Category Archives: Business Mistakes

Employees’ Hours Quality Time or Quantity Time?

Business Mistakes

(This is cross-posted from Small Business Trends, where I posted it last night. Tim)

Remember the debate about quality time vs. quantity time? It was a popular topic a few years ago, but back then it was about parenting. I think we should consider applying that same concept to the workplace in business. As an employer, do you want people staying late working? Is that productivity? I don’t think so. In fact I’m thinking we should be talking more about "quality time" in the workplace, and make sure we don’t substitute quantity time instead.

True story: in the middle 1980s, you could go to the Cupertino head offices of Apple Computer until about 7:30 or 8 at night and find people still working. By the early 1990s, you could go around 5:30 pm and find the halls mostly empty.Working Late

What happened? Did the company grow up? Or maybe the people grew up; ambitious single people became coupled-up people and people with children. Maybe they had discovered something better to do than work.

I think we have to distinguish the special case of crunch time. I posted on that a while ago on this blog:

The 60-hour work week, let alone the 80-hour work week, doesn’t work. People need lives to be able to produce over the long term. However, you also have to recognize the "crunch times," which have to be the exception. In general, in my experience, people are more productive when they have lives outside the office, arrive in the morning, and work until they’ve done a normal day, and then go home. That is, at least, until there is that special time when it’s imperative to do more in a short period. When the product deadline approaches, when the packaging has to be redone, when there is a big presentation, a large consulting project to deliver … those are the crunch times. I like working in a company that expects people to have lives, but I also like the excitement of the crunch times.

This comes up for me today because In yesterday’s New York Times piece Unhappy? Self-Critical? Maybe You’re Just a Perfectionist, author Benedict Carey talks of the disadvantages of perfectionism, which sheds some light on this "how hard do we work question." He starts reciting the standard mottos of a driven society:

Believe in yourself. Don’t take no for an answer. Never quit. Don’t accept second best. Above all, be true to yourself.

But then, with what I hope is contrarian glee (although if so, it’s hidden), he goes into the dark side:

Yet several recent studies stand as a warning against taking the platitudes of achievement too seriously. The new research focuses on a familiar type, perfectionists, who panic or blow a fuse when things don’t turn out just so. The findings not only confirm that such purists are often at risk for mental distress — as Freud, Alfred Adler and countless exasperated parents have long predicted — but also suggest that perfectionism is a valuable lens through which to understand a variety of seemingly unrelated mental difficulties, from depression to compulsive behavior to addiction.

Which leads to describing a study conducted by Alice Provost at UC Davis involving university workers:

Ms. Provost said those in her program at UC Davis often displayed symptoms of obsessive-compulsive disorder — another risk for perfectionists. They couldn’t bear a messy desk. They found it nearly impossible to leave a job half-done, to do the next day. Some put in ludicrously long hours redoing tasks, chasing an ideal only they could see.

As an experiment, Ms. Provost had members of the group slack off on purpose, against their every instinct. "This was mostly in the context of work," she said, "and they seem like small things, because what some of them considered failure was what most people would consider no big deal."

Leave work on time. Don’t arrive early. Take all the breaks allowed. Leave the desk a mess. Allow yourself a set number of tries to finish a job; then turn in what you have.

"And then ask: Did you get punished? Did the university continue to function? Are you happier?" Ms. Provost said. "They were surprised that yes, everything continued to function, and the things they were so worried about weren’t that crucial."

Carey doesn’t mention the employer’ side of this story, but then she wasn’t just doing pure research, and she isn’t an academic, strictly speaking, she’s "an employee assistance counselor." So she is working for the employer in this case, University of California at Davis, and working on employee productivity. By convincing people they don’t have to obsess.

Through my years in business I’ve developed the view — I can’t prove it, I have no Harvard-Business-Review-worthy study with data, but still — that over the long run business is better with a corporate culture that believes employees have lives. I’ve been involved with both sides of that question, from the Silicon Valley rat race in which everybody is pressured to work extra, to the way-too-old company in which nobody likes their job and everybody can’t wait to get out.

I think what really works could be related to an idea that became popular a few years ago, related to parenting back then, but perhaps more suited to business than parenting. That’s the idea of "quality time" instead of "quantity time."

Coincidentally, Jeff Cornwall, over at the Entrepreneurial Edge, posted this related opinion yesterday:

I have some concern that many are taking the importance of passion and meaning too far — to an almost unhealthy extreme. If unchecked, seeking meaning for your life from your business can lead to the kind of workaholism that many had hoped to avoid with an entrepreneurial career.

And the following quote from Naval Ravikant at VentureHacks:

"Let’s get serious. Nobody works eighty hours a week. Not eighty real, productive hours. Look closely at workaholics (and I’ve been one, and worked with others), and a lot of the time is spent idling, re-charging, cycling, switching gears, etc. In the old days this was water-cooler talk. In Silicon Valley, it’s gaming, email, IM, lunches, and idle meetings. Let’s drop the farce, ok?" Naval Ravikant at Startupboy.

I once overheard (I wasn’t eavesdropping on purpose, but that’s a different story) a middle-20s employee of my company talking to two friends working in an overheated Silicon Valley company, epinions.com, which, coincidentally was being run by that same Naval Ravikant at the time.

"You guys all leave almost exactly at five," said one of the two epinions.com people, as an friendly accusation.

"You know what?" came the answer, "We do, but I bet we get more done from nine to five than you do from 10 to 8:30."

2 Rules for Ignoring Voicemail

Business Mistakes

Both of these should be totally obvious, but they aren’t, apparently, because people frequently break them. 

  1. If they don’t explain, don’t call them back. I get caught ignoring this rule, repeatedly, but it just doesn’t add up. If that caller doesn’t tell you what it’s about, it’s not that they’ve forgotten, it’s that they don’t want to say. They’re betting that you don’t think you want what they’re selling but they will be able to change your mind. "This is Ralph Smith. Call me back at 555-555-1212." No dice, Ralph; if you don’t have the courtesy to tell me why you called, I’m not calling you back. 

    I admit I’ve broken the rule a few times when the teaser is too much to resist. For example "I want to tell you why your business sucks" or "I’m very unhappy with your customer service" is hard to resist, but in truth, even those calls are blatantly unfair, obviously trying to force a return phone call. I’ve only gotten a handful of these in 19 years running a business dealing with something like a million customers, and I called every one, but not one of them was really legitimate. People who have a real gripe say what it is. People who don’t say leave that out because they know that if they do, you won’t call back. 

  2. Even if they do explain, if you don’t want what they’re selling, don’t return the call. In my case, that would be calls from recruiters, accountants, fulfillment businesses, or programming and development houses, not because there’s anything wrong with those businesses per se, but just because either I don’t want these services, or I already have a vendor. If the vendor calls you, unsolicited, you have no obligation to return that call.

Is it rude to not return calls? No. At least not in either of these two cases. And yet, amazingly, don’t you occasionally get people who act like you were supposed to call them back, and it was rude of you not to. I know of one case in which a phone vendor making unsolicited cold calls called somebody back, angry, after she had quietly hung up on her. "Why did you hang up on me?" she demanded. Incredibly, that’s a true story.

I’m particularly annoyed at tactics intended to either trick you or guilt you or intrigue you into calling back when they know you wouldn’t. Oh, and those people who say they are just following up on an email they sent last week, or a letter they sent last week, unless they are really polite and friendly about it and they make it clear you’re not supposed to call them back unless you want to.

Ironically, it makes me wish for the sentiment expressed in that most famous of all spam opening lines: "We don’t want to waste our time, or yours." Prove it. 

Mistakes About Mistakes

Business Mistakes

Can your business afford to make mistakes? Would you do that deliberately? Would that be a good thing?

Thanks to Megan — my youngest daughter — for picking this up this morning. Writing in the New York Times, Alina Tugend notes two recent errors that were basically inconsequential. "But they bothered me and made me consider how we are taught to think of mistakes in our society." Ignoring the possibility that this is a hidden message from daughter to parent (gulp), I also see a lot of business implications. And they aren’t hidden. 

There’s a lot of ambivalence around making mistakes.

On one hand, as children were taught that everyone makes mistakes and that the great thinkers and inventors embraced them. Thomas Edison’s famous quote is often inscribed in schools and children’s museums: "I have not failed. I have just found ten thousand ways that won’t work."

On the other hand, good grades are usually a reward for doing things right, not making errors. Compliments are given for having the correct answer and, in fact, the wrong one may elicit scorn from classmates.

We grow up with a mixed message: making mistakes is a necessary learning tool, but we should avoid them.

The piece points out some interesting studies.

Carol S. Dweck, a psychology professor at Stanford University, has studied this and related issues for decades. "Studies with children and adults show that a large percentage cannot tolerate mistakes or setbacks," she said. In particular, those who believe that intelligence is fixed and cannot change tend to avoid taking chances that may lead to errors.

Often parents and teachers unwittingly encourage this mind-set by praising children for being smart rather than for trying hard or struggling with the process.

Prof. Dweck ran a study with fifth grade children, dividing them into one group praised for good results and another group praised for hard work. The ones praised for effort were far more likely to take on a more challenging new task than those that were praised for results. Then in a follow-up task, a test that was way too hard, those who’d been praised for results were three times more likely to lie about a bad score than those who had been praised for effort. Conclusion?

"One thing I’ve learned is that kids are exquisitely attuned to the real message, and the real message is, ‘Be smart,’" Professor Dweck said. "It’s not, ‘We love it when you struggle, or when you learn and make mistakes.’"

And that comes with some advice:

As we get older, many of us invest a great deal in being right. When things go wrong, as they inevitably do, we focus on flagellating ourselves, blaming someone else or covering it up. Or we rationalize it by saying others make even more mistakes. What we do not want to do, most of the time, is learn from the experience.

I’ll second that, but it’s hard. I remember vividly the day my wife and I agreed we were sick and tired of the silver lining consolation prize of learning from the experience."  One of us said "Yeah, but I’m sick of learning from experience. Next time let’s just guess right from the beginning."

The article cites Prof. Paul J. H. Schoemaker, chairman of Decision Strategies International and teacher of marketing at the Wharton School of the University of Pennsylvania, who puts mistakes into a business context with an article in Harvard Business Review titled The Wisdom of Deliberate Mistakes.

The resistance to making mistakes runs deep, he writes, but it is necessary for the following reasons, which he outlined in the article:

  • We are overconfident. "Inexperienced managers make many mistakes and learn from them. Experienced managers may become so good at the game they’re used to playing that they no longer see ways to improve significantly. They may need to make deliberate mistakes to test the limits of their knowledge." 
  • We are risk-averse because "our personal and professional pride is tied up in being right. Employees are rewarded for good decisions and penalized for failures, so they spend a great deal of time and energy trying not to make mistakes." 
  • We tend to favor data that confirms our beliefs. 
  • We assume feedback is reliable, although in reality it is often lacking or misleading. We don’t often look outside tested channels.

This makes a lot of sense, but I wish he’d changed the title. "Deliberate Mistakes" is a tough concept. My business experience includes 19 years running a company that’s grown to 40 employees without outside financing, and I don’t think we had the luxury of making too many mistakes, and certainly not deliberately. We were spending our own money the whole time. I wish he’d called it "Dealing Wisely with Mistakes."

On the other hand, one advantage of bootstrapping, and owning the whole company as it grows up, is the luxury of making mistakes. I’ve posted before on this blog the story of how Philippe Kahn built Borland International from zero to public in three and a half years by making a lot of brilliant moves that looked like mistakes at the time. If he hadn’t had free reign — this was pre-venture-capital — he wouldn’t have had that luxury.

Another thing I think I’ve learned, as the company has grown, about delegation: you’re not really delegating anything to anybody unless you support them, after the fact, when it turns out they’ve made the wrong choice. When you bite back later on bad results, nobody will risk making another mistake, which means, basically, that you haven’t delegated anything.

And, finally, in startups, small business, and entrepreneurship, fear of making mistakes can lead to paralysis. You have to know that you can never be sure when you’re guessing the future. Don’t get caught hanging back, waiting for more data, at least not too often. You have to deal with uncertainty in small and medium business. I’m certain about that.

So I’m not sure. I can’t stomach deliberate mistakes, I am sure of that. But I still make the mistakes I make by mistake, far too many, and I hope I learn from them, whether I like it or not. 

This Shortcut Won’t be Missed

Business Mistakes, Current Affairs, Marketing

Worth reading, a point well made by Seth Godin in his post The end of misogyny?

It’s sort of astonishing… in my lifetime, we’ve seen the end of public (but certainly not private) attacks on people because of race or mainstream religion (fringe beliefs and sexual orientation are still fair game, apparently)… but trying to humiliate half the population because of their gender seems just fine.

That may be changing. There’s a significant backlash about John McCain’s handling of a question earlier in the week. If the questioner had used a similar epithet about a black person or someone from Poland, they would have been shown the door. At least I hope so.

As Hugh Hefner demonstrated with Playboy fifty years ago, objectifying women was a shortcut to cash. And all you have to do is visit Las Vegas to see it happening in every hallway, on every billboard. What is now becoming clear is that many of the people in your market won’t stand for it any longer. One more shortcut, gone.

I hope he’s right. Good riddance.

3 Ways to Make Employees Miserable

Business Mistakes

I just listened to an HBR Ideacast interview with Patrick Lencioni, author of  The Three Signs of a Miserable Job. Here’s a quote:Miserablejob

A friend of mine was a waitress in college … she said her and her friends would come to work and complain all the time about the people who came into the restaurant because they stayed too late, or they made a mess … and they always wanted to get out of there as fast as they could. Finally their manager sat down with them and said ‘look at these people who come here. These are people who are celebrating birthdays and anniversaries, or who are coming in to meet an old friend, or who have a stressful life and they need to go someplace where they can actually relax and get a good meal. We are the conduits of that. Everyone who comes in here has a story. Our job is to help them make this the best experience possible.’

He was sincere in that. After a while these waitresses starting coming to work with a different sense of purpose. During the breaks and after work they would talk about the different events they’d served, and the people who came into the restaurant. He turned what looked like a crummy job into a vocation. All people deserve that.

Notice the way his story puts it, that the waitresses deserved to have meaning in their job. It isn’t about how their manager tricked them into working harder, it’s about how he gave them relevance. Irrelevance, he goes on to say, is one of the three signs. People deserve to have their jobs matter. Good companies, and good managers, need to give them that level of satisfaction.

Who does the administrative assistant help? Her boss. Yet her boss is probably reluctant to acknowledge the impact that he or she has on his or her life because they don’t want to seem selfish, so they fail to really sit down and say do you realize how  much better my personal and professional life is because of you? Do you know every thing you do for me makes me happier and less stressed?

Every employee needs to know that there is somebody out there that they serve, and when we don’t let people know that, we deprive them of a fulfilling job.

This irrelevance is the second of the three signs. The first is anonymity:

People cannot be fulfilled in their work if they are not known. All human beings need to be understood and appreciated for their unique qualities by someone who is in a position of authority. People who see themselves as invisible, generic or anonymous cannot love their jobs, no matter what they are doing.

The third is a coined word, immeasurement. It reminds me of what I called metrics in a recent post on this blog.

All human beings in any kind of a job need some way to assess their own performance that’s objective. It might not be numerical or easily quantitative, but it’s somewhat objective and observable by them, because then they are not left to depend upon the opinion or the whim of a manager once a year during a performance appraisal. People need to be able to go home from work every night, or every week, or every month, and know where they stand, and know what they can do to influence how they’re working. This is why sales people are generally very satisfied in their job, because they have very clear evidence of their performance. Most people think they are coin operated, but in fact a quota is a wonderful scoreboard for them evaluating themselves, and all people need that.

Sometimes it requires a manager to be very creative in how they come up with that. In my book this one guy works at the drive-through window in a fast-food restaurant and the manager helps him realize that the best way he can measure the impact of his success is to find how many times he can make somebody smile or laugh that comes through his line. So he writes down or records for himself how often he can do that.

We have to give people that sense that they have some measure of control.

What do you think? I posted a few months ago about research related to better performance from happy employees. This makes a lot of sense to me.

–Tim

Run Silent, Run Deep, Run Out of Money

Business Mistakes, Business Stories

I’m posting this today with a double purpose, I admit, because in about two hours I’m going to be giving a workshop at the annual Small Business Development Center convention in Denver, on the topic of "Teaching Cash Flow."

The win here, I think and hope, is to distinguish between planning cash flow and teaching cash flow. Those are separate problems.

The most important problem is getting people who haven’t been running companies to believe that cash flow and profits are different. That’s so vitally important because, on the surface, it doesn’t add up. It isn’t believable.

I developed business plan software originally as templates for business planning clients to deal with the following amazingly typical exchange:

Me: So if you grow faster, then you’ll need to get more financing.
They: No, that can’t be true, because we’re profitable. We make money with each sale, so the more we sell, the more we can fund ourselves.
Me: Bingo! Please sit down here for a few minutes and deal with these numbers.

And so it would go. As soon as you’re managing inventory or selling on credit — which means just about any sale you make to a business — then your cash flow is waiting on the wings, a silent killer, to foul you up.

I learned this first in business school and then forgot about it. I learned it later again, the hard way, when Palo Alto Software sales tripled in 1995 and that nearly killed the company. Why? How? Well, the huge sales increase was selling software product through traditional channels of distribution, meaning stores, and that means selling to distributors who then resell to stores, and that means that it can take five months between selling the product and being paid for the product. In the meantime, you’ve got to make payroll and pay your vendors.

Yes, it’s a good problem to have, we all want to increase our sales and profits, but it’s a whole lot easier to deal with if you plan the cash implications well.

Today in my presentation I’m going to use one of my favorite metaphors, the Willamette River as it runs through Eugene , Oregon, where I live. The river slows down coming out of the Cascade Mountains and into Eugene, and it looks deep, slow, and peaceful; but it’s much more dangerous there than when it’s throwing up white water through the rapids. Why? Because it seems so calm and welcoming. People disrespect its currents, get caught in weeds, branches, or rocks, and … well that’s a good metaphor for the way cash flow hits small business when things are good, when sales are growing.

What’s particularly painful about the cash flow problems that come with growth is that, precisely because there is growth, these problems can be prevented by planning.

You can see how the sales are growing, then determine what your cost of sales will be, and look at what you have to pay, to who, and when. See how your checking account will balance go down, and down. Next, chart out when your customers will pay you. It will be obvious if you will run out of money before those profits actually reach your hands. You can then plan how to find the financing to float your boat before you actually hit the snag and sink.

We’ve had growth spurts since then that were far less painful because we understood the dangers of cash flow, planned for the cash implications of growth, and worked with our bank ahead of time to make sure the working capital was there.

–Tim

So Many Tools, So Little Time

Business Mistakes, Personal Productivity

What’s worse than no calendar, agenda, or day planner? Two of them. And three is worse than two, and four worse than three. And so on. Tools_istock_000001436436small

What’s worse than no to-do list? Two of them.

How often do you change your tools — meaning personal productivity software — instead of using what you already have? I do that way too often. It’s a bad habit, a way of avoiding the real issues of getting organized and getting things done by distracting myself with the tools instead. Recently my Outlook calendar fought with Plaxo so I moved my calendar to Google calendar. But then I got the iPhone and it synchronizes with Outlook two ways, and Google only one way. *Sigh*, so then I got a utility to synchronize the Google calendar to Outlook. But, ooof, my iPhone will talk to only one computer, and I need that to be a laptop when I travel, so I had to resynchronize with that one.

Then my company decided to replace our mail server with Zimbra, which has its own calendar, but don’t worry, it synchronizes with Outlook, but then, Oh NO!, it doesn’t work with Outlook 2007.

For several weeks now I’ve been intending to comment on this wise suggestion from Jeff Cornwall of the Entrepreneurial Mind: Link: Technology Can Make a Difference, But Focus on Its Efficiency Ratio.

"That is also how technology can work best for a small business. Wait until they get it right and wait until the wild-eyed first adopters are done bidding up the prices for the latest and greatest gadget. I was one of the last people I knew in business to get a fax machine in the 1980s. But by the time I bought one they worked really well and the prices had fallen through the floor."

Yes Jeff, I think you make a lot of sense with that one … except that I find getting the newest things is so marvelously entertaining. I’m on my third iPhone already, I confess, the first had battery problems — Apple replaced it very quickly and very free — and the second, gulp, I dropped. It still worked but the on-off button didn’t. And having Vista and Office 2007 is screwing up the switch to Zimbra for me, but then I was already confused by accounts for Google apps, Zoho, and Entrepreneur Assist, all of which do the same thing, sort of, that Microsoft Office does. So where did I leave that text I was working on?

Now I need a tool that has a system to keep track of all my tools with systems.

I think it’s a long-term character flaw. I wrote several books in the middle 1980s using an early Macintosh, an even earlier CP/M computer, and a DOS computer. I used to change word processors just to cut the monotony of the same commands. I particularly liked Perfect Writer because I could change the interface just for the hell of it, when I had nothing better to do. Of course, I never had nothing better to do, but I changed it anyhow.

And to put a management point into this piece, I’m sure I’ve seen signs of the same phenomenon in management teams and groups. Are you in a group that’s moved from Yahoo Groups to its own wiki to Sharepoint to something else? Have you gone from Microsoft Project to 37signals to something else?

-Tim

True Story: Business Plan Addict

Business Mistakes, Business Stories, Starting a Business

Yesterday I posted my slogging it out theory, how business is sometimes a matter of doing the work, getting the store open, returning the phone calls. That post reminded me of someone I worked with who did just the opposite.

I haven’t seen Ralph (not his real name) for several years now. Rumor has it that he finally did get a company going, sales of a few million a year, and then fought with the programmer whose work got them started, and fell from grace.Gambling_business_planistock_000000

Ralph was a serial non-entrepreneur. We worked together off and on for about six years and during that time he was never not working on a business plan. He was going to get financed. "Business Plan" to him wasn’t just planning a business, it was a lottery ticket to a carpeted office and big BMW and somebody else answering the phone and making the coffee. He spent years working on one business plan after another, none of which ever got financed. He was a business plan addict, living on the dream of hitting it big, always looking for the big win, but never actually taking small steps in the right direction. Nothing could happen until he "got financed."

Like the gambler that never leaves Las Vegas, Ralph was always hoping that the next one would be the big one.

That phenomenon is the main reason for this post. My slogging it out post yesterday reminded me of Ralph’s way of not slogging it out, using the business plan as a reason to not do anything. My wife always said he didn’t do anything, he just talked about it, and dreamt about it. 

On the other hand, Ralph was 10 years older and had more industry experience, so he did some mentoring. For example, at one point we worked up a  business plan for assembling generic business computers in Mexico City (that may sound random, but I had lived there for 10 years and was returning to live there again). He was to be my partner in the Silicon Valley, and I was going to build the business in Mexico. As part of that plan, he taught me, step by step, how to build my own computer. Do you remember the S-100 bus and the CP/M operating system? I built my own.

His best advice for me was extremely valuable: "Sell boxes, not hours." Ralph liked pithy entrepreneur-folk wisdom like that.

Unfortunately, he also taught me a lot of what not to do. From what I heard later, Ralph finally did get something going after I had moved to Oregon, and his business had several million dollars of annual sales back when that was a lot of money. We drifted apart so I don’t know for sure, but mutual friends tell me that the propensity for luxury offices and big-company perks hurt a lot as his business turned into one of those Nova-star affairs that crashed and burned fairly quickly. There was also a rumor that the crashing had something to do with questionable legal moves that were unfair to a partner who had done the programming to get them started.   

This true story is in this blog mainly for several actual business points:

  1. If you’re in the startup mode and working on business planning, don’t suspend business life until the plan is done (because it never is) or until you’re financed. If it’s a good idea, get going. Keep working the plan. If you need to get financed, keep at it, but take small steps in the meantime.
     
  2. If you’re working on a startup, take my advice (not Ralph’s) and think about cinder block offices and such in the more economical locations. If your business isn’t about receiving clients or customers, wait for the luxuries until after you have more revenue than costs and expenses.
     
  3. Sorry, this one is so obvious, but as your business rises in the world, make sure you bring along the people who got you there.

-Tim

True Story: Missing Assets Equal to A Year’s Sales

Business Mistakes, Business Stories

You don’t think finance and accounting matter in small business? Here’s a true story, and it’s about a small business like the ones I write about, in fact one I was involved in, not a large publicly traded company. $3 million worth of assets went missing, but nobody took them. Where do you think they went?

It is sparked, I admit, by news of Dell, Inc. Last week the New York Times reported Dell to Restate More Than Four Years of Earnings. Here’s a quick summary of that story:

Dell said that it would restate its financial statements for 2003 through the first quarter of 2007, concluding an internal investigation into accounting errors.

Dell said that the restatements would shave off between $50 million and $150 million in cumulative net income.

I know, that seems like standard large-company stock market stuff, but here’s a true story of Creative Strategies International, which was then a medium-sized high-tech research and consulting company owned by Business International and based in San Jose, CA. Call it CSI. I should add that this story preceded the change in ownership to the Creative Strategies that is now the brainchild of Tim Bajarin, still exists, and is still in San Jose, CA. 

I need to emphasize this, because I like Tim Bajarin and he’s done a great job with the company since he took it over. I’m pretty sure the corporate entity even changed, I know the ownership changed, so I assume there’s no harm in telling an old story. And I think there might be a lesson here.

Shortly after I started to work there, there was an audit called by the parent company in New York. And, as you suspect from reading the title of this post, assets were missing. In fact, quite a sizable chunk of assets. In a company of 20 or so employees, selling $4 million or so per year, roughly $3 million worth of assets had disappeared.

Needless to say, the parent company was not amused. But there was no theft, no embezzlement, just bad accounting.

What do you think happened? Of course you have no idea, but let me give you a hint first, then think about it. The assets were accumulated research, not chairs or tables or computers or gold bullion, but research. Does that tell you the answer?

It turned out that CSI created what we called group studies, research studies that we’d design to cover some interesting new market in high tech, develop, finish, and then sell to multiple buyers. For example, a study in telecommunications would be created and developed and sold to 10 or 20 or more companies in the telecommunications markets. If you could sell a study that cost $25,000 to 20 companies for $5,000 each, they got a good study — market forecasts, competitive analysis, etc. — at a great price, and CSI made a healthy profit. Whoknows_istock_000000551118small

So have you figured this out? As the studies were created and developed, consultants were paid real money to research markets. They took real checks home and cashed them and paid mortgages and things. They also took planes to places and interviewed people, and purchased some secondary research, sometimes developed primary research, all of which cost money.

All of this spending should have been expensed as product development expense. It was just like computer programming in terms of tax treatment and standard accounting. You aren’t really building an asset, you’re incurring an expense. Product development is almost always an expense, even though it sometimes generates technology that goes into products that get sold for money.

Somebody doing the numbers assumed that since this would be cost of sales when the studies were finished and sold, and instead of calling this money development expense and subtracting it from profits, they’d call it assets, as if it were inventory, and subtract it from profits as direct costs.

It may have seemed logical at the time, but over time many of those group studies were started but not sold. If the sales were disappointing, instead of spending the full $25,000 and finishing the study when only two clients signed up for $5,000 each, they’d just dump the project.

And there’s the rub: nobody went back to those supposed assets, the accumulated investment in product, and wrote it off. It remained on the books as assets, for several years, until the parent company audited. Nobody had purposely or intentionally done anything wrong, there was no fraud, no charges, no money recovered; just several very unhappy people.

I guess I’m some kind of weirdo, particularly as I was a literature major and journalist-writer before I got into business, but I like the business numbers and I think they’re important. Maybe it’s from stories like this one. No, I wasn’t the accountant, I was one of the researchers, but I was also a vice president and those were bad times for all of us, not just the bookkeeper.

–Tim

Knowing when to hold ’em and when to fold ’em

Business Mistakes

Somewhere in my random memory is a quote from an IBM chairman (I think it was Lou Gerstner) talking about how success depends on being absolutely ruthless about deciding to kill products that weren’t working. (And if anybody wants to correct that quote for me, please help. I couldn’t find the exact reference, though I found a collection of Gerstner quotes which didn’t include it.)

I also remember a chilling moment in my personal past when I listened to a guy who’d been running a sailboat company for 15 years tell me how he’d hated it the last 10 years. It was always borderline failing, but he couldn’t get out because he’d started it with friends and family money and he couldn’t tell his parents, sibling, and cousins that they’d lost their investment.

In my specific business past it’s been a problem for us to give up on products that didn’t make it, but for the record we’ve killed a bunch of them, from Business Plan Toolkit to Financial Forecasting Toolkit to Business Budgeting Toolkit, Cash Plan Pro, Cash Compass, DecisionMaker, Incorporation Toolkit, Systems Continuity Plan Pro, and I’ve probably put others into repressed memory where I don’t have to think about them.

I was at the pre-competition meeting of the judges of the University of Oregon intercollegiate venture contest a few years ago when we (the judges) were asked to introduce ourselves. One of them, Ty Pettit, said "I probably have the best qualifications for judging this contest because I recently oversaw a company going bankrupt." That struck me as a very wise comment. Ty has had several successes since.

Thanks to Management R&D for pointing to some McKinsey material related to the hard decision to kill a project, or product, or, in some extreme cases, a company. I ended up signing up to receive regular updates, McKinsey seems to be generating very interesting analysis.

— Tim