In a remarkable irony, the seat of Ted Kennedy (who spent his life fighting for health care reform) was lost to a Republican who has now shifted the balance of power in Congress. With the threat of filibusters looming, Republicans have new found leverage. Will Obama’s sudden drop in popularity translate into a more modest economic agenda?

I always say that within our firm, our role is not to provide all the answers; it is to ask the right questions. As the new realities of the new year emerge, one must wonder if some widely held assumptions about pending legislation (that affect businesses) must be modified to reflect the political climate. Clearly, health care and other legislation will be watered down. What are the ramifications of a Congressional stalemate?

• What will the new health care bill look like? Will employers be burdened with extraordinary administration such as employer coverage requirements? Will Congress levy a tax on preferred health care plans?

• Will the administration, desperate to maintain a majority during the mid-term elections and facing the reality of 10% unemployment, introduce a new stimulus package?

• With labor’s agenda stalled, will the law that would have replaced secret union ballots with card checks stall?

• How will bank regulators respond when financial institutions, still mired in commercial real estate debt, begin to default?

• Will TARP money be spent on infrastructure? Will the Afghan war drive military spending, or will deficit woes bring about an early conclusion to the war?

• What will be done about the Federal debt? At $107,000 per tax payer (did you know you had another mortgage?), not including the looming deficits to Medicare and Social Security, the Federal credit card balance continues to swell.

• Will marginal tax rates (due to increase to 39% in 2011) be reset?

In the face of such uncertainty, strategists must continuously review their forecasts. If you own a small business, you must seek out external (government, industry, competitor, etc.) predictive indicators and monitor the pulse of the economy and your sector before it is too late to react. Businesses are also well advised to revisit their budgets regularly and make rapid decisions based on demand and socio-economic trends.

Intel’s earnings release last week was revealing. The company reported a 28% revenue surge, driven by a 42% increase in microprocessor sales within its data center group.  The shift from personal computing to server farms and cloud computing is clearly underway.

Clouds represent a disruptive force in the delivery model of the Internet and information technology.  Computer makers are talking about a new wave of laptops that are even smaller and lighter than Netbooks and contain no hard drives.  Apple is about to release its tablet, an even thinner multi-media device that serves as iPhone, iMac and Kindle all in one.

Thus our business use of the Internet is about to take on a dynamic shift. Many are resistant to have their information stored on servers they don’t control, but to believe that information is safer on your desktop at home is simply flawed given vulnerability to viruses, hackers, disasters and lost data. Software as a service (i.e. ASP’s) have been popular for several years, but the movement to launching all applications via a browser (such as Microsoft office) has significant business implications, not only in terms of how we use the Internet, but how we invest in technology.

On any given desktop or server, there is a massive amount of underutilized space and computing power. Clouds present the opportunity for the population to collectively use the computing power we need, at the time that we need it, reducing the overall cost and energy depleted. There are also other potential benefits as various applications may be integrated at the server level, reducing the integration required by IT departments and users (an example would be syncing your Outlook and CRM or Blackberry).

For the business community to optimize (still my favorite word) the use of cloud computing will require a paradigm shift. While all companies will seek to mitigate their risk of losing vital information, the upside in terms of IT ROI may be extraordinary and worthy of our attention and investment.

For years, various employment surveys have yielded the same results. They tell us that employees value encouragement and trust over money, yada, yada, yada. Such surveys are inherently flawed, because we know that responses to such surveys often differ to the way people actually respond to various stimuli.

A study published in the Harvard Business Review reveals a vital lever in the execution of strategy. It appears that what employees truly value most is “progress”. In other words, workers want to feel a sense of accomplishment about their activities and that they are contributing to something that is creating value in some way.

This point may seem subtle but it has tremendous ramifications for the strategist. It reinforces a paradigm we have long since advocated; the more people who are involved in the formation of strategy, the better the execution will be.  It means that:

* As organizations develop strategies, they should retrieve data from a wide breadth of internal and external stakeholders.

* To tap innovation, companies should plunge deeper into the organization and seek out information from front line employees on what pain is being felt by customers and how the customer experience can be enriched.

* Key strategies must be communicated to all employees so that they have a better sense of how their daily activities align with the greater good.

* Measurement and accountability for execution must be shared throughout the enterprise.

* Decision making is vital to the pulse of an organization, and executives are well advised to push the envelope (and perhaps make a few bad decisions) as opposed to making slow decisions via paralysis by analysis.

The study, conducted by Harvard professors Teresa Amabile and Steven Kramer, was based on a more rigorous scientific method than merely asking for employees to provide their opinions. Instead of measuring their satisfaction on a given day, they measured their attitudes, behaviors and motivations in a diary format and synced them against achievement of specific milestones. When obstacles were overcome or key objectives were met, employee satisfaction and engagement spiked dramatically.

Amabile and Kramer concluded that management has control of the levers of both employee engagement and execution of strategy, and that they are one and the same.

Amidst the scandal and meltdown in the financial sector, many have been waiting for a taxing regulatory response.  One was not forthcoming until last month, as the House approved the most significant expansion of Federal regulations since the Great Depression.  In an effort to avoid a repeat of the liquidity crisis, the bill includes leverage limits and the ability for regulators to break up large banks.

But the more ominous government action will take place in 2010, as the Obama administration is positioning for significant tax increases which will dramatically impact small businesses.  The Treasury’s recommendations to enhance “revenue” include:

* Tax cuts for families and individual in the form of more aggressive MWP (Making Work Pay) credits,  Earned Income Tax Credits (EITC) and Child Tax Credits.

* Reinstatement of the 39.6 tax rate, 36% for couples over $250,000 in income, and elimination of deductions for certain taxpayers in this tax bracket.

* Imposition of  a 20% rate on dividends and capital gains (at incomes above $250k)

* Changes in 401K rules that will encourage retirement savings for lower wage earners

* Elimination of Capital Gains taxation on investments in small business stock (primarily in manufacturing).

* Making the Research and Experimentation (R&E) credit permanent.

*Expansion of the Net Operating Loss Carryback.

The most dramatic of these changes is the 13% tax increase in the marginal tax rate for the wealthy.  In a remarkable irony, the 35% rate (due to sunset in 2010) was part of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Now that some in Congress believe that jobs and growth are seemingly not as important, the proposed rate will escalate to 36.6% for high income earners should the legislation pass.

The news is not all bad for the manufacturing sector as new tax laws may include the elimination of capital gains taxes for non-service businesses. To qualify, stock must be issued in 2009 or later and be held for 5 years. Tax savvy manufacturing entrepreneurs should seek counsel from their tax professional (that would not be us) and watch as these tax rules unfold in the months to come.