Berkonomics – Business Insights from Dave Berkus

                There is a relationship between time and money that is more complex than most managers think.  Fixed overhead for salaries, rent, equipment leases and more make up the majority of the “burn rate” (monthly expenses) for most companies.  Since this number is budgeted and pre-authorized, managers tend to focus upon other things such as sales, marketing and product development issues.

                There is an art to efficient management of a process, whether that is the process of bringing a product to market from R&D to production or developing a new product’s launch program.  What most managers miss is that every month cut from the time it takes to perform such tasks cuts the cost by the value of a month’s worth of fixed overhead or burn.  Although young companies rarely measure profitability this repeatedly, more mature companies usually can bring from five to ten percent of revenues to the bottom line in the form of net profit.  Ignoring cost of product for a moment to make a point,  saving a month’s fixed overhead by making processes more efficient, could easily double profits for the year.

                That relationship between fixed overhead and production time is as critical as any other factor in success of a young company.  Many of the start-ups my various angel funds have financed died a slow death, not because of poor concept but because of poor execution, wasting fixed overhead and draining the final resources from the company coffers. 

[Email readers continue here...] In the technology sector where I most often play, extended unplanned software development cycles account for the majority of these corporate failures.  We often accept that development schedules for young companies are almost always too optimistic.  But we investors often allow too little slack in our estimates as well.  The great majority of young companies developing complex products such as semiconductor-based products, new software-based systems and technologies based upon new processes greatly underestimate the time needed to bring the product to marketable condition.  So the CEO comes back “to the well”, asking for more money from the investors to complete the project.  It is not a strong bargaining position for the CEO to ask for money to complete a product promised for completion with the previous round of funding.  And professional investors often penalize the company with lower-priced down rounds or expensive loans as a result.

                I have one story that remains as vivid in my mind as when it happened several years ago.  Helping the founder create a company and build a much-needed product in an industry I knew very well, I served as chairman for the newly formed company, and along with my several rounds of early investment, led rounds of other angel investors in what I knew as a successful opportunity to fill a need in an industry I understood.   

               The company grew to be well known in this limited niche and was operating at slightly above breakeven, when the Board and CEO decided to seek venture investment from what we hoped would be a first tier VC firm in Silicon Valley.  And we were able to secure that investment along with a partner from that firm joining our board.  It did not take long for the partner to become impatient with the relatively small size of the opportunity.  Dreaming of a company many times the size, he led the board to approve a complete reversal of course, even stating that the company should ignore the existing market niche completely and redesign the product for the broad Fortune 500 corporate market.  Every one of us on the board expressed our concern that the time to make these product changes and position for the new, broader market, would eat away all of the company’s capital.  Promising the full weight of his VC firm’s resources, the board voted to make the change against the best judgment of those of us who knew the original market niche so well and thought that there was growth to spare in that niche alone.

              So the company turned the ship, slowly it seemed, as R&D worked to develop an appropriate product using the base of the original design.  Time slipped; fixed overhead continued.  And exactly as you’d expect, there came the time when the company ran out of money as it ignored its original market.  Surprise.  Since the company slipped in its R&D schedule, the partners of the VC firm voted to not add new money to the company for the project.  Not long after, the company was sold in a “fire sale” amounting to slightly less than the debt on the books. All investors, including the VC firm, lost everything.  Do you remember a previous insight, that “the last money in has the first say”?  That is what happened within the dynamic of the board, and the result is that the board was completely at the mercy of the “last money” VC to save the company in the end.  Yes, there were other issues such as a protracted patent rights fight that drained cash, but the largest problem, inefficient use of R&D time burning fixed overhead, led to the demise of the company.  Lots of good jobs were lost and many investors including myself were left with the question. “Why did the company abandon a profitable market, even if it could not generate $100 million a year in revenues?”

                We will revisit the relationship between time and money again in future insights.

First customers are critical. Greatly exceed expectations at all costs.

                 There is so much history behind this insight, and so many stories that illustrate this point.  Your first customers for any product or service form your reference base, the important group of allies that your marketing and sales people rely upon when attempting to create buzz and make a mass market for a new product.  If you’ve been involved in the launch stage of any product in the past, you should recognize the overwhelming feeling of panic when initial customers make first contact with complaints about quality, functionality, speed of service or other critical part of the new release.

                The best advice I can give is to allocate all of your resources to supporting the roll-out of a new product, at least for a short period.  Respond immediately to every question and complaint.  Capture every compliment and ask if you can use it for marketing purposes.  If the product or service is especially complex or expensive, send someone from sales or marketing or even R&D to the customer location at the moment of first use. 

                Of course most of us have limited resources for such overwhelming support of a new offering. So make the first release a limited one, sized so you can support it with existing resources, even if that means releasing it to only three carefully chosen customers at first.

                And I am serious about the “…at all costs” admonition in this insight.  If you must provide a free backup unit, personal on-sight service for a month, your personal cell phone number for the customer CEO, or any number of unexpected offers of superior service and accountability to those first customers, do just that.  Make your customer a partner in the process.   Send flowers to the staff in the department using the product for the first time if appropriate.  Call the customer CEO and thank him for helping launch a product so very important to your success.

                The result of doing this right will be to blunt criticism, reinforce compliments and provide a solid user base to build upon.  And the alternative is a lost opportunity to shine, perhaps a first wave of negative public reviews that post and report across the Internet, and a loss of reputation and goodwill that will take years to overcome.

                I don’t know about you, but I would much prefer to spend dollars reinforcing a great first customer’s experience than fighting fires in the marketplace after seeing negative reviews.  Make sure your entire staff buys into this mantra. “These first customers are critical.  You are personally empowered to do everything possible to exceed their expectations.”

                An amazing transformation is taking place in the work place.  As the new generation of digital natives enters the work force, management is being pressed to open their networks and their thinking to allow social networking inside the firewall, workers who are more productive and comfortable anywhere but in a cubicle, and management of a virtual workforce.  Mobile workers are quickly overtaking the fixed desk worker in developed countries, quickly catching up with Japan, where this has been the majority behavior for several years.

                To enable these new nomadic workers to be productive, developers have created over 120,000 applications for the iPhone alone, and over 100,000 applications for Facebook users.  These applications enable desktop connectivity from smartphones, netbooks or iPads, list the latest airport delays, provide  GPS traffic and route guidance and so  much more.

                Which brings us to my personal list of the ten most important – essential – things we digital natives need to un-tether from our cubicles and desks and be at least as productive home or anywhere.  You may have a different list, but here is mine…  [Email readers continue here...]

1.           A great smartphone.  More than half of the people on the planet now have cell phones, and the smartphone with Internet and enterprise system access is the fastest growing segment, approaching 25% of all phones sold.   Most any of these models work well for a digital native who can then state with passion, “I have an office in my pocket.” 

2.          Collaboration tools:  GoToMeeting, WebEx, FreeConference.com, Skype, Google Docs, and others:   Some are now available on the smartphone as well as desktop and even built into some newer HD-TV’s.  Skype provides the infrastructure for cost-free video and audio conferencing and long distance dialing with sound quality often exceeding that of normal communication channels. 

3.          Internet access via cellular networks:  If the theme is “un-tethering” from a fixed broadband land line, then a great wireless card is a must.   Variations on the theme include cards that broadcast WIFI signals to a small area, built-in cards in netbooks and tablets and more.

 4.        Wireless desk phone system:  I discovered the power of this one recently when installing the new Plantronics Calista system, allowing me to walk up to 300 feet from my desk with a belt-clipped remote and up to 30 feet from that remote with the included Bluetooth earpiece.  The Calista seamlessly receives calls from my desk phone, my cell phone and my desktop Skype with equal ease as I roam the office environment.  

5.        A follow-me account :  Although many digital natives have cut the cord literally and done away with landlines (21% at latest measure), the rest of us would like to have up to five phones ring simultaneously, and roll over to a single voicemail if we do not answer any of them in a set time.  Vonage, Google Voice and YouMail are services providing this great feature at minimal cost for the freedom it provides. 

6.       A compact all-in-one:  When we are at home with our limited space and resources, a great all-in-one printer, scanner, fax is a necessity.  I prefer a black and white laser unit with a small footprint for low cost pages and quiet operation, delivering quiet inexpensive pages when needed, and color scanning to the computer. I prefer the Brother MFC7840W, but lots are available for under $230.00. 

7.        A netbook or tablet:  I no longer carry a large notebook, but rather a mini-note (or netbook or tablet). All in the name of longer battery life, less space and less weight.   The arrival of the iPad and competing devices add both complexity and simplicity at the same time. I will carry both my netbook and an iPad wherever I travel, combining the book reader and application-friendly iPad with the workhorse netbook for office work and presentations.  

8.        A portable scanner and / or portable printer:  If you haven’t seen or worked with a pencil-thin portable scanner such as PlanOn’s Docupen Xtreme, you haven’t experienced the ability to digitize at will anything you run across in your travels.  Only ½ inch by 9 inches in size, you will forget you have this in your bag or pocket until you need an instant copy of a news article, a document or an invoice. And sometimes, we just have to give in to the fact that the paperless office is not going to be a reality soon, especially when we are away from our desks for more than a few days.  PlanOn produces the ultra-portable Printstik PS905, a mobile printer with a 20 page self-contained roll of paper (or plain paper printing) from a smartphone or computer through Bluetooth or USB.  It weighs only 1.5 pounds and measures 1” by 2” by 11” in size. 

9.         The small resource bag:  All of us need an extra USB memory stick, chargers, cables and even a second battery.  Some of us add a wireless remote for presentations, a laser pointer and a few small screwdrivers.  

10.       The wild card:  Here is your chance to add that tool relevant to your needs. I would split the wild card into two items if I could:  a docking station with keyboard and monitor … and a portable projector, which is not for everyone, but for most of us who make presentations on the road and sometimes on the spot. There is a new generation of tiny projectors hitting the market to allow the mobile worker to share without notice.  For full room size presentations, I carry the slim Casio XJ-S38 XGA projector, only 1.7” high and 8×10” in size, weighing 4 pounds and able to fill a large room with a beautiful picture.   For smaller projections, the Aiptek PJT21X PocketCinema can be carried in your pocket.  New cell phones with digital projectors built-in were shown at this year’s Consumer Electronics Show and will soon be available. 

                So that’s my list of things I cannot do without as I work from anywhere and at any time.  Yes, I understand that any list becomes obsolete before it is published.  You’ll have your own “must have” list.  Whatever our disagreement, let’s celebrate our personal digital empowerment and collective un-tethering from a fixed business desk.  And sure, add your comment with your “indespensible” road warrior or SOHO technology…

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.

I am happy to announce the availability of BERKONOMICS in book channels worldwide, including the eBook edition from Amazon.

Purchase either for yourself or for an entrepreneur, board member or executive of a growing business. This book and workbook contain all the material from the BERKONOMICS emails and blogs and much more.

Organized into eleven chapters from start-up through a sale of the company with focus upon growth of the enterprise, the unique combination of book and workbook helps ensure the success of a growing business by providing insights and tools to those who are responsible for building business value. The workbook becomes a personal journal for entrepreneurs and executives to apply the lessons of BERKONOMICS for their own business enterprise, helping business-builders sharpen their message, create value and avoid pitfalls. The book contains over fifty stories of entrepreneurs who have done it right or from whose mistakes we can learn.

Here are easy-to-folow links to find more information and order copies in the form just right for your use, or as gifts to others:

BERKONOMICS hard cover with author signature ($30.00 your cost, $37.50 list)
- Hard cover is available only from the Berkonomics crew

Soft cover book ($20.00 your cost, $24.95 list) direct from the crew

Workbook direct from the crew ($15.00 your cost, $19.95 list)

Soft cover from the Amazon bookstore ($24.95)

Workbook from the Amazon bookstore ($19.95)

Amazon KINDLE eBook edition ($9.95)

Soft cover from Barnes & Noble Booksellers ($24.95, members $22.45)

Workbook from Barnes & Noble Booksellers ($19.95, members $17.95)

(All editions subject to tax and/or postage as appropriate)

                  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.