What a Business Financial Statement Can Tell You About the Health of Your Business

When you run your own small business, it can be difficult to keep an objective distance from what you do.

Bills come in, sales go out, you have your day-to-day goals and you watch the curvy line of profit and loss make its inexorable progress throughout the financial year. You have your big one-year and five-year plans, and it takes a serious upheaval for you to reconsider them.

Even if things take a surprising turn – a rough patch or an unexpected boom period – it is human nature to swallow these changes and rationalize the impossibility of them changing the business plan on which you worked so hard. Maybe you assure yourself that things will work out anyway, or that this is no time to take a risk by deviating from your roadmap.

If you alone are responsible for this business plan and for keeping your company afloat, there might not be anyone else around to challenge your views. This is just one reason why maintaining your company’s financial statement is wise business practice. It also means you have a document ready to present to potential investors or collaborators, and that you’ll only need to give it a tune up when the time comes to approach your bank for a loan to take your business to the next level.

But while it’s always pleasant to look at a sheet of healthy, blossoming figures, even when business is booming the actual process of putting your financial statement together can be intimidating. If you started your company because there was a service you were keen to provide, or an idea for a product you were excited to build and sell, then sitting in front of Excel trying to make the numbers add up probably seems difficult – and definitely not a lot of fun.

When you break the document down into its three component parts, however, it starts to seem more straightforward. And once you’ve created your first one, you’ve done most of the hard work – and all that remains is to update it every quarter, or when you are faced with an investment opportunity.

So what are those three components all about?

The first section is your balance sheet, which gives a birds-eye view of your company’s position. The left hand side of this sheet should show your assets – the cash value of the stock and property owned by the company. This is broken down into ‘current’ assets, meaning those that are likely to be converted to cash within the next twelve months, and ‘non-current’ assets, indicating those you’ll hang on to for longer, such as office furniture or vehicles. The right hand side of the balance sheet is your liabilities – the debts you need to pay. Again these are divided into current liabilities (such as a small loan that you will repay within a year) and non-current ones (your mortgage, for example.)

The balance of this section (your assets minus your liabilities) is represented as the ‘shareholder’s equity’ – what you would be left with if you sold off your assets and settled your debts right now.

The remaining two sections provide different ways to look at the current profitability of your business. Section two, your Income Statement, pits your revenues and gains (including sales, service charges, and any interest you might be earning on your business account) against all expenses and losses (equipment, salaries, rent etc.) for a given period, most commonly the past quarter. This gives an indication of the general health and profitability of your business as it stands.

The final section, your cash-flow statement, is a more specific version of the same thing. Here, your profits and losses should only refer to the cash that’s come in or gone out over the same period. It is a more tangible picture of the current state of your business, not taking into account non-cash elements such as depreciation.

To give you a clearer look of just how it functions, you may be interested to take a look at this handy new visual guide – a kind of dissection of the business financial statement. Get your first statement out of the way, and you’ll find you have a much clearer perspective on the current health of your business – and what you need to do to make the next great leap.

G. John Cole is a digital nomad and freelance writer. Specialising in leadership, digital media and personal growth, his passions include world cinema and biscuits. A native Englishman, he is always on the move, but can most commonly be spotted in Norway, the UK and the Balkans.

Image: Pexels

How to turn down work without compromising your position

When was the last time you said ‘no’ at work? There’s no shame in being the guy who says ‘yes’: taking on work indiscriminately is the sign of a healthy work ethic – but whether it’s a productive work ethic or not is another matter. And, unfortunately, the willingness to take on every task you’re assigned can sometimes be caught up in other, less positive attributes: fear of losing out, pride in handling everything that’s thrown at you, or simply the inability to assess and manage your own schedule.

If you take on tasks that you don’t have time to complete, or that will impact negatively on the rest of your workload, you are not just letting yourself in for a hard time – you are compromising the level of what you can achieve for your business, your boss and/or your client. If you decide to turn a project down, saying ‘no’ can be the most difficult part. If you fear the wrath of the person to whom you’re declining, try to remain confident in the knowledge that ultimately it’s the best solution for everyone.

Therefore, transparency is the best way to proceed. Take some time to clarify for yourself the reasons that you can’t take the work on, and potential solutions. Be bold and honest, and you will retain their understanding and respect. This isn’t the moment for excuses, but for reason. Meet them in person (rather than sending an email) – you can ensure you’ve been understood properly and it will be easier to make your point.

If you’re working as part of a team or community, you may know someone who is better suited to take the work on. Again, this may be what throws you in a quandary about whether to turn the work down: perhaps you’re concerned that redirecting work on one occasion may see you overlooked next time around. It’s a legitimate fear, but ask yourself: is it better to suck it up and submit inferior work, or to offer a better solution that keeps everyone happy? Pass along a tasty assignment, and you should be remembered positively by client and colleague alike: you will position yourself as a helpful and resourceful part of the ecosystem. It all comes back around eventually.

On the other hand, if you’re passing on a less savory task and you’re concerned your boss will think you’re shirking, face up to the music and ask for help. Arrange a meeting to discuss your schedule. Use the opportunity to discuss the implications of overwork and to try to solve the issue together: maybe you need more overtime, more workable deadlines, or perhaps some help prioritizing and scheduling. Approached with honesty and maturity, hopefully your boss should see sense.

If transparency is the foundation of this approach, gratitude is an element not to overlook. Whether you’re saying no to an appealing bit of business, or asserting yourself regarding your employer’s unrealistic expectations, these are the people that pay your salary. Expressing thanks at having been considered for the task is a valuable way of maintaining relations even as you’re forced to turn it down. A client should be thanked for the potential business and asked to remember you next time; a boss can be thanked for considering your talents to be suitable to the job at hand – and for having confidence in you to complete such a heavy workload! So finally, when you’ve met with the person, explained your position and offered alternatives, remember to say thank you. After all, having too much work can be a privilege that others would love to have.

These ideas and more are collected in a new infographic from The Business Backer. Be sure to read and digest them next time you’re unsure how to deal with a request too far.

This is a guest post from John Cole. John is a digital nomad and freelance writer. Specialising in leadership, digital media and personal growth, his passions include world cinema and biscuits. A native Englishman, he is always on the move, but can most commonly be spotted in Norway, the UK and the Balkans.

(Image Source: The Business Backer)

The Spirit of Giving

Merry Christmas!

Joyeux Noël!

Sheng Dan Kuai Le! (圣诞快乐!)

Wishing you an enjoyable day, and a happy holiday season spent with good people, surplus amounts of food and drinks, and a large number of gifts!

One idea that is firmly associated with Christmas is gift giving. This is a central part of the Christian tradition, and also has an important place in broader Western culture, which retailers are obviously happy to encourage and embrace.

The festive season’s spirit of giving provides us with a nice opportunity to revisit basic notions of “value”, “price” and “cost”.

the-spirit-of-giving-2

We can think of “value” as the benefit provided by a good or service to the end user.

Economists typically interpret this as the consumer’s “willingness of pay“. That is, the maximum amount that a consumer would be willing and able to pay for a good or service. This allows them to introduce the idea of “consumer surplus“, which is the difference between willingness to pay and the actual price level. And the notion of consumer surplus leads to the idea of “gains from trade“; the idea that both consumers and producers can be made better off if they are allowed to trade freely.

Christmas gives us a chance to re-examine this mainstream interpretation of “value”.

It is evident at this time of year that a gift’s value is often totally disconnected with how much the recipient would have been willing or able to pay for it.

Factors that might affect the value of a gift include:

  1. The strength of the relationship between the giver and receiver of the gift;
  2. Whether or not the gift is a surprise;
  3. How well the gift matches the recipient’s needs and interests;
  4. The message on the card;
  5. The decorations surrounding the gift (Xmas tree, stockings, reindeer, Nativity scene);
  6. The colourfulness of the packaging;
  7. How fun or difficult the packaging is to rip open; and
  8. The atmosphere, experience and ritual of opening gifts together with family and friends.

Christmas is a time of year when people go to great lengths to maximise the value of what they give to others, so much so that it shatters mainstream Economists’ interpretation of “value” as “willingness to pay”.

Next we can consider “price” (what a firm receives from a customer (who may or may not be the end user) in exchange for a good or service) and “cost” (what the firm needs to pay for inputs that are used to produce it).

When I studied Economics as an undergraduate at Sydney University (under such luminaries as Kunal Sengupta, Tiho Ancev, and Don Wright) it was explained to me that firms aim to maximise profits. They can do this by adjusting price and quantity in order to increase the distance between total revenue and total cost. At a minimum, I was told, they will never set a price which is lower than the average cost of producing one extra unit (that is, price will never be lower than variable cost).

At Christmas, people spend significant resources (time, money, effort, imagination) to purchase or create gifts which they then give away for free. People tend to hunt for the best “value” gift that they can find within a given budget. That is, they seek to maximise the gap between “value” and “cost”, not “price” and “cost”.  Christmas shoppers will often hunt for a bargain, but if they stumble upon a remarkable gift which exceeds their budget they will often buy it anway.

“This is far too expensive! Meh, it’s Christmas! I’ll put it on my credit card!”

Your response might be that a firm is not a family, and so this Christmas analogy is invalid.

But is it?

What would the world be like if firms thought of consumers like family members?

And, more to the point, how did many of today’s most valuable technology firms become billion dollar companies? Think of Whatsapp, Twitter, WeChat, and Facebook. They did it by trying to provide value for as many end users as possible, and only afterwards did they find a business model to sustain and grow the firm.

Merry Christmas!

Joyeux Noël!

Sheng Dan Kuai Le! (圣诞快乐!)

Image: Tom Spencer

Harnessing Creative Energy

China comes up for criticism in modern times for stealing software technology from the West.

Software is a language (or a set of languages) which can be used to make computer hardware do marvelous things, and because software is easy to copy (or reverse engineer), it’s easy to steal.

But if there is software stealing going on in China and elsewhere, should we really be concerned about it?

Software development is currently a fertile ground for creative minds to explore because the leverage provided by billions of computers and smartphones networked over the Internet means that a single piece of software can be used to solve problems and delight millions of people. And the additional cost of reaching one extra person is basically zero.

This presents a wonderful opportunity for creative minds to make a big impact.

And when it comes to stealing software, the reality is that creative types have been stealing from each other since the dawn of time.

In ancient times, travelling minstrels would borrow each others words, using the principle that “he writeth best who stealeth best all things both great and small, for the great mind that used them first from nature stole them all.”

In more modern times, Steve Jobs adopted the philosophy of a travelling minstrel, and is well known for stealing many of his best ideas including the idea for the computer mouse which he discovered at Xerox park.

Legal protections for intellectual property like patents and copyright remain important. But not for the reasons that most people will tell you.

The common line in the media is that patents and copyright are important because they protect the innovator’s profits, and therefore protect the innovator’s incentive to invent new technology and continue innovating.

This may be part of the story, and it is certainly true that many people are interested in profit. However, the biggest innovators in history have been the people who have pushed the boundaries because they were interested in the work. People like Galileo Galilei, Leonardo Da Vinci and Steve Jobs. They were not driven by profits but by a passion for the work.

And so, if the most creative people are driven by passion, and will do the work whether they get paid or not, then why are legal protections required?

Well, at the heart of the issue would appear to be the concept of “fairness”.

Discovering new technology is difficult, but copying a technology once it exists is often a task that any fool can accomplish. And once a new technology has been copied, the production process can often be scaled up quite quickly.

What this means is that, in the absence of legal protections, a fast follower might be able to scale up more quickly than the original innovator and thereby take most of the benefits from innovation.

This seems like a very unfair outcome.

And it is not the kind of outcome that is encouraged in countries that champion innovation such as Australia, America, or the UK.

By making legal protections available for new technology, a community can give the original innovator time to scale it up and the chance to make an impact. And this is the community’s way of saying thank you for the gift of a new creation.

An issue arises though when multiple countries are innovating concurrently, each playing by a different set of rules.

Should we be concerned if new technologies are being created in America, say, and then copied and scaled up overseas?

On the one hand, this seems quite unfair. The reason that firms in Silicon Valley are able to innovate and develop new technology is that they are located in a country that supports innovation and provides appropriate legal protections. Having secured these protections, though, many of these firms then turn to foreign companies to help them scale up production. Thereby transferring employment, productive capacity and tax revenues overseas.

It is easy to see how some people might view this as unfair.

On the other hand, most Economists would argue in favour of technology transfer and the offshoring of production to low cost jurisdictions. Average labour costs in China, for example, are low relative to developed countries, and so increased production in China allows the rest of the world to benefit from cheap imports (and Chinese workers to benefit from rising wages). Many young people in China aspire to study in Western countries and buy Western products, and successful Chinese firms are likely to invest overseas. And so, by helping China to become more prosperous, America and other developed countries are helping themselves in a kind of positive feedback loop.

One thing that seems clear is that the creative process involves two separate components. Firstly, it requires some kind of creative leap, which might involve discovering a new technology, or combining existing technology in a way that people really love. Secondly, it requires a viable business model that allows the organisation to provide the new offering at a price which exceeds the cost of production, which is likely to require economies of scale and production experience.

The role of Silicon Valley firms in making the creative leap and pushing the boundaries of innovation is crucial for the creative process.  At the same time, however, it might be argued that the role played by low cost manufacturers in places like Shenzhen, China is equally crucial because it allows new offerings to be created at sufficiently low cost to allow for viable business models.

Successfully harnessing humanity’s creative energy clearly requires high levels of cooperation. Lots of people in many different organisations working in various countries across the globe.

Thinking as an Economist, I would argue without hesitation that the more globalisation, foreign direct investment and international trade we have the better it will be for everyone.

However, we need to bear in mind that organisations and their respective country governments will typically care more about their own self interest rather than obtaining the theoretical optimal solution for the world as a whole.

Thinking as a strategist, I would provide some words of caution. When an organisation is thinking about outsourcing activities that provide value for the end customer, it is important to consider how strategically important those activities might be. Will outsourcing lead to the loss of crucial knowledge that will be difficult to re-learn? Is it possible that the supplier will become a future competitor? What are the firm’s competitive advantages and will these be strengthened or weakened as a result of outsourcing? Will the new supplier benefit from economies of scale and so be difficult to compete with later if necessary?

Thinking as a government policy maker, there are some other issues that might be relevant. For example, how many jobs and how much tax revenue might be lost as a result of local firms sending production overseas? Instead of providing welfare payments to unemployed people, would it make more sense to provide subsidies and tax incentives to encourage firms to incorporate and build production capacity locally rather than overseas? Is the outsourced knowledge important for national security? Are domestic firms outsourcing production to a country whose government is uncooperative or hostile to the values of the domestic country?

We live in a world where robots and the automation of work could lead to unprecedented levels of unemployment over the coming decades.  And so, it has never been more important for individuals, firms, government and the world at large to think about how we can harness our collective creative energy.

Globalization will have a large role to play, but it will also be important for individuals, firms and our respective governments to act independently and work for the benefit for their respective stakeholders. Through cooperation, we can all be made better off.

Taking Profit

I am currently living in Beijing, lecturing strategy and finance courses to undergraduates.

One observation I’ve made is that the people here are good at identifying opportunities for profit.

And I use the word profit not in a financial sense, but with the broader meaning of the French verb profiter, which means “to make the most advantage of”.

This can have positive, negative and hilarious consequences.

Here are three examples:

  1. Food is a religion here in China. There is no better example of making the most out of life than having a true appreciation of good food. (Peking duck, jiaozi and baozi are my three current favourites.)
  2. People often say that the Chinese are hard bargainers, which is true. They see how big the pie is, and, with a friendly smile, they ask for all of it. This is obviously a generalization, but I have witnessed it enough times for it to have become a familiar pattern. It can be extremely positive, for example, if the person is your friend and is helping you to bargain for a big ticket item. It can also have calamitous consequences, such as the traffic jam which is frequently caused at an intersection near my apartment because every driver tries to gain a small edge by cutting through the intersection without waiting for a green light; a complete traffic meltdown typically ensues.
  3. Opportunity knocks at the door only once (机不可失,时不再来). I was recently at a large French retail store called Auchan. I left my shopping trolley at the end of a long isle, with a few items in it, and walked down the isle to see if I needed anything. When I returned to my trolley, I noticed that my items had been neatly placed on a shelf, and the trolley was gone. It took me a half a minute to figure out what had happened … someone had stolen my trolley! The experience was so bizarre. Five minutes later and a few isles further along I spotted a middle aged Chinese lady with a huge carry bag sitting in a trolley that looked suspiciously like the one I had lost.

Sometimes you have to laugh.

We would do well though to follow the Chinese example of trying to always make the most out of life, particularly where it involves a shared positive experience or the chance to create something valuable for others (like the wonderful Chinese cuisine!).

Profite!

Disclaimer: Creating traffic jams, and stealing shopping trolleys should generally be avoided.

3 Ways to Distinguish Yourself

We live in an increasingly digital and technology enabled world, which is increasing the level of competition between organisations.

Why is this the case?

There are three key reasons.

Firstly, technology is helping to lower barriers to entry. It has never been easier to create new goods and services, and get them noticed by your target audience.  Whether it be a website, a blog or an iPhone app, the initial startup costs for launching a new project have never been lower. This is especially true for organisations that have software development skills and who are able to produce new digital products by drawing on their own capabilities.

Secondly, the Internet is the greatest communication device ever invented, and allows customers to find out about products quickly and easily. This means that customers have more information than ever before, and are able to switch from one organisation to another based on the benefits on offer and the asking price. Customers have more power, and so organisations need to stay on their toes.

Thirdly, the large number of startups which are being launched each year means that there are lots of failures but also lots of breakout success stories. This increases the intensity of competitive rivalry for everyone, and makes it more important for organisations to innovate where they can before someone else innovates for them.

In this world of increased competition, here are three (3) ways to distinguish yourself:

1. Brand building – tell a compelling story and build relationships with the people who care. Your story won’t resonate with everyone, but it will resonate with some people. And so the goal is to find your people, to feed them and to delight them.

2. Making old things new – iPhone apps and websites can be used to add additional value to offline products and services. One example of a company that seems to have done this quite nicely is Bluesmart. Travel bags are old news, but by redesigning the travel bag and connecting it with a user friendly iPhone app, the company has created the world’s first smart luggage and is re-imagining the travel experience.

3. Mix things up – I am currently staying in a hotel in Beijing. The reception staff have been very nice to me, but they don’t seem to be too friendly to the locals who come to stay here. The staff appear to have the mentality that they are selling beds, and so the need to smile and be friendly to customers is not part of what they are providing. This, of course, misses the point entirely. Everything you say or do is part of the experience, and part of the value that you provide to others. And so while smiling may not be a core part of your business, it doesn’t hurt to mix things up a little.

9 M’s Resource Audit Checklist

An organisation’s approach to strategy will always depend on the circumstances.

Who are the organisation’s competitors? There will be existing competitors, and outsiders who might threaten to compete in future.

And who are the organisation’s customers? There will be existing customers, and larger groups that the organisation wants to target.

By understanding the external environment, an organisation will then be able to develop a strategy to achieve continued success by taking advantage of opportunities and avoiding threats.

But while understanding the business situation will obviously be very important for ongoing success, an organisation’s ability to compete will ultimately be determined by the resources and capabilities that the organisation has available to it.

In order to find out what these resources and capabilities might be, an organisation will want to carry out a systematic review; a process that might be referred to as a ‘resource audit’.

The thing about auditing is that it tends to be quite a formal process, and you want to make sure that you don’t miss anything. And so, it will be a good idea to use a checklist.

While by no means perfect, the 9 M’s Resource Audit Checklist might prove useful for the task.

The checklist categorises an organisation’s resources into nine categories; each of which, as you might of guessed, starts with the letter ‘M’:

  1. Materials: Who are the organisation’s suppliers? Does the organisation have good working relationships with them? Are they reliable and responsive? Do they provide quality inputs? How much do they cost? Do they have spare capacity? Where are they located?
  2. Machinery: What kind of plant, equipment and other tangible assets are used by the organisation to turn raw materials into finished products? What is the age, condition and utilisation rate of these asset? Are they technologically up to date? What is the likely replacement cost? What is the quality of finished products?
  3. Make-up: What is the culture and structure of the organisation? What intangible assets does the organisation possess, e.g. patents, trade marks, brands, and good will?
  4. Management: What are the skills, experience level and vision of senior management? What is the management structure and prospects for career progression? Are management loyal to the organisation, and are there programs in place to align management incentives with the long-term interests of the organisation?
  5. Management information: Does management have the ability to generate and share relevant and timely information within the organisation? Does management have the ability to easily collect and analyse information from within the organisation to support strategic decision making?
  6. Markets: What customer segments and regions does the organisation serve? What products are sold in each market? What is the market position of the organisation? What is the position and life cycle of its products?
  7. Men and women: How many staff does the organisation employ? How does the organisation attract, select and recruit new candidates? What skills do they have, and what training programs are in place to support their development? How are staff compensated, and what are wage costs as a proportion of total costs? What is the level of staff morale and labour turnover?
  8. Methods: How are activities carried out? Are they capital intensive or labour intensive? Which activities are performed in-house, and which activities are outsourced? How does the organisation handle its supply chain process, e.g. push method, pull method?
  9. Money: What is the organisation’s cash position? What is the credit period? What is the turnover period? What kind of short-term and long-term financing does the organisation have access to? What is the organisation’s debt-to-asset ratio? What are its investment plans, and how will they be funded?

5 Reasons It’s Okay To Say “No”

  1. If you are using your talents in a way that interests you for the benefit of other people, then that’s a good thing. Charities, non-profits and religions may come to you for aid, but it’s valid to refuse if your gifts to them would detract from the good work you are already doing
  2. Giving more than you can manage can create an imbalance in your relationships with other people, which can damage or destroy those relationships when you discover that they do not reciprocate to the same extent
  3. Saying “no” marks a boundary beyond which you are not willing or able to go right now, which helps to demonstrate your independence and enhance your identity
  4. It makes sense to put your own Oxygen mask on first. Helping other people when your own affairs are not in order can cause harm to you or harm to other people who may need to step in and rescue you
  5. One of the three necessary ingredients of a have strong personal, professional or corporate strategy is “focus”. Steve Jobs once said that “[p]eople think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.”

False Dilemma

Harvard Business School Professor Michael Porter argued back in 1985 that there are three generic strategies that an organisation can follow to achieve above average performance.

You can operate at low cost, provide distinct value to customers, or focus on doing one of these things while targeting a specific niche in the market.

The unfortunate fallacy that Porter introduced is that he made us think of these three choices, “low cost”, “differentiation” and “focus”, as three separate strategy alternatives.

In reality, they might more accurately be thought of as three necessary ingredients of any strategy that stands a chance of thriving in the long run.

Two companies that appear to have adopted the strategy trifecta are Aldi and Ikea.

Both firms have focused on a particular market niche. Ikea provides nicely designed furniture, and Aldi provides good quality groceries.

Both firms have designed their organisations to enable them to operate at low cost and they have passed these savings on to the customer.

The additional beauty of pursuing this strategy is that delighted customers can’t help but talk about the value for money that they receive, and so the firms make further savings by being able to reduce their marketing costs.

The choice of pursuing low cost or high value is a false dilemma.

While it is true that it might be difficult to achieve both on any given day if the resources and systems are not in place, it is also true that organisations don’t exist merely at a point in time.

Most organisations exist for many years and a sound strategy is one that will make this enduring existence more certain, sustained and successful.

Pen vs Sword

Pen vs Sword

(Source: Flickr)

Most people are familiar with the expression “the pen is mightier than the sword”, but where does it come from?

According to the BBC, the expression first appeared in Edward Bulwer-Lytton’s 1839 play Cardinal Richelieu.

This may have been the first usage in English, but Bulwer-Lytton appears to have borrowed from a longer tradition.

Napoleon Bonaparte, known more for his military conquests than his thinking, is known to have remarked that “four hostile newspapers are more to be feared than a thousand bayonets.”

The Prophet Muhammad has been quoted as saying “the ink of the scholar is holier than the blood of the martyr”.

And Greek playwright Euripides is thought to have written “the tongue is mightier than the blade” in circa 406 BC.

A long history indeed, but what does the expression actually mean?

To get at the meaning behind the expression, it may help to go back to basics.

A pen is a tool which can be used to write, and writing is a creative act that can be used to inform, entertain, and solve problems. The writer creates something that didn’t exist before and in doing so, assuming the writing has some merit, gives something to the reader which makes her better off as a result.

In contrast, a sword is a tool which can be used to fight, conquer, and acquire by force.

Writers share information and create intellectual property, and writing is the work of the educator, the scientist, and the author.

In contrast, fighters defend or acquire existing resources like land, property and oil reserves, and fighting is the province of the military, common thugs, and investment bankers.

For many of the world’s largest corporations, such as McDonald’s, Virgin and Apple, intellectual property is their most valuable asset.

The golden arches are one of the most recognisable trademarks in the world and have helped McDonald’s sell millions of BigMacs. Apple’s brand strength has consistently allowed it to enter new markets while its rivals have routinely struggled. And the power of Virgin’s reputation has allowed the company to enter a diverse range of unrelated markets including trains, planes, space travel, and hotels.

“The pen is mightier than the sword” is not just a pithy expression. If properly understood, it has real relevance for business leaders and the strategies that they choose to employ to sustain and grow their organisations.

Man vs Chimp

Man vs Chimp

(Source: Flickr)

Humans and chimpanzeees (our closest genetic relatives) are both social animals that have the ability to form groups and communicate between themselves.

Why is it then that humans have populated the globe (7 billion and counting) while chimp numbers continue to fall (currently standing at around 250 thousand or less)?

A key difference between us and our close genetic cousins is our ability to use, control and reflect upon language.

Research has shown that chimps can learn, use and teach other chimps how to use sign language (an insight I picked up from Emeritus Professor Glenn Bassett‘s book “Word Play“). However, chimps don’t have the ability to use spoken language and, more crucially, codify that language in written form.

Spoken and written language are easy to take for granted because everyone who is currently alive was born after the invention of both technologies, however the implications of these technologies appear to be an important factor in explaining our ability to survive and thrive as a species.

Isaac Newton famously stated in the late 17th century that “If I have seen further, it is by standing on the shoulders of giants.”

In other words, Newton was acknowledging the important truth that his discoveries were dependent on the work of people who had come before him. People whose insights he was able to benefit from because they were communicated to him through written language.

It’s one thing to have this amazing technology available to you, and it’s another thing to appreciate and make use of it.

Here are three questions to get you thinking:

  1. What was the name of the most recent book you read?
  2. Do you keep a journal to record your thoughts and ideas? If not, why not?
  3. What was the topic of the most recent article you wrote or co-authored? Did you publish the article so that other people could read, share and benefit from your ideas?

Let me know your answers via email by hitting reply, or sending an email to tom [at] spencertom [dot] com.

Restoring Derelict Spaces to Lease-Ready Condition

Restoring Derelict Spaces to Lease-Ready Condition

This is a guest post from Sarah Smith.

Savvy investors know that there is a lot of potential in converting abandoned or derelict spaces into lease-ready properties. Below are five (5) tips on converting a vacant spot into a high-revenue lease property.

1. Pop-Ups

This refers to taking a small vacant space and converting it into a restaurant or shop. These are great for:

  • Trial marketing a new brand, product, or testing out a new region
  • Selling seasonable items (e.g. Christmas, Halloween, etc)
  • Adding a bricks-and-mortar location to an existing online business
  • Showroom space
  • Establishing a permanent location for items previously sold at crafts fairs or festivals

2. Advertising and Marketing

It only takes a little imagination to realize that an empty shop window makes for a great spot to place advertising and marketing.

Likewise, blank walls on the side of a building can be a tremendously good location to place large ads or marketing messages. Blank walls and large open spaces are also wonderful locations for projection advertising and mixed media marketing messages.

3. Build a Pod

Vacant and underused office space is now becoming extremely popular as part of the “pod” or collaborative working space concept. Many small businesses refer to the acronym POD, Phone, Office, & Desk, being the minimal space necessary in order to work. Short-term leases and flexible arrangements can take a vacant office space and turn it into a cash cow.

4. Virtual Shop-Fronts

One of the most exciting new technologies to re-use spaces creatively is the idea of a 3-D virtual shop front. When applied to a vacant lot or empty space, a detailed 3-D image can be rendered, perfect for prospective clients who may be imagining how their business can make use of the location.

Besides just being appealing to prospective clients, virtual shop fronts are also useful in making abandoned or derelict properties look occupied, adding aesthetic appeal to the neighborhood and helping to minimize visual deterrents to leasing the property.

5. Re-Purposing Venues

Many of today’s largest companies are looking for ways to stealthily guerilla market to certain demographics. You can take advantage of this by working with these companies to re-purpose abandoned properties as pop-up venues for their latest marketing idea or branded activity.

Another way to create revenue from blighted areas is to work in conjunction with local authorities to host festivals, fairs, and other celebrations. By adding pop-up attractions to your property, you can increase foot traffic to the area, benefiting local businesses and attracting potential long-term clients.

Successful event planners are always looking for new and exciting venues to stage their activities. Whether repurposed for a fashion show, art exhibition, festival, or music concert, your previously low-value property may be able to command a high price.

Sarah is a small business owner, and is currently learning about marketing, using the internet. Aside from working on her own business, she likes to use social media, and read travel books.

How You Can Use Signage To Brand Your Business

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This is a guest post from Sarah Smith.

Business owners know that they can’t attract customers if those customers don’t know that they exist. That is why they rent buildings in high traffic areas and pay large sums to place ads where people are likely to see them.

There are many ways that companies can get the word out, and with all the hype around online and social media marketing it would be easy for companies to overlook how important proper signage can be to the success of a company’s marketing strategy.

Let’s look at the link between branding and signage and list some reasons why clever signage can be an effective way to advertise your business.

Signage Can Be Simple, Affordable and Memorable

Even if someone doesn’t know what your company sells or what service it provides, he or she will recognize your brand if your signage is memorable enough. In many cases, people who see an attractive sign will want to learn more about the business behind it and what it does. Social media users may be willing to share your sign just because it looks cool and they want as many people to see it as possible. Ultimately, you are going to increase awareness for your brand, which will help to increase sales and revenue for your company.

Signage Can Be Simple, Affordable and Memorable

Signs Can Be Placed Anywhere

The best part about a sign is that you can put it almost anywhere. You could put a sign in your car window, on local bulletin boards or on a fence outside your property. If you want to reach a wider audience, you could even consider putting a sign on a public building or another area that is open to the public and which receives a large volume of foot traffic. For instance, you could put a sign on a light pole at a busy intersection.

Signs Can Be Placed Anywhere

Attract Customers From Miles Around

A brightly colored sign that is placed several hundred feet in the air can attract customers from miles around. To make it even more attractive, you could use neon lights or have it light up at night or at times that it may be harder to see. Depending on where the sign is located, you could include on it the closest highway exit to your location and the company’s web address and phone number. Doing this can allow potential customers to find your store, connect with you online or contact you by phone.

Attract Customers From Miles Around

Fence Signage Could Be Part of Your Marketing Plan

Large farms or public parks may have advertising space available on fences that surround the property or gated fences that people have to walk through to gain entry. The sign doesn’t need to be anything fancy, and a handmade sign can often be just as effective as a fence sign crafted by SiteSmart or something created using design software. If you are a startup founder looking to connect with your target audience, a handmade sign might also be seen as more authentic and fun.

Taking the time to create an effective sign can increase brand awareness, which can ultimately boost sales volume and revenues. The best part about signage is that you can be as creative as you want to be, and anyone in your company can help with the project. Signage can be an effective way to promote your business, and it is worth keeping this in mind when developing your branding and marketing strategy.

Sarah is a small business owner, and is currently learning about marketing, using the internet. Aside from working on her own business, she likes to use social media, and read travel books. Follow Sarah on Twitter.

Pie or Cake?

Strategy involves defending your slice of pie, or growing it bigger.

Innovation involves saying, “hey, we have some pie, why don’t we bake a cake or some cookies to go with it.”

Some companies spend so much time trying to get more pie, that they never get a chance to enjoy a second dish.

Business (like life) should be enjoyed.

What’s on your menu this month?

Olswang – The name says it all

I recently had the dubious honour of meeting with two partners from London based law firm Olswang.

Olswang is a firm which holds itself out to the market as being an expert in technology, media and telecommunications, and so I was quite looking forward to meeting them.

Unfortunately, I was sadly disappointed.

It was interesting to learn that, despite being apparent technology experts, the firm’s partners still use an old version of the Blackberry.

And in a world where technology startups is a growth industry, I was edified to learn from Partner Charles Kerrigan that he has no growth strategy for his practice, no desire to develop one, and moreover the firm as a whole appears to have limited interest in using its legal skills in the technology arena for the benefit of genuine technology startups.

As Paul Keating might have put it, “Olswang – all tip, no iceberg.”

Culture vs Strategy

Strategy involves understanding your current position, deciding on a destination, and charting a course from here to there.

Culture is about who you are, and why you do things.

Culture is arguably more important than strategy because, if you look at it over the lifetime of a product or an organisation, the culture is the only thing that will really matter. The strategy and the products are today’s strategy and today’s products, but over time the strategies and the products will change while the culture will remain.

Creating a successful culture won’t happen accidentally, but the key to creating a winning culture is to understand that culture matters.

And in the long run, it may be the only thing that matters.

Cannibalisation Is Not A Useful Choice Of Language

Phil Libin, CEO of Evernote, doesn’t like the word “cannibalisation” because it’s zero sum. It implies that you’re the guy doing the eating or being eaten.

He says being in business is not like playing a sport or being in warfare. It’s more like music, it’s more like art. It’s not a zero sum game.

I absolutely agree with Libin, and in the long run his view is the only healthy and constructive way to think about business. However, this doesn’t account for the popularity of books among business people like Sun Tzu’s “The Art of War” or Machiavelli’s “The Prince”.

What’s going on here?

Why does Libin think about business as music, whereas many others think only of warfare?

A first explanation is that most people who think and write about business are not C-suite executives or founders of successful companies, and so they are typically exposed to the hostilities that are inevitable in trying to rise upwards. Even in the friendliest of work environments employee performance will be reviewed annually and productivity will be compared against other employees working at the same level.

Large professional service firms typically place employees in a kind of tournament like dynamic where they are shown the promise of a small number of well-paid managerial roles and the implicit threat of being fired if they fail to perform better than their peers.

A second explanation is that some industries are more zero sum than others.

Any industries dealing in the real world of atoms (for example, mining, farming or transportation) are likely to see the world in a more zero sum way. The customer either buys my coal, corn or transportation or they buy someone else’s.

Industries dealing in the virtual world of information on the other hand (for example, tech start-ups) are likely to see the world in a more collaborative way. After all, there is always more information and goodwill to go around.

That being said, I would suggest that Libin’s view of business should apply not just to the technology industry but to all sectors.

Economists have coloured our thinking by painting traditional business as a place where firms compete to maximise profits through the sale of goods and services, forgetting of course that businesses can only sell their products by first engaging in some form of marketing. And what is marketing, if not the pure and free exchange of information.

Libin is in the technology industry, but in a strange and unexpected way, so are we all. And as a result, talk of “cannibalisation” is not a useful choice of language.

Love vs Lock In

Economists love to talk about “scarcity” and the fact that we live in a world of limited resources.

However, in the digital world this need not necessarily be the case.

Phil Libin of Evernote is of the view that if you’re in a traditional industry like minerals extraction or transportation, then customers will either go for your stuff or your competitors stuff, but almost certainly not both. And so it’s more or less a zero sum game.

However, Libin believes that in the world of technology it’s really not zero sum. There is room for people to use multiple products. It’s not a scarcity based economy. If anything, it’s a love based economy. It’s an economy where the affinity that people have towards your products and towards your brand controls how much money you make. If you’re in the technology industry it’s a mistake to think about the world in terms of scarcity.

Libin believes that while the tech world does lend itself towards having one business dominate in a particular segment (for example, Google in search), this is only because the tech world is becoming more of a meritocracy than it’s ever been. Libin asks, quite reasonably, why would you use the second best product when you can use the best?

The problem with Libin’s view about meritocracy (apart from the fact that it seemingly contradicts his view that there is room for everyone in Silicon Valley’s love based economy) is that it’s only a half truth. One of the strongest forces that enable (or inhibit) many technology companies are network effects. Companies that have lots of users can be extremely valuable because users benefit from each other rather than from anything that the company itself provides.

A case in point is Facebook. There is not a month that goes by that I don’t consider leaving the network, or don’t talk to a friend who is thinking about doing the same. But people typically return when they realise that, despite Facebook being a horrible and pointless waste of time, everybody else they know is on there too.

Network effects can protect incumbents long after their time has passed and this explains not only the persistence of Facebook but also that of other technology products including Microsoft Office and Whatsapp.

The technology industry may not be a zero sum game, but nor is it quite the meritocracy that Libin would have us believe.

Maintaining Market Power Online

In an age of rapid digital disruption, how can you retain market power and continue to prosper online?

There is a lot of misinformation and confusion about how to compete in the digital landscape, and one of the points of confusion is about the power and value of content.

There is a new company called The Grid, which you may have seen advertised on Facebook, which is planning to sell AI websites that design themselves. The company’s tagline is “content is power, power your content on The Grid.”

The company argues that if we each had our own unique personal corner of the web, then the Internet would be a better place. This is a compelling sales pitch but it also conveniently ignores the way that market dynamics work online.

As I highlighted yesterday, the Internet creates winner take all dynamics whereby companies that can establish brand recognition, sufficient scale and strong network effects will often be able to dominate their market segment online.

Consider also the fact that companies like Narrative Science have managed to produced natural language algorithms that can create high quality pieces of writing. This technology has the potential to put most journalists out of work and, perhaps a little bit further down the line, lawyers and technical writers too.

Content is not power, but if it can be used to connect with people and bring them together in a scaleable way then that would be powerful indeed.

Emulate vs Imitate

Emulate vs Imitate

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When we imitate someone the goal is to copy what we see; to replicate; to produce more of the same. Think Rocket Internet or cheap Japanese electronics from the 70’s.

When we emulate, on the other hand, we take inspiration from a role model, a hero. And with effort we might one day hope to acquire their qualities, and to equal or surpass their level of skill and recognition.

We can learn from the successes and failures of our role models, and use these lessons to guide us on our personal journey.

In time we might create something worthy of recognition, and become a role model for the people who are seeking to emulate the success of the people who have gone before them.

Say Something

Often we can be scared to open our mouths and say something.

Expressions like “empty vessels make the most noise” and a pervasive social fear of rejection can make it difficult to open up.

Why is this the case?

Schools, universities and families typically work best when there is an open flow of communication. But on a day to day basis, and in the workplace, it can often seem best to say as little as possible.

The issue is that, as social animals, and whether we like it or not, we are constantly engaged in relationships with other people and the power dynamics that inevitably ensue.

If you are a junior employee with views on what your company should be doing, then calling the CEO to tell them may certainly get the CEO’s attention but it may also mark you as a trouble maker and hasten your exit from the firm.

There is always a power dynamic in play (and people who tell you differently are probably playing power games with you).

Speaking without thinking or sending an email which doesn’t convey a clear story backed by supporting data means that your communication is probably “criticism or noise” rather than being a meaningful contribution to the conversation.

The challenge then is not the speaking up part; the challenge is to first do the necessary research and thinking which can be used to foster a constructive dialogue.

You need to say something, but what?

Have you done your research?

Masters of University Adminsitration

I had coffee in early June with Chris McKenna, Associate Professor at Oxford’s Said Business School.

When I say we “had coffee”, we didn’t actually drink coffee, but I had offered to buy Chris one as I thought it might give him a reason to meet with me.

Chris’s area of expertise is strategy and business history, and he is also Director of the Centre for Professional Service Firms.

Needless to say, I was interested to hear his views on strategy, the professional services industry, and the state of the academic job market.

During the course of some light-hearted banter about his academic career, I decided to tell Chris that I was toying with the idea of doing a PhD, and all of a sudden he turned serious.

Don’t do it. He told me pointedly. Lots of people fancy the idea of teaching and research as a job, but the reality is that the odds of getting tenure are extremely remote and the odds of getting tenure somewhere nice like Oxford are slimmer still. Moreover, the opportunity cost of pursuing a PhD is extremely high because you not only miss out on a higher salary which you could have earned pretty much anywhere else, but you may also make yourself less employable in the process.

He conceded that if I still wanted to do a PhD despite his warnings and the lack of job opportunities, then there were a few things to bear in mind:

  1. Only do it if the university is willing to pay. His reasoning on this point was that a PhD is very time consuming and since it doesn’t offer a good return on investment anyway, you can’t afford to get into debt while doing it. He also suggested that the willingness of a university to provide funding is a proxy for how much they want you to come and join them, and so it is a kind of “leading indicator” for whether there will be follow on opportunities like post-doctoral work, consulting, and lecturing opportunities.
  2. Look for the spider in the web. Read lots of academic papers, and then talk to the academics whose research really resonates with you. You may find that the academic’s ideas are not as interesting as the research articles had led you to believe, and the reason that this can happen is that the research ideas may have come from the academic’s supervisor. If this is the case, then try talking to the supervisor or to some of the supervisor’s other hatchlings.
  3. In deciding which faculty to apply to, think about which subjects you would like to teach. If you would like to teach supply and demand, then apply to economics faculties. If you would like to teach strategy, then apply to business schools. Chris’s reasoning on this point was twofold (1) most PhD’s require you to do a year or so of course work which brings you up to speed on the core courses offered by the faculty, and (2) a PhD like any other degree has a certain “signalling effect”. If you do your PhD in a business school then your ability to find work in a business school following the PhD will be enhanced.

After Chris had finished advising me on how to avoid imminent demise and how to successfully navigate the academic job market, he then mentioned something in passing which was even more interesting.

He said, if you really want earn money in a university, then you should become an administrator. With the rise of online courses, the teaching function is likely to become more and more automated.

If you wanted to become a farmer, he told me, then the best job prospects for that industry came and went several hundred years ago. And if you want to become an academic, then the window of opportunity for that market is similarly closing. Universities need administrators, but they need fewer and fewer academics.

I wonder how long it will be before universities start offering a Masters of University Administration? And where will all the creative minds go once universities no longer need them?

Trump Nation?

Donald Trump

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The Donald has announced his intention to run for the White House in 2016 on a ticket to “Make America Great Again!”.

At this stage it’s unclear whether he will run for office or not because he has flirted with running in the past and then not done so.

Whatever happens though, the take away lesson at this stage is that Donald Trump is a master at manipulating media attention and getting people to talk about him (in articles like this one).

Trump is a shrewd businessman who never misses an opportunity to build the Trump brand.

Are you being similarly diligent with your own brand building efforts?

Ownership vs Control

The recent news of succession planning at 21st Century Fox brings an interesting issue to light.

On Thursday, the Guardian reported that James Murdoch will succeed Rupert Murdoch as CEO at 21st Century Fox.  At the same time, Rupert and Lachlan will become executive co-chairmen.

The interesting thing about the Murdoch family’s control of Fox is that it relies on a dual-voting structure in which the family has nearly 40% of the voting power but only owns about 12% of the shares.

This may infuriate some people, but the interesting lesson here for all of us is that “control is more important than ownership”.

This is an incredibly powerful insight that can be used by business owners who are looking to grow their business.

Giving up equity in a company or a subsidiary in order to gain key talent or much needed financial backing is worthwhile so long as it doesn’t result in loss of control.

This concept is used by Richard Branson to expand into new markets.

Virgin will, as I understand it, typically provide its brand name and a small fraction of the financial capital required for an investment, but at the same time gain most of the shares in the new venture, thereby retaining control.

Ownership versus control; it’s a valuable distinction for all of us to be aware of.

Art vs Business

Art vs Business

(Source: Flickr)

I attended a talk last week at the Oxford Union given by Alexandra Shulman, editor-in-chief of British Vogue.

Shulman is the longest serving editor in British Vogue history. She took the helm in 2002, and has presided over a circulation increase to 220,000 copies.

Needless to say, I was interested to hear what she had to say about the media and publishing industry.

Shulman is an interesting character, and a master of the British art of understatement.

She entered journalism in the 1980’s and claims to have had no particular inclination towards fashion. Although, after gaining some exposure to the fashion runways working with the British edition of GQ, she says that she ultimately found herself as the editor of Vogue. She also claims not really to be a business person, but has engineered not only a successful career for herself as the editor-in-chief of British Vogue but has also helped to build the profile and circulation of the publication. This is no small feat given that the media industry in general is struggling.

The most interesting takeaway from Shulman’s talk was the distinction she made between art and business.

People who think fashion is all about art and pretty pictures, she said, are not going to do very well in the fashion business.

Pretty pictures and fanciful notions are not worth much, unless you can deliver on time and on budget.

To drive home just how much of a business pragmatist Shulman actually is, it was interesting to hear how she selects which model to use on the cover of British Vogue.

One of the students in the front row asked whether there were plans to feature more black and Asian models on a regular basis rather than merely bringing them in as part of special feature issues.

Shulman acknowledged that things are evolving on this issue albeit very slowly. The reality, she told the audience, is that a blonde will sell even more issues than a brunette, and (as we understand her) a black or Asian model will sell fewer copies still.

British Vogue may be a magazine about fashion, but its editor-in-chief remains a pragmatic business woman. If her readers prefer blondes, then she will be only too happy to provide them.

Thinking About the Long Term First (Nigel Lake, Part 1 of 10)

Thinking About The Long Term First

(Source: Flickr)

This is the first instalment of my conversation with Nigel Lake, CEO of Pottinger, a global corporate advisory firm based in Sydney, Australia. Nigel is the author of The Long Term Starts Tomorrow, a must have book “for any manager, leader or Minister.” The Hon Mike Baird MP, Premier of NSW

Tom: Nigel, I had intended to ask you questions about Pottinger and your recruitment process but I was reading up on what you’ve been doing and I’d be interested to instead talk to you about your book, “The Long Term Starts Tomorrow”.

Nigel LakeNigel Lake: Those two things are somewhat related, but I’m very happy to do that. Just fire away with anything you wanted to ask. Let’s get into it.

Tom: A lot of tech companies were invented by college students in dorm rooms and the Internet poses a continuing threat to the business models of many established companies. From what I understand your book is really about innovation and the ability to make short term decisions that are going to stand the test of time. Is that an accurate characterisation?

Nigel Lake: Yeah, it’s an interesting thing, it kind of goes deeper than that, and I’ll give you a bit of context and then you’ll understand why I’ve written it the way I’ve written it.

There is lots of evidence that the way that people make decisions in the business world doesn’t work especially well, and a simple example is all these crazy young kids who created trillions of dollars of value, and the old guys surrounded by lots of advisors didn’t.

If you peel it back, what are the things that are going wrong fundamentally with decision making?

One of the deep problems is that the whole architecture that we live in for decision making focuses people’s minds on the short term.

You see that in a qualitative sense in terms of the reporting cycle and in terms of what analysts want to see and what CEOs then go and do. But you also see it in a very quantitative sense in the world of discounted cash flow models and the whole economic architecture which I describe as a kind of cult of economic rationalism.

People have picked up that way of doing things which came out of the 1950’s and early 1960’s, and in fact some of it goes back to the 19th century.

No one has really done anything different since.

Nobody has stopped to think about the fact that the pure mathematics of those models drives you to focus on the first five to ten years and encourages you to ignore everything after that.

Many of the great successes and great failures over that period came about because people precisely ignored what would happen a little bit further down the road.

At Pottinger we do a whole bunch of work around infrastructure, for example, and one of the fundamental problems most major economies have is that they need to rebuild crumbling infrastructure and build new infrastructure.

They struggle to justify the costs and returns that they are going to get, and part of the reason is that people are trying to build 100 or 200 year assets on the basis that it should pay for itself in 30 or 40 years.

It’s just not going to work.

Time and Money

Time and Money

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If you had all the time in the world but not much money, then your capacity to create new ideas and connect with people would be great, but your capacity to consume would be limited.

On the other hand, if you didn’t have much time but had a lot of money, then your capacity to create new ideas and connect with people would be limited, but your ability to consume would be considerable.

Time and money, where should we be placing value?

This is not just a question for individuals but also for organisations.

Universities appear to value time over money (at least this was traditionally the case), and so tend to be geared towards sharing ideas and enabling people to connect with one another.

Many corporations today take the opposite approach and value money over time, and so tend to be geared towards maximising short term earnings. Employees are required to be in the office regardless of whether this improves productivity, initiatives that provide value to consumers but don’t generate revenue get discontinued, and the mantra “time is money” might on occasion be heard echoing through the hallways.

Companies will of course need to keep an eye on cash flows, but important strategic decisions should not be held hostage by the quarterly earnings report.

A resilient company will be one that has freedom to maneuver and sufficient time to anticipate new opportunities and respond to impending threats in a thoughtful and considered way.

Peter Thiel at Oxford’s Said Business School

I had the good fortune yesterday to attend a conversation between Teppo Felin, Professor of Strategy at Oxford’s Said Business School, and Peter Thiel, co-founder of PayPal and recent author of the bestselling book Zero to One: Notes on Startups or How to Build the Future.

Apart from being a co-founder of PayPal, Thiel is also known for being the first outside investor in Facebook, taking a 10% stake in 2004 for $500,000. He now sits on the company’s board of directors.

As if that weren’t enough, Thiel is also:

  • Co-founder and chairman of Palantir, an American software and services company;
  • President of Clarium Capital, a global macro hedge fund;
  • Managing partner of Founders Fund, a venture capital fund with $2 billion in assets under management;
  • Co-founder and investment committee chair of Mithril Capital Management, a global investment firm; and
  • Co-founder and chairman of Valar Ventures, a globally oriented venture fund.

Needless to say, I didn’t want to miss this conversation with one of the world’s tech startup demi-gods.

Below I highlight ten (10) of the key lessons shared by Peter during the discussion.

  1. When it comes to teaching entrepreneurship and innovation there is a certain paradox.  How do you offer a formula for how to do new things? Science always starts with experiments and every moment in the history of technology happens only once. For example, the next Gates won’t create an operating system and the next Zuckerberg won’t start a social network.
  2. A lot of great entrepreneurs have certain diametrically opposed personal qualities. They will be, for example, people who are very stubborn but yet still quite open minded.
  3. Imitation is how culture is built, but it is also how things go wrong. People who are hyper-socialised (for example, business school students) are more likely to follow the big social trends and more likely to be talked out of their truly interesting and original ideas before they are even fully formed.  Innovation requires a certain willingness to buck the trend.
  4. In a company, you want to unite people around a common mission which differentiates the company from the rest of the world. For example, Elon Musk’s company SpaceX is the only company aiming to go to Mars.  At the same time, within the company, you want the roles to be as differentiated as possible. Conflicts tend to arise when people’s roles are too similar.
  5. There is not enough time to A/B test every idea you might have.  We live in a world which is far too skewed towards A/B testing, and not enough towards mission driven and vision driven companies.
  6. If you define the culture of a company the way an HR person would, then that’s probably evidence that you have no culture at all. You shouldn’t think of a culture as “having foosball tables and lava lamps” or anything generic like that. You should define culture around the common mission of the company.
  7. Assuming it were possible to reduce innovation to a formula, Thiel says the three part formula for a successful startup would be to have (1) a great team, (2) some great technology (because Thiel is a tech investor), and (3) a good business strategy.
  8. A startup should have a great team, and the team should in fact be a team. You need very talented people who can work well together. Preferably people who have known each other for a decent period of time, and who have complementary skills. When it comes to finding a startup co-founder, Thiel notes (tongue firmly in cheek) that “you don’t want to get married to the first person you meet at the slot machines in Las Vegas”.
  9. Business strategy is about having a story which explains how the startup will move towards building a monopoly. You can have a great team, and great technology, and no business at all. If your business creates X dollars of value and you capture Y% of X, most people forget that X and Y are independent variables. In most cases Y equals zero percent (0%).
  10. Investment capital is often deployed in extremely inefficient ways. Thiel notes that there is a very big difference between investing your own money, and investing other people’s money.  When you invest your own money, you are just trying to generate good returns. But when you invest other people’s money, you have two objectives. Number one is to get good returns, and number two is to look like you’re going to get good returns.  And the disconnect between those two can be much larger than people would typically think.

Just A Game?

Using gamelike elements to engage customers can produce real business value

We are currently taking an online course on Gamification with Wharton’s Professor Kevin Werbach, which provides a fascinating insight into the world of games and how gamelike elements can be incorporated into the customer experience.

The basic concept is that games provide a structure within which people can achieve outcomes and have fun in the process.  By incorporating gamelike elements into the customer experience, businesses can engage customers and produce real value for customers.

Many successful multi-billion dollar companies use gamelike elements to engage customers. Here are just three (3) examples:

  1. Game Concept: Badges. Business Application: American Express Platinum Card.
  2. Game Concept: Rewards. Business Application: Starbucks coffee card.
  3. Game Concept: Teams. Business Application: Weight Watchers Groups.

Are you using gamelike elements to engage customers or employees? Or have you seen companies that are doing this successfully?  Share your experience in the consulting forum. The person who provides the best example of gamification in the next 48 hours will win a free book.

Discipline and Decency

All too often partners in professional service firms know how to issue orders, but forget about the need for kindness.

Employees develop fear rather than fondness for their managers, and quickly learn how little they can produce to keep people happy.

In professions where the quality of the final product hinges on the quality of the thought process used to develop it (e.g. law, accounting and management consulting), monitoring effort is often impossible and employees have significant lee way about how much effort they choose to exert.

In this context, discipline and punishment are unlikely to be effective motivational tools unless employees have first been treated with common humanity, and given a chance to develop an attachment to the organization, their managers and the role itself.

Being good to people, can be good for business.

Consulting Jargon 101

ORGANISATIONS hire management consultants to help them solve their most challenging business problems.

Senior management are busy people, and so consultants need to communicate their message clearly and concisely, preferably accompanied by some colourful powerpoint slides.

The irony, though, is that consultants have gone on to develop an industry jargon which is often completely incomprehensible to industry outsiders.

Below we outline some of the buzzwords and phrases that you are likely to come across if perchance you are dealing with consultants, or happen to be one.

Consulting Jargon 101

10,000 foot view: A high-level overview of the situation.

80/20 rule: A rule of thumb which holds that 80% of a business problem can be solved by focusing on 20% of the causal factors.

Add some colour: Make it more interesting/appealing/persuasive.

Adding value: Making a contribution.

AOB: Stands for “any other business” and might be used in a meeting agenda to block out time for miscellaneous discussion.

“At the end of the day”: A consultant may use this phrase before summarising the main thrust of her argument.

B2B: Stands for “business to business” and indicates that a business is aiming to sell to other businesses rather than to end consumers.

B2C: Stands for “business to consumer” and indicates that a business is aiming to sell directly to consumers rather than to other businesses.

Bandwidth: Capacity to take on additional work commitments. For example, “I don’t have any bandwidth this week”.

Big 3: McKinsey, Bain and BCG

Big 4: Deloitte, EY, KPMG, PwC.

Boil the ocean: Go overboard; undertake an excessive amount of analysis; fail to follow the 80/20 rule.

Buckets: Categories.

Buy in: Agreement; support. For example, “we need to get buy in from the client before finalising the report”.

CAGR: Compound annual growth rate.

Capacity: See “bandwidth”.

Charge code: A unique code provided for a project which can be used to record work-related expenses.

Circle back: Follow up with someone at a later point in time.

Close the loop: Completing an item on the agenda or topic of discussion with everyone being in agreement.

Core client: A client that has a long-standing relationship with the firm.

Deck: PowerPoint slides.

Deep dive: To conduct an extensive examination of a particular issue.

Deliverable: Work product that a consultant needs to provide to her manager or the client as part of a client engagement.

Development opportunity: A professional shortcoming or area for improvement that requires attention.

Due diligence: Comprehensive examination of all relevant issues, such as a review of the client’s business or industry.

Elevator pitch: A short persuasive summary of a proposal, which leaves the listener wanting to know more. Always end your elevator pitch with a call to action, for example “can I buy you a coffee next week to run you through the business model?”

Fact pack: A pack of information that provides the essential facts for a project/industry/company.

Granular: Focusing on the finer details, as in “this analysis needs to be more granular.”

Hard stop: A stated time after which the person will no longer be available to continue the meeting/discussion. For example, “I have a hard stop at 3 o’clock”.

Key: Critical; essential; required; important; central. For example, “the key issues are X, Y, Z.”

Let me play this back: Words used before providing a summary of the discussion from the listener’s perspective. This is a helpful technique which can allow a consultant to clarify their understanding of the key issues and at the same time sound intelligent by saying something even if the summary adds no additional insights.

Leverage: Make use of.

Low hanging fruit: Targets that are easily achievable, issues that can be quickly resolved, opportunities that can be readily exploited, or problems that are simple to solve. By picking the low hanging fruit first, consultants can demonstrate quick results, which can boost confidence in the project and help build initial momentum.

Lots of moving parts: Complex.

Managing upwards: Providing feedback to more senior employees.

MBB: McKinsey, Bain and BCG.

MECE: Pronounced “me see”, and stands for “mutually exclusive, collectively exhaustive”. It is a principle developed at McKinsey for grouping information into distinct categories which, taken together, deal with all of the options.

On the beach: In between assignments. Time spent on the beach may be spent in training or used for new business development.

On the same page: See things from the same perspective.

Opportunity cost: What you give up in order to pursue an opportunity; the value of the next best alternative.

Out of the box thinking: Lateral thinking; coming up with new ideas which don’t follow neatly from the data.

Ping: Contact someone, as in “I will ping you later via email.”

PIOUTA: Pulled it out of thin air.

Pipeline: Current and upcoming client engagements.

Production: A department of the consulting firm (often outsourced) that assists in producing material needed for presentations and meetings.

Pushback: Resistance or disagreement, as in “we received some pushback from the client.”

Right size: Downsize.

Sandwich feedback technique: A structure for providing feedback that resembles a sandwich – one positive comment, followed by a piece of constructive feedback, and ending with a positive comment.

Scope: Agreed set of deliverables for a client engagement.

Scope creep: When the client adds, or tries to add, additional deliverables which were not agreed in the initial project brief.

Sniff test: A common sense check of a particular idea, proposal or analysis.

Strawman: An initial draft providing an idea of what the final output will look like, and which is meant to be heavily criticised.

SWAG: Some wild-ass guess.

Take the lead: Take responsibility for something, as in: “Why don’t you take the lead on this project.”

Takeaways: The key points that should be remembered at the end of a discussion or meeting.

Touch base: To meet at a certain time to talk about the project.

Up or out: Many top consulting firms adopt an “up or out” policy. Employees are expected to advance up to the next level of responsibility or they will be counselled out of the firm.

Work stream: The tasks that make up a project.

Did we miss any buzzwords or phrases in this list? Let us know in the consulting forum.

Finance vs Strategy

The financier cares about the next 3 months or less.

The strategist cares about the next 3 years or more.

The financier wants the deal to close as soon as possible so that he can earn his bonus.

The strategist is open to taking action if it will strengthen the firm’s position over time, and a better outcome can’t be achieved in some other way.

Pushed to his limits, the financier will find ways to package debt in more creative ways. While the strategist will carefully assess the situation and consider various ways to respond or adapt the approach.

A successful firm will need to pursue sound strategy and, at the same time, stay on top of its finances. However, the outcome that results when the leader focuses primarily on one or the other could not be more different.

Leaders who have exhibited a strong “financier” mindset include Jeff Skilling, Ken Lay and Bernie Madoff.

Leaders who have played the role of the “strategist” with gusto include Steve Jobs, Warren Buffet and Richard Branson.

The conflict between the financier and the strategist is a very real one, and must be fought by each of us.

The tension between short term needs and the long and more difficult road towards building a sustainable position from which you can consistently solve problems and delight people.

Excuses or Solutions

We each face obstacles at times that prevent us from achieving our goals as quickly and effortlessly as we would like.

In your professional life, difficulties may result from factors outside your control: fierce competition, lack of customer demand, or a new well-heeled company entering your industry.

Hurdles can also result from factors a little closer to home: outdated skills, insufficient experience, or a weak reputation.

Obstacles may be unavoidable, but we do have a choice about how we respond to them.

One option is to search for excuses, stories that make us feel safe by allowing us to avoid the difficulty by giving up on the dream. “Success is impossible, I’m too old, I’m too young, I’m too busy, I’m too tired, I’m too inexperienced.”

If you are in the habit of searching for them then excuses will always be easy to find, but they come at a cost.

By adopting excuses you are making a choice to live in a more constrained world, to accept defeat in advance, and to rule out the most favorable versions of the future that are open to you.

There is another option.

By clinging to the possibility of success, however unlikely it may seem, you give yourself the chance to learn and grow from the experience.

What are you trying to achieve? What is standing in your way? And what steps can you take to bolster your position or move in the right direction?

A relentless search for solutions will keep you on the front foot and allow you to discover openings that may have remained hidden had you not taken the trouble to look.

Christmas Tidings

Two lessons we might learn from Christmas

For many of us, especially expectant young children, Christmas is a day of high expectations.  It can often fall short of the mark.

Santa may have brought you an Xbox when you had desperately wanted a Playstation. Or perhaps you got a new Samsung tablet, when you were busting for the new iPad instead.

It can be painful when reality falls dismally short of our idealized vision of the future.

The cynic might respond simply that these are “first world problems”, but the issue is not quite that simple. Disappointment, at times, is felt by all of us.

With expectations high, and disappointment almost inevitable, it seems like as good a time as any to reflect on the true meaning of Christmas, and what it might teach us about business.

We have two thoughts to share with you.

The first one is about gratitude. You won’t always get dealt the cards you wanted.

Santa may have brought you some gifts, but they may not have been the ones you really wanted. Disappointment naturally follows from expecting more than you were given. You set the bar quite high, in your own mind, and Santa failed to deliver.

A different response to the same situation would be to feel gratitude, thankful for whatever you have. While nice presents are always wonderful, you set no expectations of receiving anything from anyone, and so even the small gifts that you received can be made to feel wonderful.

We have never heard the word “gratitude” used in a business context, but it has some surprising implications. Take for example Clay Christensen‘s famous research on disruptive innovation in which he looked at the ability of inferior new market entrants (e.g. mini mills in the steel industry) to displace powerful and well established incumbents (e.g. the integrated steel mills).

Clay explained it this way. The process of disruption is made possible because the large incumbent firms are pretty much always happy to sacrifice the bottom of the market, with its lower margins, in order to pursue even higher returns upmarket. By abandoning the bottom of the market, the new entrants are able to gain a foothold from which they can move upmarket, eventually displacing the formerly powerful firms that had dominated the industry.

The large players have high profit expectations and, as a result, are not grateful for low margin business. They are happy to abandon it. The new entrants, in contrast, are delighted with these scraps of work, since small profits are better than nothing.

Looking at it this way, we can see that lack of gratitude for the opportunity to serve the bottom of the market appears to be a factor that contributed to the bankruptcy of integrated steel mills in the 1990’s and 2000’s.

Christmas is a time to remember the value of gratitude.

It is also, as it happens, a time to remember the value of giving.

You may have received lousy gifts: business socks, jelly beans, or a gift voucher. The spirit of Christmas, though, is about giving gifts, not receiving them.

For many years this seemed to us to be a very strange custom. Receiving presents is obviously nice, and so why the focus on giving?

The lesson, it now occurs to us, is that giving allows us to strengthen our relationships with the people we care about.

At Christmas time, we give gifts and send messages of good will to family and friends. These gifts and heart felt communications help to bring us closer together.

Generosity, though, is not just a feel good notion that should be reserved for Christmas, it is also an important ingredient for sustaining and growing profitable businesses.

Every year, major brands spend billions of dollars to communicate with us. Nike reminds us that victory and success are possible, “Just do it!”. McDonald’s sends us messages of happiness and love, “I’m lovin’ it!”. And Coca Cola reminds us that the holidays are coming.

Marketing is often misunderstood and misused to spam people about new products and price discounts. Successful businesses have realized though that people don’t just buy products, they buy products from brands with whom they have an ongoing relationship. They buy products from brands that they know and trust.

Throughout the year, as they do every year, successful brands will find ways to reach out to the people they care about, to make connections, and to keep the relationship alive.

Merry Christmas! May you have a prosperous year ahead!

Relationship Power Play

If you run a company, your customers hold the balance of power. Are you delighting them, or leaving an opening for somebody to cut your grass?

IF you want to know which party holds the balance of power in a relationship, you just need to look at the direction in which the gifts are flowing. The gift recipient almost certainly holds the balance of power.

If you are the partner of a management consulting firm taking the CEO of a large corporation out to dinner, you had better choose a nice restaurant, be charming as hell, and pick up the bill at the end of the night.

If you are Apple Inc. planning the launch of the latest iPhone, you had better dazzle your fans at the Worldwide Developers Conference, produce appealing advertisments to delight and inform the public, and maintain beautiful stores where customers can discover your products for themselves.

If you are a guy inviting a girl on a first date, you had better make sure she has a good time.

Relationships are tricky things, and there will always be people and companies who get it wrong.

The partner in a consulting firm who neglects his clients and believes the quality of his work should ¨speak for itself¨. The retail store manager who never smiles and spends more time stocking shelves than talking to people. Or the radical feminist who believes that if a guy treats a girl nicely and insists on paying for dinner that he is somehow opposed to equal rights for women.

Relationships are tricky things, and there will always be people and companies who get it wrong.

While we may not be able to straighten out the perplexed, we can at least do our best to understand our relationships with other people.

Who holds the balance of power, and are you making them happy?

[Hat tip to Matt Costa.]

Publicly Generous

But what about when nobody is watching?

GENEROSITY is the act of giving more than we expect of you.

You are probably familiar with the most common form of generosity – public generosity. Giving more when people can see it.

The public benefactor to a prestigious university foundation; the celebrity who campaigns to fight poverty; or the wealthy men on a quest to cure malaria.

Public generosity is valuable, necessary and commendable. We need more of it because equality and prosperity in our communities cannot be sustained without it.

There is, however, a more unique form of generosity – private generosity. Giving more even if nobody is likely to hear about it.

The partner in a firm who takes extra time to make sure his juniors are learning, developing and growing. The mother who makes an extra effort to help her children develop their unique talents. The big shot friend who always makes time for her small town friends.

Public generosity may get you recognition, but private generosity can help you lay a foundation for your life and your work upon which future success can be built.

Are you giving more than people expect of you? And what about when nobody is watching?

Your generosity is needed now more than ever.

The Truth

Will set you free

THIS expression has been a popular saying among business gurus like the late Jim Rohn, and has its origins in scripture.

“The truth will set you free” has a nice ring to it and makes people feel good, but what does it really mean?

Here are three practices that follow directly from the pursuit of truth, and which underpin sustainable business.

1. Accepting things for what they are. A core requirement of good strategic thinking is the ability to accept the world as it is. Business failures inevitably result when executives cling to the past, holding on to an existing business model which may remain profitable (for a time) but which no longer solves the problem it set out to solve in the most valuable or cost effective way.

A contemporary example is Eastman Kodak, which pioneered the core technology used in today’s digital cameras in 1975, but failed to accept the new reality and ultimately filed for Chapter 11 bankruptcy protection in 2012.

2. Acting with integrity. In a world where most Economists and corporate executives believe (or have managed to convince themselves) that the purpose of business is to maximize profits, where do you draw a line in the sand? When is it possible to say enough is enough?

Acting with integrity means saying “no” to initiatives that produce short term profits in a way that causes lasting harm to employees, customers or members of the community.

Standing up for the truth is a sound and sustainable business practice and a contemporary example of where this didn’t happen is Enron.

Prior to its collapse Enron was one of the world’s largest energy companies but the pursuit of short term profits led executives Kenneth Lay, Jeff Skilling and others to embrace mark to market accounting, a dubious practice whereby anticipated future profits were booked on the day the deals were signed rather than when profits were actually earned.

These deceptions eventually led the company into bankruptcy and many of its executives were sued on criminal charges or committed suicide.

3. Seeing something, and saying something. Companies that fail to improve will ultimately fail to survive, and the first step in the improvement process is when employees see areas for improvement and speak out. If people are unwilling or unable to do this, then the performance of a company will suffer.

A contemporary example of where lack of communication crippled business performance was the terrible safety record of Korea Air from the 1970s to the late 1990s.

A cultural issue made it difficult for Korean co-pilots to tell the pilot about their mistakes and the resulting break down in communication led to the write off of 16 airplanes and the loss of over 700 human lives.

The truth will set you free is not just a pithy aphorism. The truth is a liberating force which can clear the way for continued growth and prosperity. A solid foundation on which to build sustainable business.

Mumma’s Cooking

Brings the family together

Mumma's Cooking

WE are currently in Portugal and recently stayed at Home Hostel Lisbon, which was voted best medium-sized hostel in the world for the last two years running.

Think about that for a second.

There are thousands of hostels in the world across hundreds of countries, and many of them are excellent.

Home Hostel Lisbon was voted “best hostel in the world” two years in a row.

That’s a pretty impressive achievement.

How do they do it? What makes them the best? And what can we learn from them?

We have three thoughts on the matter.

Our first thought is that the thing which makes Home Hostel Lisbon “best is the world” is the appealing design. Whether it be the chandeliers in the dining room, iPads and flat screen TV with PlayStation in the living room, free iMacs in the computer room, or the simple and appealing branding which is consistent throughout the entire hostel, Home Hostel combines practical functionality with the kind of appealing design you would expect from a hotel or your rich Aunt’s house.

Appealing design is definitely part of the magic, but that’s not the whole story.

Our second thought is that the thing which makes the hostel so great is that it revolves around one superior person, Mamma!

Mamma is the mother of the hostel’s owner, a wonderful Portuguese lady with marvelous cooking. She remembers everyone’s name, takes an interest in what everyone did during the day, and plays the perfect hostess. Every night she serves up a home cooked three course meal (with unlimited drinks!) for the insanely reasonable price of 10 euros. This is not only exceptionally good value in a financial sense but it sets the tone for the hostel and provides a unique opportunity for guests to get to know each other over a home cooked meal.

Mamma is definitely part of the magic, but we have one final thought.

Our third thought is that it’s actually all about generosity. Many hostels subsidize the bed price by charging for ancillary services like Internet or luggage storage, but this tactic can destroy the community feeling. Home Hostel doesn’t nickle and dime its customers. Whether it be the free shot of Portuguese liquor served on arrival, the delicious free breakfast catered each morning (with scrambled eggs to rival Bill Granger), or the “how to get to the airport cards” which you don’t realize they have until you ask the question, Home Hostel Lisbon is in the business of solving problems and delighting its guests.

Mamma will be missed.

News or Noise

IF you are like most hard working professionals, then you probably make a habit of reading the news each day.

The New York Times, The Boston Globe, The Sydney Morning Herald.

The Wall Street Journal, the FT or The Economist.

There are many titles to choose from.

You scan the headlines for an interesting story and then dive in, happy to have something to read on the way to work, glad to be able to discuss the latest sporting headlines with colleagues – with whom you may have nothing else in common.

The reality though is that most of the time the news is not news, it’s noise. Information for information’s sake, something to read, something to talk about. Another story to consume our attention.

Why do so many of us choose to spend our time in this way?

It’s possible that the alternative is just too uncomfortable – silence and time to think.

Time to read a book that changes our world view. Time to write an article that challenges someone’s thinking. Time to create something remarkable that solves a problem or delights an audience.

We each have a choice about how we spend our time.

Are you filling your time with noise, or making an effort to create a story all of your own?

Ready or Not

The Consulting Industry is Ripe for Disruption

Ripe for Disruption

(Source: Flickr)

ACCORDING to the Harvard Business Review, the consulting industry is one of the most resistant to change. Even though consultants are brought in by corporations to innovate and shake things up, the consulting industry itself has been slow to innovate.

At its core, the consulting industry has remained the same for more than 100 years. Meanwhile, new tools and technologies have become increasingly sophisticated and available.

This begs the question, “why hasn’t the consulting industry been reinvented?”

CONSULTED, a company run by CEO Sebastian Sager, have not only asked this question but are also taking action, and may be on the cusp of profoundly changing everything.

Using a non-traditional business model, CONSULTED is on a mission to give companies access to expert consulting without the long-term commitment or initial expenses.

Traditional Consulting

Traditional consulting is perfect for enterprise businesses that have massive budgets, constantly “creeping” needs, and a particular business structure which is difficult to change. But even so, engaging a traditional consulting firm often only makes sense if the consultants are used to the fullest.

The issue with traditional consulting is that it doesn’t work in all cases. Very rarely do businesses – big or small – use the full consulting retainer. As a result, money that gets paid to consultancies could have been invested in other areas of the business.

The startup world is rapidly changing the way that businesses operate. For example, it is now easy to find credible, highly regarded contractors to fix your house through online tools like Angie’s List.

Why aren’t the same resources available for helping businesses get advice?

Many founders and mid-level managers don’t need a long-term consulting contract – they’re just looking for some quick, credible advice to guide them through a problem situation or challenge.

Credibility is key, but you shouldn’t have to pay an arm and a leg for it. Consulting should also be flexible so that people can get the advice they need by scheduling a quick phone call or discussion via Skype. You shouldn’t need to “know a guy” or have a contract in place to get the help you need.

A New Era of Consulting

It’s finally time for a fresh new approach to consulting – something that is designed to truly help businesses.

Enterprise-level clients are starting to look at changing the way they engage consultants. Professional service companies in the past charged high fees for standard service packages, making them unsuitable for companies that needed a more discrete piece of advice.

Many newer consulting firms are addressing this pain-point by offering smaller and more flexible consulting “blocks” and flexible collaboration packages so that companies can get on-demand consultancy on topics ranging from audits to Lean Six Sigma to strategic planning. This is a step in the right direction, but a whole new consulting model appears to be on its way.

Companies like CONSULTED are developing solutions which allow clients to forget about meetings, memos and all the other unnecessary hassles that come with engaging a major consulting firm. They also allow users to browse a range of experts from around the world, review consultant credentials and save money by paying for only the time they use.

Is this a disruptive innovation? How is this new consulting model likely to affect your business? Share your thoughts in the Consulting Forum.

Free Is Never Free

Your time has value

Economists are fond of telling us that “there’s no such thing as a free lunch.”

Whether it’s fish and chips for lunch, or something else, what they mean by this is that it’s not possible to get something for nothing.

But hold on, you might be thinking, surely this isn’t true. Just think about Facebook. It’s free isn’t it?

Not exactly.

While Facebook may be free in financial terms, you also need to think about your opportunity cost. That is, what other things could you be doing with your time?

If you spend an hour, then that’s 60 minutes gone.

Since each of us has 24 hours in a day, we each have a choice about how to spend our time.

Are you spending time this week to enhance your reputation, your network, your skills and your knowledge? Or are you just camping out, getting by and working for the weekend?

You can always earn more money, but you can’t get more time.

Simple, Appealing and Delicious

Fish and chips at the Golden Union Fish Bar

Simple Appealing and Delicious

WHEN it comes to project delivery it is said that the customer always wants it “fast, good and cheap”, but they can only have two.

A project can be delivered quickly and cheaply, but the quality will suffer. It can be shipped cheaply and to perfection, but it will take a long time. Or it can be supplied quickly and with quality, but this won’t come cheap.

The “fast, good and cheap” paradigm can be a helpful way to think about project delivery, but the problem is that it encourages blinkered thinking by leading management to focus on inputs (time, costs and scope) rather than considering what the customer might actually want.

Your author recently visited the Golden Union Fish Bar near Oxford Circus in London with Microsoft Test Engineer Brad Reaves, and discovered something remarkable.

The Golden Union Fish Bar serves fish and chips.

Fish and chips.

Simple, appealing and delicious.

The remarkable thing about the Golden Union Fish Bar is that fish and chips is pretty much all it serves.

The simplicity of the restaurant layout and the limited range of menu options is delightful because it makes the dining experience hassle free. No stressful decision about where to sit because every table is picture perfect and pretty much identical. No annoying battle to select a dish from an encyclopedic range of menu options because when you go to the Golden Union Fish Bar you order fish and chips.

The food is priced at a premium and you have to wait a short while for the food to be served, but the growing anticipation only makes the final arrival of an appealing dish even more delicious.

Before racing around to deliver your project as quickly and cheaply as possible, it may be worth stopping to think about your customers, and what they might want from you.

Doing Business In An Infinite Channel World

In an infinite channel world, not-for-profit may just be the new normal

We were recently invited to attend Professor Donnie Maclurcan’s talk in Islington, London entitled “Not-for-profit enterprise will be at the heart of the global economy by 2050”.

We were unfortunately unable to attend Donnie’s talk, and haven’t yet read the book, but on first glance the forecast seems a little optimistic.

For one thing, the claim appears to be unsupported by current evidence. Donnie’s media release states that “In Canada … not-for-profit institutions now contribute 8% of the country’s gross domestic product.” In other words, a relatively small share of the Canadian economy.  Hardly the ground swell of support that would foreshadow a not-for-profit world by 2050.

The other thing is that the claim appears to fly in the face of current economic thinking. Adam Smith, the founder of modern free market economics, is credited with the idea that many individuals working in their own self interest will produce a socially beneficial outcome (as though guided by an invisible hand).

Unless something dramatic has changed in the way that people respond to incentives, it is not clear why the world would shift from a free market system (dominated by for-profit enterprises) to one comprised predominantly of non-profits.

What could have changed?

It must be something big.

While people still respond to incentives in the same way they always have, the Internet completely changes the playing field.

In the pre-Internet world it was costly to communicate with large groups of people, you needed to own a printing press or a television station. It was also costly to form and build communities, since you needed to be able to build large and beautiful buildings where people would be happy to spend time (think religions and universities).

The Internet changes both of these things.

It is now possible for anyone to share ideas with the whole world instantly, and for anyone to build an online community where people can connect and spend time.

The full implications of this change are yet to be fully understood, but one thing jumps out at us.

An established online community can be self sustaining.

Loyal community members can provide the financial capital to keep the community going through donations and by buying products and services. If all profits from the community are then funneled back into maintaining and building the community, then the community may never produce any taxable accounting profits.

In other words, communities are by their nature not-for-profit (regardless of whether they are registered as such for tax purposes).

In an infinite channel world, where the cost of connecting with people is now zero, everyone has the opportunity to connect with people who care about the same things that they do, and build a community in the process.

Not every community will become financially viable, and of course some communities will produce taxable profits, but the implications should be clear enough.

We are moving towards a world with more connection and less profit. At least, less financial profit in the way that we have always been taught to think of it.

Donnie is definitely on to something, and we look forward to reading his book. It will be published in April 2015, and if this topic interests you then you can place a pre-publication order here.

5 Ways to Foster Learning

Learning is a natural process, but management still has a role to play

5 Ways to Foster Learning

(Source: Flickr)

FOLLOWING on from our post on learning from experience, in which we discovered that learning by doing is a natural process, we are finally delivering what we promised – a post which explores some ways that management can help.

Learning may occur naturally, but management can enhance and harness the learning process by:

  1. Fostering a culture of learning
  2. Directing effort to specific goals
  3. Capturing and sharing learning internally
  4. Keeping learning proprietary, and
  5. Commercialising good ideas

We explore each of these five approaches in more detail below.

1. Fostering a culture of learning

The culture of a firm can affect how receptive employees are to new ideas and the rate at which learning takes place. There are five methods that management can employ to help build a learning culture.

1.1. Create space for tinkering

If management wants to encourage improvement then a policy which punishes failure may sound like a good idea. Success is good, mistakes are bad, and therefore anyone who fails should be punished.

This may sound logical, but it ignores what we know about the learning process – mistakes are to be expected and are part of the natural process of learning which, combined with a due sense of stoic perseverance, inevitably leads to the next big breakthrough.

Convex Tinkering

Scientists understand the learning process and have adopted trial-and-error as a fundamental part of the scientific method. Management needs to appreciate this as well.

Small mistakes and discoveries that lead nowhere are to be expected, and should not just be tolerated but accepted as normal.

If management tries to optimise operations and set deadlines so tightly that there is no space for curiosity and tinkering, then employees may be prevented from trying new approaches which have the potential to radically improve performance.

Intelligent and energetic people are more valuable when they have space to tinker. This fact has been willingly accepted by many Silicon Valley firms and was the core idea behind Google’s “20 Percent Time”, a company policy that allowed Google employees to spend one day per week on a project of their own choosing and which led to innovative new products like Gmail and Google Adsense.

1.2 Celebrate success

Incremental improvements and breakthrough advancements are valuable, and management can help by celebrating the employees responsible for making it happen.

Some people are motivated by short term monetary incentives, but when it comes to learning and creativity the process of discovery is often its own reward. By recognising the heroes, management can send a strong signal to everyone in the organisation that innovation is valued, and that the people responsible will be recognised.

The flip side of the coin is that new discoveries are often commercially sensitive, and so in order to protect innovations from the prying eyes of the competition it may be necessary to keep award ceremonies in-house and out of the media.

1.3 Measure Employee Engagement

Employees will only learn from experience if they are actually working – goofing around doesn’t count.

In a factory setting you can assess how much work is being done by measuring the factory’s output. This is easy to do.

The difficulty lies with professional service firms and other organisations where the work involves thinking and creativity. How can you tell whether people are really working? What if they are just going through the motions and filling out boilerplates without applying any independent thought? If this is the case, then they may not really be learning anything.

Our suggested solution to this problem is to measure employee engagement, for example using Gallup’s Q12 Survey. Employees who are more engaged in their work are more likely to be learning.

1.4 Temper Pride with Humility

A common way to boost morale is to encourage a feeling of pride in the organisation. This can be effective, and as you might remember your author’s high school headmaster was pretty fond of this technique, but it has a hidden cost.

As we explored in our post on humility, pride can blind us to the good ideas of others. A special fondness for your own organisation should not go so far as to blind you to the good ideas put forward by customers, suppliers, competitors, government agencies, universities, or your mother-in-law.

Don’t get too full of yourself.

1.5 Avoid Perverse Incentives

Perverse incentives are inducements which lead to unintended consequences, and management needs to be careful to avoid them.

One example given by behavioural economist Dan Ariely is the effect that small monetary payments can have on motivation.

Ariely explains that if you ask someone to help they may be quite willing to do so. However, if you offer them a small payment, say $10, then the person’s motivation is likely to decrease rather than increase.

The inducement has the opposite effect than intended because it crowds out the person’s internal motivation (i.e. the joy of helping), and transforms a social relationship into a financial transaction.

The offer of money changes the question that the person asks themselves from “Do I want to help Tom?” to “Is $10 fair payment for this job?”

According to Ariely, this problem can be avoided by offering a small gift instead of a small monetary payment. In other words, give chocolates or movie tickets to reward a job well done rather than offering a small hourly wage.

2. Directing effort to specific goals

Management guru Peter Drucker is famously quoted as saying “what gets measured gets managed”.

Making measurable progress is important, but before progress can be meaningfully measured management needs to set specific goals which employees can align their efforts around.

Undirected learning can be valuable especially during the early creative phase of product development, but in order to reach its destination the ship’s captain needs to set the sail.

Management needs to determine the direction of learning.

3. Capturing and sharing learning internally

To accelerate the learning process, a firm should establish ways to capture and share learning within and between practice groups, offices and business units.

Management should also be mindful of the fact that sharing information can be hindered by geographic distance and internal rivalry.

Ways of capturing and sharing learning include:

  • Hold weekly team meetings at which learning points are discussed
  • Record know-how by producing internal memos and technical papers
  • Organise regular internal talks and conferences
  • Support working groups that cut across formal departmental boundaries
  • Send employees to external conferences and require them to share learning internally
  • Acquire competitor learning by poaching employees, analysing competitor strategy, reverse engineering products, forming relationships with the competitor’s suppliers, and engaging consultants who have worked with the competition.

4. Keeping learning proprietary

If it is possible for a firm to learn from the competition, then it will also be possible for the competition to learn from it. This is a problem since it may allow competitors to improve performance more quickly and at lower cost.

Management should take steps to limit the spill over of learning to competitors, and ways of doing this include:

  • Produce strategically important technology and components internally in order to maintain, develop and protect know-how
  • Patent new technology in order to slow down the rate at which it can be copied
  • Control publications and media releases to avoid educating the competition
  • Retain key employees
  • Place strict non-compete and non-disclosure provisions in employee contracts

5. Commercialising good ideas

Developing good ideas and new technology is important, but it is only half the battle. A firm also needs to develop a system for connecting innovations with commercialisation opportunities. Many large companies are currently doing this by running an in-house start up incubator that they use to generate, develop and commercialise good ideas.