The Power of "Yes"

As a corporate manager, one of the things that used to amaze me was how certain entrepreneurs had the ability to create something out of nothing.  It used to baffle me how someone with just an idea and no other resources could end up creating a multimillion dollar enterprise three years later.  I, on the other hand, could make things happen as long as I had resources to work with but creating something from nothing was beyond me.

And then I met "The Chief."

The Chief was a serial entrepreneur with an uncanny ability to create value out of thin air.  I met the Chief when he hired me to be manage the operational side of his startup.  We used to joke that while I could take the bricks lying around and build a house, he could conjure up bricks out of thin air.  Now, I had a chance to learn how it was done.

So I watched him for a year.
I watched how he pulled in investors.
I studied how he pulled in specialists.
I worked with him as he created partnerships and deals and alliances.

What was the secret?  Vision was certainly part of it, but not sufficient unto itself.  His people skills? Ditto.  Confidence?  Communication skills?   Ditto, ditto.  Then finally, I figured it out; how he pulled rabbits out of a hat.

Underlying all was the power of yes.

How to describe the power of yes?  Partially a decision mindset, partially a habit, it worked like this:

• Say yes to a lot of meetings - The Chief met with anybody and everybody that took an interest in, or could potentially advance the vision.  He never failed to take something away in terms of knowledge or revised thinking from every meeting.  And while many of these meetings never developed into a working relationship, he always left the door open for future contact.
• Say yes to some uneconomic opportunities  - Especially in the beginning, the Chief said yes to a few economically marginal projects just to get a working relationship going, to start exercising the company's operations, and to get us down the learning curve.  To use an analogy, the Chief understood that to learn to sail, you eventually have to put the book down and get into the boat.
• Say yes to seemingly unrelated opportunities - In defiance of conventional target marketing wisdom, the Chief said yes to many seemingly unrelated projects.  The reason? To create a critical mass of experiences that enabled him to take the next step which was to...
• ...create interconnections between opportunities - With a broad enough set of experiences, the Chief was then able to see the interrelationships and patterns between them.  Doing this enabled him to strategically determine which ones to pursue and which to abandon going forward.
• Follow up on the ones that gained traction - The other advantage of working a broader scope of opportunities was that while some inevitably fizzled out, others gained momentum, opening the door to new opportunities.  The Chief didn't worry about the ones that fizzled out.  And he alwas left the door to them reigniting.
• Say yes to incorporating the vision of employees, partners, investors into the grand vision - By being open to the influence of others, the Chief gained their buy-in and their voluntary contribution of creativity, time, skills, and money.  The Chief was able to get hundreds of thousands of dollars worth of expert technical advice and the use of multimillion dollar facilities for a fraction of the true value, all because he allowed our vision to be their vision.

In short, the Chief had mastered the practice of Stone Soup.

Several years later, when I decided to start my current business, I applied the power of yes.  With just a vision - that I could improve a startup's chance of success by providing expert, affordable back office services on a timeshare basis - I started to meet with prospective clients and partners to talk about the idea.  One meeting, led to my finding my business partner.

Further discussions led to our first lead clients, whom we offered highly competitive deals just to get going.  As we worked, we found ourselves developing capabilities in areas we had expected, dropping them in others, and creating service offerings in unexpected places.  We began to acquire clients with more demanding requirements, further enhancing our capabilities.  And as critical mass built, we were able to start connecting client and partner opportunities, improving economies of scale start and operational efficiency.

Today, while the vision remains the same, the implementation of the vision with respect to our service offerings is different than what we had predicted.  But that's okay because at the end of day, we now have a stable, core business model on which to base future growth.

Is the power of yes always appropriate?  The answer is no.  Yes has power is when you are trying to to create your business model or in business development when you are trying to establish a new partnership.  It is for the Stone Soup phase of a project.  But once the business model is known or the partnership established, it takes a different power to execute and scale it.  In fact, in the growth phase, the power of yes can be deadly.

So what is the secret to growth?  Stay tuned for my next post...in 2011.

Merry Christmas and Happy New Year!

Activity is Not the Same as Effectiveness

"It is not good to have zeal without knowledge, nor to be hasty and miss the way." - Proverbs 19:2

The other day, I received an email from a client with whom we are working to develop an appropriate strategy to unblock sales growth.  We've completed a preliminary analysis indicating probable root causes and, as these things usually go, several potential tactical actions have popped out of the study.  The email was to tell me that they've already put these latter into action.  Great right?

Groan. Here we go again.

One of the biggest frustrations of doing strategy consulting is having clients rush into action before the full analysis is done?  Why?  Because without a comprehensive review, it won't be clear what the actual root cause issues are vs. aren't.  Strategy issues almost always have surface symptoms which can be caused by several different root causes.  For example, take the common problem of stagnant sales.  First of all, is it a strategy or execution issue?  If strategic, is the problem caused by poor product/market fit, misaligned channel strategy, shift in the competitive market dynamics, etc. etc?  It does no good to change one's product targeting if the channel strategy is wrong! A proper diagnoses is critical to determining an effective course of action.

Inevitably, when I explain this to clients, they all nod their heads vigorously then most of them promptly leap into action anyways.  The result in most cases?  NOTHING happens.  No impact.  Just money out the door.

So why does this happen?  In my experience, for three reasons:

• Confusing operational speed vs. strategic speed - A recent Harvard Business Review article⁽¹⁾ "Need Speed? Slow Down,"  addresses this well.  Operational speed is simply moving faster. But this assumes that one is doing the right things. Strategic speed means reducing the time it takes to deliver value.  It's about making sure you are doing the right things.  The key to this is holistic alignment - of initiatives, elements, resources, and priorities. 
• Action is exciting, thinking is not - Action is exciting, visible, fun, satisfying, and worst of all, it's easy.  It gives the illusion of solving a problem when in actuality, all you may be doing is going nowhere fast or even worse, swiftly scaling the wrong wall.  Thinking, on the other hand, is unglamorous, boring, and hard.  Substituting action for thinking just because it feels good has a name:  laziness.
• Buying into the Conventional Wisdom of Ready, Fire, Aim - Reinforcing the second point, particularly with Silicon Valley startups, is the idea that "ready, fire, aim" is a virtue (don't get me started on this one...).  There is a definite bias towards action (not a bad thing), a disdain for big company "analysis paralysis" (also not a bad thing), and the urgency to move fast, fast, fast.  We celebrate the entrepreneur who has ten meetings before noon followed by another ten before the evening networking event and then codes all night.  We love the caffeine buzz which keeps the fifty coffee houses in downtown Palo Alto in business.

Unfortunately for many of the adrenaline junkies, activity is not the same as effectiveness.  Many startups would be better served by ceasing all work for four hours, sitting down, and really think through what they're doing.  Good strategic thinking is a resource multiplier; one effective action is worth 100 pointless ones and a darn sight cheaper.

Now don't get me wrong.  This is not to imply that there isn't a lot of work in a startup and that effective strategic thinking is going to make it all go away.  The fact of the matter is that there is a lot of work, where cranking out the volume is necessary, but it only makes a difference if they are directed at advancing the company's goals.

So instead of booking those ten angel meetings to raise another $250K so that you can hire five more people to handle all the work, it might be worth turning off the email, silencing the cell phone, and locking yourself in a quiet room with a whiteboard and marker and think.  Make sure you're scaling the right wall.

You might not need that $250K after all.

Footnotes:

1. Davis, Jocelyn and Atkinson, Tom, "Need Speed?  Slow Down," Harvard Business Review Reprint F1005E (May, 2010).

How to Make Your Professional Services Firm Rich

One that got overlooked by WikiLeaks...

Rackem, Sokem, and Sulese LLP

666 Griedisgud Way

New York, NY  10002

*** INTERNAL CONFIDENTIAL MEMORANDUM ***

To:  All Partners and Associates

Re:  Proper Target Client Acquisition

_____________________________________________

It has come to our attention that Y/Y revenue growth is running below target.  Finance's most recent analysis show that the root cause is the unacceptably low acquisition rates of Class A vs. Class B clients.  Specifically, Class A clients constitute a mere 35.34% of our revenue base, well below the target of 55% called out by this year's budget plan.

In case it has escaped your notice, in order to retain clients in the current recessionary climate, over the last year alone, we have been forced to reduce hourly rates by a net average -10.2%.  Therefore, it is imperative that we find ways to increase actual billable hours.  And the method decided upon at this year's  Strategic Planning Review meeting was to focus more on Class A profile client acquisition and reduce the amount of Class B profile clients.

As a reminder, the Class B client profile is as follows and is to be avoided:

• Provides Complete and Timely Information - By doing this, Class B clients reduce or eliminate the amount of time Associates spend chasing information.  Phone tag, multiple calls, or multiple visits enable us to increase the number of Billing Units (BU).  Because BUs are in six minute minimum increments, multiple contacts allow us to significantly increase billable hours.  In-house data shows that each incomplete information request results in 2.3 additional contacts or 4 BUs.
• Provides Prompt and Timely Approvals - In addition to eliminating chase time, Class B clients who do this also eliminate the potential for additional billable hours solving problems with their customers caused by the late approvals.
• Provides Reliable Follow Up on Action Items - Reliable follow up means action items get closed resulting in a lean open work docket, rather than the more desirable situation (for us) of having a large open docket that can lead to subsequent confusion thus creating opportunities for unnecessary problem resolution, all involving billable hours.  Reliable follow up also means that a Class B client rarely ends up with missed deadlines and subsequent crisis mode, thus eliminating the potential to charge premium rates.
• Batches Work - By batching work, Class B clients minimize the number of interruptions that stretch out billable internal time.  Industry studies show that for analytical work, such as the type we engage in, it takes 20 minutes (3BUs!) to get back into the flow or work following an interruption.
• Plan and Schedule - The worst.  Class B clients engaged in these work habits tend to be the most efficient in terms of time usage as they tend to exhibit all of the undesirable traits listed above.  As you may recall, there was even discussion at the last partner's meeting to reclassify any client or prospect exhibiting this trait as Class C.

All Rackem, Sokem, and Suhlese Partners and Associates are to take immediate steps to ensure that we focus on Class A client acquisition.  Unless we can increase the number of clients who are disorganized, with poor follow up skills, and who confuse frantic activity for effective action, we will not hit our financial targets for the year.  Needless to say, this could have a negative on all of our year end bonuses.

I.M. Suhlese

Managing Partner




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Shameless Pitch: Stanford Marketing Course, BUS213

Starting January 11, 2011 I'll be teaching a six week evening course called "Monetizing Marketing Models" (Course Code: BUS213) as part of Stanford University's Continuing Studies program.  The course is designed to teach strategic marketing concepts and frameworks that can be used to evaluate the money making potential of a new business idea, whether as a startup, a new venture inside a corporation, or as an investment.

We'll be covering product/market fit and exploring different ways to analyze business models.  The course assumes no previous experience in marketing. We'll be using Customer Development as the backbone methodology, focusing primarily on the Customer Discovery phase.  Our course text will be a great little book called The Entrepreneur's Guide to Customer Development, by Brant Cooper and Patrick Vlaskovits, both of whom will be speaking at the final course session on February 16th.

If you're interested, you can register online starting November 29, 2010 at the Stanford Continuing Studies website.  Here is the direct link to the course.

Hope to see you there!

Small Business vs. Scalable Entrepreneurship

Two weeks ago in my post Education, Entrepreneurship, and Employment we started to distinguish between scalable entrepreneurs (i.e. those seeking to start large businesses) and small business entrepreneurs (i.e. those seeking to start lifestyle or small businesses). What are the similarities and differences between the two?  What does this mean in terms of skill sets and education?

At the risk of oversimplifying, let's start with...

Objectives

• Scalable:  Making a large impact, prospect for significant wealth
• Small Business:  Supporting self and/or family with an eye to a particular lifestyle

This leads to a...

Strategic Path

• Scalable:  Identify a business model that can be systematized, scaled up, and ultimately lead to a market leadership position both in scope and share.
• Small Business:  Identify a business model that can be sustained and defended.  The degree to which the business is systematized and scaled up is determined by the lifestyle objective.

Which means one needs the following...

Resources

• Scalable:  Hiring specialists capable of developing the initial product or service, achieving product/market fit, and sales traction followed by different specialists capable of building scalable business processes and infrastructure able to facilitate growth.
• Small Business:  Hiring specialists but with a broader set of generalist skills; the proverbial "T-shaped" person.

Which in turn leads to requirements for...

Capital Financing

• Scalable:  External financing usually from institutional equity investors (e.g. VCs) to get the business to where it can generate sufficient cash to sustain operations and reach its scale objectives, often augmented by institutional debt financing as well.
• Small Business:  Friends and family money (either equity or loans) to get the business to where it can generate sufficient cash to sustain operations.  Lines of credit or small business loans may augment the capital structure.

Which dictates a path for...

Growth

• Scalable:  External equity financing implies being able to deliver growth rates fast enough to achieve the high levels of return associated with the risk.  It also means the company must plan on a liquidity event either in the form of an initial public offering (IPO) or strategic sale.
• Small Business:  As long as the business generates cash sufficient to meet its expenses plus any external debt financing obligations (if any), the rate of growth is determined by the lifestyle objective.

Which means you will have the following...

Accountability

• Scalable:  Investors as represented by a board of directors, employees, creditors
• Small Business:  Owners (self+), employees, creditors, customers

Therefore to succeed, entrepreneurs should have the following....

Critical Business Skills

• Scalable:  Ability to recognize opportunity, devise a product or service vision powerful enough to attract the specialists, investors, and other resources needed to make the concept a reality, create a scalable business model, acquire customers, and generate the initial momentum towards scale.
• Small Business:  Ability to recognize opportunity, devise a product or service concept, pull together the initial people, money, and other resources needed, create a sustainable business model, acquire customers, train employees, and operate the business.

While many of the critical skills are the same, there are slight but important differences.  These in turn lead to difference with respect to their needs in an...

Educational Curriculum

• Scalable:  Marketing (Strategic), Finance, Business Development, Legal (Intellectual Property, Contracts, specific regulatory), Organizational Development, Leadership, Communications, Corporate Governance
• Small Business:  Marketing (Promotion), Accounting & Cash Management, Sales, Legal (Contracts, Employment Law), Small Group Dynamics, Operations specific to their businesses value proposition, Customer Service

In short, scalable entrepreneurs need an education that helps them pull together resources and lead a company towards rapid, institutional growth.   They will largely be coordinating and working through others.  They need skills, not just at the initial startup level, but enough beyond that they can get the company moving up the scaleup path, even if they plan to bring in others to drive the scaling process.

Small business entrepreneurs need a specialist skill in the principle area of the businesses value proposition, plus a generalist education that helps them sustain the healthy operation of the business.  They will often be much more hands on in the delivery of the product or service to customers.

Thoughts?

The Creative Economy

This week, I had intended to explore the similarities and differences between the skills needed by scalable vs. small business entrepreneurs.  But in exploring the interplay between education, entrepreneurship, and employment, I got caught up re-reading a book, originally published in 2002, called the Rise of the Creative Class, by Richard Florida, a professor at George Mason University.  I highly recommend it for anyone interested in what the future will look like for our children and indeed what our society is changing towards right now.  In my mind, it should be required reading for anyone in government in a position to influence public policy.

For those who have heard me teach or speak, they know that I believe that the 2008 Great Recession marked the final death of the Industrial Era as the driving force in our economy and society, just as the 1929 Great Depression marked the ascendant dominance of the Industrial Era over the Agricultural Era.  In both cases, the trends were evident for many years prior to the final shift.  In the case of Industrial over Agricultural, this trend was visible for almost 300 years before the Great Depression nailed the coffin shut.  In the case of latest shift, the trend towards what has been called the Information Era has been evident since the late 1800s.

But the term Information Era has always struck me as a misnomer given that most⁽¹⁾ of the service jobs created under this label were actually low level, "deskilled" positions that require very little engagement on the part of workers to apply information.

Instead, Richard Florida has coined the term "Creative Economy" which I believe is a much better term to describe the post-Industrial era that the most advanced economies, including the United States, are becoming.  In his writings, including his most recent The Great Reset,  he argues that it is creativity, not just information, that is becoming the dominant source of value generation whether it be economic or social value.

To me, here are some of the most interesting findings from Florida's work.  At the risk of oversimplifying:

• Service sector jobs can be divided into two types.  Creative Class jobs involve high level processing of information to create value and solve problems and are often highly compensated.  Scientists, artists, engineers, architects, doctors, lawyers, and managers are typical of this class.  Conversely, Service Class jobs involve the execution of deskilled tasks, often in support of people in the Creative Class. These are lower wage jobs like food service, security guards, and janitorial work.  Now I am not denigrating the dignity and worth of these jobs; they need to be done.  But the fact of the matter is that today it is very difficult for people in these positions to earn a living wage.  This was not the case with Industrial Era "blue collar" jobs.
• During the Industrial Era, socioeconomic stability came to be built around private enterprise, in particular, large corporations.  Salary, health benefits, and pensions were predominantly provided by private employers.  Much of this infrastructure came as a result of the fallout from the Great Depression and enacted during Franklin Roosevelt's New Deal.
• During the Creative Era, socioeconomic stability is crystallizing around geographic location, not private enterprise.  Job security today is less tied to a particular company than to a particular region.  For example, one of the attractions of living in Silicon Valley, or Austin, New York, Boston, or Seattle for that matter is that even if you lose your job at one company, the chance of picking up new work at another company is better than if you live in an Industrial Era center like Detroit where the economy is dominated by a few large employers.
• Unfortunately, at least in the United States, we have yet to put into place the socioeconomic infrastructure suitable for the Creative Era.  For example, in spite of the recent health care reform bills⁽²⁾, it is still not available to nor is it affordable by a vast number of Americans.  Portability is limited to clumsy mechanisms like COBRA.  Defined benefit pensions have been replaced by defined contribution 401(k)s and IRA plans, both of which are riskier.  

Now, I'm not an expert in government or economic policy but it seems to me that if a defining attribute of the Creative Era will be more fluid economic relationships (i.e. project teams, core employees plus contractors) and frequent transitions (i.e. multiple employers and careers) what is needed is some form of offsetting, stabilizing infrastructure like portable, universal health care and "transition benefits" in lieu of the current unemployment insurance system.  (Of course one challenge in a transition benefits program would be how to provide sufficient infrastructure to foster the risk taking and retraining that may be needed to help people in transition without turning it into a welfare entitlement program.)

If location is the new locus for socioeconomic stability, this means that it is no longer possible nor sensible for private enterprise alone to provide answers.  Local government has a role.  Arts and cultural institutions have a role.  And of most interest to me personally, educational institutions have a role.

Creative Era Implications for Education?
I'm still thinking this one through, but in terms of how to educate people to navigate and prosper in the Creative Era, a couple of things seem evident to me:

• If information is the grist for the creative mill, then education needs to better prepare people on how to search, sift, and evaluate information quality, analyze and manipulate qualitative and quantitative data, make and validate hypotheses, and how to synthesize and communicate findings.
• Education needs to prepare people to work in a more fluid work environment.  This includes training to work as part of a project team, training in interpersonal dynamics, in creativity, in opportunity recognition, in personal self management, in risk assessment.  Unfortunately, today's educational system is structured around producing Industrial Era employees with its emphasis on standardized curriculum, testing, "command and control" classroom setup, and adherence to synchronized class period schedules.  At least this is beginning to change.  For example, in Palo Alto, where I live, my kids do a lot more group project work than I did at their age.  And I see more alternative learning options available.
• People need to learn the rudiments of self-employment.  I'm not saying that everyone should aspire to being self-employed.  Rather I am saying that the probability that a young person starting a career today will experience a period of transition and self-employment is high.  We should prepare them for this.  Skills like networking, skills and interest self-assessment, self-presentation and salesmanship, and basic financial management are key.

Next week (assuming I don't get sidetracked again):  I intend to explore the similarities and differences between the skills needed by scalable vs. small business entrepreneurs.

Footnotes:
(1)  According to Florida's classification of Creative Class vs. Service Class jobs to U.S. Dept. of Labor statistics, 60% of the service jobs in 1999 were the latter.
(2)  Patient Protection and Affordable Care Act; Health Care and Reconciliation Act of 2010.

Education, Entrepreneurship, and Employment

This post is going to be a bit more rambling than usual.  Bear with me.

A couple weeks ago, I had lunch with a friend who serves as a trustee for one of our local community college districts. At some point, the talk turned to the impact business and entrepreneurship education could have on creating local jobs.  While Silicon Valley appears to be recovering, like many areas around the country, it got hit pretty hard in the Great Recession;  the "official" unemployment rate still hovers around 11-12%.

As a former entrepreneur, whose current business provides services to early stage startups, and as a part-time teacher in marketing, this is an issue that I care about.  One thing that motivates me is using what I know to improve the odds of success for the entrepreneurs I work with whether as clients or students.

And as someone who adheres to a broad definition of entrepreneurship I'm a big believer in its power to create socioeconomic value. Of course, the connection between economic vitality, jobs, and startups is an article of faith bordering on dogma in Silicon Valley.

Furthermore, I believe that education can be one critical ingredient in developing future entrepreneurs or at least improving their chances of success.  Again, I'm not alone in this belief.  Stanford University, UC-Berkeley, and virtually every other institution of higher education in the San Francisco Bay Area have programs in entrepreneurship and, in many cases, not just one but several.

Silicon Valley Bias:  The Scalable Startup
Thanks to Steve Blank and others, there is now a pretty good understanding of the difference between a scalable startup that leads to a large company and a startup that ends up as a small business.  In Silicon Valley, the scalable startup is KING beloved by the entrepreneurial community, venture capitalists, and university entrepreneurship programs.  Big impact!  Big dreams!  High risk, high reward!  I mean, where else on the planet can you even have a semi-serious debate about whether a $20 million exit is a real startup or just a "dipsh--" company? (Dave McClure can carry that torch!)  And a lifestyle business?  What's that?  Is that a real startup?

Getting back to the conversation with my friend, as he was talking about what was going on at the community college level, this started me wondering.  Is this benign neglect of small business startups (which I'll define here to include lifestyle businesses) smart? Where are the jobs being created?  How durable our those jobs?  Are the failure rates different for scalable startups versus small business startups?

Facts About Startups, Small Business, and Employment
To answer the questions about the role of startups in job creation, let's start by examining an oft quoted statistic regarding small businesses and employment.

Data Source:  United States Census Bureau, 2004

While true, what's usually omitted is the last part, that these firms employ just 45.6% of the U.S. private sector workforce. This means that the majority of U.S. private sector workers are still employed by large companies.  So here's certainly one argument for promoting the scalable startup.  But 45.6% is still a big number, so the point still stands that small businesses are an important source of jobs.

Over the past few years, the Ewing Marion Kauffman Foundation has been sponsoring research to understand the economic impact of entrepreneurship as a means to guiding economic policy. (For a summary fact sheet of the Kauffman Foundation's findings go here.)

With respect to new job creation by small businesses, the studies show that it's more about age than size.  New companies, as one might expect, tend be small.  Surprisingly, the jobs created appear quite durable.

• From 1980-2005, business startups (less than 5 years old) account for ~3% of U.S. private sector employment.  While a small percentage, without these new jobs, the net employment growth rate for the U.S. would have been negative.
• New firms add ~3 million jobs in their first year;  older companies lose 1 million jobs annually.
• While less than 50% of startups survive to their fifth year, 80% of the jobs created by the firms survive five years.

So there appears to be statistical support for Silicon Valley's beliefs about startups, jobs, and economic vitality.  And given the relatively safe assumption that most of these startups are not intended to be scalable (still looking for data to validate this) I would conclude that it might be smart to pay attention to these small business startups.

Educating for Small Business Entrepreneurship?
If small business startups are a meaningful element of job creation, then shouldn't we be offering small business entrepreneurs as high a quality an education as we do to those pursuing scalable startups?  Which skills are common to both?  Which are different? What would a small business entrepreneurship curriculum look like?  Who is the small business entrepreneur?  Are there different educational needs for an entrepreneur just starting out versus someone who's making a mid-career transition?

Some relevant findings from the Kauffman Foundation:

• U.S. startup formation from 1977-2005 has been relatively constant over time at ~500,000 reported per year.  Entrepreneurial education appears to have little impact on the rate of formation but  may have a role in reducing the rate of business failure.
• In the U.S. from 1996-2007, the highest rate of entrepreneurial activity is in the 55-64 age group.  The 20-34 age group had the lowest (surprise!)
• The "typical" high-tech founder comes from a middle class or upper-lower class background, is well-educated (>95% with a bachelors degree or higher), is married with children, had an early interest in starting a company but over six years industry experience before actually starting.

This would indicate that in educating small business entrepreneurs, it's important to focus on training mid-career entrepreneurs business survival skills. This may also indicate that community colleges and evening continuing education programs are potentially better venues than a daytime, four-year university.  Universities still appear to be a better fit with those seeking to build scalable startups (as represented by the high tech company demographics in the Kauffman study).

Other Factors
Of course education and knowledge are merely one part of being a successful entrepreneur.  Temperament is another big part.  So are motivation, confidence, ability to recognize opportunity etc.  Then there are external factors like access to capital.  To the degree to which education can impact these, I'll be looking into these issues as well.

Next week:  I'm going to explore some of the similarities and differences between the skills needed by scalable vs. small business entrepreneurs.

Process vs. "Product" People

One of the essential skills needed in building a company is the ability to hire and fit the right people to the right job.  Most entrepreneurs spend a lot of time blending together the technical qualifications of their people.  Some of the more savvy also focus on the personality or cultural fit.  But in my experience, one of the key dimensions is whether the person is a process person or a product person.

A process person is someone who focuses on doing things the right way.

A product person is someone who focuses on getting to the end result or end "product" whatever that may be.

Now I can hear all the entrepreneurs thinking, "Of course we want product people.  It's the end result that matters, not how we get there."  And for the most part, they would be right...until it's time to scale up.

The reason I focus on this element is that while I've found that smart people can learn missing technical skills and even interpersonal skills (harder), whether someone is process oriented or product oriented seems to be hard wired.

The truth of the matter is that most teams and all companies need a mix of both types.  The actual mix depends on the nature of business and tends to evolve with time.  So how does one determine the proper mix?  Let's look at the circumstances that favor the need for a process vs. product orientation.

Product People
Product people have a natural orientation toward the end goal and are less concerned by the means to getting there.

Stereotypical product people are entrepreneurs, salespeople, and designers.  They fill out their expense reports under duress, mess up the system with special deals, or do end runs around the system altogether.  It's not that they don't appreciate the need for business processes.  Rather they recognize that at the end of the day, the goal of a process is to achieve a result.  And if that process isn't getting the results or they have what they think is a better way to achieve the result than via the process, the process is sacrificed.

Product people are usually comfortable with change, particularly disruptive change, and in fact may be the drivers of change in their organization. Change is synonymous with improvement in their minds.  Product people often prefer the blank paper approach to problem solving vs. continuous improvement because it increases their freedom of action to solve problems.

As such, they are at their best when the environment is uncertain or undergoing rapid change, the situation faced by most early stage startups or by mature companies whose industries are undergoing some type of technological, economic, or regulatory disruption.  Startups undertaking the process of developing product/market fit and proving out the viability of their business model need product people.

Unfortunately, product people tend to approach every challenge as a new problem, even when it may be similar to an already solved problem.  They may develop guidelines for solving related problems, but rarely like to sit down and document the detailed steps required to convert guidelines into processes.  As a result, there is a lot of reinventing of the wheel, details slip through the cracks, and the quality of work becomes highly dependent on that person's individual skill.  This ultimately limits the ability of a company to scale up.  A company dominated by product people can often degenerate into chaos.

Process People
At some point, someone gets fed up with the chaos.  Enter process people whose main orientation is doing things the right way. In order to do this, there first has to be a right way, so they are the ones that corral the product people into a room, lock the door, and force them to document the way things are being done in laborious, but necessary detail.  Good process people then collapse and streamline similar processes to reduce inefficiencies and link them together to eliminate dropped balls.  Because a good process eliminates most of the micro-judgments that a person has to make, less skilled people (and therefore more widely available people) can be trained to use it to achieve high quality results which makes it scalable.

When it comes to change, process people are not as comfortable with it as product people.  Establishing a good standard operating procedure is difficult and takes time to get running smoothly.  So while incremental change in the form of continuous improvement is fine, disruptive change is not.  Improvement to a process person means driving out error and waste.  And they understand the biggest source of both is the fallible human being.

Therefore, process people are at their best in more stable environments particularly where complexity is high or errors are costly like in manufacturing, financial services, health care, or the military.

Unfortunately, in their quest to eliminate error and waste, process people tend to overbuild systems.  They are the ones always saying "what if" sometimes to the point of absurdity.  Process people also equate proper operation of the system with results which is not always the case.  And as the process becomes part of the background, they often forget what the intent was behind the process and start focusing on the feeding of the system (anyone who's dealt with a government agency knows what this is like).

Getting the Balance Right: The CEO
One of my most important jobs as CEO was to get the balance right over the years I've developed some distinct biases and tricks.

• The CEO should be a product person - Once a process is established, it tends to be self-perpetuating.  Unfortunately, things change which inevitably leads to the process becoming less effective at delivering results over time unless someone is keeping the company focused on the end results.
• Product people should outweigh process people - I don't necessarily mean that they should outnumber them.  In fact, it is quite likely to be the other way around.  By outweigh, I mean that management's bias should always be towards someone achieving the desired result.  People should not be unduly punished for doing end runs around the system provided those end runs are not on a whim and they achieve the desired results.  (You do need to take corrective action with people who are end-running the system and making mistakes the system was designed to prevent.)
• Business processes should be required to justify their existence every so often - In one of my turnarounds, a key issue was that the company was buried in processes.  We first identified and killed any process that no one seemed to be using and there were a lot.  Many were "CYA" processes designed to address contingencies that someone had anticipated but that had never actually occurred.  We then targeted processes that generated the most complaints from the end-victims and informed the process owners that unless they (not the victims) could justify the benefit of the process, it would be terminated.  After much screaming, this usually resulted in significant streamlining of the process rather than elimination.  Finally, after the major pruning, I made it a point to select and "pick on" a few core processes every year by making process owner performance reviews dependent on end-victim satisfaction, efficiency, and unobtrusiveness.  It's amazing how much better processes get when someone's raise depends on it.

Balance is the key.  Too many process people can efficiently run you into the ground but too many product people can effectively run you off a cliff.

The Essence of the Message

The other day, my daughter Mina presented me with this drawing that I really love:

To understand the context, for the past many mornings on the way to her school, we've passed a flock of hummingbirds zipping in and out among the flowers.  I love these walks with my daughter because no matter how chaotic the "get-the-kids-to-school" morning rush has been, by the time we reach the hummingbirds she's happy.  This picture captures beautifully the essence of our walks.

I particularly liked this drawing because I've always been fascinated by Japanese "sumi-e" inkbrush painting.  Sumi-e is a style of art that seeks to capture the essence of a scene with the minimum number of brushstroke.

The pictures can convey the essence of simple things...

...or more complex things.

And what I find fascinating is how the essence is often conveyed less by the actual strokes you see as by the  strokes that were never made.

In marketing, when developing positioning or crafting a message, we face the same challenge as the sumi-e artist, namely how to communicate the essence of our message with the fewest possible elements.

But, this is harder to do than it looks.  When faced with the task of developing a slogan, positioning statement, or the ubiquitous elevator pitch, we often take the direct approach which is to describe it in more detail. The problem with this is that in our zeal to describe things completely, we lose the essence in the complexity.

Whether we're creating a marketing message, a position statement, a strategy, a product, we only learn what's the core essence by continually removing the extraneous and by imposing restrictions.  This is one of the keys behind the concept of Minimum Viable Product in Customer Development.  This is the purpose of the "60/60" rule (i.e. 60 seconds or less in 60 words or less) in elevator pitch development.  This is why any business strategy that requires more than a single page to describe becomes dead paper.

When know too far? Not connecting.

Still with me?

How about now?

The Homework Matters

On October 13, 2010 I had the opportunity to listen to Mark Suster (Both Sides of the Table blog) present at the Stanford Entrepreneurial Thought Leaders series.  I like Mark's blog because having been an entrepreneur and a VC, he brings both the inside and outside view to the startup world.

The purpose of his talk was to "joust with some dragons" the dragons being Silicon Valley conventional wisdom.  He then proceeded to take jabs at the Lean Startup movement ("lean does not mean fast, fast means fast, rapid means fast..."), super angels, and most of all the notion of "fail fast."

But I thought his most interesting comment was this:   

"Silicon Valley is lazy."

Now before you get out the pitch forks, heat up the tar and feathers, and conjure up a flash mob in Los Angeles, it's important to understand the context of the statement.  He was not saying that people in Silicon Valley don't work hard or long hours in general.  He was saying this in the context of doing market research, i.e. doing the homework.  Unfortunately, market research has become an almost scatological term in Silicon Valley signifying "analysis paralysis", spreadsheet slight of hand, and navel gazing.  Instead, "launch and learn" usually shouted from beneath the banner of Customer Development, has become the new rallying cry as the substitute for market research.  And for many entrepreneurs with borderline ADHD and strong bias towards action, it feels so much better.

But since when did market research and Customer Development become mutually exclusive?  One definition of  market research is "the collection and analysis of information about consumers, market niches, and the effectiveness of marketing programs." Customer Development, as outlined in Four Steps to the Epiphany, calls for the statement and validation of multiple hypotheses including:

1. Product hypothesis
2. Customer & Problem hypothesis
3. Distribution & Pricing hypothesis
4. Demand Creation hypothesis
5. Market Type hypothesis
6. Competitive hypothesis

Hypotheses 2, 3, 5, and 6 fit squarely into the definition of market research.  In fact, what many people lose sight of is that Customer Development is a market research methodology.  Getting out of the building and A/B split testing are just the tools used to validate hypotheses to be added to other tools in the kit like customer surveys and conjoint analysis, each with its strengths and weaknesses.

Suster's point was that for some in Silicon Valley, "launch and learn" has become an excuse for laziness, for not doing the hard, sometimes boring, grunt work of market research.  Who are the players?  When and how did they get started?  What's been tried before?  How did the channels evolve, etc.?  But "launch and learn" does not eliminate the need to do market research, to know the industry, to do the homework.  Which led him to make another interesting statement that as a VC, "I'll pass if someone doesn't know the history of their industry." 

Thanks Mark, for a thought provoking presentation.

Entrepreneur's Holiday

This Monday, October 11th, we celebrate the only U.S. holiday that honors an entrepreneur: Columbus Day.

Christopher Columbus is best known as the explorer who discovered the Americas*, but he was first and foremost an entrepreneur.  His journey was not one of pure exploration, but driven by commercial advantage.  And his story shows that the entrepreneur's journey remains the same 500 years later.

The Problem
During the reign of the Mongol Empire, trade between Europe and the Orient, via the Silk Road, was a fairly safe and lucrative one.  That all changed in 1453 with the fall of Constantinople to the Ottoman Turks.  Trade routes collapsed leading to a scramble for alternatives.  There were two main options:  an eastern route around Africa or a hypothesized western route across the Atlantic.

The Solution
Contrary to popular belief, educated Europeans did not believe the world was flat.  In fact, recent advances in celestial navigation rested on the fact that the Earth was spherical.  But for a variety of reasons, there were different estimates for the circumference of the Earth.  To make a long story short, Columbus estimated the westward distance from the Canary Islands to Japan to be ~3700 km (the correct figure is 19,600 km).  Even so, a sea voyage of even that length was pushing the limits of the maritime technology of the day.  While the easterly trade winds might enable a voyage of that distance westward, the question was how to return.  Fighting those same winds eastward would likely exhaust the provisions that ships of that day could carry.  Therefore the western route was considered unfeasible.

But Columbus had a plan.  Based on his 25 years as an ocean trader and his knowledge of the trade winds, he proposed to use the westerlies further north in the mid-Atlantic, to make the return trip feasible.

The Opportunity
In 1488, Bartholomeu Dias of Portugal rounded the Cape of Good Hope which eventually resulted in Portugal's establishment and control of an eastern sea route along the coast of Africa, India, and ultimately to China and Japan.

Enter Spain.  Desparate for funds after a long and expensive war pushing the Moors off the Iberian peninsula, King Ferdinand of Aragon and Queen Isabella of Castile needed a way to boost trade revenues.  With Portugal in firm control of the eastern route, they were willing to entertain the more speculative western option.

The Venture Capitalists
Initially, Columbus took his proposal to King John of Portugal, Genoa, and Venice the "market leaders" in the Orient trade routes.  But King John's experts correctly rejected the proposal on the basis that Columbus's distance estimates were too short.  His negotiations with Genoa and Venice were unsuccessful.  Finally, he sought audience with the Catholic Monarchs of Spain and in 1486 presented his proposal to Queen Isabella.

The Term Sheet
Columbus proposed to discover a western route to the Orient for Spain in one year in exchange for funding for three ships.  If successful, he wanted 10% of the revenues from the new lands in perpetuity, an option to buy one-eighth interest in any commercial venture with the new lands and one-eighth of the profits, the rank of Admiral of the Ocean Sea, and appointment as Viceroy and Governor of all new lands discovered.

As in the case with King John and for the same reasons, the Queen's experts advised her to reject the proposal.

However, to keep Columbus from taking the proposal elsewhere and to maintain an option, Spain paid Columbus a small stipend to support him as he sought to raise funding from private investors.  Columbus lined up commitments for half of the funds from private Italian investors provided he could find a lead investor.  After two years of negotiations and some tempering of the deal, Spain agreed to fund the venture.

The New Venture
Columbus departed Spain on August 3, 1492 with the flagship Santa Maria plus the Nina, and Pinta and as new ventures go, the plan quickly ran into reality.  First, Columbus expected the journey to last four weeks.  Instead it took five weeks with Columbus narrowly avoiding a mutiny.  He made landfall on October 12, 1492 in the Bahamas but convinced he had reached India.  Two months later, the Santa Maria ran aground and had to be abandoned.  On the return voyage, a storm forced them to make landfall in Portugal instead of Spain where they were detained for a week.  They were then allowed to proceed and returned to Spain on March 15, 1493, faster than the one year allotted.

Success!  Columbus was ennobled and granted the title of Admiral of the Ocean Seas.  The Church granted Spain exclusive rights to all lands beyond a line 100 miles west of the Azores, a monopoly that enriched Spain for the next 300 years.

Scale Up
On September 24, 1493 Admiral Columbus led the first of three voyages to colonize and explore the "Indies" as he believed the new lands to be. But Columbus was a lousy governor (i.e. CEO) and over the next six years, his methods became harsher and the complaints from the colonists louder until finally "Chairman of the Board" King Ferdinand appointed Francisco Bobadillo as governor to investigate the allegations of mismanagement.  As a result, on October 1, 1500, Columbus was arrested and sent back to Spain in irons.  He was eventually released and allowed to lead another expedition but he was permanently removed as governor.

Columbus died on May 20, 1506 a wealthy man and firmly convinced that he had reached the east coast of India.

The Pivot and the Fast Follower
So when did Spain and the rest of Europe figure out that what Columbus had discovered was a new continent?  From 1499-1502, Amerigo Vespucci conducted his own voyages to the New World.  A German cartographer, Martin Waldseemuller working from Vespucci's journal became convinced that the land that Columbus had reached was not India but an entirely new land.  In a map he published in 1507, a year after Columbus's death, he labeled the new land America after Vespucci.

Perhaps if Columbus had been able to recognize this, the two new continents would today be called North and South Columbia and America would be that Latin Columbian republic next to Venezuela in South Columbia.

The Legacy
In the end, Columbus's legacy was recognized.  Strangely, even though he thought big (there's nothing small about asking for 10% of the profits from the New World in perpetuity...), in the end his vision wasn't big enough.  He never found a commercially lucrative western sea route to the Orient but something much bigger:  the New World.

Happy Columbus Day!

*  I'm not going to debate here whether Columbus was actually first or not.  I'll leave that to professional historians.

Independent Contractors, Uncle Sam Wants You!

For many reasons, early stage startups love to hire contractors instead of employees.  Independent contractors are often cheaper, the company doesn't have to pay employment taxes, benefits, or worker's compensation insurance, HR compliance issues are simpler, and the company retains workforce flexibility.

Unfortunately, I have to remind my clients that the choice as to whether someone is an independent contractor or an employee is not necessarily up to them.

"But we're only going to hire them a few hours a week!"  Sorry, but full time vs. part time does not determine whether someone is a contractor.  They might be a part-time employee.

"But they want/have agreed to be an independent contractor!"  Sorry but willingness on the part of both parties is not a determinant either.

So who does determine whether someone is an independent contractor if not the two parties involved?  The IRS and the state.

Why?  Because the U.S. government really wants as many people as possible to be classified as employees. The reason? Take a look at this graph:

Notice that between individual income tax and payroll taxes, 81% of government income comes from employee based revenues.  Now independent contractors also pay income taxes and will pay their equivalent of payroll taxes (1040 Schedule SE) as self-employment tax.  But the amount will generally be less because of one key difference: employees earn a wage that is taxed after which expenses are paid. Self-employed individuals, on the other hand, are small businesses which earn revenue, deduct business expenses, and only then pay taxes on the net, which is most often a smaller number.  This means less taxes to the government.  (It's also one reason why only 12% of government income comes from corporate income tax.)

So what determine whether a person is an independent contractor vs. an employee?  Unfortunately, the answer is not clear cut.

The guidelines used by the U.S. Dept. of Labor, IRS, and (in California) the Employment Development Department (EDD) is whether the employer has the "right to control" a person's work whether it is exercised or not. They also look at whether the contractor can suffer the risk of loss, provides their own tools, have their own workspace, are publicly available for business with multiple clients, and the duration of the work engagement.

So how do government auditors determine this?  Largely its a judgment call.  With respect to the above factors, the more often the contractor answers "no" and if the engagement extends more than six months, the more likely the auditor is going to want to classify that person as an employee.

The IRS used to have what it was called a twenty point test, but replaced this a few years back with the more ambiguous guidelines in effect today.  Note that the penalties for misclassifying someone who should be an employee as an independent contractor can be significant including back employment taxes, associated interest, and penalties.

"So how will anyone find out?"  It usually happens when someone unfamiliar with the laws and working as an independent contractor gets terminated and files for unemployment benefits, listing the company as the last employer.  But independent contractors are not eligible for unemployment benefits; they are supposed to be independent businesses.  This can then trigger an audit.  And in the current economy with many state governments running budget deficits and the widespread abuses in this area, state auditors are getting much more aggressive about going after small businesses, which are much more likely to be in violation.

So what should a small business or startup do to protect themselves?

1. Signed Independent Contractor Agreement - You should have a signed agreement drafted by an attorney.  It should spell out that the contractor is responsible for filing and withholding their own taxes and have their own insurance (general liability, workman's comp if applicable).  It should also have a statement of work that preferably outlines a work project with milestones, deliverables, and project fee vs. just calling out a rate and general duties.
2. Determine what control is necessary over the way the work is performed - While you have the right to determine what the work product standards and deliverables should be, the more the contractor determines how, where, and when the work gets done, the more likely the contractor will be considered independent.  If a job requires that the person follow your detailed policies and procedures, under your supervision, at your premises, using your equipment, you probably need to hire an employee.
3. Review the IRS guidelines mentioned above -  See how many of these factors your contractor can pass.  The more the better.
4. Check to see if the job falls into the "statutory" category - There are certain jobs that have been defined by law to be employees.  Examples can include officers of corporations, full-time dedicated sales people and insurance agents, agent/drivers in food service, laundry, or dry cleaning, or home workers performing work on employer supplied materials.  The list can differ from state to state. 

If in doubt, consult a human resources specialist or labor attorney for advice.  The hour fee is worth it.  Or if you don't want to do that, all you have to do is file a Form SS-8 with the IRS.  They'll be happy to provide their objective, unbiased opinion.

The Best School of Leadership

Periodically, I get asked where I think the best place is for someone to learn leadership.  Is it Harvard?  Stanford?  The U.S. Army?

Without hesitation, I tell them "spend a year running a volunteer organization, any volunteer organization with more than ten people."

People management has two sets of incentives, the proverbial carrot and stick.  On the carrot side we have pay, rewards, etc.  On the stick side we have things like authority, the ability to fire, etc. 

As I've mentioned before, my son, Alex, is in the Boy Scouts.  In my experience, the Scouts are one of the best groups around for teaching 11-18 year old boys how to lead.  In working with the Scouts, it's always interesting to watch boys who have just been elected to their first patrol leader position.  Almost always, when he wants his patrol mates to do something, the new patrol leader starts by issuing orders.  This rarely never results in compliance at which point  the Scout shifts to the "do it or else" approach.  The Scout is then often shocked and frustrated when this doesn't work either at which point he experiences a sinking feeling as it dawns on him that he has absolutely no way of forcing the other Scouts to obey him and they know it!

This pattern is not just confined to the boys.  I've seen the same pattern in companies, but with a little different outcome.  In this case a new supervisor issues orders and gets partial compliance.  Any resistance or lagging is quickly overcome by a "do it or else" conversation.  The result:  it works!  And that's too bad because that person never gets to experience the sinking feeling that the Scouts do that ultimately sets them on the path to good leadership.

Consciously or not, the advantage the new supervisor has over that Scout is the authority of the company to back up his orders.  In spite of the move towards more egalitarian organizations, at the end of the day, the supervisor is evaluating the employees and through this process, controls raises and assignments, his means of ultimately forcing his employees to obey him and they know it.  Unfortunately, because it works, many new supervisors become overly reliant on wielding the stick and little practiced at dangling the carrot except in the crudest, clumsiest way.

My first chance to experience that sinking feeling was leading a volunteer organization in college, as president of our student chapter of the American Institute of Chemical Engineers (AIChE).  We had a real budget, some real goals that the university wanted to have us accomplish, and a bunch of very busy student volunteers.  There was no stick to be applied and precious little carrot (i.e. no pay or benefits).  Our volunteers were a mix of the highly motivated and barely present, exceedingly competent and the struggling to make it.  We didn't have the luxury of a rigorous selection process that would only admit the world-class, self-motivated, best and the brightest.

Honestly, I can't even remember what we ended up accomplishing that year, but what I do remember is how much I struggled, sweated, and really learned the art of motivating people without having the crutches of authority, pay, and promotions to lean on.  They are the same lessons the smart Scouts learn bit by bit once the shock and despair have left them.  And they are, unfortunately, lessons that some working managers never learn because wielding authority, pay, and promotions work well enough for them to get their job done (although how well they work for their employees is another matter).

So what are some of these secrets?

• Remember that your job is not to control, it is to motivate and enable your team to win - In a volunteer organization, you need them at least as much if not more than they need you.
• Assume the best in people until proven otherwise - We all like to be thought of in the best light, even if our efforts don't quite live up to our ideals.  Or in the words of motivational speaker Ian Percy, "We judge everyone by their behavior.  We judge ourselves by our intentions."  Part of being a leader is helping others live up to their ideals, not rub their noses in their faults.  But if and when the flaws appear, depending on what these are, these become the basis for a either a personal development plan...or termination (see below).
• Show appreciation for efforts, not just results - Do you believe that the only thing that matters is the result? Well call me soft, but I don't buy it. End results depend on a variety of factors, not all of which are within your team's control.  What your people do control is their efforts.
• Keep everyone in touch with the common mission and values of the organization - When your people are head down, disagreements are brewing, and tempers running hot, you need to pull everyone back to the organizations goals and the values.  Which means you have to have some.
• Maintain your sense of humor - No one wants to work in a cheerless, grim environment day after day under a prickly boss.  And volunteers won't; they'll vote with their feet.
• Be clear about the desired results; be flexible about means & methods - I.e. don't micromanage.  The onus is on the leader, to offer a clear vision of what needs to be done; those that do a poor job of this, end up having to micromanage. People need to be able to interject a bit of themselves into their work or they don't own it.
• Let people make mistakes if it helps them learn - Improvements come when people are not afraid to reach out.  Give them room to try.
• If when the mistakes happen, don't punish - Instead, get on the same side of the table and problem solve.

But lest you think this is all sweetness and light, my last lesson:

• If at the end of the day, if someone is not working out, remove them with as much dignity as possible, but do it ASAP - Unfortunately, for a variety of reasons, even in a volunteer organization, some people don't work out.  It could be a lack of skills, a conflicting vision, a poor fit, or even worse (e.g. theft, lack of integrity).  If it gets to the point where they are doing more harm then good, you need to remove them.  At the end of the day, as a leader, your duty is to the team as a whole.

I close this post with a quote I heard over the weekend at a Scoutmaster leadership training session:

A leader is best when people barely know he exists, not so good when people obey and acclaim him, worse when they despise him....But of a good leader who talks little when his work is done, his aim fulfilled, they will say, "We did it ourselves." - Lao Tzu

Service Not Surveys

Lately it seems like you can't shop anywhere without being asked to fill out some survey.  The ones that drive me crazy are "Customer Satisfaction" surveys.  Maybe I'm cynical, but I swear there is an inverse correlation between the length of the survey versus the quality of service delivered.

A case in point: I own a Subaru SUV and overall I'm pretty happy with both the car and the the dealer.  In fact, this is my second Subaru from this dealer.  They had a nice no nonsense sales process.  No "I have to get approval from the sales manager" baloney.  But happy as I am with the sales side, I'm less than impressed by their service department.

A few weeks ago, I was driving down Highway 101 when my "check engine" light flashed on.  Normally, I ignore these as it usually turn out to be something minor, like a malfunctioning knock sensor.  But in this case, Subaru tied it to several other idiot lights. The end result was my dashboard flashing like a Macy's Christmas display.

Fortunately (or so I thought), I was only two exits from the dealer.  What luck!  They should be able to figure out quickly whether or not this is a real issue or the usual trivia. For those of you familiar with the "check engine" light problem, you know that it takes a mechanic about a minute to plug a handheld device into the car and diagnose what the potential causes are.

I pulled into the dealer service department.  Now this is the same group that advertises its concierge type service, white glove treatment, free car wash after every service etc. to justify their premium prices.  This is also the dealership that routinely sends out an annual "customer satisfaction" survey.

The service representative was busy so it took several minutes to get his attention.  No big deal;  after all I'm a drop in.  But once I finally got his attention and described the problem, instead of just plugging a handheld device into the car and figuring out whether I was going to need real service or not, I got some sob story about how busy they were and did I want to be scheduled for an appointment next week? "Maybe, " I replied but first I wanted to know if it was potentially something for which is was worth scheduling an appointment.  The dealer is ten miles from my house; an appointment involves dropping the car off for the day and arranging for a ride to and from work.  I also have to find a day when I don't have any off-site meetings.  This is not something I want to do if it turns out to be a faulty knock sensor or some other triviality.

No luck.  The guy wouldn't budge.  So I didn't schedule an appointment and drove off.

Later that day, I decided to visit the Jiffy Lube four blocks from my house, where I get most of my routine (and substantially cheaper) service done, on the off chance they might be able to diagnose the "check engine" light.  Again, all the mechanics were busy, but the manager took the time to stop what he was doing and talk to me.  Thirty seconds later, he has a handheld plugged into my car.  A minute later he asks me to pop the gas cap cover.  He twists the gas cap into the fully locked position and resets the light.  Problem solved.  He then explains how a missing or loose gas cap is a common cause of a false "check engine" lights without once even implying that I'm idiot for leaving the gas cap loose.

Talk about two totally different ten minute interactions.

Being in the service business myself, it once again reminded me that customers are PEOPLE, not an abstract marketing profile, how important it is to treat people as you with to be treated and how important these little interactions are to keeping customers (i.e. PEOPLE) happy. In Subaru's case, while I love the cars, you can bet I'll continue to look for alternatives to their very expensive service department.  In the case of Jiffy Lube, that manager once again cemented a 15+ year customer relationship.  I should mention, that this is not the first time this group has done some little extra for me that keeps me coming back (on top of their quality work and fair prices).

And its not just in service businesses where this is important.  It is the rare product that requires zero support.  If you analyze your product from a whole product standpoint, you'll see lots of places where a support person at your company needs to interact with a real live human being that is a customer.  SaaS ("software as a service") has been touted as one area where everything is customer self service, but I've found that nothing is further from the truth.  The good SaaS companies understand this.  For example, one of the reasons I like Intuit Payroll (formerly Paycycle) is that their chat help line is great (and I hate chat and instant messaging).  It's convenient, timely, and so far, they've always been able to solve my issues. Think about that if you're a SaaS company striving to reach that magic +90-95% renewal rate that seems to be a threshold for survival.  And in addition to being critical to retaining customers, good service can be a formidable barrier to entry for smaller companies, difficult to replicate by a larger, more bureaucratic competitor.

Now in this case, both Jiffy Lube and Subaru have customer satisfaction surveys.  Jiffy Lube's was a quick online thing which I was happy to fill out.  Subaru's is an annual booklet and bubble chart questionnaire that I expect will arrive in the next few months.

I've scheduled it for an appointment  with my round file.

Determining Your "Natural" Growth Rate

4th and final post in a series on Strategic Growth

As we close this series on Strategic Growth, the question arises, how does one determine a company's inherent growth rate?  While the answer "it depends" is accurate, it's not terribly useful.  To get a useful answer, let's ask the question "what typically constrains company growth?"

In most cases, the answer is hiring and growth capital, with the latter often, but not always, being the restriction on the former.  Given this, there is a financial planning tool called the Sales Sustainable Growth Rate Model that can be used, under certain conditions, to give a rough estimate of the funds required for growth,

******** ALGEBRA ALERT! ********

The Sales Sustainable Growth Rate (SSGR) Model

The model stems from the premise that the supply of funds must equal or exceed the demand.  Demand for funds is caused by growth (SSGR).  Dissecting equation (3), the sources of funds are retained earnings, invested assets, debt, and new equity.  All figures are calculated as percentages.

The main limitations of the model are that the ratio of sales to assets (or investments) is relatively stable over the planning horizon.  This means that the model degrades if there is a large build up in capital assets (causes the model to overestimate SSGR), high inflation, or time horizons over five years. Note that this model is most useful for a company with existing operations and operating cashflow vs. an early stage company still trying to reach cashflow breakeven.

The net upshot of the model is that the growth in the total equity base must meet or exceed the growth in sales.

Equation (1) shows that SSGR can be financed from two sources:  funds raised from equity (NER) and "internal" funds (earnings and debt). 

The Internally Sustainable Growth Rate (ISGR) in Equation (2) represents the sustainable growth that the company can get without giving up control to external shareholders.

Equation (3) shows how ROE is related to profit after taxes, debt financing level, and interest paid on the debt.  Debt is commonly used to lever up ROE. (Because debt does not result in ownership transfer, it is considered internal financing.)

Internally Sustainable Growth Rate
For reasons that will be made clear, growth funds for an early stage startup almost always need to come from a new equity infusion, whether it is "friends and family" or institutional money.  But for cash generating businesses, growth can potentially be funded internally.

Focusing on ISGR and rearranging key terms as in equations (4) to (7), ISGR can be increased by:

• Increasing profit after tax
• Decreasing or eliminating dividend payouts
• Increase financial leverage (more debt)
• Increase operating leverage (e.g. improving inventory turns)

Obviously except for operating leverage, none of this works for early stage startups running a loss without access to debt (and consequently not making dividend payouts), hence the need for new equity issuances.

How Google Stacks Up:  An Example
To show you how it works, I've plugged Google's numbers into the model.

From a financial perspective at least, Google has sufficient resources to fund its projected growth without needing to issue additional stock with perhaps a bit of headroom.  Does this indicate that Google could be more aggressive or that some other constraint is holding them back?  Maybe.  Or maybe Google management is just erring on the conservative side in preserving cash for downside risk management in the still uncertain economy or to retain flexibility in its acquisition strategy.

Strategic Growth in Summary
To conclude, the question you should be asked yourself is what is the right growth rate for my company?

• What are my industry competitive dynamics?  Do they require fast growth? Or do we have a decision to make?
• If controlled growth is an option, what are our barriers to entry?  Or what barriers do we need to erect?
• Is controlled growth desirable?  Why or why not?
• If controlled growth is our objective, how will we limit customer acquisition?
• If fast growth is our objective, are our business systems, people, and finances adequate to support it?  What plan is in place to ensure that we don't allow product/service quality to fall apart?

Finally, remember to revisit this question periodically.  Your company and your industry will evolve over time.