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.

The Power of Potlach and Comunicato

OWA is developing a product in partnership with the Knowledge Transfer Company called Comunicato. Comunicato is a highly effective way to enable any professional to create low cost, professionally designed and edited videos that can be sent to customers and viewed on their smart phones or PCs. The key to the solution is sending thoughtful ideas that clients can use. By doing so, the knowledge based service provider can increase his share of mind or "personal branding" with his target clients. The tool is inexpensive and can be delivered from a client's site. No expertise or skill in video is needed.

I was reminded of the core value of our product when reading Seth Godin's blog. Seth emphasized the value of giving gifts as a tool for developing relationships and networks. The key to Comunicato is using the tools to teach your network something of value, something you know that they don't. This type of Potlach marketing is key to anyone who sells knowledge based services for a living.

Ej4 and Video

Ej4 is a portfolio company of ours. They specialize in developing training video that "Moves the Needle". Usually training is just an expense, an enormous waste of time. Here's a video by yours truly that talks about a different way to use training. Training to 'move the needle'.

Watch it here.

Welcome to the Openwater Advisors Group Blog

We are an investment banking and strategic consulting boutique composed of former PwC partners. Our goal is to help mid-market knowledge based service business owners build their businesses by partnering with, selling to or being acquired by the Fortune corporations, private equity and venture capital firms that we and our network has relationships with. Openwater is composed of a significant and growing number of partners, some who work full time for the Firm, others who partner with us on specific clients and engagements. If you have a background in high quality professional services and want to find out how you might work with us, please contact me, Bill Reeves at breeves@openwateradvisors.com.