Corporate Bulimia: Why Current Profitability Models are Unsustainable & What to Do about It.

Corporate Bulimia: Why Current

Profitability Models are Unsustainable…& What to Do About It

By

Dr. William (Bil)l DeMarco

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Abstract:

Over the past few decades, profitability has become almost the exclusive driver for most businesses due to the unrelenting-short term profitability demands of boards and shareholders.  Service to all stakeholders, superior quality, leading edge research, and executive & management development have all become casualties to the lowest hanging fruit in most organizations: cost-cutting.

Key business and government decision makers, including boards of directors, need to be weaned off of what has become an addiction to “chop-chop, cut- cut leadership”, because it is an unsustainable “fools gold” model of what good performance looks like, not to say anything of their fiduciary responsibility to sustain the enterprise. This has led to an obsession with having more profit in the next quarter/year than the last, with the ultimate goal of becoming/remaining the biggest  company in the industry.  Stockholders are rarely educated about what good really looks like.

Part One of this article points out why the current profitability model is unsustainable, and how we got here. Part Two is all about what inspired leaders can and should do about it.

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 Part One

Profitability is the gaining of advantageous returns on investments. When I began my career decades ago, there was discussion about the role of service to customers, respect for employees, and service to the community as a major if not primary purpose for a business’s existence. That was still the era of mutual insurance companies, multi-generational company employers/employees, banks partnering with customers and the community for the general good, and company towns.

Much has changed since those days. We have experienced a steady diet of downsized companies, unemployment rates so severe that even unemployment statistics fail to count the millions who have just stopped looking for employment, entire key industry sectors eviscerated or just moved offshore, millions of minimum wage jobs replacing well paying pensionable jobs.  Even mutual insurance companies, originally founded to perform some noble purpose for widows, orphans, and the general public, have almost all migrated to for-profit models.

There has been a gradual but undeniable redefinition of what a well run company looks like: profitability irrespective of the quality of customer service, employees treated as commodities, and service to the community frequently taking the form of events sponsorship and naming rights. One of the most glaring changes has been around pension funding.  Defined benefit (DB) programs, once very  highly valued for their secured pension fund  savings, have mostly been replaced by defined contribution (DC) profit-driven models. According to a Bloomberg 2018 report, the reliance of both pension models on stock investments over the last decades has led to a significant underfunding of  the pension reserves. Governments in both the U.S. and Canada, responsible for overseeing the funding of contractually agreed-to pension plans, allowed this, frequently charging an administrative fee for deferring funding company pensions, placing those administrative fees into government operating funds. All of this has led to a domino effect, not unlike families today relying on borrowed money (credit cards, lines of credit, home equity loans, etc.)…it looks good in the beginning until it comes time to pay the bills, or the income line slows down.

Feeling the profits-now pressure of most stockholders, company leadership very frequentlyThat failed to fund their pensions by taking “contribution holidays”; in Canada, federal and local governments that allowed this to happen were ostensibly trying to keep jobs within their jurisdictions.  During that time, Ontario pension law was not significantly different from other North American jurisdictions. Companies that took pension fund “contribution holidays” hoped to achieve higher market evaluations, stock splits, and other market-related activities that would generate “money” more quickly.  This in turn, would put a “happy face” on the next financial report. Hundreds of stock history shows us that this is unsustainable; stocks that go up in value do eventually go down as well.  While running out of resources to”sell off” and the ” happy face” approach to putting a good face on financial statements  quickly deteriorates to a personal and corporate survival issue.  Of course this is understandable at a purely human level, but this  hehavior has little to do with sound leadership.

To illustrate this, I once had a major Fortune 500 Company client that had a fantastic year-end in Europe, driven in no small part by the strength of the American dollar vis-à-vis the German Deutschmark.  European executives received large bonuses. In all these cases, irrespective of whether it was pension- related or not, we have examples of a “fools gold” model of what good performance looks like.

Like a drug addiction, these companies over time failed to see what was happening until it was too late. The Fortune 500 Company just mentioned, like so many others, was eventually sold off in parts. They all failed to recognize what really counted was truly growing the business through innovative new products, superior customer service, increased sales, constantly returning happy customers and more effective operations; for companies with under funded pension liabilities, this is particularly more important than the risky roll of the dice they too frequently engage in.

“Insanity is doing the same thing over and over again

and expecting different results.” – Albert Einstein

Governments in both the U.S. and Canada, responsible for overseeing the funding of contractually agreed-to pension plans, allowed this, frequently charging an administrative fee for deferring funding company pensions, placing those fees into government operating funds. All of this has led to a domino effect, not unlike families today relying on borrowed money (credit cards, lines of credit, home equity loans, etc.)…it looks good in the beginning until it comes time to pay the bills, or the income line slows down.

In the early to mid 1990’s, it seemed to work well for everyone. These diverted pension funds initially bolstered quarterly company and government numbers. Many pension funds even ran surpluses, while quarterly company profits looked rosy. As time went by, these under funded pension liabilities reached minor (1999) and not so minor (2008) tipping points as stock values deteriorated. Coupling these events with the ever-increasing number of retirees, even once venerable companies like General Motors frequently faced a perfect storm: ever-increasing underfunded pension liabilities, deteriorating value of corporate investments, and a rapidly growing number of retirees. The beat went on so relentlessly that by the end of 2011, 93 percent of federally regulated DB plans were under-funded according to the Office of the Superintendent of Financial Institutions of Canada.

The situation has gotten even more dire since then. For example, an August 2012 study by the credit rating agency Dominion Bond Rating Service Limited (DBRS) looked at 451 major corporate DB plans in the United States and Canada, including 65 north of the border. It found funding deficits of US$389 billion. DBRS noted more than two-thirds of the plans were “underfunded by a significant margin” and heading into a “danger zone, ” the point at which reversing the deficit becomes extremely difficult.As of 2018, with the highest stock values ever, these dangers have been masked for the time being; but hundreds of years of stock market history show that there will be a downward trend in the future.  That “danger zone” is still lurking.

I am not attempting to be critical of stockholders or pensioners here; they are on the receiving end of a profitability model which common sense would dictate is not sustainable for the long haul. Unfortunately, there ends up being multiple victims in this scenario… including stock holders/pensioners who rely on recurring profits for sustenance and lifestyle choice.

There are fundamentally two ways of achieving profitability: (1) grow the business through the judicious design and distribution of market-desired goods and services; (2) cut costs. The latter has become the dominant, and uninspired business/government means of obtaining more desirable numbers, because for all its management challenges, it is relatively easy to achieve and does not require much real business imagination. Of course companies need to be judicious with how they manage their businesses. However, there is an increasing obsession today with beating the analysts’ predictions, getting “bigger” , becoming the biggest in the industry at all costs, beating last quarter’s/year’s numbers no matter what, etc. etc. Executives of major companies enjoy hefty bonuses when this is achieved, frequently achieving seven and eight figures, irrespective of the sustainability of the means used to achieve such results. Company and government decision-makers have become too often addicted to the opiate of what I call “cut-cut, chop-chop leadership”, as if there is an endless supply of physical and human resources to be cut, or suppliers willing to provide goods and services for almost nothing. In this scenario, the temptation to cut salaries/benefits is great since human resource expenses account for over 50% of overall expenses for most companies; and the savings can go to the bottom line almost immediately.

Key business and government decision makers, including boards of directors, need to be weaned off of this addiction to “chop-chop cut- cut leadership”.  This management addiction is absolutely not sustainable for the long haul; and the lure of this borderline unethical yet highly profitable practice for too many executives/ board members to sell off the company is so very tantilizing.  in spite of their fiduciary responsibility to sustain the enterprise. In 1957, the average life expectancy of a company in the S&P 500 index was 75 years. Today, it’s less than 15 years.

There is a better way. It requires inspiration, courage, and real leadership where the enterprise is given a real purpose, recognition in high places that making money is a result not a purpose, and stakeholders at all levels give their willing effort to support that purpose. This is not a call to go back to a bygone era of any form of utopianism (welfare/ social / Nordic/ Rhine capitalism). Rather, it is a call for a common sense that recognizes that current profitability models are unsustainable for stock values do go down.  To make a real difference,  senior executives need to think and behave for both the short AND long haul, rather than leaving this untenable situation for their successors to handle! Of course, this assumes that stockholders and their elected boards are interested in the long haul instead of cashing out for frequently obscene amounts of money when there is precious little left to cut, and selling/going offshore appear to be the only options left.

Let me offer an example. About twenty years ago, I was a senior executive at a major consulting firm. A client of our firm for many years was a global aerospace company, known for its decades of engineering creativity and performance. In recent years, they were having difficulty growing the business, mostly due to a risk-averse culture and leadership. The firm’s ceo and the board really needed positive year-end numbers to beat the buzz on the street about the company’s financial underperformance.

Since I was responsible for our Organizational Effectiveness Practice, our consultant responsible for the account asked me to come in to help the special ad hoc committee put together by the CEO to come up with some way to quickly improve the bottom line numbers. The reality was that the CEO had a white knight willing to “invest” several billion dollars for new product development, subject to agreeable year-end numbers. The committee chair was an executive vice-president. He and his staff had come up with one recommendation, which they wanted me to put our firm’s reputation behind when he presented it to the CEO. The suggestion was to implement an early out program for all employees over 52 years of age. The amount saved in salary and benefits would marginally surpass the targeted amount sought.

I asked two related questions: “Does an aerospace engineer with thirty-plus years experience have more business and technical knowledge/capability than an engineer with ten plus years experience? Why get rid of just about all of the knowledge, capability, and experience that distinguished the firm in the marketplace?’’ His response was they had that covered. They would hire back senior engineers as consultants as needed. If I was a stockholder, I would have been appalled with the idea of simultaneously paying out retirement benefits, generous exit packages and high consulting fees, while losing the resident capability that made the company great. My firm and I refused to support the idea.

To no one’s surprise, the company went ahead with the plan any way. The company beat the street’s year-end expectations… executives got hefty bonuses. Big headlines appeared in the Wall Street Journal a few days later; the company leadership was praised for their leadership. Most importantly, the company was bought up by a competitor in a fire sale less than two years later. Truly a long-term victim of corporate bulimia: risk-aversion and “chop-chop, cut-cut” leadership!

So what is a better way? Is it possible to be profitable now and for the long haul? What does a sustainable profitability culture look like? It starts off with leadership that gives purpose to organizational effort while inspiring willing effort to support that purpose! Part Two will cover some specifics.

Part Two

What to Do About It

All attempts to improve performance for the short and medium/long-haul must start with a vision of what is wanted AND what good performance looks like, and NOT just fixing what is not working! By only fixing what is not working will most likely fail to get us what we do want. We need to focus on what we do want.

The best way to cut the cord on “chop-chop cut-cut leadership” as the solution is to understand what real leadership is all about. I am writing about the kind of understanding that is internalized, thought through and fully embraced. Far too many of us quickly dismiss a lot of what I am going to say as kind of obvious, but, based on my years of experience, I know that is not really so.

1. Define leadership’s Purpose

Let’s start off with a working definition of leadership. Leadership is all about giving purpose to group effort, while inspiring willing effort to support that purpose.

The power of this definition, besides being field- tested in hundreds of situations, is that it works at two levels. (1) It provides a universal definition, which all stakeholders can understand; and (2) if properly conceived, can inspire employees, who represent a company’s greatest assets/costs, to give that extra effort when the times get tough and the enterprise is on the line. If properly conceived and implemented, it greatly helps minimize grousing about the nominal leadership, and greatly increases efficiency.

Not all people of title are leaders and not all people without title are not leaders. This applies to any individual who attempts to give purpose to what a group of individuals are doing. Without a working definition, just about any thing that is in the mind of everyone in the group will get in the way of progress of any sort.

Here are a few tips on what is required to “give purpose to group effort”.

2. Define the industry or industry segment your company/operation is part of.

Talk about stating the obvious but so many companies don’t ever really do this. If they did, we would not have the following missed opportunities or failures by otherwise great firms:

  • In the middle of the twentieth century, the Swiss watch industry owned over 80% of the world’s watch market. Their CEH (Centre Electronique Horloger) research lab dismissed the first digital watches because they had no mainspring…a critical element of how they defined a watch. They were really in the time keeping ibusiness and not the mainspring business. Their failure led to the current situation of having an 18.4% share of the world watch market, and no patent ownership of the quartz/digital technology as well.
  • Chester Carlson invented photocopying in 1938. Among other things, the technology uses mirrors and illumination. From 1939 to 1944, he approached over twenty companies to sell his invention. Two of them were Kodak and GE. Kodak recognized the importance of mirrors in his invention, but it failed to see how it fit within their model of photography. GE, on the other hand, understood the importance of illumination to his invention, but they defined themselves as being in the light bulb business. By 1948, Carlson joined forces with business partners to create XEROX .
  • The train industry is the classic example. For decades, they saw themselves as being in the train business and not the transportation business. Hence, they lost significant commercial transport business to the trucking industry. It was not until the late 1950’s that they created the standardized steel Intermodal container, which started to reverse the trend.
  • Edwin Land founded Polaroid in 1937 as an instant film camera company. The importance of that description became an organizational roadblock to embracing the digital revolution. Hence Polaroid, once one of America’s photography industry giants, failed to leap from instant film to “digital photography”.

There are many other examples. No matter how your organization defines itself, there is an ongoing need to reflect/define/redefine the industry/industry segment it operates in, and make this definition an integral part of the organization’s Vision/operational Mission.

3. Understand the Difference between Efficiency and Effectiveness

There is an obsession today with operational efficiency. I believe it is a byproduct of the obsession with MBA education, which is mostly about efficiency modeling. Efficiency is the creation of a system which optimizes performance within a single element of the business. Of course this is a good thing in theory, because it ideally eliminates waste and redirects all activities in one direction, which sounds like our definition of leadership. It is not! It rarely if ever tests the underlying purpose of the enterprise, and usually encourages the attainment of profitable numbers as its real goal. Efficiency needs to have a purpose within a higher order of things.

Primarily focusing on organizational efficiency is like a sports team having the drafting of the most accomplished player(s) at each position as its main success formula. The results are likely to lead to individual players earning a number of personal achievement awards, but the team is less likely to win the big prize. The reason is quite simple: teams need to play as more than a collection of high performing individuals, but rather as a collection of individuals inspired to achieve a common purpose especially when the going gets tough. What they should be looking for is seamless handoffs, self sacrifice for the greater good, and running plays that take advantage of optimal team performance.

For more on this, take a look at Henry Mintzberg’s controversial though highly respected 2004 book, “Managers Not MBA’s”. In this book, Mintzberg, a much respected leadership and business scholar, writes at length about how just about all MBA programs focus on efficiency within silos. MBA programs generally provide high degrees of useful knowledge in operational efficiency, but that is not the only thing that is needed within organizations. What is needed to stop the “chop-chop cut-cut leadership” cycle, most often given in the name of efficiency, is true operational effectiveness. The difference between efficiency and effectiveness is what, the late-great organizational theorist, Russel Ackof, described as the difference between knowledge and wisdom. That is because organizational effectiveness focuses on institutional purpose and links all the “silos”into an integrated whole. To make this happen, both technical and human organizational effectiveness are needed. This combination will lead to superior product quality, greater competitiveness in the marketplace, better delivery systems, and a greater likelihood of achieving objectives.

There are several universities I am familiar with that try to get the efficiency/effectiveness balance right. They are Mintzberg’s programs at both INSEAD (in France) and McGill University (in Montreal), the University of Toronto’s new Institute for Management & Innovation (IMI), and the University of Guelph’s Master in Leadership program, which is designed around organizational effectiveness principles of cross-functional collaboration and alignment with the organization’s stated vision and goals. The latter program ideally should be paired with the knowledge derived from an MBA program, while the former university programs have more of an integrated efficiency-effectiveness design.

4. Put in Place Performance Management Systems, Based on Both Organizational Effectiveness AND Efficiency

Performance management is all about defining and tracking what good looks like within the organization. Once leadership’s purpose is clearly defined, an organization can align its technical and people systems to that purpose.

On the technical side, there are:

  • enterprise resource planning (ERP) systems,
  • enterprise planning systems, and
  • customer relationship management software.

Enterprise systems (ES) are built on software platforms. Examples are Oracle’s Fusion and SAP’a NetWeaver.

On the hardware side, , enterprise systems are the servers, storage and associated software that large businesses use as the foundation for their IT infrastructure. They manage large volumes of critical data, and provide high levels of transaction performance and data security. More well known ES vendors are HP, IBM, Oracle among others.

At least as important as integrated ES systems are the integrated people systems. These have to do with:

  • Recruitment systems
  • People development systems
  • Recognition and reward systems
  • Promotion systems
  • Succession Systems
  • Communications systems

Once technical ES systems are in place, it is too easy not to “spend the money” required for integrated people systems. Beyond this, organizations which subscribe to the “Chop-Chop Cut-Cut Leadership” model will argue either that they have these elements in place already or they are not part of their core business model. My years of Organizational Effectiveness experience tell me that in most cases, these and other popular objections are based on a lack of what Russell Ackof, called organizational wisdom. The answers to the following questions should provide an insight into the effectiveness of an organization’s performance management system:

Are the stated goals of the organization part of the organization’s definition of the leadership’s purpose, which is most often found in the vision of what is wanted AND what good performance looks like? If not, why?

What were recent promotions primarily based on? Did it appear as if these promotions were based on the stated goals of the organization? Were you inspired to go the extra distance to support the goals on the organization as a result of this process?

Are those who are held up as examples of what “good looks like” fundamentally represent the stated purpose of the organization, or are they primarily models of something else? Why?

Everyone knows that an organization which has two sets of financial books is probably up to something unsavory, and puts its future at risk. An organization which has both a stated and unstated understanding of what good people-performance looks like also puts its future at risk because succession is a key part of its performance management system.

If you are particularly intrigued by the topics covered in this article, please contact me to find out how you / your organization can find out more.

Meaningful Reflections!

Dr. William (Bill) DeMarco

A Dialogue on Leadership & Nationhood

Posted October 14th, 2014 in Culture, Leadership by Dr. William (Bill} DeMarco

                     A Dialogue On Leadership & Nationhood
                                                  by
                                     Dr. Bill DeMarco


One of the defining moments in a society’s history is when it comes to terms with the issue of “why and how we govern”. In most countries, such defining moments are immortalized in historical documents, national holidays, artistic renderings, symbols of nationhood, and codes of law. There are no right or wrong answers to the question of “why and how we govern”. That is because the “correct” answer in each case is culturally dependent. If we define culture as “the sum of the history, folklore, and values that, taken together, make up the unique identity of a society at a given point in time” (DeMarco, 2003), we can begin to appreciate the complexity of answering such a simple question. The values describe what a society stands for, while the folklore looks at the symbols and stories that best embody those values. The history is the kaleidoscope of people, events, and institutions that help frame the culture. With all of this as living subtext in the great debate around “why and how we govern”, participants in the great drama of nation building debate issues of governance structure: federation…confederation…monarchy… republic… parliament… chambers of government…and the all important “who has the right to participate in decision making?”. Ultimately, the debate focuses on the culturally dependent governing principle: who, how, and why we serve. This is where issues of “governing and the governed” reside. The “debate” always takes place, but sometimes it is not as explicit as it needs to be!
As challenges to the governing construct emerge, societies revisit their governing principles. History is replete with examples of such challenges: the Anarchist Movements in Europe and North America in the 19th and early 20th centuries… the post WWI Red Scares…post WWII Cold War…the post WWII end of Colonialism…civil disobedience and Civil Rights movement in the U.S. in the 1960’s and 1970’s…the 1960-1970 FLQ challenge to Canadian sovereignty…the Basque Separatist movement in Spain…the Irish Nationalist Movement…the Sinn Fein—Ulster Unionist confrontations in Northern Ireland…China’s “Great Proletarian Cultural Revolution”…and, of course, September 11th (2001) to name just a few examples. In each case, societies looked at “who, how, and why we serve”. In each case, the answers to the seminal question of “who, how and why we serve” led to structural reforms. These reforms were usually led by leaders who may not always have been right, but were always single- minded of purpose. They acted in service of the values they believed were core to their respective cultures.

Robert Harris’s painting depicting the 1867 Meeting of the Delegates of British North America, also known as The Fathers of (Canadian) Confederation

At this time of year, citizens in many jurisdictions have an opportunity to celebrate their nationhood by participating in the voting process. Rarely, if ever, are we asked to put our lives on the line for this privilege.  That is reserved for those noble souls who engaged in the great debate of such big issues as “why and how we govern” and “who, why, and how we serve”. Unfortunately far too many of us trivialize the process by engaging in mundane banter over entitlement and personal interests, if we engage at all, It is time for societies to once again engage in the great debate of nationhood.  We seem to have lost our way.  As Tip O’Neil, the late, great Speaker of the U.S. House of Representatives, famously said time and again: “All politics is local!”.  Now is time for all citizens to again engage in the great debate about “why and how we govern”. This debate needs to start with each of us at the local level. It is our right and our responsibility to do so!

BELIEFS: They Choose Me & I Choose Them

Posted July 9th, 2013 in Business Culture, Culture & Leadership by Dr. William (Bill} DeMarco


BELIEFS: They Choose Me & I Choose Them

                                           © 2003, Dr. Bill DeMarco

Beliefs are one of three segments of the Values element of my Culture Model. Beliefs, along with Needs and Attitudes, taken separately and in their interaction, make up our unique Values proposition.  Beliefs are ideas viewed as being true by most members of a society. This applies to personal, societal, and organizational cultures alike.

 Our Beliefs come from two sources.  In some inexplicable way, they are partly given to us by everything and everyone that came before us and partly developed through our life experiences. In this sense, they both choose us and we choose them. Our core or fundamental beliefs are the inexplicable kind. Our life experiences commingle with our core beliefs throughout our lives constantly calling out for reappraisal/ revalidation/ (re)commitment.

At a fundamental level, we are in search of truths about the meaning of life, love, and happiness.  It is what Jefferson described in the U.S. Declaration of Independence as “life, liberty and the pursuit of happiness”.  Since our beliefs represent our understanding of the meaning of truth in important aspects of our lives, they are most often refined but rarely significantly changed.

From a cultural standpoint, the important thing to remember is that Beliefs are ideas viewed by individuals/most members of a society as being true.  While constantly subject to reappraisal/revalidation/(re)commitment, Beliefs  frequently act as cultural hot spots when challenged. To a large extent, this explains the reason for the personal and societal conflict between traditional religious and secular beliefs, both belief systems capable of profoundest impact.  The former calls for personal sacrifice in support of a higher calling. The latter debunks sacrifice and supports a notion of personal gratification here and now.

This plays itself out in the business world as well. A business world corollary has always been the company-specific belief system informally described as “how things are done around here”.  It defines what is important, what it takes to get ahead, what it takes to continue to be employed.  For many employees today, personal core beliefs about the meaning of life and happiness are being challenged, leading to what I call cultural decision-making “moments of truth”.

 Two metaphors at polar opposites of the Belief spectrum:

1. Supremacy of Scientific Knowledge!

Image number one is a metaphor for a belief system that says that there is truth only in scientific knowledge.  It likely supports a bottom-line first business culture.

 

2. Supremacy of a Supreme Being!

Image number two is a metaphor for a belief system that says there is a Supreme Being, the Creator of all things and the source of all truth.  It likely supports a people-first business culture.

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Some Contemporary Philosophical/Religious/Business Belief  Systems & Movements

 Anarchism     Atheism     Baha’i     Behaviourism     Buddhism     Capitalism

Christianity     Communism     Confucianism     Creationism     Environmentalism

Evolution     Feminism     Free Enterprise     Free Will     Globalism     God(s)

Hinduism Human intellect     Humanism     Human Sexuality     Islam     Jainism

Judaism     Nationalism     Native Spirituality     Paganism     Personal Gratification

Personal Sacrifice     Positivism     Relativism     Right to Choose     Right to Life

Roman Catholicism     Secularism     Sikhism     Supreme Being     Socialism

Taoism     Theory E     Theory O     Unitarianism     Wiccanism     Zoroastrianism

___________________________________________________________________________

 

No matter what, Beliefs are all about our lifetime search for what is true. This applies to both personal and group cultures.  In the case of a group culture, it is what the majority of people within the group hold to be true.  For more information about how Beliefs are reinforced, take a look at the Symbols segment in an upcoming blog.

Additional information can also be found at LifesBigQuestion.com.  Current speaking engagement topics include:

 Þ   Using Culture to Unlock Hidden Commercial Value

 Þ   Telltale Signs of When an Organization is Running Out of Gas &  What to Do about it

 Þ   Inspiring Real Growth by Rediscovering Who We Are

 Þ   Finding the Leader Within & Understanding What to Do With It

Meaningful Reflections!

    Dr. Bill DeMarco