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SMITH-TRG, 2010 Year to Emerge, Special Report, 10 Reasons for Optimism, CXO Outlook by Richard D. Smith

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January 2010 Special Report From SMITH -TRG A BUSINESS ADVISORY SERVICE OF SMITH-TRG A Copyright 2010 SMITH-TRG, All rights reserved. 10 Reasons For Optimism ¡®2010 Is Year to Emerge¡¯ In four previous U.S. ¡®Road to Recovery¡¯ CXO studies SMITH-TRG considered how shifting Wall Street activities, Federal policies, business trends, employment demographics, declining state revenues, and consumer behavior have impacted the By: Richard D. Smith national economic infrastructure. In the following excerpt from the latest of a CEO, SMITH-TRG continuing series of Special Reports, the company examines how enterprises from RDSmith@SMITH-TRG.com across industry sectors and geographic regions have adapted to market conditions to determine if 2010 is the transition year for sustainable economic growth. SMITH-TRG
January 2010 09 Year-End Assessment 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. I. Even with a strong recovery, annual deficits will average about 5% of GDP over the next decade, and total debt will climb to nearly 77% of GDP, its highest level since 1952. II. Persistent deficits of this size will put upward pressure on SMITH-TRG long-term interest rates, crowding out investment and stunting long-term growth. Interest payments on the debt will be onerous - by 2019 they will exceed defense spending. III. Investor anxiety about the huge borrowing needs of the U.S. government could trigger a sharp decline in the dollar and another crisis in global financial markets. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
CXO Copyright 2010 SMITH-TRG, All rights reserved. OUTLOOK The results of this SMITH-TRG led study reflects the consensus view of 250 participating U.S. based small, mid-market and Global 1000 company CXO¡¯s. SMITH-TRG
January 2010 1. Vision & Positioning 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 1. Vision & Positioning. Over 80% of participants updated their vision statements to reflect greater customer centricity. Consequently, these businesses re-engineered /re- fined customer relationship management (CRM) processes and down-sized then right-sized SMITH-TRG operations to optimize going-forward market position(s). Despite anticipated challenges, 76% invested heavily in business development --- are The vast majority of study poised to seize upon target market opportunities CXO¡¯s believe the turbulent which they believe will set the stage for improved times of 2008 &2009 are risk management and sector changes, including behind them. mergers, acquisitions, and divestitures. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
January 2010 Innovation/R&D 2. & 3. & Growth Capacity 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 2. Innovation/R&D. Yes, during turbulent times companies across industries, market sectors, and product line segments drastically reduced R&D budgets. However, beginning in mid-2009 over 85% of surveyed enterprises increased innovation /R&D funding -- are now focused on gaining market share. SMITH-TRG 3. Growth Capacity. U.S. based manufacturers, associated distributors and service enterprises are taking a contrarian view regarding historically low inventories and dwindling product lines. They consider themselves, those remaining/working with growth funding sources, to be the primary ¡®capacity-scalable¡¯ beneficiaries as latent /pent-up demand begins to surge. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
January 2010 Tax Management & 4. & 5. Incentive Compensation Plans 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 4. Tax Management. Current economic/political realities indicate that the Federal Government and 50 recession-scarred states, states with aggregate deficits of $500 Billion, who previously wanted to increase taxes and fees will hold or reduce taxes and offer incentives to SMITH-TRG stimulate jobs creation. 5. Incentive Compensation Plans. Some 82% of CXO¡¯s believe privately held and public company incentive plans, unlike those of Wall Street firms and banks, will not draw scrutiny. Business IC plans will continue to be a positive motivating force designed to achieve key performance objectives. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
January 2010 Cyber Threats/Fraud & 6. & 7. Third Party Relationships 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 6. Cyber Threats /Fraud. Nearly 74% believe cyber threat management costs will be reduced via employee vigilance and greater vendor (Microsoft, Google, Yahoo, McAfee, etc¡­) investment in more secure products. Internal fraud is expected to be negated via improved and ongoing SMITH-TRG audits and more stringent financial controls. 7. Third-Party Relationships. Over 70% say third party relationships will expand with those who have best demonstrated their ability to survive the economic downturn. Key issues: people trust, business integrity, product or service value, and timely ¡®measurable results¡¯ delivered. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
January 2010 Outsourcing Services 8. & 9. & Human Resources 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 8. Outsourcing Services. To enhance control structures & processes and protect intellectual property (IP), over 68% of participants intend to outsource only to U.S. based customer relationship management (CRM) and/or back-office financial function firms. Just 12% SMITH-TRG consider off-shoring a viable option going-forward. 9. Human Resources (a.k.a. Intellectual Capital). Intellectual Capital Nearly 95% believe the ease of identification and (HR-Brain Power) recruitment of qualified job candidates has never been better! The ¡®HR - intellectual capital¡¯ glue required to fill business unique skill gaps is readily available via the 26.5 million pool of unemployed and underemployed U.S. citizens. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
January 2010 10. The Economy 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 10. The Economy. Over 80% of participating CXO¡¯s are optimistic about near-term prospects for the nations economy because: ? Proposed healthcare legislation, which would have directly/indirectly increased business operating costs, will not pass in its expansive SMITH-TRG form thus minimizing associated enterprise budgeting risks. Future is more predictable. ? Both Federal and State governments will make job creation their #1 priority. As a consequence, new tax legislation (example: Cap & Trade energy tax) will be deferred or dropped. ? The immediate need to reduce $12.1 Trillion deficit will shrink government size and reach. ? With the above three done/in-play, bankers willingness to lend will increase and in-turn consumer confidence will climb. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
January 2010 4 Randomly Selected Q&A¡¯s (no particular order) CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 1st. Question: What could Federal Government do to demonstrate fiscal leadership? CXO #1 Answer: Hold government agencies to same P&L performance standards as private sector. Example, Federal government employees during Presidential campaign owed the IRS over $3 Billion SMITH-TRG in unpaid taxes. Today, IRS is still owed over $3Billion by Federal employees. In the private sector, you¡¯d be fired for not paying back money owed the business! Dual standard, irresponsible. CXO #2 Answer: We¡¯ve had the Stimulus Binge. Now we have a debt Hangover. The President and the Fed need to articulate their Federal Debt reduction and management plan¡­soon. See follow-on Debt Reckoning information >>>
January 2010 CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. Japan is a poster child for the Great Reckoning. Asia's biggest economy has little to show for the 30 trillion yen ($329 billion) that the government has pumped into it since late 2008. Unemployment, already at a near-record 5.2%, is edging higher. Meanwhile, deflation SMITH-TRG is intensifying, wages are stagnant, and worried households are saving more and spending less. Worse, Japan's population is aging rapidly, reducing the tax base and raising social costs. The most indebted among industrialized nations, with public debt approaching 200% of GDP, slow-growth Japan risks seeing a downgrade of its Aa2 credit rating this year. "Japan is the mega-risk problem. It's the next big thing that will hit credit markets," says Carl Weinberg, chief economist at High Frequency Economics.
January 2010 CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 2nd. Question: Name a major Federal Agency that is run well. CXO Answer: None. Look a the IRS (see chart) or the Office of Personnel SMITH-TRG Management. OPM¡¯s leader calls his agency dysfunctional. OPM is outsourcing their ¡®Human Resources¡¯ work because they don¡¯t have the competency or know how to manage their business.
January 2010 CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 3rd. Question: What is the most significant issue faced by U.S. private enterprise today? CXO Answer: Access to capital. Banks, in general, are afraid to lend primarily because of unstable national economy, perceived loan applicant market risks, and/or new Federal banking regulations. SMITH-TRG 4th. Question: How do you feel about China? CXO Answer: China¡¯s recent cyber attack on Google and related business espionage activities represents a strategic threat to Western economies. Consequently, more U.S. companies are rethinking the value of operating there. In addition, China¡¯s behavior is helping American consumers make a more compelling case for boycotting Chinese goods.
January 2010 Our Predictions 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. #1. Manufacturing will start a slow but sustainable path forward by end of 1st Qtr. 2010. This is a contrarian perspective. We see customer-centric and innovation driven specialty firms leading the way. SMITH-TRG
January 2010 Our Predictions 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. #2. Consumer goods spending will begin a mild surge by end of 2nd Qtr. and into 3rd Qtr. 2010. SMITH-TRG
January 2010 Our Predictions 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. #3. A Second Economic Shoe Will Drop in early 2nd Qtr. 2010 ¡°A Combination of Commercial Real-Estate Defaults & Community Bank Failures¡± Example indicators: Silicon Valley, CA market has over 43 million sq. ft. (15 Empire State Buildings) of vacant buildings. Valley foreclosures expected to double in 2010 to $1.5 Billion. SMITH-TRG These assets have lost half their value per Real Capital Analytics, N.Y research firm. Tenants in existing buildings are re-negotiating 20% discounts to stay or they move/relocate. Most community banks, unwilling to make business loans, continue to be hobbled by commercial construction and real- estate loans that soured after the implosion of several large mortgage lenders in 2008. The jobless recovery, weak economy and expected loan defaults put more at risk. On Jan. 8th, Horizon Bank was first bank to close in 2010. There were 140 failed banks in 2009, compared to 25 in 2008 and 3 in 2007.
January 2010 SMITH -TRG ON ENTERPRISE TRANSFORMATION A Copyright 2010 SMITH-TRG, All rights reserved. ¡°Now is the time for America to do a business growth paradigm shift. A transformative rethink of how it SMITH-TRG designs, finances, builds and grows market competitive U.S. based businesses.¡±
SMITH-TRG BUSINESS ADVISORS Thank you! We assist. . . Copyright 2010 SMITH-TRG, All rights reserved. ? CEO¡¯s to create business value ? CXO Stakeholders to solve business performance problems ? Innovators to develop more ¡®customer-centric¡¯ propositions CXO ? Business Developers to maximize return on their investments OUTLOOK SMITH-TRG By: Richard D. Smith RDSmith@SMITH-TRG.com

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SMITH-TRG, 2010 Year to Emerge, 10 Reasons for Optimism by Richard D. Smith

  • 1. January 2010 Special Report From SMITH -TRG A BUSINESS ADVISORY SERVICE OF SMITH-TRG A Copyright 2010 SMITH-TRG, All rights reserved. 10 Reasons For Optimism ¡®2010 Is Year to Emerge¡¯ In four previous U.S. ¡®Road to Recovery¡¯ CXO studies SMITH-TRG considered how shifting Wall Street activities, Federal policies, business trends, employment demographics, declining state revenues, and consumer behavior have impacted the By: Richard D. Smith national economic infrastructure. In the following excerpt from the latest of a CEO, SMITH-TRG continuing series of Special Reports, the company examines how enterprises from RDSmith@SMITH-TRG.com across industry sectors and geographic regions have adapted to market conditions to determine if 2010 is the transition year for sustainable economic growth. SMITH-TRG
  • 2. January 2010 09 Year-End Assessment 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. I. Even with a strong recovery, annual deficits will average about 5% of GDP over the next decade, and total debt will climb to nearly 77% of GDP, its highest level since 1952. II. Persistent deficits of this size will put upward pressure on SMITH-TRG long-term interest rates, crowding out investment and stunting long-term growth. Interest payments on the debt will be onerous - by 2019 they will exceed defense spending. III. Investor anxiety about the huge borrowing needs of the U.S. government could trigger a sharp decline in the dollar and another crisis in global financial markets. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 3. CXO Copyright 2010 SMITH-TRG, All rights reserved. OUTLOOK The results of this SMITH-TRG led study reflects the consensus view of 250 participating U.S. based small, mid-market and Global 1000 company CXO¡¯s. SMITH-TRG
  • 4. January 2010 1. Vision & Positioning 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 1. Vision & Positioning. Over 80% of participants updated their vision statements to reflect greater customer centricity. Consequently, these businesses re-engineered /re- fined customer relationship management (CRM) processes and down-sized then right-sized SMITH-TRG operations to optimize going-forward market position(s). Despite anticipated challenges, 76% invested heavily in business development --- are The vast majority of study poised to seize upon target market opportunities CXO¡¯s believe the turbulent which they believe will set the stage for improved times of 2008 &2009 are risk management and sector changes, including behind them. mergers, acquisitions, and divestitures. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 5. January 2010 Innovation/R&D 2. & 3. & Growth Capacity 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 2. Innovation/R&D. Yes, during turbulent times companies across industries, market sectors, and product line segments drastically reduced R&D budgets. However, beginning in mid-2009 over 85% of surveyed enterprises increased innovation /R&D funding -- are now focused on gaining market share. SMITH-TRG 3. Growth Capacity. U.S. based manufacturers, associated distributors and service enterprises are taking a contrarian view regarding historically low inventories and dwindling product lines. They consider themselves, those remaining/working with growth funding sources, to be the primary ¡®capacity-scalable¡¯ beneficiaries as latent /pent-up demand begins to surge. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 6. January 2010 Tax Management & 4. & 5. Incentive Compensation Plans 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 4. Tax Management. Current economic/political realities indicate that the Federal Government and 50 recession-scarred states, states with aggregate deficits of $500 Billion, who previously wanted to increase taxes and fees will hold or reduce taxes and offer incentives to SMITH-TRG stimulate jobs creation. 5. Incentive Compensation Plans. Some 82% of CXO¡¯s believe privately held and public company incentive plans, unlike those of Wall Street firms and banks, will not draw scrutiny. Business IC plans will continue to be a positive motivating force designed to achieve key performance objectives. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 7. January 2010 Cyber Threats/Fraud & 6. & 7. Third Party Relationships 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 6. Cyber Threats /Fraud. Nearly 74% believe cyber threat management costs will be reduced via employee vigilance and greater vendor (Microsoft, Google, Yahoo, McAfee, etc¡­) investment in more secure products. Internal fraud is expected to be negated via improved and ongoing SMITH-TRG audits and more stringent financial controls. 7. Third-Party Relationships. Over 70% say third party relationships will expand with those who have best demonstrated their ability to survive the economic downturn. Key issues: people trust, business integrity, product or service value, and timely ¡®measurable results¡¯ delivered. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 8. January 2010 Outsourcing Services 8. & 9. & Human Resources 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 8. Outsourcing Services. To enhance control structures & processes and protect intellectual property (IP), over 68% of participants intend to outsource only to U.S. based customer relationship management (CRM) and/or back-office financial function firms. Just 12% SMITH-TRG consider off-shoring a viable option going-forward. 9. Human Resources (a.k.a. Intellectual Capital). Intellectual Capital Nearly 95% believe the ease of identification and (HR-Brain Power) recruitment of qualified job candidates has never been better! The ¡®HR - intellectual capital¡¯ glue required to fill business unique skill gaps is readily available via the 26.5 million pool of unemployed and underemployed U.S. citizens. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 9. January 2010 10. The Economy 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 10. The Economy. Over 80% of participating CXO¡¯s are optimistic about near-term prospects for the nations economy because: ? Proposed healthcare legislation, which would have directly/indirectly increased business operating costs, will not pass in its expansive SMITH-TRG form thus minimizing associated enterprise budgeting risks. Future is more predictable. ? Both Federal and State governments will make job creation their #1 priority. As a consequence, new tax legislation (example: Cap & Trade energy tax) will be deferred or dropped. ? The immediate need to reduce $12.1 Trillion deficit will shrink government size and reach. ? With the above three done/in-play, bankers willingness to lend will increase and in-turn consumer confidence will climb. ¡®2010 is Year to Emerge¡¯ - 10 Reasons For Optimism
  • 10. January 2010 4 Randomly Selected Q&A¡¯s (no particular order) CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 1st. Question: What could Federal Government do to demonstrate fiscal leadership? CXO #1 Answer: Hold government agencies to same P&L performance standards as private sector. Example, Federal government employees during Presidential campaign owed the IRS over $3 Billion SMITH-TRG in unpaid taxes. Today, IRS is still owed over $3Billion by Federal employees. In the private sector, you¡¯d be fired for not paying back money owed the business! Dual standard, irresponsible. CXO #2 Answer: We¡¯ve had the Stimulus Binge. Now we have a debt Hangover. The President and the Fed need to articulate their Federal Debt reduction and management plan¡­soon. See follow-on Debt Reckoning information >>>
  • 11. January 2010 CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. Japan is a poster child for the Great Reckoning. Asia's biggest economy has little to show for the 30 trillion yen ($329 billion) that the government has pumped into it since late 2008. Unemployment, already at a near-record 5.2%, is edging higher. Meanwhile, deflation SMITH-TRG is intensifying, wages are stagnant, and worried households are saving more and spending less. Worse, Japan's population is aging rapidly, reducing the tax base and raising social costs. The most indebted among industrialized nations, with public debt approaching 200% of GDP, slow-growth Japan risks seeing a downgrade of its Aa2 credit rating this year. "Japan is the mega-risk problem. It's the next big thing that will hit credit markets," says Carl Weinberg, chief economist at High Frequency Economics.
  • 12. January 2010 CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 2nd. Question: Name a major Federal Agency that is run well. CXO Answer: None. Look a the IRS (see chart) or the Office of Personnel SMITH-TRG Management. OPM¡¯s leader calls his agency dysfunctional. OPM is outsourcing their ¡®Human Resources¡¯ work because they don¡¯t have the competency or know how to manage their business.
  • 13. January 2010 CXO¡¯s Speak 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. 3rd. Question: What is the most significant issue faced by U.S. private enterprise today? CXO Answer: Access to capital. Banks, in general, are afraid to lend primarily because of unstable national economy, perceived loan applicant market risks, and/or new Federal banking regulations. SMITH-TRG 4th. Question: How do you feel about China? CXO Answer: China¡¯s recent cyber attack on Google and related business espionage activities represents a strategic threat to Western economies. Consequently, more U.S. companies are rethinking the value of operating there. In addition, China¡¯s behavior is helping American consumers make a more compelling case for boycotting Chinese goods.
  • 14. January 2010 Our Predictions 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. #1. Manufacturing will start a slow but sustainable path forward by end of 1st Qtr. 2010. This is a contrarian perspective. We see customer-centric and innovation driven specialty firms leading the way. SMITH-TRG
  • 15. January 2010 Our Predictions 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. #2. Consumer goods spending will begin a mild surge by end of 2nd Qtr. and into 3rd Qtr. 2010. SMITH-TRG
  • 16. January 2010 Our Predictions 2010 CXO OUTLOOK A Copyright 2010 SMITH-TRG, All rights reserved. #3. A Second Economic Shoe Will Drop in early 2nd Qtr. 2010 ¡°A Combination of Commercial Real-Estate Defaults & Community Bank Failures¡± Example indicators: Silicon Valley, CA market has over 43 million sq. ft. (15 Empire State Buildings) of vacant buildings. Valley foreclosures expected to double in 2010 to $1.5 Billion. SMITH-TRG These assets have lost half their value per Real Capital Analytics, N.Y research firm. Tenants in existing buildings are re-negotiating 20% discounts to stay or they move/relocate. Most community banks, unwilling to make business loans, continue to be hobbled by commercial construction and real- estate loans that soured after the implosion of several large mortgage lenders in 2008. The jobless recovery, weak economy and expected loan defaults put more at risk. On Jan. 8th, Horizon Bank was first bank to close in 2010. There were 140 failed banks in 2009, compared to 25 in 2008 and 3 in 2007.
  • 17. January 2010 SMITH -TRG ON ENTERPRISE TRANSFORMATION A Copyright 2010 SMITH-TRG, All rights reserved. ¡°Now is the time for America to do a business growth paradigm shift. A transformative rethink of how it SMITH-TRG designs, finances, builds and grows market competitive U.S. based businesses.¡±
  • 18. SMITH-TRG BUSINESS ADVISORS Thank you! We assist. . . Copyright 2010 SMITH-TRG, All rights reserved. ? CEO¡¯s to create business value ? CXO Stakeholders to solve business performance problems ? Innovators to develop more ¡®customer-centric¡¯ propositions CXO ? Business Developers to maximize return on their investments OUTLOOK SMITH-TRG By: Richard D. Smith RDSmith@SMITH-TRG.com