Just last week I was trying to sell a large software project to a prospective client. It was a big client, with lots of users and a potential for lots of revenue. But they were tough negotiators. Actually, they were unreasonable negotiators. They asked for huge product discounts. They dismissed my recommendations for critical training and customizations. They thought my rate per hour was too high and insisted on paying a much lower amount. They were unrealistic and difficult to work with.
In the end, I had to walk from the opportunity. Looking at the numbers I realized that if I were to agree to their demands I would barely break even on the job. Most likely I would lose money. For my ten person company, a significant loss on a big project could be a disaster. This was too big. And too risky. It felt terrible at the time to walk away. It still feels terrible. I feel like I failed.
But was this a failure? Did the fact that I walked away from a bad deal mean that I didn't succeed? When you put down a half read-book or walk out of a movie you don't like you feel like you failed. When you choose not to have that big holiday party this year for your employees because sales are flat you feel like you're letting your people down. When you're unable to buy that Christmas present for your kid this year because you can't afford it, you feel like you're disappointing her.
But in reality....these aren't failures. These are conscious decisions NOT to fail. Failure would have been wasting your time with that lousy book or movie. Or wasting your money on that holiday party or expensive Christmas gift when you know darn well you couldn't afford it (and your daughter would likely be bored with by New Year's). Or taking on a project with too much risk and not enough return.
Smart business owners make decisions like this all the time. It's never a good feeling when we decide not to spend money or make an investment. But we know that to stay in business we have to make these choices and do what we have to do with the resources in hand.
The "Super Committee", that group of twelve Congressman who tried to come to an agreement on reducing our government's enormous deficit, did not fail. In the eyes of most small business people, they succeeded. They chose. Of all the options they considered they couldn't agree on what was best. So instead they made the decision to trigger automatic cuts across the board. It wasn't the best deal. But clearly it had to be better than all other alternatives or otherwise they would've agreed on something else.
This is no different than me choosing to walk away from that big software project. It wasn't the best decision. But it was the better decision for my business. You don't take risky big jobs that could lead to losses.
The committee couldn't agree on raising taxes. They couldn't agree that it would generate the necessary revenues needed to offset deficits. They couldn't agree that their customers (the taxpayers) would accept these higher taxes. They weren't sure that taxing the "rich" would have the intended effect of raising more revenue or, instead, cause this group to reduce their investments, hire less people and spend less money. They couldn't agree that the effect of raising taxes wouldn't be counter-productive, creating a barrier to growth and thereby reducing overall revenues to the government.
Was this a failure? To a small business owner, it's not.
I would love to raise the rate per hour we charge to our clients for services. I would love to increase our software prices to cover my ever-decreasing margins and ever-increasing overheads. Ask any small business owner and they'd love to charge more for what they sell. Problem is: we can't. In these times of low inflation and uncertainty more of our customers wouldn't pay if we increased our prices. Some may take their business elsewhere. Others may decide not to buy anything at all and wait for another time. I haven't raised my prices in over three years because I can't be more than 50% sure that a price increase wouldn't negatively affect my revenues. So I've decided not to do this. Maybe I'm wrong. Maybe I'm not as much of a risk taker as others. But this is my choice. This is not a failure.
And so now government agencies across the board, by law, will face significant cuts in their budgets. Now there will be $1.2 trillion in expense reductions beginning in 2013. No government department will be spared.
According to one report the reductions would look like this: "$216 billion would be assumed interest savings. That would leave $984 billion in automatic spending cuts over 10 years.That works out to around $55 billion annually each from defense and domestic programs though a Congressional Budget Office analysis shows that comes out to 10 percent of the Pentagon budget in 2013 alone, a huge hit. On the domestic side, the law exempts Social Security, Medicaid and many veterans' benefits and low-income programs. It also limits Medicare to a 2 percent reduction. That leaves education, agriculture and the environment programs exposed to cuts of around 8 percent in 2013, according to the CBO."
Are these reductions painful? You bet they are. No one wants to see cuts in our spending on education. We don't want our food safety jeopardized. We're concerned with the environment. I, for one, am extremely concerned about cuts to our defense budget, particularly in wake of the China's rise, Iran's nuclear programs and our ongoing fight against terrorists that want to see our way of life destroyed. No one's happy about this.
Just like no one's happy when a small business owner decides to cut back on holiday parties. Or reduce overtime pay. Or forego another year of repairs to his roof, hoping against bad weather and counting on luck to get him by.
But that's what smart business owners do. They don't spend money they don't have. They make painful cuts so that they can stay in business, ride out slow economic times, and ensure that their employees still have jobs when the cycle turns around and things inevitably pick up again. It's painful. It feels like failure. But it's not. It's just us making hard decisions so that our companies can continue to compete. The smartest ones innovate and figure out ways to grow their companies on a shoestring.
And now both small businesses and government will be faced with more choices.
If the President stands firm on his promise yesterday to veto any attempts to change these automatic cuts then those businesses whose largest customers are the government will need to make some changes. After years of economic stimulus and other largess, less money will be coming to defense contractors, educational providers and consulting firms. Do those companies bear down and prepare to battle to the death over the remaining funds available, or do they change direction and go after different markets?
And taxes are still on the table. The next debate will (again) be about the Bush era tax cuts which were last extended until the end of 2012. If they are allowed to lapse then we'd all see about a 10% increase in our taxes and the top rate would go up to 39.6%. Given the Super Committee's decision in favor of automatic spending reductions, will Congress ultimately vote to let these tax cuts expire? Many small business owners like me will be watching closely. If repeal seems likely , then we'll need to do some serious tax planning with our accountants before the legislation takes place.
And finally, will markets appreciate the benefits of what just happened? Will they realize that the Super Committee made a choice to allow automatic cuts to take place and that, as a result, our government is now taking significant steps to get its budget deficit under control? Or, like the media likes to say, will they interpret this as just " giving up." Will other governments and investors in U.S. Treasuries view these events as making America a better risk for them...or worse?
As the news begins to seep in, I believe that most in the business community, particularly those of us in small business, will view what has happened as good for this country. Our government actually made some hard choices to reduce our deficits. Even a Super Committee of experienced politicians couldn't come up with a better answer. Of course it's painful. Losing that software project was painful. Small businesses understand this. We've been living in this pain for the past few years. But it's been our reality. And many of us are glad to see the government get a dose of this reality too.