Category: business advice

A blind faith in technology

Sometimes we still have to use our judgement

“How could this happen with all the technology these ships have?” is the first question many of us had when we saw pictures of the Costa Concordia lying on its side with a ripped hull.

In an era where we have Global Positioning Systems, sonar, radar and sophisticated mapping technology it seems almost impossible that a ship could find itself in such a terrible situation.

Every generation has its own blind faith in the technology of the day and almost a hundred years ago one of the greatest shipping disasters of all – the RMS Titanic – happened because of the same belief in that era’s technology.

While the Titanic’s builders claim they never said the ship was unsinkable, popular belief held the vessel was the safest of all ocean liners with sophisticated steam engines, modern safety designs and better communications tools like the radio and Morse Code.

Those technologies were part of the Titanic’s undoing; the improved performance of steam ships saw the shipping companies competing for the Blue Riband prize of the fastest crossing of the Atlantic, meaning captains took risks they wouldn’t have with less technically advanced vessels. This is why the Titanic found itself in an ice field.

Once the ship was struck another problem with our blind faith in technology arose – we never foresee all the consquences.

In the Titanic’s case there weren’t enough lifeboats – the safety rules of the day had fallen behind the capacity of the ships and, while the Titanic exceeded the minimum number required, there were barely enough lifeboats to take a third of the passengers.

The Titanic’s sinking has some similarities in that today cruise ship companies are in an ‘arms race’ to build bigger and more luxurious liners, marketing them as floating resorts raising concerns among maritime experts that the capacity of these ships is too great for them to be evacuated quickly.

Of course we have to be careful of drawing too many parallels between the Titanic and the Costa Concordia, the Titanic’s loss of life was several orders of magnitude greater than the Concordia’s and the Titanic happened towards the end of a period when technology looked like it would solve all the world’s problems.

The sinking of the Titanic was also the peak of the Edwardian standards of “women and children first” and “for King and country.” Only one in six of the third class male passengers and half of that in second class survived.

A few years later, the clash of Edwardian culture and modern technologies was starkly shown when millions died in the trenches of France, Belgium and Gallipoli as generals applied 18th Century cavalry tactics against 20th Century weapons. Another example of not understanding the effects of new technologies.

Whenever we adopt a new technology there’s a risk we’ll get it wrong and blind faith in tools we don’t understand can lead us to a disaster.

Even in a business we can’t just accept that because a computer says “yes”, the answer is yes. Sometimes we have to think.

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Are KPI’s a business evil?

How misplaced bonuses, incentives & performance indicators can damage a business

One of the cornerstones of 1980s management theories is offering staff incentives for performing to certain benchmarks.

While the theory is good, it can go badly wrong. I encountered this personally when at PC rescue we started selling computers systems and, to encourage sales, offered our technicians a commission on any they sold.

Quickly we started getting negative feedback from customers, some didn’t like what they perceived as a hard sell and some believed technicians were more interested in selling a computer rather than fixing the problems.

In a few cases it turned out the customers’ suspicions were correct; we found some the techs had decided it was quicker and more profitable for them to sell a new system rather than to fix the problem they had been sent out to resolve.

We had to change our KPIs and it taught me a good lesson about assuming how staff will respond to incentives.

Courier companies are good example of what happens when incentives and performance indicators go wrong, all of us have had examples of deliveries going wrong because the drivers are under pressure to meet targets. In the worst case, you might get your computer monitor thrown over the front gate.

The systems that encourage this sort of behaviour can damage entire industries, as we’ve seen with the used car industry. For individual businesses, poorly implemented commission based structures, like ours was, eventually build distrust which is one of the reason why electronic stores like Best Buy are struggling.

Google’s recent changes to search are another illustration of what can go wrong with poorly thought out incentives with CEO Larry Page reported to have tied staff bonuses to “success” in social. As a consequence Google are prepared to damage their core business as employees scramble to meet their targets.

The definition of ‘success’ is part of the problem with performance indicators, a government agency I did some work with defines successful worker as having a hundred meetings a year which has some predictable results in how that department operates.

On the bigger level, badly thought out incentive structures are damaging our economy as senior managers are driven to deliver short term objectives while ignoring the long term growth of their business and sometimes even damaging the wider community in the process.

Probably the ultimate level of damaged performance reward is the political system those of us in the ‘developed world’ have allowed to develop in the last fifty years; by rewarding politicians on being elected, we have a generation of leaders who are very good at winning elections but not terribly good at running governments.

While there’s little we can do about governments beyond being careful with our votes, we can watch our businesses closely to see what indicators and rewards work best for us.

Planned and monitored properly, bonuses and performance indicators can work well for a business blindly using inappropriate ones though often turns out to do more harm than good.

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Tightening the screws

Cloud computing changes business IT economics, but it isn’t a magic pill.

Google had a big boost this week with Spanish bank BBVA announcing its 110,000 staff will switch to use the cloud based productivity software.

This wouldn’t be good news for Microsoft as their struggle to retain their almost monopoly position in corporate desktop applications and will undoubtedly mean reducing licensing fees and accepting tighter margins on their products.

BBVA’s move is interesting on a number of fronts although there’s a few myths among the trend towards cloud computing services and office productivity.

Cost saving myth

Part of the focus of selling these products is on cost and the head of Google Enterprise apps in Europe, Sebastien Marotte, said that his corporate customers on average achieved cost savings of between 50% and 70%.

The cost aspect is interesting, I’ve posted before about exaggerated claims for cloud computing savings, and Marotte’s statement deserves a closer look.

It’s highly likely the claimed cost savings are based on licensing – the standard Google Apps cost of $50 per user per year is substantially less than even the discounted rates large corporations receive on Microsoft licenses.

While the licensing cost is a serious line item, particularly when you have 110,000 employees, it isn’t the whole story; there’s training, maintenance, disaster recovery, security and a whole range of other issues.

Cloud computing services address a lot of those costs, but nothing like the order of 50 to 70%. In fact, it would be hard to find an enterprise that had the sort of slack in its IT operations to achieve those sort of savings.

In one respect, this is where its disappointing that cloud computing vendors tout those sort of savings – not only does it commoditise their industry but it perpetuates the myth amongst executives that IT staff spend the bulk of their time playing video games.

While there are real savings to be made for businesses switching to cloud computing, any sales person claiming a 50% or greater saving should be asked to justify their claims or shown the door.

Clean slate

Another interesting point with BBVA switching to Google is how the bank wants employees to leave all their old email and data in their old systems. Carmen Herranz, BBVA’s director of innovation, says we “want to start from scratch… don’t want to carry across old behaviours”.

Not migrating data is an interesting move and how BBVA’s users deal with retrieving their contact lists, dealing with existing email conversations and how staff will deal with feature differences like document revision tracking – an area where Microsoft Office outdoes Google Docs.

Internal use only

BBVA are only applying the Google services to internal documents as well which means the bank will be using other software – probably Microsoft Office – for corresponding externally.

This makes it even more unlikely the touted cost savings of 50 to 70% are achievable, and may actually increase support costs while reducing productivity as many customer facing staff will have to deal with two systems.

Having one system for use inside the business and another for external communications seems to be a European trend – before Christmas French company Atos announced it was abolishing email within the company but still using it for outside messages.

Both abolishing email and moving to cloud based office packages are really about improving productivity in a business while cost savings are nice, the main focus on adopting cloud computing – or any other new technology – should be on freeing your staff to do more productive work.

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Blinking

Sometimes a business has to change, despite customer opposition

A while back I wrote about leaving customers behind. As a business grows or evolves some customers are left behind.

That’s not to say those customers are wrong or bad, just that they are not the right fit for the long term objectives of your business.

Sometimes those customers are raving fans and passionate patrons are important; if you can meet your clients’ business and emotional needs then you, and your customer, are in a great place.

But not always, sometimes those fans are a boat anchor to your business.

In 1998  Steve Jobs announced he was ditching the Apple Desktop Bus (ADB) standard for Mac computers and moving to the USB standard for new computers. Thousands of outraged Mac fans swore they would never buy an Apple computer again.

Henry Ford is quoted as saying if he’d asked 1890s what they wanted, he’d have built a better horse cart rather than a motor car.

Sometimes customers don’t know what they want and sometimes those who do know what they want aren’t the customers you want.

If you have to make that decision, it has to be firm – blinking in the face of opposition doesn’t work. You’ve shown you’ve blinked on one thing and you’ll be blinking on more. You’re now owned by your customers and the most conservative, risk adverse ones at that.

Once you’ve given ownership of your business to your most conservative customers, you’ll have to fight to regain control.

It’s much better to make a calculated, informed decision and go for it  – if you’re right, your business is going to be stronger without those risk adverse and often low margin customers.

A lot of people decided they wouldn’t buy Steve Jobs’ or Henry Ford’s products again. Eventually they did.

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The pay day

How does a local news agent exit their business?

Last Sunday Mark Fletcher celebrated his 10,000th post at the Australian Newsagency Blog. In seven years of posting that’s an impressive achievement for someone running both a retail store and a software company.

In his landmark post, Mark looked at the major issues he’s covered on his blog over the last few year and one stands out as the biggest – the payoff for newsagency owners when they sell their businesses.

The failure of many newsagents to manage their businesses for day to day profit. Too many newsagents expect their pay day when they sell and do not realise that their pay day is today, tomorrow and next week … and that this determines what they will receive when they sell.

For Australian newsagencies the news is bad; their established industry is struggling in the face of technological change and regulatory changes – both of which are other points Mark raises – but more importantly the buying and selling businesses in all sectors is undergoing a fundamental economic shift.

Lifestyle Businesses

The underlying idea is that these businesses are what Steve Blank calls “lifestyle businesses”; proprietors buy them to provide an income for their families.

For these “lifestyle businesses” to have a resale value another family is has to raise the funds to purchase the enterprise.

Therein lies the problem, most purchases of businesses are financed by bank loans secured against property.

Late baby boomers and Generation Xers – those born between 1955 and 1970 – are the obvious buyers of these businesses and they don’t have access to the same equity as their parents.

The situation is even worse for those generations following whose high education debts mean an even later entry into the property market and even less equity available should they want to buy these businesses.

For sellers, this means is buyers can’t pay the prices retiring business owners need as their nest egg to support them through twenty or thirty years of bowling or travelling in their later years.

This inter generational mismatch isn’t just restricted to Australian newsagents; it’s a problem around the Western world for business owners whose exit strategy involves selling the business as a going concern for a substantial amount.

Cash poor buyers

As we reach the end of the late 20th Century credit boom, the money isn’t there for people to pay the sort of sums required by existing local business owners to retire in comfort. Even if the banks were prepared to lend the sum required, the buyer’s underlying assets can’t secure the loans and, most importantly, the cashflows aren’t there.

In an Australian newsagent context much of the cashflow has changed because of deregulation and new competition but on the bigger scale changing consumption patterns at the end of the 20th Century debt binge coupled with aging populations and restricted credit are changing the economics of family owned, small local businesses.

For the current owners of these small businesses, it means the pay day has to be today as it won’t be there tomorrow.

The danger is how many will follow the example of the large corporations who find themselves in a similar situation and respond by excessively cutting costs or chronically under-investing which is what has crippled big store retailing across the US, Australia and the UK.

Mark’s constantly pointed out that Australian newsagents have to reinvent themselves, as he celebrates seven years of blogging and 10,000th blog post it’s probably worthwhile considering how many, like the rest of us, will be working in our businesses far longer than we originally expected.

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The pros and cons of bootstrapping

Should a business fund itself from cashflow?

There are plenty of ways of raising money for a business; venture capital, bank loans, private equity and – by the far the most common – bootstrapping, where a company finances it’s growth through its own cashflow.

An article in Tech Crunch by Ashkan Karbasfrooshan looked at the reasons why bootstrapping doesn’t work, his views are understandable Ashkan given his own business has raised $1.5 million in venture capital (VC) funding over the past four years.

Outside the Silicon Valley bubble, it’s worthwhile considering the real benefits and disadvantages to bootstrapping your business. As with any business tool there’s real pros and cons with all financing methods.

Benefits

There are a number of benefits with bootstrapping, in that it forces the business’ management to focus on the product and customers while giving founders full control of the business.

Total control

A bootstrapping business has total control over its destiny – the business owners answer to no VC, bank or outside imposed board of directors.

Those outside investors may also have different business objectives to the founders. Often a venture capital or private equity investor has a three to five year time frame while a founder may be looking further.

Also a mis-match between the founders’ and investors’ exit strategies will almost certainly be a problem should the opportunity to sell the business arise.

One of the biggest risks for a smaller business is banks can call in loans or ask for additional security – something that crippled many smaller businesses during 2009.

For those who’ve raised equity funding, founders can find their shareholdings diluted or even be fired from the business they created.

Customer focus

The business that is focused on funding itself pays close attention to the needs of its customers. The distraction of raising, and then managing, investors or lenders can distract from building the business.

Validating the business model

A successful business that has grown through funding itself is has, by definition, a valid and profitable business model. This is not necessarily true of VC or debt funded enterprises.

Overcapitalisition

In his Tech Crunch article,  Ashkan quotes Marc Andreessen and Jason Calacanis as saying “raise as much money as you can.”

This may well be conventional wisdom in Silicon Valley though the reality is a business can have too much money, as we saw in the original dot com boom with businesses such as Boo.com lavishing money on founders and expensive frills.

A business can be crippled by having too much investment money that distorts the founders’ objectives and allows the company to lose focus on helping customers and getting the product right.

Generally with bootstrapping this isn’t a problem unless the founders have an insanely profitable business, which renders the need for outside investors largely irrelevant.

Disadvantages

For all of bootstrapping’s advantages there are real downsides as well including the risk of being undercapitalised and the difficulty in attracting diverse management.

Undercapitalisation

One of the main reasons for business failures is under capitalisation; simply not enough money to grow the enterprise or to put it on a sustainable footing. This is a constant risk for bootstrapped businesses.

Inability to focus

Many owners or managers of bootstrapped businessese focused on making sales so they can pay the rent and make payroll; this distracts management from executing the longer term aims of the business.

Expertise

In taking an equity partner – either in private equity, venture capital or angel investor – the founders get the benefit of the investors’ expertise.

A good investor who has similar objectives to the founders can add real value and complement the original team’s strengths and weaknesses.

No one size fits all businesses

Overall there’s no black and white to bootstrapping versus borrowing money or finding an equity partner; all of them have their risks and benefits.

As entrepreneur Steve Blank points out, there are six types of startup and only two of them; the scalable and buyable (born to flip) are suited to the Silicon Valley venture capital model.

The real risk in business is assuming one way or another is the only way to fund an enterprise, for many it’s a combination of some or all of the methods to raise funds.

It’s quite possible to see a business first bootstrap to get established, then get a bank loan to finance growth, followed by a VC or seed investment that finally sells out to a private equity fund.

For many business owners though, funding the business out of cashflow is the most sustainable way to grow and profit. If you’re happy with what you’re doing, there’s no reason to be hassling for equity or begging at the bank.

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The business of baffling choices

Why do computer and phone companies offer so many plans and models?

In his Daring Fireball blog, John Gruber’s takes to task the view that Apple suffers through not having a wide product range.

John makes the valid point that Samsung seems to stealing market share from HTC rather than Apple but the whole theory of offering too many choices strikes to the heart of two industry’s business models.

Those two industries are the mobile telco business and the Windows personal computer sector.

In the PC world, the wide range of models has been both an advantage and a weakness; it’s allowed Dell and others to create custom machines to meet customer needs but also leaves consumers – both corporate and home buyers – confused and suspicious they many have been taken advantage of.

All too often customer were being had; frequently buyers found they’d bought an underpowered system stuffed with software that either was irrelevant to their needs or an upgrade was necessary to get the features they hoped for.

The entire PC industry was guilty of this and Microsoft were the most obvious – the confusing range of operating systems and associated software like the dozen version of Microsoft Office was deliberately designed to confuse customers and increase revenue.

For the PC industry, the “baffle the customer” model reached its zenith, or nadir, with Windows Vista where Microsoft deliberately put out an underspecced ‘Home’ edition designed to push sales up the value chain.

Compounding the problem, most of the manufacturers followed Microsoft’s lead and put out horribly underpowered systems in the hope that customers would upgrade with more memory, better graphics card and bigger, faster hard drives.

Most customers didn’t upgrade and as a result the Vista operating system – which was horrible anyway – enhanced its well deserved reputation for poor performance.

In the telco sector, consumer confusion lies at the heart of their profitable business model; a bewildering range of phones and plans often leaves the customer spending too much, either through an overpriced plan or paying punative charges for ‘excess’ use.

Having a hundred different types of Android phone adds to the confusion and, by restricting updates, they can cajole customers into ‘upgrading’ to a new phone and another restrictive plan every year or so. This is why you get phone calls from your mobile phone company offering a new handset deal 18 months into a two year plan.

Apple’s model has been different; in their computer range there has never been a wide choice, just a few configurations that meet certain price points. The same model has used for their phones and iPads.

For Apple, this means a predictable business model and a loyal customer base. They don’t have to compete on price and they don’t have to fight resellers and telcos who want to ‘own’ the customer. It’s one of the reasons mobile phone companies desperately want an alternative to the iPhone.

Companies using the baffling choices business model – Microsoft, HP, Dell and your local mobile telco – may well continue to do okay, but that business model is coming under challenge as new entrants are finding new niches.

For all of us as consumers all we can do is make the choices that are simple are reject complexity. Warren Buffett has always maintained he doesn’t invest in businesses he doesn’t understand, perhaps we should have the same philosophy with the purchases we make.

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