigan and the William Gould Dow Collegiate Professor in Electrical Engineering and Computer Science. Dr. Forrest’s role in the Office of the Vice President for Research (OVPR) is to nurture and support excellence in research across the University by working with the deans and department chairs in supporting interdisciplinary research.

We had the chance to speak with Dr. Forrest on how research is coordinated at U-M and what the growing trend in public/private collaboration can mean for the location Ann Arbor area economy.

With such depth a breadth of research conducted at U-M, how do you orchestrate the research efforts? What are your unifying principles?

It’s really a ground-up approach in the sense that it starts with a lot of people and a lot of ideas. The ideas then move upwards perhaps in a pyramidal format. As people develop their own ideas and their own themes, they find that there are pieces that are missing.

If we were to try to orchestrate the effort, things would start to unravel fairly quickly. My office’s job is to recognize where these pieces might be bubbling up independently, and then make them aware of each other and even to provide resources to get them to start to work together. They then join with others to form small teams, and these small teams then form bigger teams. All of sudden you have some things going on that really do stand out across the campus and across the world.

This is, I think, a pretty common paradigm for university research. You need a place that has scale; a lot different of people looking at a problem from different angles. And this is one of our true strengths here a U-M. If there’s one thing that the University of Michigan has is scale. So, we’re really well-positioned to take on much larger problems than the average institution.”

The scale of problems facing humankind is vast: climate challenges, energy challenges, and the spread of disease, to mention a few. We have such a plethora of interactions between human beings and the environment that affect our health and standard of living. These are grand challenges facing humankind today, and there are very few places that can address them.

The University of Michigan is far too small by itself to address these problems, of course, but at least we can generate that nucleus that can drive a theme within those problems. We can then link with other universities, institutions, companies, NGOs, governments, etc. to really solve the big problems that we face.

Talk about the commercialization process and your relationships with the private sector.

Something that we’re very actively engaged in developing is our university partnerships with the private sector. We’re doing that by starting a lot of private companies. The faculty has an idea and they test it in the lab, usually with government funding. If the idea has some legs to it they pursue opportunities to commercialize the idea.

The old method of commercialization was basically to offer licenses in a rather vague and broad-brushed way to the world, asking companies “Would you like to commercialize this for us?” That’s a pretty passive way a doing business. The University of Michigan, as well as many other universities, began to take a more active approach of encouraging faculty to start their own companies if they were so motivated.

We feel that this is very much part of our mission as a public university. The public good in this state is for economic development, there’s no question about that.

We’re a pretty big job creator here at the University of Michigan, certainly the largest in the region. But we also can do more. So, we’ve been actively exploring mechanisms to incentivize faculty and companies to work together to leverage more of our federal investment, particularly to get it into the private sector.

This has been quite successful. We’ve been spinning off new companies at the rate of one every six weeks, and Ken Nesbit [Executive Director of the U-M Tech Transfer] says it’s getting closer to one every five weeks now.

One of the things that we did with the NCRC [North Campus Research Complex] that was new for the University of Michigan was that we started the U-M Venture Accelerator [located in the NCRC]. That seems to have fired up the engine even a bit more because faculty now don’t have to go searching for high-class facilities to start up their companies. They can get mentoring from people who help them with business plans and getting money. It’s a full service operation. Plus, there is an abundance of first rate laboratory space.

The U-M Venture Accelerator has accelerated the formation of new companies. But more importantly, it will put the new companies on a much more successful track early on so that we have fewer failures. The business of starting new companies is never an easy one.

Talk about Universities relationship with the general public.

The biggest investor in our research is the federal government. [U-M received over $750 million in federal research funds in fiscal 2010]. The government is investing even more broadly across the country. That is taxpayer money; we should never forget that.

We have a responsibility to the taxpayers to inform them of what the value that investment is achieving. Whether it is looking deep into the universe to see the distribution of mass of stars, or it is something very practical such as searching for cures to rare diseases, we have the responsibility as researchers to not only do the very best job we can with the money, but also to give the public feedback. If we don’t give that feedback, the public will have no reason to continue to make this investment.

I think one of the really fine pieces of American culture is that, by and large, although people may not always have an appreciation of how research is conducted, they believe that research has created the engine of innovation and economic value to this country. We don’t want to see this sentiment disappear.

When times get tough, as they certainly are now, we have an even greater responsibility to keep the public informed and make it part of the process so that we don’t get the myths forming around research that we sometimes see. There is the myth, for example, that there is a grand conspiracy by climate scientists to fudge the data so that everyone believes that global warming is a human-made effect simply so that scientists can get more research money. I think that these myths evolve and get legs is because we in the research community haven’t been sufficiently communicative.

One area where we need to pay more attention is to public policy. I work in the energy field, where it is very easy to see why you can’t stop at the lab bench. Let’s say you come up with a new technology for a more efficient way to generate wind energy. The question is how to get policy makers and the public to accept this innovation as a solution; that fossil fuel has limitations, and why we may need to think about its replacement or augmentation at the very least. This is, at heart, a policy issue.

If, as a researcher, all I do is create a new and better way to make energy from wind, what’s the use of it if it ends up just sitting in my lab? Therefore, I encourage my students, as do other faculty, to be more engaged with the public. The spectrum of engagement goes from taking the time to inform the public about what you’re doing, to making the effort to interact with and inform policy makers.

What are your priorities for the next 12-24 months?

First and foremost: we have to keep our own research enterprise quite strong in the face of very uncertain times in Washington. There is a lot of tension along with contradictory messages that we’re getting out of Washington about the importance of research and discovery to our future. We have to stay strong in our research efforts if America is to remain a global leader in innovation.

My priorities, next, are to ensure that our faculty who want to engage the external community can do so easily and effectively. To do this, we want to remove as many barriers as possible, and there are many barriers that are built within a university that can make this type of engagement more onerous than necessary. These barriers are there as protections for our faculty as well as the institution. There are conflicts of interests, as you can image, that arise, so we have to be cognizant and respectful of those barriers. But, we also need to make it easier for our faculty to get out there and work with the public as much as possible. All we have to do is make sure that we energize those faculty who want to do this. If these willing faculty are energized, we would have a wonderful organizational problem trying to serve all their needs.

What message do you have for the local Ann Arbor area business community?

If they have challenges, we have expertise to help. They need to come to us. They need to recognize us as a huge resource, a unique resource, probably in all the Midwest. Most of the local companies are now aware that we have a Business Engagement Center that works hard to connect companies that have a problem to solve, with problem solvers at U-M. And that has been a real benefit to both the university and industry.

Companies should not feel constrained by the BEC, however. If employees of a company have a challenge that needs addressing, and they know of a professor who can help them, they should contact that professor directly. But companies should reach out to us; we’re constantly reaching out to them. They should know that this is an extremely important value to U-M to be good partners with the local business community.

by David Baker and Margaret Baker
www.bakerstrategy.com