Berkonomics – Business Insights from Dave Berkus

When do you cross the line between honesty and dishonesty in tax planning?  Is it ethical to allocate income between periods to take advantage of tax breaks?  Can expenses be put off until the next period to increase income, or accelerated into this period by prepayment to decrease net income?  Where do you draw the line, assuming no intent to defraud?

First, corporations are usually on an accrual accounting basis, meaning that income and expenses are accounted for as earned, not when the cash is received.  (You, on the other hand, account for your individual income on a cash-accounting bases, counting the cash as received or spent, not as of the date of your earning or accrued expense.  The difference:  If you earn pay due December 31^st and it is paid January second, you pay income tax on those earnings in the following year.  But the corporation that pays you accrues the expense and takes the deduction in the year in which the income was earned or expense actually incurred.)

[Email readers continue here...] It is perfectly legal to hold delivery of goods until after the start of the next period and take the income next year rather than this.  It is a bit murky if you accelerate payment for incomplete services or even for products not yet received into this year to take the deduction from income early.  In either an IRS audit or an accounting review or audit, the accelerated costs and payments will show as an accrual – a balance sheet item – that does not change income, just cash and an asset.  In other words, for the usual accrual-based business, there are fewer ways to affect the outcome than for a cash-accounting individual.  There are lots of caveats here and certainly if the issue is critical to you, an accountant (rarely a bookkeeper) should guide you to the action that is both legal and strategic.

Time bankruptcy results from the deliberate over-commitment of core resources. 

          I created the term “time bankruptcy” almost thirty years ago when the computer software business was young, and I was a software developer building a young company based upon quality first.  Asked to speak at a number of software industry events, I found my voice and immediate audience understanding as I described variants of the following problem to my audience. The insight became clearer as I was hired again and again to pick up the pieces of failed programming efforts by other software companies in this then young industry.

          A developer would take on a new customer, customize programs as needed, and install perhaps an 80% completed system upon the customer’s brand new minicomputer system.  The customer would pay for all or at least 90% of the system, perhaps holding back a retainer awaiting completion.  Burning through the payment and needing more to cover fixed overhead, the developer would do the same for the next 80% customer, moving on to the third.  About that time, the first would call asking for completion of programming or training, firmly but politely.  The fourth installation was interrupted as the first customer suggested that he would stop giving glowing recommendations for the vendor, insisting upon a completion date, while the second customer interrupted with its first call for completion.  By the fifth or sixth (who keeps count for these stories?), the first threatens suit, the second becomes demanding and the third makes that expected call for a completion date.  So the vendor stops work on the newest installation to complete earlier installations.  Revenues dry up while overhead continues to burn though the developer’s pockets.  It’s a classic case of time bankruptcy.  The developer deliberately overcommitted his prime or core resources (in this case his personal time) leading to a loss of income and reputation that it could not recover.

[Email readers continue here...] The same story could be constructed for any company selecting a limited number of test customers for a new product. Select too many, and pay too little attention to each.  Commit all of your core resources to solving the resulting problem, and new work stops.  Time bankruptcy. Not a pretty sight, and completely avoidable.

          Be aware of this trap.  No-one but yourself can be blamed for allowing core resources to be overcommitted, even if by subordinates.  That’s because you now know the term and the impact of such an error in judgment, and understand that the simple but important remedy is to slow the commitment of those most critical resources to the front lines.

Your customers know what they want more than you do.  Find one to teach you.

                  This insight came from personal experience and from a good friend who advanced the notion of the “teacher-customer” years ago.  I internalized this phrase, recalling the many times I had partnered with customers to design new feature-functionality into my hotel computer system back when such systems were brand new to the industry. 

                  It was an ideal partnership between my growing company, as it approached one hundred employees on the way to almost two hundred fifty, and selected special customers anxious and willing to spend time telling us of their pain points.  Together we would work out solutions in the form of new functions, new controls, new reports, and new safeguards.  The customer would be the first to receive the new functionality in a new release.

                 At the annual user conference, I would often make sure the entire user community present knew of these extraordinary collaborations by naming the teacher-customers in the presence of their contemporaries.   Sometimes the audience would cheer one of their own, knowing that everyone benefited from the extra time and effort spent teaching their vendor the needs of the industry not yet addressed by competitors or by our firm to date.

[Email readers continue here...]   This is not to bend this insight into a claim that a company should wait to develop new, groundbreaking products and services until a customer asks for them.  If that were the ideal mode, many game-changing concepts would never have made it to market, including Fred Smith’s FedEx, first explained to a college professor in a paper returned with a C+ grade and the professorial comment that the idea was “good but impractical.” 

                Even if you are an expert in an industry segment, partnering with one of those rare, willing teacher-customers during the design stage for your proposed product or service is empowering and fruitful for both parties.

                All companies whether service or product-oriented must fight to gain and maintain quality of product, or fall to the bottom of the competitive heap. ..

               We have explored feature-functionality and finding your ideal niche.  Next week, we’ll take time out to explore the ten essential technologies for a mobile “digital native” then in following weeks focus upon stage four in our exploration of insights, product quality and its effects upon the organization.

                  You can take “everything changes” as a rule, not an exception.  You’ll recognize the truism, “No battle plan ever survives contact with the enemy” first stated by German Field Marshall von Moltke in the 19^th century.  This variant of the “battle plan” truism is important to internalize.  A product at the concept stage contains feature-functionality that customers may not want or be willing to pay for, or which just might not work well enough for release to the public. 

                You may recall that Microsoft planned a new file system for Vista, but pulled the file system from the product before release, and has not released the WinFS file system yet as of this writing, years later.  It is interesting to note that not many of us even remember this “feature” let alone miss it.

[Email readers continue here...]  Plan for change; sometimes at the last minute.  Allow for the cost and extra time for tweaks to the product or service.  Make the first release a limited, controlled one, so that changes and corrections can be made much more easily than if a general release all at once. 

                And how do we protect ourselves against surprises that relate to feature-functionality as opposed to product quality upon release?  Early contact exposing friendly close customers to the product are critical to the development staff, marketing and even to the customer that feels closer to your enterprise as a result of the special treatment.  This is not to state that the customer tests a new product before we do internally, although many of us are surely guilty of that error. 

                 Back when I was developing early systems for the hotel industry, with the full cooperation of the owner and managers of a hotel in Tulsa, Oklahoma, I would fly in from Los Angeles on Friday evenings, install new releases that night and make fixes on the fly in a real 24 hour environment.  Sunday afternoon, just about departure time for my scheduled flight, the hotel manager would drive me to the airport barely in time to make the returning flight.  My excitement in having developed so many new and “somewhat tested” features over a sleepless weekend was exceeded only by the enthusiasm of the entire hotel staff for the new and wonderful capabilities left behind after the magic weekend of non-stop programming.  

                  These trips were so common and their aftermath so predictable (a late night emergency repair call waiting for me at home upon return Sunday evening) that the hotel owner created a mantra that stuck with me and caused quite a laugh at my expense for years.  He would be sure to remind his staff, shaking my hand goodbye as I left in a hurry to catch that Sunday evening flight: “Wheels up, system down.”  I am not advocating such brazen behavior today.  “Cowboy coding” is no longer common or permissible in the computer software industry, especially for enterprise systems.  But those were the days.

     So you have a great new product or service that you and your associates love.  Early adopters should climb all over each other for a look.  But what have you done to test the concept against the realities of the marketplace?   Have you developed a prototype, alternate pricing schemes, even a PowerPoint mockup to show to potential buyers?  I would be very, very nervous without testing the product in the market as early as possible, ready to make changes and enhancements before committing to production and release. 

     Even with a perfect product, is the market ready for this?  Will you have to be both the evangelist for the product and for its marketplace as well?  Few early stage companies have the resources to do both. 

[Email readers continue here:] There are formal focus group organizations to help you, or you can attempt to test the market yourself by calling together a variety of potential users and asking a third party to facilitate a meeting where the product is exposed to the group and a conversation freely formed allowing the participants to agree with the premise or reject the product as useless to them, all without personalities getting in the way.

     No matter how you plan to test, make that plan an integral part of the development cycle, as early as possible so changes will not be costly.  Do NOT rest until you test.

Know your market and competition, or don’t spend a dime on anything else.

                I have stated previously that I love absolutes – statements with no wiggle room for gray-area responses.  Well, here is one of those, and it deals with market research first and foremost. 

                Let me tell you a short story at my own expense.  In 1994, (I know a long time ago), I invested over a million dollars into a company whose entrepreneurs had a vision that I bought into for many reasons, not the least of which was that I had industry experience and understood the need.  The first of a number of advanced products was a unique cell phone for hotel rooms, connected through a special “switch” in the hotel’s telephone room that was able to detect when a call was coming to the guest room phone and simultaneously ring the cell phone assigned to that room, no matter where it was at the moment.  A tent card beside the fully-charged phone greeted the guest entering the room for the first time, inviting the guest to pocket the cell phone for the duration of his stay.  The phone could be used for receiving incoming calls when in the restaurant, on the golf course or anywhere.  The guest could even make room-to-room or concierge calls as if dialing from the room itself.  These systems were not cheap as you might guess.  But four and five star hotels loved the concept, which included redirecting outgoing calls from the cell phone by the guest to be sent through the hotel’s land line switch, making the hotel a miniature phone company with its attendant profits.

                Here’s where some intelligent market research might have saved the company and my investment.  Fast forward several years to 1996…  [Email readers continue here...]Hotels were installing the system; guests were satisfied and the company was growing. There was even talk of some phone companies using the patented system for serving communities of guests, not just from a single hotel.  Back to 1996. That year, some of you will recall, the first digital cell phones were released to the market, smaller, cheaper and priced with roaming plans that made it no premium cost to carry these digital phones to cities far from home.  Overnight, guest use of the room cell phones dried up and hotels were left with expensive switches, phones and chargers unused.  Soon the company was drifting toward bankruptcy as the leases for the systems expired, one by one. 

                I guarantee that there were tens of thousands of people in the country who knew long beforehand of the imminent arrival of the digital cell phone and could predict its effect upon usage, especially roaming use.  And yet the company was blindsided as it continued to invest in switch and specialized analog phone hardware, soon to be instantly obsolete.  Merely adapting the switches to new digital phones would not work, since guests no longer needed the service itself, being instantly self-sufficient.  People no longer called guests in their rooms but directly to their cell phones, even when the guests were on the road.

                In this case, the competition was not from a company but a new technology.  In most cases, it is the competitor with a better product, lower price, faster service, better reputation that is the threat.

                When I listen to a pitch from an enthusiastic entrepreneur or read the summary of a business plan, one of the first questions I ask is about the strength of the competition.  Surprisingly, many entrepreneurs immediately respond. “There is no competition.”  Now, there is a statement even Alexander Graham Bell could not make about the telephone (which he pitched to his investors as a device to aid the deaf).  Bell’s competition was the written message, doing nothing, the telegraph and old fashioned word of mouth.  To say “there is no competition” is always the most red of all flags to an investor.  For most brilliant new ideas and business plans, the competition is merely to do nothing. That response is quite different than one where competitors have paved the way and existing customers prove through use that the product or service is valued.

                So I lost over a million for lack of market research.  Bell was lucky, but the pace of technology was so much slower then.  Just to make a well-earned point now that you have heard my story, know your market and competition or don’t spend a dime on anything else.  Oh, how I wish I had taken my own advice.

                 Have you ever driven a car that had no speedometer?  I had that thrill when a student at the Richard Petty Stockcar School of Driving recently at a motor speedway in California.  With a wide track, angled aggressively at the curves, and being told to hug the wall on the straightaways, there was little reference available to a novice driver as to speed.  I followed my instructor’s car closely, but still could not tell anything about my speed, so that I could either compensate for lags behind the leader or a test my comfort zone at various points that matched the expectation of my instructor and my own increasing capabilities as a driver.  Upon conclusion of eight laps of this, after pulling into the alley and climbing through the window on the driver side (there are no doors in these cars), I was handed a sheet with my timings for each of the eight laps.  Only then, after when the information might have been useful, could I see how well I did.

                That’s how you would feel if you ran your company without a dashboard containing relevant metrics that drive your company.  If you cannot relate to this, then you probably have been driving without a speedometer from the start and need to pay particular attention. 

                [Email readers continue here...] Metrics should be created by you and your managers to measure near real time progress for your enterprise.  A number of these deemed critical to you and your managers should be combined into a single page on your desktop screen or in printed form and available or circulated as often as daily.  These measures of progress must be fresh and meaningful.  Yesterday’s sales and returns compared to same day last week and last year for retail businesses;  Units produced and units shipped compared to plan and same period last month for manufacturers;  Yesterday’s overtime hours by department;  Ratio of hours worked to units produced;  Backorders unshipped;  Customer service calls in cue or unresolved.

                You can think of numerous critical measures for your business that must not be ignored, but often are neglected by senior management. It is not bad to manage by walking around, a term that became popular as a result of another of the many business advice books of the ‘90’s.  But that method, although good for employee morale, is imprecise as a tool of measurement and should be relegated to a supporting role.  Financial information for last month compared to plan and same month last year is certainly relevant, but not part of a dashboard, since there is nothing you can do to fix a problem when numbers are as old as a week, let alone the typical several weeks required to prepare financial statements for review.

                Finally, what good is the information contained in a great dashboard if you ignore it?  Show that you value the information by acting immediately upon variances, even if only to question the numbers.  Everyone down the line will become aware of your attention to their work, your interest in the outcomes and care for their success.  And you will drive revenue and better control costs and the customer experience with quick reaction to the variances within critical metrics the best describe your immediate situation.

                In past insights, we explored the need for a tangible goal and strategies that are measurable as steps toward achievement of the goal.  This insight calls to account tactics to accompany each strategy, and even suggests a number for each. 

                Tactics support strategies and allow your individual managers and departments to contribute to strategies in measurable ways that are more short term and procedural than are the strategies they support.  Tactics change frequently as achieved and may be updated or replaced during a year when achieved, unlike strategies which often span a number of years.

                Five tactics to support each strategy seem a fair, even if arbitrary number.  Tactics direct each department in very specific ways.  Here are several examples of tactics from my recent experience with companies where I serve as board member. 

[Email readers continue here...] 

Strategy Three: Expand into at least three new continents through new distribution channels.

1. Sign one distributor by June of this year in each of three major geographic areas. EMEA, Asia, Latin America.  Each distributor to be capable of generating $1 million in business by year two.
2. Assign development manager to localize design and oversee needed enhancements to product and support materials for each new territory.
3. Train and transfer technology to each new distributor within 90 days of signing.
4. Assign one corporate employee to support sales and installation efforts by all distributors.
5. Seed demand in each new territory with at least two corporate marketing events in partnership with each distributor.

Note that each of these tactics directly support the strategy, are measurable and assumed to be achievable, bought into by each department effected by the tactic.  Note that the strategy calls for cooperation between business development, sales, marketing, product development, installation and support.   This is a great way to unify departments that once may have competed for resources toward individual ends, now pointed toward a common goal supported by all levels of management up to the CEO.

        In planning, the matrix, “5×5=1” is a good memory tool for management to keep from overreaching with too many strategies and too many tactics.  But it is not written in stone.  And development of these important elements of the plan should be made using all the resources available, from your board of directors to your senior management to departmental management. Getting all to buy into each step may not be easy, but when accomplished, is a powerful and invigorating opportunity to celebrate, then to get to work as a functional unit of the whole.

 Now we’re getting organized.  There are many ways to express the roadmap for your enterprise.  One of the most popular was used by the U.S. Army late in World War II, and adopted by a number of high profile businesses such as Texas Instruments after the War.  The structure combined the listing of the goal with a series of strategies and then tactics, each designed to support each other, each measurable and made public throughout the organization.  The technique, “OST” (objective, strategies and tactics), is a very good way to organize your effort to find guideposts and then develop metrics to measure progress.

[Email readers continue here...]  What is a strategy?  It is a medium range process involving senior management and departmental management as well, directing resources in ways that, as accomplished, lead the company toward the goal.  A typical small to medium, business finds five sweeping strategies for the current year, many cross-departmental, and some carried over from the previous year’s plan and even from years before that.  Here are some example strategies from some of my companies over the recent years.

• Expand into at least three new continents through new distribution channels.
• Penetrate the Fortune 500 with at least five active accounts within two years.
• Create a hosted “software as a service” or “on demand” addition to our product line by end of (next) year.

Note that these are expansive “junior” goals that, if achieved, would certainly move the company forward toward a larger financial goal.  Yet each is measurable if achieved.  In fact, the degree of progress toward achievement can also be achieved, such as “We did establish and do business with two of the five Fortune 50 accounts this year.”  

Measurement is the key to success.  Even at the strategic level.  Next we’ll look at the last major step in creating an OST plan for an entire organization.

          It’s time to speak of some sort of business plan.  As a professional investor in early stage companies, I have long discounted long, detailed business plans in favor of a concise “executive summary” followed by a believable spreadsheet-based financial forecast projecting three to five years into the future. 

           Yes, everything does change between drafting that plan and its successful execution.  But flying without a map of some kind seems just plain too risky.

           [Email readers continue here...] I recently joined the board of a company that was growing slowly, running beyond breakeven, but had not approved a plan for the current year, let alone attempted to develop one for the next.  So the CEO had one of his own that he did not share, while the CFO had one for internal use that was never shown to the CEO or to the Board.  No wonder the Board members wanted to dig in and find who was communicating with whom, and who was in charge of the map to the goal.  By the way, there was no goal understood by all or agreed to by anyone.  How do you compensate executives and all levels for successful accomplishments if there are no established steps toward the goal?  And how do you measure a person’s contribution to an unnamed goal?

           So if you have not, create a concise map for your enterprise.  Start with a reasonable goal, usually expressed as a revenue number some number of years in the near future.  Assess your current resources and attempt to calculate the resources needed to accomplish the goal.  Do you need to raise money, focus spending upon only core projects that advance the company toward the goal, or bring in new management talent to make it happen?  Write these steps down in any form for now. We’ll explore a more organized approach in the next insights.