May 12, 2022


Troublesome Challenges Facing the US Economy Today

Annacaroline Caruso, editorial associate

The U.S. economy rebounded faster than anyone could have predicted following the pandemic. But now, economic growth is unexpectedly slowing as GDP contracted in the first quarter of 2022, according to the Bureau of Economic Analysis.

This is the first time the U.S. economy declined since the pandemic started in spring 2020. The drop has fueled concerns for a serious economic downturn. According to a recent eNews poll, 75% of credit professionals are worried about today’s economy, and 73% of those fear we are headed toward a recession.

Persistent inflation, supply disruptions and aggressive rate hikes from the Federal Reserve means the U.S. economy has a 70% chance of slipping into a recession within the next year, said NACM Economist Amy Crews Cutts, Ph.D., CBE. “Rate hikes are a blunt instrument,” Cutts said in a recent episode of NACM’s Extra Credit podcast. “It can take months for the impact of rate hikes to be felt; but once they are, it can be devastating. So, for the Fed to come up so fast, we could be looking at a mid-summer impact of these rate increases.”

However, the Fed does not have many tools beyond rate hikes to tame the current 40-year-high inflation. “To be seen not fighting it is politically unwinnable,” Cutts told the Wall Street Journal in April. “But the only policy response the Fed has is to tighten. Fed actions to curb inflation will lead to a recession sooner rather than later.” Hiking up interest rates won’t solve the fundamental problem, which she attributes to a global supply problem surrounding critical materials, Cutts told The New York Times on May 6.

Wages also are inflated and the job market continues to tighten, which puts further stress on the economy. Jobs are opening up faster than businesses can fill positions. “The fact that pay is not keeping pace with prices is likely weighing on some would-be workers’ decision to stay out of the labor market. Why would they go back to work if they won’t see real returns on their labor?” reads a report from Morning Consult.

And some are unsure that enough nonworking adults needed to offset demand and wage inflation will come back to the labor force. “It’s hard to imagine that a lot of people are going to come off the sidelines of being out of the labor force as COVID winds down, that they’re going to get jobs, and that the [job] vacancy rate is going to fall,” Larry Summers, professor at Harvard University, told Kellogg Insight.

China’s COVID lockdowns and slowing GDP also poses a serious risk to the U.S. economy. “China and U.S. have such close trade ties, so the impact of weakening Chinese growth and lockdowns will be more pronounced than what we’ve seen from the Ukraine war,” John Leer, chief economist for Morning Consult, said during a webinar.

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Settlement Strategy Is More Important Than Litigation Strategy

Michael H. Payne, partner, Cohen Seglias Pallas Greenhall & Furman PC

In the world of federal government contract disputes, a great deal of time is frequently spent drafting a request for equitable adjustment (REA) or a claim under the Contract Disputes Act. Both of these actions are often a prelude to litigation and, when the parties cannot agree to an amicable resolution, lead, inevitably, to a trial. Once this process is underway, contractors and their attorneys begin the tedious process of developing a litigation strategy that involves reviewing voluminous documents, identifying and interviewing potential witnesses, and everything that goes into pre-trial discovery.

The process is time-consuming and expensive. This is unfortunate because there is little doubt that putting a dispute in the hands of a judge is the most hazardous and unpredictable way to resolve a dispute. The sad truth is that some judges have a government bias, but there are also some who are more willing to accept a contractor’s point of view. Ideally, the result of litigation should not depend on the luck of the draw when it comes to the appointment of a judge.

It has been said that the best way to avoid a trial is to prepare for trial. While it is always a good idea to out-prepare your opponent, winning involves more than superior preparation. The facts need to be on your side, the documents must support your position, the recollection and credibility of witnesses may be an issue, and the law may not be completely on your side. In other words, there are few claims that amount to “slam dunk” winners so a compromise settlement may provide the best opportunity for success, even if it is only a partial success. It is important in all of this for contractors to refrain from “falling in love” with their claims. One thing is certain, recovering some time and money is preferable to a total loss.

Lawyers normally perform a litigation risk assessment in order to advise their clients on the probability of success if a case goes to trial. The greater the risk, the more important a settlement strategy becomes. Just as there are rarely “slam dunks” for the contractor, the government normally has its own concerns and will perform its own litigation risk analysis. When both sides recognize that they have exposure and could ultimately lose the case, the stage is set for settlement discussions. A successful settlement strategy involves convincing the government that a compromise in its best interest. This requires developing a non-combative working relationship with government counsel, opening a dialogue that communicates the strength of your position, and inviting the government to hear a presentation of your case. While some might see this as giving the government “free” discovery, there is no reason to hide the quality of your position.

Once a claim has been submitted, or even after the appeal of a Contracting Officer’s Final Decision, contractors should continue to press for meetings and open discussions about the claim. Depositions of the government’s witnesses can be an effective way of demonstrating weakness in the government’s case and should be followed up by discussions with counsel. Timing is very important, and knowing what buttons to push (and when to push them) is critical. The goal in all of this is to devise a strategy to settle the case and avoid a costly and risky trial. Contractors should be wary of those who prioritize winning the litigation battle over doing what is best, in the long run, for the contractor. Unfortunately, there is no such thing as a cookie-cutter approach to settling a case. It takes experienced counsel and reasonable people on both sides.

While preparing for trial, contractors and their counsel should spend an equal amount of time exploring what a reasonable settlement would look like and devising a plan to achieve it.

Reprinted with permission by Cohen Seglias Pallas Greenhall & Furman PC.

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Industry Credit Groups Could Be the Key to Navigating a Volatile Economy

Annacaroline Caruso, editorial associate

Credit professionals have a variety of avenues to obtain the information they need in order to make diligent credit decisions—for example, bank references, financials and credit reports. But many say industry groups reign far superior over other information sources if you want to paint a complete picture.

“It is just a necessity in the credit profession to be involved in an industry group because the information you take back is unmatched,” said Kyle King, CCE, chairman of the metals industry group out of NACM Southwest. “You will get more detailed information from a group than you would with, say a credit report, because you take away stories to back up that other data.”

Industry groups generally meet on a monthly basis to discuss what trends they are seeing, but members keep in touch much more often, said King, who also is regional credit manager at Joseph T. Ryerson & Son, Inc. (Little Rock, AR). “Anytime I encounter a new situation, I have handfuls of peers to call and collaborate with. We send several emails a day to each other and exchange information.”

In a world where the economy is unpredictable, having a network of peers on hand can be the quickest and most reliable way to stay ahead of the curve, said Toni Drake, CCE, president of TRM Financial Services, Inc. (Midland, TX), who participates in oil, gas and energy groups.

“Right now, with all the business interruptions, supply chain issues and inflation changing overnight, we need a source for real-time information,” she said. “Because what was true six months ago is no longer the case. So, for us to have that resource where we can get information almost immediately from our group members becomes invaluable. I would hate to be without a credit group right now.”

Industry groups also help mitigate risk when vetting new customers, said Karen Watson, CBA, participant in the paper merchant industry group and credit manager with Lindenmeyr Munroe (Dallas, TX). “When we get a new customer, we still check with the bank of course, but we always check with the other members of the trade group because a customer may not be listed yet as slow paying. It prevents a customer who had trouble paying one vendor to quickly switch to another vendor.”

Yet some companies can be hesitant to allow their credit teams to participate in these groups for fear of breaking antitrust laws, losing customers to competitors, lack of time or simply because upper management does not see the benefit, Watson added. “I think it can be hard to convince the business that it is actually in their benefit. But once they realize how much money they can save by being ahead of the game with the information from these groups, then they may be less worried.”

If that sounds like your business, Drake recommends to “bring your operations manager, president or upper management and let them sit in on a meeting because I think they would come away with an entirely different mindset.” That’s because while these groups help mitigate risk, they also allow a space for credit professionals to share best practices and learn basic credit skills from one another.

You can learn more about NACM industry credit groups on our website. If you are interested in joining a group, contact your local affiliate.

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Leading Is Tough Right Now, But You’ve Got This

Kellogg Insight

The last few years have not been easy on leaders, to say the least. But according to Harry Kraemer, good leadership still looks a lot like it did pre-pandemic.

“The requirements to be a leader have always remained pretty constant. It’s leading yourself, leading others, communicating like crazy, listening carefully, demonstrating you care,” says Kraemer. So instead of changing your style, what the current moment calls for “is really turning up the volume.”

Kraemer is a clinical professor of leadership at Kellogg and executive partner with the Chicago-based PE firm Madison Dearborn Partners. Before coming to Kellogg, he was CEO of healthcare giant Baxter International. In a recent webinar for The Insightful Leader Live, he shared how leaders across an organization can amp up their leadership skills to meet crises with grace.

Double Down on Self-Reflection

Before you can lead others through turbulent times, you need to first lead yourself—which of course requires understanding yourself. This is pretty much always good advice. Kraemer has long advised leaders to set aside a few minutes each day to self-reflect on what they intended to do, what they actually did, and what they might have done differently—both at work and in other areas of their life. (You can read a full list of his favorite prompts for self-reflection here.)

Self-reflection is even more critical during a crisis, he explains. Even in easy times, we have a tendency to want to move quickly, lest all of our decisions and responsibilities start to pile up. In a crisis, this tendency gets much worse. But this confuses activity with productivity. It is far better to do less, but to be intentional and strategic about how those things are done—especially when time is tight and the stakes are high.

Kraemer also advises occasionally looking beyond yourself for this insight—a gut check, if you will, about whether your actions align with the things you say you care about. Specifically, he advises sharing your priorities and values with others, and then waiting to see how they react.

“The good side is when [they] say, ‘Hey, Harry, you know, you can stop here. I mean, I’ve been working with you, I see your actions every day. Based on your actions, I could have guessed what your values are,” he says. “Now the other side, a little scarier, is when [they] say, ‘Wow, based on your actions, I’m amazed you think those are your values.’”

Double Down on Communication

No matter where you sit in an organization, the key to leading others is influence. And the key to influence is showing people that you understand them: their perspective, their experiences, and at a bare minimum, even just their names.

When Kraemer asks his MBA or executive education students how many of them desire to lead, many hands go up. When he asks them how many of them “relate” well with people, again, there’s a sea of hands. Then he instructs students not to raise their hands—he doesn’t want to embarrass them—but to simply reflect: “How many of you know the name of the receptionist, when you walk into the building? How many of you, when you go in the cafeteria, know the names of everybody? And how many children they have? And when you’re talking to the maintenance folks, do you know their favorite sports team and thank them for everything they are doing?”

If you can truly relate to others and see where they are coming from, you can have an “enormous impact,” Kraemer explains. Again, this is always the case. But during a crisis, leaders need to “pump it up a lot more.” In addition to continuously checking in to see how people are doing, leaders should be extra diligent with other communication efforts, such as ensuring everybody is crystal clear on their own role, the expectations that are in place, and how people will be held accountable.

Even if you find yourself spending 90 percent of your time on communication, it isn’t necessarily a problem. After all, says Kraemer, “If I’ve got all the right people, and if everybody knows exactly what to do, what else is there to do?”

Same Advice, Lots of Situations

In Kraemer’s view, this advice—to focus, above all, on how you relate to and communicate with others—applies to most of the stickiest scenarios in which you are likely to find yourself while leading during a crisis.

Take discussions about future layoffs. Don’t promise people that there will never, ever be layoffs, or that their job is theirs for life. These promises are nearly impossible for most organizations to keep. Instead, be transparent about what would happen if layoffs did occur, and ensure your team that you will do everything in your power to treat them as you would like to be treated. (And then follow through on it.) This could include providing employees with professional-development opportunities while they are employed, as well as helping them find their next role if they are let go.

“At Baxter,” says Kraemer, “we would literally take the time to figure out, on average, how many weeks did it take to find the person another job.” Or take managing up. Say you are an entry-level employee hoping to influence your manager to do something differently or the CEO hoping to convince your board of directors about the wisdom of your next move.

Once again, the key is relating and communicating. Kraemer advises studying how those above you in the organization operate: What do they respond to? What works and what doesn’t? If someone has a big ego, for instance, can you convince them that your idea is actually their idea? Or maybe they won’t listen to you, but they are likely to listen to someone else. Go ahead and engage that person instead.

As Kraemer says, “I’ve got to figure out a way to be able to relate to you, so I can change your mind; I can change the direction.”

Previously published in Kellogg Insight. Reprinted with permission of the Kellogg School of Management.

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