Lies, damn lies and statistics

Daily Kos has gotten himself in an odd spot of bother due to the apparent fake poll results that his pollster gave him.  One of the big problems with any data driven analytical process is the integrity of the data.  This post discusses how the pollsters were found out by an intrepid band of statisticians (you don't see intrepid and statistician in the same sentence very often do you?).  It's a cautionary tale and gives us a couple easy ways to test the authenticity of data claims.

Just in case you find yourself stuck collating data.  Out on the Openwater.

Seeking safety where none exists

Watching the Euro begin its inevitable crumble and the resulting flight to the dollar, I am struck by the sad similarity to 9/11.  When planes struck the first tower, the inhabitants above the strike moved upward to the roof,  hoping for a totally unrealistic rescue by helicopter.  Likewise, the refugees from the collapse of confidence in the Euro are fleeing to the dollar, hoping for an equally unrealistic rescue.

The GAO estimates that by 2020 93% of all Federal revenues will go to entitlements and to service the debt.  93%.  I subscribe to the theory that when something can't happen, it won't.  Will we raise taxes or cut spending enough to move this number appreciably?  You know the answer to that.  We'll do what almost every 'developed' nation has done before us:  we'll inflate our debts away.

And all of those financial refugees crowding on the roof, searching in vain for rescue?

They'll be pulverized.

Knowledge Based Service Economics and the Big 4

Note to readers:  this is an incomplete white paper that I prepared. I think I can take this and tune it to Veracity so that we show how Veracity is best leveraged and why our model will win.

Openwater Advisors specializes in helping the owners of knowledge based service businesses (KBS) to maximize the value of their investment.  A knowledge based service business is one where the primary product is 'know how'.  Consultants, software makers, colleges and even churches are all KBSs.  Know how is an example of what economists call a nonrival good, meaning that one person's use of a particular piece of knowledge does not preclude others from using it.  Thus a specific unit of 'know how' can be distributed to as many people as are willing to purchase and make use of it.

This nonrival characteristic drives the principal form of differentiation among KBS:  distribution.  Let me provide a mundane example from my consulting past.  One of the services that my firm provided to corporations back in the 1980s was sales force effectiveness.  We would work with sales organizations to identify areas where they differed from 'best practice' and help them develop and implement plans to get there.  Today, much of the content of our traditional effectiveness study is encompassed in an on-line web service called Salesforce.com.  Essentially, what Salesforce.com did was take the know-how from thousands of years of experience running top sales forces and embed it in software and associated workflow that can be accessed at a modest cost from any internet connection.

Several interesting things happen when you take expertise and embed it in this manner:
Knowledge is leveraged - the number of clients a traditional 'meatware' consultant could help at any one time was limited by the hours he had available and the geography he inhabited.  By contrast, with a web service an essentially limitless number of people can make use of the designer's insights and expertise at the same time.
Pricing plummets and demand soars - by disconnecting the expert's time investment from the delivery of the service, the web service provider drives the marginal cost of providing his service almost to zero, enabling far lower prices to the market.  This in turn radically expands the addressable market for the service.  The minimum scale for sales effectiveness solutions, for example, shifted from hundreds of thousands of dollars to hundreds of dollars.


Solution value soars - Despite the massive reduction in price, the overall market value of the leveraged solution is vastly greater than that of a traditional consultant.  In other words the knowledge leverage far exceeds price destruction.  Thus beyond the  minimum scale needed to amortize the investment to embed the know how, a highly leveraged KBS like Salesforce.com is always far more profitable than traditional consulting.
Changing service delivery changes everything else - Leveraging service delivery means lower revenue per unit but many more units.  This change poses serious challenges to the traditional way of marketing, selling and administering the firm.  Even the types and mix of people change.
Value becomes portable - Traditional consultants  have a hard time selling their practices.  This is because the value of the the practice is lodged in the brains of its Principals.  By taking that knowledge and embedding it in software,  the traditional consulting expert creates an asset that is far easier to monetize.

The leverage-price-value connection holds across a wide range of different KBS distribution strategies:  including traditional management consulting, implementation consulting, BPO, traditional application software as well as web services.  See the chart above.

Relationship Holds Within Large Firms
The leverage-price-value relationship not only holds between firms, it applies within large firms that provide   multiple solutions around a specific service line.  Take for example Tax.  Tax services include everything from strategic consulting to return preparation for corporate clients and the affluent down to  HR Block, Turbo Tax and at the bottom: the IRS' online free web service.  (Some hawk eyed reader will point out that the IRS' free service generates no revenue so therefore has no value but of course they are generating immense revenue from the site).

What's interesting is that the top accounting firms with all of the expertise ceded the bottom of the Tax market to outsiders.  Why?  I think one of the reasons lies in the dual nature of the Big 4 value chain.  For some services like tax preparation, the Big 4 have become extremely efficient, by organizing services via large scale software enabled offshore facilities, they are actually able to undercut the middle market firms.

"$65 and hour?  We can't touch that" - Senior Partner of successful mid-market firm (ex PW)

Yet the vast majority of this complex middle market tax preparation business is in other's hands.  This is because while delivery and administration are scale sensitive and highly leveraged, the acquisition and management of client relationships is not.  For economic, historical and risk reasons the Big 4 limit client acquisition and management activities to a limited number of highly paid 'insiders' who bear the enterprise risk and get its rewards (aka:  Partners).  This radically limits the size of the customers that can be economically pursued, captured and managed - it drives the Firms towards a big client strategy.  The mid-market providers don't deliver a better technical service, in most cases the market is extremely fragmented with many small firms and sole practitioners providing supoptimal service.  What they do have is a willingness to accept rewards far lower than Big 4 Partners achieve and have virtually none of the independence or high profile liability issues.

Leveraged Capability Creation
At this point I wanted to discuss how someone with a lot of different intellectual capital could analyze which bits are most leverageable and then take them through a process of doing so.  Didn't get to that.

Information Cascades

John Derbyshire has an insightful post on why last week's temporary market meltdown occurred.  I've chosen to reprint it in full because he does a better job of explaining an interesting market phenomenon than I could ever do.  John is author of Prime Obsession.  You can follow John here.

Forget about the “fat fingers” and “black swans.” Last week’s sensational stock-market drop was just an unusually big instance of a normal phenomenon, the information cascade. Basically, here’s what happened: Seeing a lot of people headed over to the starboard side of the boat, a lot more people headed over to that side, too.

There are good reasons to think that this kind of imbalance will become more common. There is, for example, the current political environment.

Consider two market players,  A and B. A sells a stock to B. Why is this happening? Well,A thinks the stock is overvalued, so he wants to sell it. B, contrariwise, thinks the stock is undervalued, so he wants to buy it.

Why do  A and B have different views, though? They’re both working from the same data. Likely they’re both professionals, with teams of analysts backing them up. (In today’s environment in fact, one of them is probably a computer program; but that’s another story, and doesn’t affect the argument.)

One common reason is that they’re working with different time horizons.  A might be looking two weeks ahead, B may be looking two years ahead. On this basis, they might both be right: the stock may be overvalued in the short term, but undervalued in the long term.

A lot of trading is like that. Most commonly the trade will be between someone with a higher appetite for risk (short time horizon) and someone with a lower (long time horizon — probably an institutional investor). This long-term/short-term balance is one of the things that keeps the market stable.

Politics can upset this balance by introducing uncertainty into the long-term picture. The bailouts did just that. Investors — and many more long-term investors than short-term — are asking: “How do I know who’s Too Big to Fail? How do I know when there’ll be a bailout and when nature will take its course?  What are the rules?”

In an atmosphere of uncertainty like this, with risk harder to quantify, long-term players become short-term players. Trading strategies will then fail more often. If several fail at once, automated high-frequency trading programs all start doing the same thing (buying or selling) and suddenly everyone’s over on the starboard side of the boat. Information cascade.

......tipping your boat over out on the Openwater.

Brilliant presentation of data using video...

...on a fascinating topic - finding natural human community boundaries.  Hat tip to Carpe Deim.

Conventional Wisdom and the Knowledge Problem

A friend sent me an email with photos of a horrible crash "caused" by texting/cell phone use.  You know the drill - a virtual finger wagging designed to intimidate or shock reprobates like me that continue to telephone while driving.  But is their finger wagging justified?  I decided to run some numbers and see.  Now what I've done is only rough and directional but my reasoning was as follows:  We've had massive increases in cellphone usage and texting so much so that it is commonplace to see people using their mobile device while driving.  So, if phoning and texting while driving is such a 'clear and present danger' its impact should show up in increased mayhem on our highways.  So I got the Natinal Highway Traffic Safety Administrations's data series on fatalities per 100 million miles driven and this is what it said:

Source:  NHTSA

Compare this gently declining line to the number of cell phone subscribers in the US.  Measuring subscribers probably understates growth in usage because minutes are rising faster than subscribers as people shift from landlines to mobile devices.  Nevertheless, we've seen at least a sixfold increase in cell phone usage at the same time as steadily declining traffic fatalities per mile driven.  Hmmm.

Source:  Census Bureau

But where the rubber meets the road so to speak is with texting:  it's all those darn kids texting while they drive that creates these outrageous risks.  So here are the texting trends:

Source:  Census Bureau
Double hmmm.  Since 1996 texting has gone from nothing to almost 120 billion messages in 2008.  Cell phone subscriptions have grown six-fold  yet highway fatalities are down 28% per mile driven in a period of time where speed limits increased from 55 to  65, 70, 75, even 80 MPH.  And the steepest declines in death rates have occurred in the last two years when texting added a net 100 billion messages a year.  (Oh, and these trends occurred before most if not all of the highly publicized 'bans').

So what's going on?  Well the simple answer is that people and societies just aren't that simple.  There was probably some improvement in car and roadway safety going on during this time and our population got slightly older and more affluent.  But neither of these trends are sufficient to overcome the horrific carnage that the finger waggers were telling us was happening every day because of cell phones and texting.   My theory is that people are intelligent and adaptive creatures - they know full well that their phone behavior impairs their driving attention and adapt their driving habits accordingly.  But I could be wrong.  Nobody who's honest with themselves really knows.

So why did I come up with such a different conclusion than the waggers?   First, I tested the overall claim of "cellphones increase traffic danger" against the macro data - a trend that demands laws and moral judgment should pretty dang easy to see in the data, shouldn't it?  And if it can't be detected then what's the big deal?  and Second, I didn't presume that I had "the" answer as to what the explanation was or even that there was an answer.  Things are complex, people adapt, we don't completely understand how human societies work - if we did we wouldn't have panics, wars and riots.

This is an important consideration when someone comes to you saying that they have "the" answer to a market opportunity or institutional challenge.  The odds are that they don't.  They may have a handle on a piece of the answer but it is highly unlikely that they understand how the solution will play out in a market filled with countless independent actors making their independent value judgements and responses.  Friedrich Hayek won a Nobel Prize for articulating this "knowledge" problem.  And it's a problem that bedevils anyone bringing a new solution or policy to market.  The more frame breaking the concept, the more creative the solution, the bigger an issue this is.  We just don't know what's going to happen.

This doesn't mean that new solutions are illegitimate or that innovation should be rejected, it simply means that the outcome of innovation or change is seldom predictable.  This rewards organizations and people who are good at sensing market needs, experimenting with new concepts and adapting to changing circumstances.  Indeed, it rewards those institutions organized around markets because markets incorporate everyone's perspective, everyone's knowledge.  Oh, and by the way:  the faster a market changes the bigger the advantage that innovators have because they are driving change rather than reacting to it.

So the next time someone comes to you with 'THE' answer, tell them that it's more complicated than that.  Out on the Openwater.

Stick to your line 2 - Or how do you determine Comparative Advantage?

Peter Drucker adapted Ricardo's theory of Comparative Advantage to the enterprise world.  He argued that organizations should sort out what they considered "Core" - in other words, what activities and capabilities constituted the basis for their differentiation, their competitive advantage.  Everything else or the 'periphery' in his parlance, Drucker said should be outsourced to organizations that in turn made that function their core.  That way peripheral or support services could continually be marked to market in quality, cost and delivery terms, unsheltered by the enterprises' indifference or ignorance.

This insight has been the foundation of the movement towards outsourcing.  Leveraging ubiquitous networks and technology tools, whole business functions have been shifted and entire new industries have arisen to exploit Ricardo’s insight.  But with the transformation has come a question:  is 'core' always core and 'peripheral' always peripheral?  How do changing market conditions and technologies change this assessment?

A pertinent example of this dilemma is storytelling, particularly video.  In the past video messaging was something done at great cost by focused experts who raised the concept of the 30 second advertising spot to a state of high 'art' with its own 'academy awards' and artistic nomenclature.  But with the rise of high speed networks and ubiquitous PDAs video storytelling (messaging, advertising, training) is becoming a much larger and more diverse part of the organization’s communications strategy.  In particular, enterprises selling ideas or knowledge are increasingly dependent on being able to share 'gifts' of stories, ideas, concepts or constructs with their target customers as a precondition for engaging in relationships with them.

This shift in the 'coreness' (forgive me Mr. Webster) of storytelling has led to two seemingly contradictory trends:  On the one hand some enterprises have begun to ‘insource’ parts of their messaging functions - the ability to tailor messages and deliver them inside their competitor's message cycle has become 'core'.  On the other hand, certain groups have begun organizing the tools and infrastructure so that the delivery of video and related content can be 'industrialized' and mass customized by industry vertical.  The key to both of these trends is the core content:  ideas and the ability to communicate them in a compelling manner are rare and valuable commodities and increasingly critical to success.  Big enterprises have the scale to buy or rent top talent, smaller players don't so they are looking for the leveraged solution.

By coincidence, Openwater Advisors just happens to have one: "Comunicato:  Relationship Leverage for a Visual Age" is our answer to the industrialization of the video world.  Working in partnership with Activated Marketing and The Knowledge Transfer Company, we are currently deploying the capability to create and mass customize compelling content by industry vertical - enabling individual knowledge providers to derive personal branding, personal leverage, viral referral and speed to message at a cost far below the existing 'cottage' industry's economics.  We don’t really expect to take business away from the thousands of ‘mom ‘n pop’ video shops out there, rather we plan to generate our own, new demand.  How?  by making it far cheaper and easier for knowledge providers like investment advisers, accountants and lawyers to deliver high quality video storytelling.

The incipient industrialization of a cottage industry:  a storm cloud on the horizon, out on the Openwater.

Stick to your line

We've had a lawnmower ever since I gave my son, Bubba Jr. the contract 4 years ago when he turned twelve.  This week the inevitable finally happened - it broke down.  Should we take it to the repair shop?  nope, too long.  Borrow the neighbors? nope, short term solution.  Buy a new one? stupid.  So with the grass at our knees and our backs against the wall I did what any leader would do:  I turned to my son and said:  "Fix it, Sam".  And despite having never attended a single small motors repair class, or having any help aside from the internet and his size 8 cranium (my skills in the area constitute techno-comedy) he rebuilt the carburetor and made it run as good as new.

That led me to reflect on conversations I've been having with a good friend.  He has a job leading a series of big market facing initiatives and he's not getting the support he needs from the back office technical and communications teams.  Frustrated and needing help, he was constantly being dragged into their meetings to solve problems to get the support he needed 'unstuck'.

This is the wrong approach.  My son solved the lawnmower problem because he had to.  While no expert, he's a technical whiz and he knew that I had faith in his ability to deliver.  I asked him to do something new but well within his capabilities and he did so.  The same is true for technical support of any kind:  it's a mistake to solve their problems for them - it infantilizes them - you get down in the weeds, it becomes your problem, your fault.

The right way to deal with technical delivery is to do your homework - define what outcomes you need, compare them to what competitors or other industries achieve and demand that your team meet or exceed that standard.  Then get out of the way and let them do it.  Either they'll succeed and so will you or they will tell you that they can't keep up - that's the time to either eliminate their legitimate roadblocks or find new support.

The key concept is Comparative Advantage, best articulated by David Ricardo in 19th century England:  while you may be able to do everything that your support team does better, it is best for you to focus on your best and highest use - the thing that the market values the most about you.  By doing so and demanding excellence from those that support you, you'll get the most out of your efforts.  Out on the Openwater.

Envisioning waste

What does it mean to 'waste' a million dollars?

A million dollars really isn't that much money so to waste it isn't a big deal, right?  Well it depends on how you think about it.  Imagine if you hired a person and paid them $40 an hour.  Their sole job responsibility would be four times an hour to take a crisp 20 dollar bill, cut it into small pieces and flush it down the toilet.  If they were paid to do that 24 hours a day, 365 days a year the combination of their wages and the flushing would equal roughly $1 million dollars.

Feels a little different now, doesn't it?

A little humor

Hat tip to Four Block World.

Human Tool Making

A creole is a pidgin language adopted by natives of a region in place or addition to their native language and incorporating many local words and phrases.  If it gets used enough, it can become a lingua franca:  Hindi/Urdu, Bahasa and Swahili are successful lingua francas (as is English, which I'm sure began life as a creole of Low German, with Latin and Celtic incursions).  Apparently Facebook doesn't support Arabic script so Arabic speakers utilize the Roman alphabet to write Arabic.  Technically not a creole or lingua franca, more of a compu-franca.  It's kinda cool.  Some obscenities on the site (they don't like a band that doesn't like Islam).

Of more interest to me is how people take tools and technologies and adapt them to their use.  I suspect that none of the users took a class in Roman-Arabic script translation or consulted Roman-Arabic script dictionaries to participate  (I think they exist).  They took a communications tool that had utility for them and made it their own.  This demonstrates just how effective mobile technology linked to ubiquitous web services can be as tools for change when coupled with the ever adaptable human mind.

Now if I only could decode nouveau Arabic written in Roman script phonetically back into Arabic script so I can use my Arabic dictionary to find out what the heck they are saying.  Out on the Openwater.

Buildings = Lack of Ideas

If an institution begins a prestige building program (new headquarters, new church building) then it’s a warning sign that they’ve run out of ideas.  In the 21^st century the game is not to herd more sheep into your pen, it’s to get more connection and influence over the sheep out in the field.  The organizational returns aren’t in more bricks and mortar, they’re in ideas and relationships with customers, partners and contractors ‘out there’.  So if you’re spending all your time with architects and interior decorators you’re missing the biggest plays in today’s market.  By this standard the most idea free places in America are its colleges and universities.  About right, don’t you think?

Buy ideas, short building programs.

Never Sell Technology Short

Autoweek Magazine points out that current cars produce 98.5% less pollution while barreling down the Freeway than their predecessors did sitting still with their engines turned off.

The operating 2010 Mustang is 98.5 percent cleaner than the 1970 with its engine shut off, according to Ed Kulick, an emissions regulatory planner in Ford’s vehicle Environmental Engineering Department.

The ’10 Mustang has demand-based fuel injection with no return lines, hydrocarbon impermeable fluorocarbon gaskets and evaporative emissions canisters that eliminate gasoline vapor seepage, even during refueling. The ’70 Mustang emitted the equivalent of 3.7 grams of hydrocarbon (HC) per mile sitting still, according to Kulick. The ’10 is certified at 0.055 gram of HC per mile when cruising the interstate at 70 mph.

The 1970 ’Stang had Detroit’s first rudimentary apparatus to control exhaust emissions It met federal standards of 4.3 grams of HC, 39.6 grams of carbon monoxide (CO) and 4.1 grams of oxides of nitrogen (NOx) per mile. The 2010 generates no more than 0.055 gram HC, 2.1 grams of CO and 0.070 gram of NOx, for reductions of 98.7 percent, 94.7 percent and 98.3 percent, respectively.

Some will interpret this as a magnificent achievement of regulation, others of unfettered capitalism.  The news will be used to both justify global warming regulation and to reject it.  Regardless, the fact remains that the human mind's capacity to imagine the future is almost unlimited and over ever shortening timescales has the capacity to stun us with its inventiveness.  So as you make decisions, it's important to recognize just how fast the technology event horizon is creeping up on you while you're out on the Openwater.

On specialization

I went with my good friend Morris Shank to a 'with it' church service late Saturday afternoon.  In my lexicon a 'with it' service is one with modern music (lots of rock - we're white, after all) and a strong multi-media message - speaking leavened by video and audio clips in a convincing post-modern montage.  I've been lecturing the pastors at my (large, evangelical) church that they need to update their messaging style and I think I'm frustrating them.  As I talk to the main 'preacher' about limiting messaging to 9 minute segments followed by music (the better to leverage the standard modern American's attention span) and the need to integrate visual, aural and social stimuli to maximize retention and learning, he throws his hands up and says:  "but I'm just a theologian, I'm not a director or script writer".

And therein lies the problem for knowledge based businesses.  Imagine how lousy movies would be if the stars were forced to write, direct and perform in their own films.  For every Woody Allen or Charlie Chaplin, there are hundreds of lesser talents that can only do one thing well.  Yet most industries that sell knowledge services (I would put churches in that category) still rely on a single person:  the partner, the pastor, the guru to develop all of the ideas and content, direct the show and star in it.  This is clearly nuts.

With the proliferation of media and tools, the ability to create visually and aurally rich multi-media experiences that deliver far more impact and value has exploded, but our organizations have lagged.  With the new media environment the idea is a concept that can be taken and replicated in many different ways for different audiences.  And once created, a high impact presentation of a given concept can be repeated literally millions of times.  This has several compelling implications for knowledge based businesses:

First:  You can't afford to reinvent the wheel.  The key to communicating and syndicating your ideas is reusable content that can be leveraged via multiple channels.  In Preacher terms:  quit writing the sermons from scratch, figure out how to replicate the best of what others have done.  Then focus your time adding your unique idea or twist, your 'special sauce' to the mix.  You don't have time to think about everything from first principles, stand on other's shoulder's to get to the goal.

Second:  Repurpose the same concepts and message to multiple audiences.  An idea whose time has come has incredible impact.  The best preachers of the "word of the new" figure out how to get the message across in multiple ways:  the book , the video, the seminars, the speeches, the celebrity appearances, the tracts, the entertaining shorts and so on.  The value of the idea is enormous only if it reaches the audiences that are most likely to benefit from it - so create the idea once and deploy it everywhere.

Third:  The power of the network is key.  It is not very often that brilliant ideas are spread through mass channel marketing.  Usually there is a sophistication and complexity to ideas the make them difficult to sell in 30 second spots.  Ideas, knowledge, and know-how are spread by disciples - people who have first been exposed and then have sought out the vision of the creator of the knowledge.  Wise knowledge based businesses figure out how to create what Seth Godin calls "tribes" of people who share a commitment to the faith or concept or lifestyle represented by the idea creator.

Fourth, and this is key:  Specialize - engage people who create ideas and messages and keep them hard at that.  Find others who are good at communicating the message or choreographing the interplay between message, media and audience.  Like the entertainment industry does, give these directors, producers and technicians the power to craft a unified vision and message.  It is very seldom that the idea creator (aka the 'screen' or 'sermon' writer) really understands how to deliver their idea in a way to change the perspectives of thousands or even millions of people.

So, if you want to sell your ideas, focus on what is unique and borrow the rest, find as many different mechanisms to communicate the idea to the world, emphasizing those things that are leveragable and repeatable.  And look for disciples, people who will share your passion.  Finally LET GO - it would be very unusual if you had all the skills to deliver your knowledge in a high impact way - find brilliant professionals and let them do their jobs.  And if you let them, you might, just might do something that could change the world.

Changing the world:  now that's a goal worth pursuing out on the Openwater.

Hoeing your row

The enterprise software solution world has simplified' over the past ten years.  This is because the major players, Oracle and to a lesser extent, SAP have bought everything.  The problem with this is that they really haven't imposed much 'order' on the market, they've just imported the chaos.  See my post the Rocket Science of Soup.  It is hard for clients to buy from and implement what they have on offer, indeed it's hard for their sales people to sell it.  It's so damned complicated.  And the complication stings at so many levels:  the solutions have huge and proliferating configuration options, the complexity of integration between solutions is growing apace, and the applications the software can be applied to have risen.  It's all a bit intimidating.

So what's the answer?  Services. Clients have and are increasingly moving away from trying to optimize and understand the proliferating complexity of their enterprise software solutions.  Instead, they are turning towards vendors that deliver a comprehensive solution to a specific business problem: a full training, workflow and web service solution.  They deliver outcomes, not code.  And outcomes are much easier to understand and account for than the infinite optionality of the enterprise software world.  Appregatta is a company founded to bring this service model to market.

So while in the past sofware has been king, in the future, technology enabled services that embed training, workflow and code into an outcome will increasingly win the day.  Mind you this isn't necessarily the same thing as outsourcing or offshoring, it's delivering a completely executed service solution that client employees can deliver. If they're not careful, firms that specialize in software implementation will find their dancecards distressingly barren in this brave new world.

It turns out that finding a service row and hoeing it is an increasingly viable strategy used by the fastest yachts racing out on the Openwater.

10 Reasons why the recovery is real

We don't normally talk about general economic activity on this blog but the recession has been so deep and so long that it's important to highlight any good news that can build investor or consumer confidence.  Mark Perry of the University of Michigan gives ten reasons why the economic recovery is real here.

The power of institutional integrity

One of the most under-appreciated aspects of successful organizations is institutional integrity.  I define institutional integrity as the extent to which an organization makes and consistently keeps a valuable commitment to its customers or clients.  The more painful the commitment and the longer it's kept, the more institutional integrity.  Walmart is a company with enormous amounts of institutional integrity.  Sam Walton set out in 1962 to create a store that would bring big city prices to small town America.  And Mr. Walton's original commitment to "Every Day Low Prices" indeed, the lowest regularly offered prices anywhere has driven the company's actions and success ever since.

A friend of mine was the top real estate executive at a (soon to be bankrupt) specialty retailer.  He tells of going to the annual retail industry real estate conference.  Like the other retail execs, he took a room at the luxury hotel nearest where the conference was being held.  His two counterparts from the richest retailer in world history doubled up at a discount motel.  It is this commitment to a valid goal:  low prices for things working people need that has been the key to Walmart's success.  And what success they've had.  Click here to see a time series of the company's spread in just the US.  From Flowing Data.

Exert every ounce of energy giving customers what THEY want, rather than what YOU want over a long enough period of time and you'll find that the people will reward you with far more success than you could have ever dreamed of.  Just ask Sam Walton, fishing in the afterlife, out on the Openwater.

The Levy Flight - Interesting addition to the rocket science of soup

Check out this diagram from Seth Godin:

It represents the motion of an animal through space as it forages.  Note how the animal stays in one location for quite a while, eating whatever is there.  As soon as the local supply is exhausted it then sets out in a random direction for quite some distance, stops and then begins foraging again.  Social researchers have demonstrated that this is what consumers do:  they find a brand or restaurant or website that they like, they forage closely at it, returning again and again.  This is why increasing product complexity works for a while - the new flavors or features keep the customer coming back to the same feeding ground.

No matter how interesting and complex you make things, eventually the customer gets all the value that they want or just gets bored with your offer and they set out to find something new.  And complexity at that point makes it harder for them to stop at a new solution or brand - the complexity makes it harder to take advantage of the features that make the product valuable.


This explains why complexity is a rational short term tactic with potentially disastrous long term implications.

Something to think about next time you're fishing for whales out on the Openwater.

The rocket science of scale

While needless complexity can often complicate the branded solution's problems (see my post The rocket science of soup), it turns out that the onrush of technology can offer some knowledge based service providers real advantages over their less prestigious 'white label' competitors.  I had the privilege of listening to Al Kent - a Senior Partner at PricewaterhouseCoopers - at lunch today.  He talked about how the "Big 4" accounting firms are increasingly using technology to automate and offshore many of the more tedious activities of the accounting profession.

This is interesting because historically the Big 4,6,8 have been substantially more expensive than their less branded (if not White label then grey label) competitors - this is because the big boys needed far more infrastructure and risk management to serve global companies than the regionals needed to serve simpler mid-market businesses.  This led to a mass exodus towards 'selectivity' or the abandonment of the mid-market by the Big 4.  In Mr. Kent's remarks I noted the glimmer of a shift in competitive dynamics.  By utilizing their global reach, scale and access to technology, the Big 4 appear to be narrowing the price gap between themselves and their smaller competitors, making the decision to go with the Brand Name easier for the upper end of the mid-market.

It will be interesting to see how the 'speed boats' respond to this challenge from the 'ocean liners' out on the Openwater.

The rocket science of soup

One of my consulting colleagues, Dave Holloman has written a fascinating post on his group blog:  The Global Rail.  He uses the wild proliferation of Campbell Soup SKUs to illustrate the dilemma that branded suppliers face.  As innovation slows down and categories are commodified, those players with the power to control what goes on the shelf - retailers in CPG, integrators in tech, are motivated to shift to lower cost commodity or "white label" solutions.  These 'store brands' take shelf space that was previously owned by branded competitors.  The branded competitors respond by adding more and more options to differentiate themselves from the plain vanilla distributor's offer and justify their price premium.  David points out that this rush to complexity has real costs, both in the delivery/supply chain as well as for the buyer who must invest more time and energy in differentiating between all of the competing choices.

And if the competing choices don't really increase customer value, then there is a net loss to the system.

As they say:  read the whole thing.

 Fighting commodification with valueless complexity, another way to sink your rowboat out on the Openwater.

How to have the biggest launch ever

I like Seth Godin's work.  His perspective on how building brands and creating value in the wired world has always been a step ahead of his peers.  He writes a very perceptive post on why Apple's I-Pad launch was perhaps the biggest single truly new product launch in history.  As Instapundit would say:  Read the whole thing.

Where have all the jobs gone?

Carpe Diem has posted graphs of manufacturing employment and agricultural employment as a percent of total employment in the United States (see below) what is striking is how much the two graphs look alike.  The manufacturing employment trend has followed almost exactly the agricultural employment trend, only later and at a somewhat more accelerated pace.


This is the consequence of constant technological change and productivity growth.  For our society to get wealthier each worker must produce more output each year.  And since there is only a finite number of physical 'things' we can eat, wear or even possess (our bulging closets and basements testify to that), inevitably productivity will outstrip demand and employment will fall.

So where have all the workers gone?  There has been a temporary surge of employment in technology or 'knowledge' work but that too is falling at an even faster rate than manufacturing.  Notwithstanding all of the state and government 'high tech' quality jobs programs, tech employment will not soak up the workers.  It is simply too easily automated.  Instead employment is surging two categories:  'personal services' and 'government and government subsidized businesses'.

Personal services is a huge category that includes everything from hair dressing to lawn mowing to resort management and restaurants.  As we get more affluent we are able to pay more for the sorts of things that only the rich could get in the past.  Indeed we pay each other to get these personal services.  Research comparing German married women to their American counterparts found that even though many more American wives worked full time outside of the home, they had more leisure time because they could rely on efficient, inexpensive personal services from each other.  In a real sense we've followed David Ricardo's law of comparative advantage to it's logical end:  those who like to cook, cook, those who like to account for taxes, do the taxes.

It is likely that many of the jobs of the future will remain in this category, only becoming more inventive and sophisticated over time.  Virginia Postrel's "The Substance of Style" is an important book to read in this regard.  A significant part of the entrepenurial effort of the 21st century is likely to go into enabling people to get the services that they want at higher quality, lower price and greater level of sophistication and customization.

More later on the other major growth area - government and government subsidized industries.

Something to think about while waiting for you Mochalatte with a shot of expresso out on the Openwater.

What is social media for?

Predicting future demand for new products, for one thing.  Here's an article that explains how Twitter can be used as a predictor of film attendance.  If it can predict demand for movie tickets than it stands to reason that it can predict demand for products where the supplier must invest real money in real inventory or infrastructure.  This is big people, really big.  The entrepreneurs who can leverage the hive to drive predictive business intelligence are people who will be buying professional sports franchises in five years.

Beware software baloney

One of the things that is hard to gauge in the brave new world of web services and new social business models is whether there is any substance behind the hype in a specific concept.  The ugly downside of the 'silicon valley' hive is that a lot of VC/Entrepeneur/New Media back scratching goes on.  Evidence CrowdCloud.  CrowdCloud is billed as a tool for mobilizing large numbers of on line workers to rapidly complete tasks, paying them on a per event basis.  I got interested in the concept so I signed up to be a CrowdCloud 'employee' and completed the editing of a test website to see whether I 'had what it takes' to edit badly written english websites for them.

They came back to me and said that I wasn't 'up to their standards' which perplexed me because creating content for the web is actually an area that I am known to be very good at.  So I sent the original and my rewrite to a friend who is a professional editor for her opinion.  Sure enough after reviewing the materials she agreed with me that what I had done was certainly professional quality.

That's when it hit me:  this company has no customers.  As a result, they have no need for new people.  And rather than sign up a bunch of people who would get no work, signalling their lack of success, they chose to pretend that their standards were "too high".

Sometimes it's hard to figure out who is for real when you're out on the Openwater.

To be a Cyborg

Wired Magazine has a fascinating article about playing chess.  They point out that IBM's Deep Blue was able to beat Gary Kasparov, then the world champion by using brute force.  Not particularly interesting or relevant to the real world.  But Deep Blue's feat spawned a new hobby of using off the shelf software to compete in computer enhanced chess tournaments.

What the players found was that it wasn't the best chess players or the players with the best chess playing software that won these hybrid man-machine tournaments but the players that best integrated their chess skills with their automation.  It turns out that one has to know when to take the software's advice and when to reject it.  It was the integration between the automation and the expert that made the most powerful match.

This has profound implications for how we design software.  Quite a bit of software seeks to replace the business analyst or decision maker with codified business rules that 'always' do the right thing.  But all systems have exceptions or areas at the limit where the decision tool is not robust.  Therefore the key to competitive advantage in these highly automated decision environments may end up being in the expert human - computer interface.  In other words, in having humans with the expertise to know when the system doesn't maximize outcomes and to intervene accordingly.

Training experts to override rather than simply operate the software.  Something that knowledge based businesses need to think about while riding their cyborg hovercraft out on the Openwater.

The right way to think about money

The Artist Farm has a great post on how to think about money. You can (and should) read it here. Bottom line: if you want more money, figure out how to create more value. Focusing on 'getting more money' never works (unless you're in the weapon assisted unauthorized money transfer business). It's a great way to talk to clients, suppliers and staff: "Not happy with your rates or compensation? Lets talk about how you can create more value".

The knowledge based business corollary to this is "Lets talk about how you provide your value to many more customers" - figuring out how to leverage a company's knowledge by embedding it in staff, training, software or product is a key to making a knowledge business much more valuable.

Implementing a leverage strategy for your knowledge business - something else to think about while fishing for customers in the Openwater.

The Top Digital Deals for 2010

Kelly Porter from Woodside Capital Partners wrote a TechCrunch column that predicts what the top 10 digital deals of 2010 will be. By definition, this prediction is wrong as soon as it's made. So other than an example of hubris there's no value, right? Wrong. The reason to pay attention to PR gimmicks like this isn't to get specific picks but to get a feel for the logical thought process, the assumptions underlying the message. By exposing the logic we can gain insight into what technologically sophisticated players are thinking and worrying about.

Having this insight can be important, because a company or idea with the technorati wind at its back will have a far easier time raising money, growing and selling itself at a premium. Notice that all of the acquisition candidates in the TechCrunch list would be classified as "strategic acquisitions". Knowledge based businesses have the ability to provide enormous value leverage to the right acquirer, particularly if the market consensus supports the deal. And the difference in value creation from being a 'strategic' knowledge acquisition versus a 'financial' one can be huge.

So what does this specific list tell us about this particular group's view of the market?

First, by far the most common justification for acquisitions on this list is for existing market leaders to add capabilities that extends or strengthens their existing franchise, creating more value for existing customer segments. In other words, this market observer believes that the 2010 deal season will largely be winners consolidating their leadership positions. This makes sense to us.

The only other major conclusion that one can draw from this top ten list is that at least in the eyes of some observers, the short burst messaging platform Twitter has moved from being considered a niche concept to possibly becoming a social media platform play that acquires and integrates other solutions into its environment, like Facebook, Linked In or Google. This is an intriguing but clearly speculative prediction and I would look for much more validation before integrating this nugget into my thought process.

By paying attention to this type of industry 'fluff', you can get a sense of what "Techno-ventional" wisdom is which can help you position your company to sail with the technorati wind, not against it.

It makes sense to pay attention to the logic behind silly top ten lists when you're out on the Openwater.

The Wordperfect Axiom

Seth Godin makes an important point, using the old word processing application WordPerfect as an example:

The Wordperfect Axiom

When the platform changes, the leaders change.

Wordperfect had a virtual monopoly on word processing in big firms that used DOS. Then Windows arrived and the folks at Wordperfect didn't feel the need to hurry in porting themselves to the new platform. They had achieved lock-in after all, and why support Microsoft?

In less than a year, they were toast.

When the game machine platform of choice switches from Sony to xBox to Nintendo, etc., the list of bestelling games change and new companies become dominant.

When the platform for music shifted from record stores to iTunes, the power shifted too, and many labels were crushed.

Again and again the same rules apply. In fact, they always do. When the platform changes, the deck gets shuffled.

Think this only applies to software?

Read the rest of Seth's thought's here.

The problem is that most players have responded to these changes simply by taking whatever they've done on one platform and porting it to the new platform. That rarely works - because the new platform almost always offers new features and benefits that render old methods obsolete.

Take corporate training as an example. In the 'olden days' training was done in person by 'trainers' - and companies sent their employees to 'training weeks' or 'training days', after all, the transactions costs of assembling the trainees and trainers into one room meant you needed to get it all done in one throw. When training went on line, the one and two hour training courses were just ported to the web.

The good news was that training no longer had to be done face to face, saving money. The trainees could often choose a time convenient to them. There was a drawback: the group aspect of training - learning from each other, figuring out a tough concept together, was lost. And some of the worst aspects of in person corporate training were perpetuated: long, droning courses, done by people who weren't experts at engaging the audience, poor production values that didn't work well on line, and training that was done long before the skill being trained would be used all reduced the impact of the new tools.

However, one of our portfolio companies, EJ4 chose to take a fresh look at training, trying to leverage all of the benefits that being on line could give. This is what they came up with:

• First, they chose to specialize in video - video being the most effective medium for conveying information
• Second, they broke the training exercises into segments no more than 10 minutes in length because that's the longest someone can effectively focus on and competently absorb new material
• Third, they emphasized 'just in time' training - the concept of viewing a short training concept right before engaging in the task so that the steps are fresh and reinforced by doing
• Fourth, they used skilled training designers and professional presenters to translate expert generated content into effective skill building
• Fifth they made it all available on line via smart phone or PC so that trainees could access any material any time that it made sense for them
• Sixth, they made chat and social media tools available for specific training courses so that those taking a course could rebuild in a virtual world some of the community that they lost when moving from in person training to on line.
• They set a cost reduction objective: the new EJ4 tools and methods should reduce total corporate training costs by half.
• And finally, they set specific performance goals for training: payback within one year. If training doesn't 'move the needle' for a client, then it's free.

By thoughtfully leveraging the web training platform, by making engaging, high quality content, and by tying it to performance, they've changed the basis of competition for Corporate training. And now founder Ken Cooper is trying to take these lessons into the Education market...I'm betting he succeeds.

So has your knowledge based company taken the the shift to the web platform seriously? Have you thought through how you could innovate your current services online to get to the top of a reshuffled deck of competitors in this era? if you haven't, you might end up being the Joker.

Changing tools and platforms make things rough out there in the Openwater.

Professional service firms and the problem of tacit knowledge

Tacit knowledge is the informal knowledge that people within an organization have about how the place 'really' runs. It's knowledge of the right way to complain about your supervisor, when a relationship with a client becomes inappropriate, or the best (and worst) ways to leave the Firm. Typically this type of information is either not written down or is hidden in turgid prose on page 1132A subsection b of a policy manual. People pick up this critical organizational knowledge or what is sometimes called 'the ropes' from their more experienced peers or managers.

Professional services firms find transmitting tacit knowledge particularly daunting because they hire so many staff each year and so many of them are relatively young and inexperienced. The large numbers, client focus and often transient nature of professional careers make it hard for these firms to informally communicate 'how things are done around here'.

The Dos and Don'ts

An intriguing new approach has been taken by our portfolio company EJ4 on behalf of some of their global clients. What if a series of very short - less than two minute - videos were prepared talking about key Firm cultural norms. The videos would be designed to be sent via email and viewed on smart phones and PCs at the staff member's leisure. They would be designed to be entertaining, even funny or quirky so that staff members would be attracted to them. Topics could include:

• '3 questions to ask and 2 people to talk to before you bail'
• 'Is that P-Diddy below hip pant style appropriate for my client site?'
• '3 expense items that will defo get you fired'
• 'what to do with that cute client who won't leave you alone'
• help! my job is boring! what do I do!

By using an approach like this for critical tacit knowledge, a firm can significantly raise the firm culture IQ of new staff and reinforce key concepts to the old hands. It's also a way to introduce desired changes to behavioral norms.

An added benefit of this type of communication is that it can be shared with recruits, business partners and clients - where appropriate - to educate them on how to best work with and navigate the complexities of a firm's norms and culture. And the better outsiders know you, the more comfortable they are going to be working with you.

Improving performance by eliminating cultural confusion. Another thing to think about while you're sitting out on the Openwater.

It's what you do with the data

The Economist has a rather interesting article describing what the internet has done to the recruitment market. In the past, recruiters had proprietary databases of candidates that allowed them to charge high fees to find the right executive for their clients. Control of the data was the key to high margins. Now, with the advent of Linked In, The Ladders and other career focused sites, data on candidates is widely available.

So what are the recruiters doing? Adding more and better services around the commoditized data. For example, they are focusing on how to improve the quality of hires - reducing the number of hires that 'fail' at their new companies. They are also coming up with ways to speed up the recruitment process - making it 'just in time' so that it can support short term projects as well as long term hires. Finally, recruiters are expanding the scope of their services, helping companies come up with strategies to better manage the careers of their best talent.

All of these new approaches have one thing in common: they recognize that information is increasingly a commodity and that clients and customers will only pay for value added above and beyond the base industry data. All knowledge based service businesses face or will soon face this dilemma to one degree or another. We believe it's best to recognize it explicitly.

So, what solutions are you building to take advantage of the commoditization of your industry's information?

Delocalization of Events

Shannon Love writes about learning of a major news event 5 miles from her house on national TV. She notes that the internet, twitter, and 24 hour cable news are 'delocalizing' events. This ties in with Seth Godin's notion that "Big Events" are increasingly ineffective, that companies should only hold events if they are "mega" and can drive serious national attention.

For knowledge based businesses selling to narrow audiences, delocalization presents significant opportunities for better targeting and communicating to your audience: how can you stage online 'happenings' that draw your interest groups? Can you replicate the community aspects of major shows and events online? Can your brand replace the independent event?

Something to think about while you're sitting out on the Openwater.

A Knowledge Based Business that might go away?

Ken Cooper, Founder of portfolio company EJ4 sent me a link to news about MacMillan (the publisher) and Amazon's deal to sell MacMillan titles on line. It seems Macmillan is using the power derived from owning popular content titles to capture the lion's share of the value, despite the fact that Amazon created the business in the first place.

It seems to me that despite MacMillan's short term power, they are the ones not long for this world. You see the reason that Publishers have historically had market power is because there has been a minimum necessary scale for book publishing. The costs in capital and distribution prowess were such that publishers could choose between a wide variety of content providers and select a small subset of their products to list. With the advent of online publishing and readers like Kindle and Ipad, the economics of publishing are radically changed. No longer is there a minimum scale necessary to bring a title to market, no longer can a publisher earn economic rents by being a branded gate-keeper. The true value creators - the authors - are now able to go around the publisher and deal directly with the e book sellers. Think about it as a shift from three tier to two tier distribution, with the publisher role parceled out among the e book seller and various niche service providers.

The result, no room at the Inn for the Macmillans of this world. And velvet for customers.

If you'd like further explanation of this content phenomenon, I recommend you read Chris Anderson's The Long Tail - using a Kindle, of course.

Branding vs. Execution

Here is a classic example of a well branded company: Whole Foods coming into contact with a superb execution company: Wal Mart. The story is about how the taste testers preferred Wal Mart's produce to Whole Foods.

On to the details: Kummer buys two batches of nearly identical groceries at Wal-Mart and Whole Foods. He has them prepared in a restaurant kitchen and invites taste testers to make a blind side-by-side comparison. The Whole Food grocery set cost $50 more, $20 of which is spent on top of the line chicken breasts (Wal-Mart didn't really offer equivalently high-end meat.)

The taste testers preferred the Walmart veggies overwhelmingly, with complaints about the meat and dairy. "The tasters were surprised," he writes, "when the results were unblinded at the end of the meal and they learned that in a number of instances they had adamantly preferred Walmart produce. And they weren't entirely happy."

But the real story is how the Whole Food produce cost $30-$50 more. Well defined and marketed brands can generate huge premiums over those that focus just on execution.But there's a catch: the brand needs to continue to innovate, bringing new solutions to the customer that can't be easily copied by the Wal Marts in their industry.

Brands are like sharks, if they ever stop innovating, they suffocate.

And notice the last, throwaway comment: about preferring Wal Mart. Who do you think will feel the wrath of their unhappiness? Not Wal Mart.

Think about where you create extraordinary value and where you get paid for it. Are you staying ahead of the metaphorical Wal Mart? And if you don't think you can, look at those Whole Foods price margins: It would be a lot better to sell when you still have them, then after they've gone away.

Relationship Leverage and Ntrinsx

Relationship Leverage is the notion that one can use technology, particularly social media and video tools to radically increase your capacity to communicate and create meaningful value for your extended network. One of the keys to effective relationship leverage is understanding just how your clients, prospective clients, partners and influencers like to be communicated with - what is their style? How do they behave? Our portfolio company, Ntrinsx has developed an extremely intuitive, consumer friendly online personality assessment tool that gives its users an easy to learn and communicate language for understanding human behavior. It's based on 4 colors for the four core behavior types. Companies use Ntrinsx's color methodology to communicate the behavioral strengths, weaknesses and preferences of their team. For example, here is how Google uses the Ntrinsx color schema to communicate the behavior preferences of its top executives:

, fall

Note the colored spheres beneath the pictures: the big sphere is the dominant behavior type, the smaller one is the secondary type. For example, Eric Schmidt is dominant Orange, which means agressive, outgoing, interested in the new thing, while his minor is Blue - relationship oriented, focused on people. Sergey Brin's dominant color, by contrast is Yellow - focused on responsibility, structure, order, as is Larry Page's minor.

Ntrinsx is a highly customizable web service that can be integrated quickly into any workflow to meet a wide range of assessment needs: customers/prospective customers, recruits, employees, trainees. The technology allows companies to assess an entire distributed population in a matter of days.

By being able to get a clear picture of who you're interacting with quickly and cheaply, you can better focus your communications and ideas so that they will have impact for each person's style. Using on line tools to understand and adapt to you customers and relationships' preferences is one way to get relationship leverage.

For more information, visit http://www.intrinsx.com/

The Implications of Exponential Change

Ray Kurzweil wrote a "Big" book: The Singularity is Near. He makes a lot of frankly fantastic predictions but he bases them on a very specific insight: Technological change is not arithmetic in nature (2, 4, 6, 8) but exponential (2, 4, 8, 16) and over a long enough timescale the implications are truly stunning. For example: the computing power of a $1,000 PC roughly doubles every year (combining processor, RAM, storage media, WAN and software gains), this means the processing power grows by a factor of 1,000 each decade and 1,000,000 every 20 years.

Think about your business, indeed your life tethered to technology that will be a million times more powerful (and ubiquitous) in two short decades.

Very little will remain the same.

Is it a lousy time to sell your company?

The conventional wisdom holds that recessions - which depress business asset values - are lousy times to sell successful companies. This is both because earnings are down and the earnings multiples that buyers will pay are lower. It is said to be a 'buyer's' market and sellers should stay away. But that analysis ignores several salient facts: Yes your asset's value is down in value, but so are everyone else's. If an owner is taking stock in payment, it's the relative performance of the buyer vs. the seller in the cycle that matters. If you're taking cash, it depends on what you intend to do with it. Financial assets, luxury homes, even trophy wives are cheaper during downturns.

It's much more important to pay attention to what is going on in your sector and what your goals and intentions are then to slavishly go to market when everyone else goes. It could be that if you're the only asset in a sector available, you could set off a bidding war between all those 'bargain hunters'.

Food for thought while sitting out in the Openwater.