chokka blog

Truth, Beauty, Happiness, Shareholder Value

2011-09-02T08:21:00.000-07:00

******************************************************************************
Many years ago (in my Strategy Consultant guise) I was sitting in a business meeting debating the strategic priorities for our client’s business. In an attempt to provide some over-arching clarity to the somewhat rambling debate the lead consultant asserted;

"Well, I think we can all agree that Shareholder Value Creation is the most important thing”.

My good friend Justin’s response was to grin and propose the following;

“Truth, Beauty, Happiness, Shareholder Value: rank in order of importance”

*****************************************************************************

Now … I think that far from being the facetious statement it superficially appears to be, Justin rather eloquently (as befits his status as an All Souls Fellow) highlighted how easily we lose perspective in our day-to-day lives.

Many of you reading this blog will be similar to me, will have a tendency to bury yourself within the latest project and to place a ridiculous level of importance on work/business issues that - with a little perspective - can be seen to be just inconsequential frothy nonsense compared to the really important things in life like … well, like Truth, Beauty and Happiness.

Let me dwell for a moment on 'Happiness' and paraphrase one of our great modern philosophers;

“Whether it is your children, your business or your garden, happiness comes from sowing seeds, nurturing them and watching them grow.”

OK, so this particular modern philosopher was actually Ken Dodd during a radio interview; but his point is well made (and to be fair, he knows a thing or two about ‘Happiness', pointing out as he did that it is "the greatest gift that I possess").

Maybe more obviously appropriate to the (sometimes tenuous) ‘business’ rationale for this blog is Steve Jobs’ famous Stanford Commencement Speech. I like his challenge to look yourself in the mirror every morning and ask yourself if you will enjoy your day ahead (how often can you answer that positively?) and his assertion that “we are all naked” and really have nothing (professionally) to lose. [Of course his recent decision to step down from his post at Apple for heath reasons makes this speech all the more poignant.]

So what? Well for me personally it is true that some Happiness is to be found through business success (through ‘Shareholder Value Creation’ if you will) as I suspect it is for most with an entrepreneurial bent ; but Happiness is the goal, not business success. So I'm consciously taking the time and effort to make sure that I enjoy the journey and not just the hoped for destination, to make sure that in the drive to ‘succeed’ I don’t lose sight of the more important things in life.

To stop trying to live life quickly and start succeeding to live life slowly.

To gain Perspective.

The Apprentice

2011-06-30T02:52:00.000-07:00

I haven't watched The Apprentice for years, but last night they had a biscuit related task: as followers of my occasional biscuit blog will know, this is a subject close to my heart. So I watched it. Well putain de merde (pardon my French) but this is an awful piece of broadcasting.

It's long been accepted that Big Brother and its reality-TV bastard off-spring are the modern day equivalent of the circus freak show, encouraging us all to laugh at the clinically confused. Well I think the Apprentice is actually worse. Worse because it is held up by the BBC as a triumph of satisfying their 'educate & inform' objectives as well as being 'entertaining' in a notoriously difficult area to address, that of business.

Now don't get me wrong; it is entertaining (in a 'shout at the TV and laugh at the lack of self-awareness of these idiots' kind of a way) but educating and informing about life in business? As Lord Sugar should say : 'Oh Fuck Off' (excuse my English).

Frankly 'Hole in The Wall' or 'Wipeout' (ridiculous competitions designed to make as laugh at the fools competing) are as representative of the struggles in real-life business as The Apprentice. Actually no, they are better that the Apprentice; at least they have no illusions as to what they are. The 'point the finger of blame' process that ends every programme is truly cringe-inducing; is this how we want to 'educate' aspiring entrepreneurs as to the realities of business life? Do we want people to believe that to succeed in business you need to be good at bull-shit selling techniques and back-stabbing politics? Do we think the more irritating candidates are kept in because His Sugariness thinks they are good candidates or because they make good TV? Has a task ever involved understanding the economics of competition or being able to assemble a sensible business plan? Does boiling the complexities of business down to a head-to-head win/lose scenario every weak help people to understand what it takes to succeed?

OK, rant over.

I'm sorry, but letting these people loose on biscuits was a step too far.

Bikes, Businesses and Gearing

2011-06-24T01:44:00.000-07:00

Whilst probably baffling some of you with numbers, this post does explain why my twitter name is @kevverage.

I took my single-speed bike out for a spin last night (a bike with no gears for those non-cyclists among you) and as I laboured up one of the steeper climbs I got to thinking about gearing. Well, I actually got to thinking about why I would be so dumb as to choose to ride a bike with no gears; but once I was able to think about something other than breathing my thoughts turned to business.

Now gearing (or leverage) in business is a wonderful concept and perfectly analogous with the gearing most people are familiar with on a bike. There are broadly speaking two types of gearing that are normally referred to in business: Financial and Operational. I will focus here on Financial gearing and save Operational gearing for another day.

Financial gearing basically refers to the relative amount of debt on a business i.e. the level of debt versus the level of equity (or money put in by the shareholders).

A High level of debt, like a high gear on a bike, allows you to travel faster (it can also provide 'leveraged' shareholder returns, but we will come back to that). The debt gives you the cash to fund expansion, invest in working capital, expand store portfolios, make capital investments etc. When you have a following wind and a downhill slope ahead of you, having high levels of debt are great and you can fly along. Of course - like being in the big ring on a bike - when you hit a headwind or an uphill slope you will want to change gear; this is a lot easier on a bike than with a business (maybe analogous to the pre-derailleur days when riders would have to remove their back wheel and replace it the other way round to get 'the other' gear). The interest payments required to service this debt (the debt that helps you steam along when the going is easy) can bring down the business when you hit hard times. If the profit levels drop below those required to pay the interest - like struggling to turn the pedals when stuck in too high a gear - the business may grind to a halt and you face that horrible moment when you have to 'step off'.

I mentioned 'leveraged' shareholder returns; these are the main reason why businesses (and Private Equity investors) are so keen on debt and high gearing. The simplest illustration involves buying a business (although the numbers work equally well for existing investors reinvesting in a business) so let me illustrate with a company being bought for £10m, generating £9m of cash over 5 years and then being sold for £15m (this is of course a highly attractive scenario however you finance it);

The company is bought using £1m of equity (money from investors for the shares in the business) and £9m of debt. The debt is repaid using the cash generated over 5 years. Allow me to finesse interest payments here for simplicity and say that over the 5 years the interest payments are £2m and paid directly by the investors. So when sold the investors get £15m return for their £1m+£2m = £3m investment or a £15m/£3m = 5x return
The company is bought using £10m of equity and no debt. The shareholders therefore receive all of the £9m generated + the £15m proceeds of the sale = £24m return for their £10m investment or a £24m/£10m = 2.4x return

Now there are subtleties around interest payments, the timing of cash-flows and the discounted present value of cash that mean scenario 2. is actually slightly better than this illustration (the £8m generated by the business is received sooner than the £15m) ... but hopefully you can see by the magnitude of the numbers that scenario 1. at 5x is far more attractive than scenario 2. at 2.4x Of course scenario 2. generates a greater absolute amount of return for the investors so you would only choose scenario 1. if you had something else to do with the spare £9m -- I think we can assume we would.

Back to our bike gearing analogy -- what happens in scenario 1 is that the 'gearing' allows a small amount of equity (a small degree of pedal turn) to buy a big business (to make a greater number of wheel revolutions). Great as long as you don't hit tough times where - as described above - servicing the debt (turning the big ring) can bring you to a halt and make your return zero.

As an aside here, if you are a Private Equity player with a portfolio of businesses you can afford to risk a few grinding to a halt because of too much gearing given the exceptional returns you make when high gearing works. As an entrepreneur with your eggs in one basket, your view of the appropriate risk/return trade-off is likely to be somewhat more conservative. This quite rational but fundamental difference between PE investors and Entrepreneurs has created an awful lot of wealth for PE professionals and a fair amount of frustration for entrepreneurs over the last 15 years or so -- particularly when banks were so keen to provide debt to PE companies but loath to offer similar support to independent business. But my rant on banks will need to wait until another post.

So why does this explain @kevverage?

The terms 'gearing' and 'leverage' are often used interchangeably. The debt is the 'handle', the equity the 'bit under the business' (the fulcrum just sits where debt changes to equity along the lever, which is why I don't like this analogy as much as the gearing one). In my early consulting days leverage was talked about *a lot* and resulted in such phrases as 'leverage some beverage' or - slightly more bizarrely - 'could you leverage me the salt?'. It is but a small step from there to Kevverage ...

If You Don't Ask ....

2011-06-16T02:57:00.000-07:00

A simple message today: "If you don't ask, you don't get".

Today's message is so blindingly obvious that those of you not involved in controlling a business will think it is ridiculous to even say this; but I suspect others will likely think "Of course we should ... why don't we?"

And the staggering insight is *drum-roll* ...

Renegotiate all your key supplier contracts at least annually.

Now before shrugging and getting on with your day, test for a moment if you actually do.

When did you last competitively tender your courier contracts, email service providers, cleaning contractors, office supplies, packaging suppliers, Utilities, Insurance, security, IT support, merchant services provider, payment gateway? If you have not tested the market you will be wasting money.

Have you had all of your key goods suppliers in to renegotiate supplier terms: settlement and over-rider discounts, payment days, scale discounts?

In my previous consulting life one of the simplest "products" we ever sold was a 'non-people cost' cost review. Just the process of telling suppliers it was happening and inviting them in would would lead to them turning up with offers of improved terms.

So make sure this basic discipline is in place -- it normally isn't.

Training Entrepreneurs?

2011-06-15T02:21:00.000-07:00

Today's post is a question.

Tomorrow I am speaking to the Henley Business School MBA class on entrepreneurship; can entrepreneurs be trained (groomed?) and what do you think would be most useful for them to hear?

Tweet me @kevverage, comment below or email me with your views.

Be lucky

2011-06-14T02:33:00.000-07:00

My mate Chris (@vcmoulin) has an approach to cycling that I admire, partly because he can fair spin the pedals but mainly because he has a refreshingly laid-back approach to the whole affair. Before setting out for a long ride recently - having studied the skies and perused weather forecasts - I was unsure if I should carry a waterproof so I asked Chris what his plan was. "Stay lucky" he responded with a shrug, patting his empty rear pockets and smiling broadly.

Which brings me to the role of luck in business. It's clearly important in many walks of life: Napolean said "Give me lucky generals" and most successful entrepreneurs will admit to the role good luck has played at some point in their journey.

But is this just a bland observation? Do we sit back and passively wait to "get lucky"?

Arnold Palmer said "the more I practice the luckier I get" -- being lucky can in part be about an attitude of mind. We should never rely on luck for success, but we can make sure we engineer situations where we at least give ourselves the chance to "get lucky". So strike a bold pose and put yourself out there; be willing to take some chances and remain "in the game" even after a run of bad luck; have the patience, persistence and belief to wait for a lucky break -- and critically retain the awareness to recognise it and make the most of it when it happens (and don't mistake good luck for strategic brilliance on your part).

Having said all that ... if in doubt, always carry a waterproof. Chris got soaked; the man's a bloody idiot.

;o)

Playing the Long Game

2011-06-10T04:02:00.000-07:00

If you think "playing the long game" means hoofing the ball forward to the big front-man then, well then frankly I despair; get to the back of the class *serious teacher face*.

I am a great believer in "playing the long game" in business though. In essence this can mean many things: being patient, taking some chances, doing some things that feel right even though you can't see the obvious benefit, being willing to make long term investments, sacrificing short-term profit for long term brand building, etc.

But today (as our banking switch from HBoS to HSBC was completed) I was reminded of a particular aspect of "playing the long game" that always gives me disproportionate pleasure when it bears fruit. I believe in "doing right" by people in business as much as in life and and when I feel slighted or taken advantage of I confess I do bear a grudge, often comforting myself by muttering under my breath that "it's a long game" and believing that retribution will come, eventually.

I won't air too much laundry in public here but suffice to say I enjoyed the call to my 'relationship manager' at HBoS when we informed them we were switching. She seemed genuinely surprised, despite our last meeting ending with me pointing out that they "couldn't be less helpful if they tried" and ushering from the building whilst muttering under my breath ...

I don't think I am alone in this. If you hear Richard Branson speaking you will often hear him name-checking Coutts for nearly bankrupting him by withdrawing his overdraft (with no notice) in Virgin Atlantic's early days. I like to think that when Coutts broke the news he muttered under his breath "It's a long game" ... and now delights in publicly bad-mouthing them at every opportunity. Another famous Branson example is when he was turned away from the Rooftop Gardens nightclub in Knightsbridge for wearing jeans ... and within a year he returned and bought the nightclub.

We won't all get to serve revenge as sweetly or dramatically as Sir Richard ... but playing the long game and remembering that revenge is a dish best served cold can help us all through some of the darker hours.

When Profit isn't Profit

2011-06-09T00:42:00.000-07:00

Yesterday's post generated some interesting responses, mostly positive but some questioning why I would air such thoughts in a public forum. It might help explain the rules of engagement I decided on when I set myself the challenge of writing one of these posts a day:

Be disciplined with the amount of time I spend writing each post (I try for under 30 mins)
Be open and honest (it saves a lot of time in business and life)
Avoid being too self-censorious around what I was revealing
Not worry too much about how my thoughts might be received

Hopefully by conforming to theses rules I will manage to generate one of these a day and (although quality and style will inevitably vary) maybe from time-to-time I will "inform, educate and entertain" (if those Reithian objectives are good enough for the BBC, they're good enough for me).

****

The topic of "When Profit Isn't Profit" is one I expect I will return today but today's "Top Tips" are specific and simple (and aimed mainly at new businesses that have to invest in stock)

You won't know how much profit you are making until you have turned your stock.
Discount Deep, Discount Early

If these are statements of the obvious to you there is no need to read on; otherwise ...

As covered to some extent in my Amazing Balancing Act post (and you likely understand already), when you spend money on stock it goes on your balance sheet but doesn't touch your Profit & Loss (P&L); it affects your P&L as and when you sell it. This means if your stock is unsaleable at your expected sales price, *when* you come to sell it you will generate far less profit than you have on the freely selling stock that generate your early sales. Typically this means in the first 12 - 18 months businesses over-estimate their true profitability because they have stock that has not fully turned (i.e. items that have never sold-through and been re-bought); only when these items are sold (the stock is 'turned') do you see the true profitability of the business. Of course you would expect to get better at knowing what to buy and therefore improve your profitability over time, but most businesses inevitably have some material level of 'failed' stock.

As a related point there is another mantra which is often heard in our offices: "Discount Deep, Discount Early". In effect this means if mistakes have been made on stock purchases (they inevitably will from time-to-time) then recognise it and deal with it by moving the stock on. As a crude rule of thumb we reckon that pretty much anything will sell at half-price --- better to go straight to 50% off and move the stock on so you clear stock space, generate some sales buzz and don't kid yourself that you are making more money than you really are.

What Motivates Us: A Deeply Personal Perspective

2011-06-08T03:45:00.000-07:00

Further to yesterday’s post I succeeded - despite my puritanical streak and cynical outlook – to enjoy myself greatly at the Richard Branson / Sunday Times Fast Track 100 dinner last night. The speakers included ‘Sir Richard’ himself of course but also a selection of highly successful entrepreneurs and - as a wild-card - a NASA astronaut who had returned to our planet just a week ago (a line he heroically resisted using).

Listening to the speeches (where a common theme was ‘what has driven me’) and chatting with some of the wide variety of entrepreneurial types there I got to thinking about what makes a good entrepreneur and what motivates them.

Kev’s Theory of Entrepreneurial Motivation

My tentative conclusion is hardly controversial but runs as follows: Successful entrepreneurs cover a wide variety of personality types, a range of different management styles, have differing degrees of financial ambition, pursue alternative business philosophies and range from highly intuitive/creative individuals to devoutly analytical and rational ones … but they all have something in common: they have something to prove.

Examples on show last night included (at least in my analysis) people motivated by personal academic failings, by trying to emerge from under an older sibling’s shadow, by seeking parental approval or by the peer pressure of others’ apparent successes.

Now, for the record, I wouldn’t yet count myself as a successful entrepreneur, rather one who is striving to be a success (which may in itself tell you something about my personality type); but I feel it is only fair in the spirit of this blog to test my hypothesis on myself. Here we enter the ‘deeply personal’ territory. I suspect I have saved a potential fortune on psychotherapist fees by always being pretty open about this stuff but if you are embarrassed by others’ revelatory back-stories, look away now.

My Back-Story

At its most fundamental I suspect my motivation is to seek the (unobtainable) approval of absent (or non-existent) father figures.

I never knew my biological father (or ‘DNA donor’ to steal Lance Armstrong’s rather apposite phrase) who I think left when I was a 2 year old. I then had a step-father (and step-brother, who stole my first name as it happens but that is another story) for 8 years, neither of whom I saw again after my Mum ‘walked us out’ of that situation. My next step-father was around for 8 years or so before suffering a rather dramatic break-down as that relationship ended; I haven’t seen him since. Then my Mum settled with a clinically insane paranoid schizophrenic (it’s a long story), but by that stage there was no pretence of this one being a father figure as I was off to University anyway.

This all led to a rather peripatetic lifestyle and some ‘interesting’ living arrangements – I think 16 abodes (including house-boats, caravans, a tent) by the time I was 12 – which in itself I am sure has influenced my outlook in later life; but let’s focus on the ‘father figure’ question which I suspect is the core motivator for me.

I’m a father of two and - although divorced now (go figure) – I strive hard to be a good Dad to them. I find it unfathomable that my biological father and both my step-fathers failed ever to properly engage or bond with me. They all seemed to simply strike me from their lives when their relationship with my Mum ended (as, to be fair, I guess I did them … although how much say I had in that is a moot point). Now maybe the fault lies with them, maybe with my Mum … but I guess somewhere deep down I must wonder whether it was my fault. What was (is?) wrong with me that none of these men seemed to want to be my Dad?

We each have our own motivations in life but I’m a great believer that most driven people are at their core insecure, desperately trying to prove something, desperately seeking approval. In my case (as in most I suspect) it is a proof that can of course never be achieved. Hopefully at least the energy and drive that comes from this insecurity ultimately leads to something positive.

The ultimate achievement may be to realise that in fact there is no need to prove anything, no need to seek external approval or validation. The hope must be that with that realisation comes the ability to relax, have fun and simply enjoy life for what it is.

Loneliness and Vanity

2011-06-07T02:46:00.000-07:00

I'm writing this post whilst travelling to Oxford for the Sunday Times Fast Track 100 dinner (as both the companies I am involved with - M8 Group Ltd and Endura Ltd - qualified this year) and I've realised I'm in the process of breaking one of my golden rules.

Entrepreneurial life can be lonely and at times frankly quite tedious. Don't get me wrong, I love what I do but sometimes I yearn for the variety and intellectual stimulation that comes from interacting with other like-minded people and businesses in other sectors. The risk of course is that one gets drawn into spending time doing things that address that itch for social interaction and intellectual stimulation at the expensive of the day job.

So I have a personal rule: to avoid ego-massaging events and self-publicising competitions. More often than not the motivation for getting involved in these is simply to feed one's own vanity and search for interest rather than to really help the business. In fact, these events can in themselves be described as Time Thieves (see earlier post).

Back in 2002 M8 Group acquired the assets of two *very* bust .com boom businesses: Greenfingers and ThinkNatural. Buying assets from receivers is an interesting topic in itself but one specific incident sticks in my mind in relation to this topic. We had 24 hours to clear the assets out of the head offices of these businesses and one of the tasks was trawling through the shelves of documents to see if there was anything worth taking with us. At the time I was struck by the acres of trade-press cuttings (none of which would have been seen by a prospective customer of the business) and the impressive shelf of plaques and industry awards we had to wade through to try and find anthing of value. You have to wonder how much effort was spent on pursuing these vanity based affirmations of how great the businesses were whilst the businesses slowly (well, rapidly actually) ran into the ground (burning over £20m in the process).

I'm sure I'll have fun tonight and hopefully meet some interesting people; but I will have a nagging worry that attending this event is the first sign that I'm allowing loneliness and vanity o affect my judgement.

Negotiations and the Sheer Force of Will

2011-06-05T02:18:00.000-07:00

In my early years as a Strategy Consultant I and a colleague were travelling around the Far East whilst gaining an understanding of our client’s International Sourcing operations. After moving between several countries in just a few days we found ourselves having dinner in down-town Bangkok and decided to get a Tuk Tuk ride back to the hotel.

We were savvy enough to know that we should agree the price for the journey before getting in and we hailed our first Tuk Tuk driver and duly started negotiating. We weren’t going to be taken for mugs and we knew the price in Baht for the journey shouldn’t work out at much more than about £1. We were unsurprised to be offered some outrageous prices but - with a long line of drivers willing to haggle for our business - we merrily dismissed driver after driver as we waited for one to accept a reasonable price. Eventually we persuaded a driver to accept our £1 and take us to the hotel. At the end of the journey he pleaded with us for a decent tip, explaining passionately that we really were paying too little for the journey. By this stage brimming with confidence in our negotiation skills and pleased with ourselves for having not been taken as a pair of fools, we airily waved him away.

Now here’s the rub. The following morning we realised that - having been through several currency changes in the preceding days - we had completely messed up our exchange rate calculations. What we had thought was £1 was in fact only 10p.

What I found interesting about this experience was that although we almost certainly weren’t being reasonable in our negotiations, that didn’t matter – we *believed* we are being reasonable. Whether or not what we eventually paid was a fair price is irrelevant, we would never have negotiated that low if we had known the correct exchange rate.

***

Just last week I was reminded of this experience during a ‘real business' negotiation.

The incident relates to a contracted service that is variably billed but has a minimum annual charge associated with it. Basically I had screwed up by failing to ensure that we were monitoring our utilisation of the service - when we passed the contract year-end I was surprised to see a (several £'000) invoice hit my desk for the unutilised service amount. On checking I realised the contract was tightly worded and we had also missed our break option so were committed for another year.

My initial response was to attempt a rational, 'reasonableness' based negotiation with the service provider. Sure, we had signed the contract and legally they were in the right -- but shouldn’t they have been helping serve us (their customer) by alerting us to the unused commitment as we neared the contract end? Surely they could see that it was not ‘fair’ to charge us the full amount? Their response was a (frankly not unreasonable) “hard cheese, you signed the contract, you owe us the money”.

So, remembering my Tuk Tuk experience and with nothing to lose, I abandoned my rational approach and adopted the following stance: “Well I just don’t think that’s fair, you've upset me. Please go away and rethink your position.” As I hung up the phone I joked with one of my colleagues that it would be interesting to see if this rather unsophisticated “You’re upsetting me” approach would yield any return. Of course you will have guessed the outcome; they came back agreeing to credit us 50% of the disputed amount and to restructure the contract going forwards.

So next time you are negotiating and you realise that rationally you are in the wrong, try to forget the rational stuff and see if you can make yourself believe you are being hard done by. You might be surprised with the results.

*****************************************

Don't underestimate the power of conviction and

sheer force of will in negotiations

*****************************************

An Amazing Balancing Act

2011-06-03T01:27:00.000-07:00

Conscious that my last few posts have been somewhat generic, I thought today I should get a little more specific. Apologies for the cryptic post title, but today I’m going to explain why I think Balance Sheets are great (and I doubt you’d have reached this far if I had mentioned Balance Sheets in the title).

I’ll try and tread the fine line here of not losing those who have no financial training whilst hopefully providing some interesting perspectives for the more financially literate – forgive me if I this over-simplifies or over-elaborates.

This may be a statement of the obvious but I am often surprised by how few people recognise what a Balance Sheet fundamentally represents: it’s the running total of all the financial activities of the business since inception.

This makes balance sheets particularly valuable when looking externally at other (young) companies’ financials; the Profit in any one year may come or go, but you can’t hide from the running total in the balance sheet.

Let me illustrate with some (rounded) real figures from an online company that is broadly a competitor of mine and has been around for a little over 10 years (I won’t name them as this is an illustrative exercise, not a judgement on any one business);

The Profit & Loss (P&L) Statement tells one story: Loss making in the last few years (up to £1m loss), they show a modest c.£100k profit in the most recent year. Fair enough, not a great story but trending the right way and making money now, right?

The Balance Sheet tells a rather different story:

P&L Reserve Account (the cumulative total profit ever) shows over £11m of losses. Puts the c.£100k profit this year in perspective doesn’t it?

Stock value is £1.4m and has increased every year despite revenue being up and down. In fact over the last 4 years stock value has increased by >80% whilst revenue has only increased by <20%; does that seem strange? A balance sheet being what it is we know that £1.4m is the cumulative amount they have spent on stock that they have not yet sold (i.e. money spent that is reflected in the balance sheet but has not yet made it to the P&L). Do you think there’s a chance that the stock may not really be worth £1.4m? Maybe some of that stock is not in saleable condition or is commercially worthless? You would only need to write-off 10% of the stock value (a figure which would then appear as a cost in the P&L) to wipe out this year’s profit figure completely. The fact that the stock figure has grown so dramatically would certainly make me wary that the accounts may be somewhat optimistic.

Trade Creditors (the amount owed to suppliers) is almost the same as the stock value. As a crude simplification that means all that stock has been ‘bought but not paid for’. Bank Loans & Overdrafts are nearly £1m, Cash is only £200k. Would you start to worry about the financial stability of the business?

Trade Debtors (money owed by customers) is over £0.5m. This means the revenue from these customers has been taken though the P&L (so has contributed to the modest profit) but the cash has yet to be received. You don’t know this business, but I can tell you it is ostensibly a consumer retail business and such significant debtor figures are strange

I could go on but this is intended as a thought stimulator not an essay. Hopefully I have illustrated that the Balance Sheet tells you so much that the P&L doesn’t; that’s why I think Balance Sheets are great.

Beware the Time Thieves

2011-06-02T00:30:00.000-07:00

Just yesterday a cold caller managed to get me on the phone (selling search engine optimisation services) and his opening gambit was 'do you know who founded Google?'. He had immediately identified himself to me as a Time Thief and I was able to make it a very brief call (and yes, I do know it was Larry Page and Sergey Brin). So let me explain my 'Time Thief' thesis.

I spent 10 years as a strategy consultant selling my brain (and others' brains) by the hour; that's a sure-fire way to make you value time. More recently - whilst ploughing the entrepreneurial furrow - I have come to value my time somewhat differently, but no less highly. Time in the office, in meetings, on the phone, on the laptop is time not spent living life to the full. I enjoy my work, but I enjoy many things more: time with my kids, good company, long bike rides, fresh air, hill walks ...

Which brings us to the "Time Thieves". You must learn to spot them and know how to deal with them. They come in many guises and generally exploit our innate good nature; so you have to be willing to be rude (it saves a hell of a lot of time).

Spotting them is easy. They typically try and engage you with a Socratic approach and avoid telling you what they actually want, why they are asking for your time. Sales people are the most obvious examples -- The phone call from someone you don't know that starts with 'how are you today?', the sales person who tries to engage you with 'are you interested in gaining new customers for free?' (I love to answer that with 'no', it always throws them).

But it's not just the cold callers; it's suppliers, relationship managers, banks, colleagues who decide meetings are a good place to generally chew the fat. Typically these people are not troubled by concerns of their personal productivity or worried about a P&L. It's harsh, but they simply value their time less than you value yours. Remember that they are STEALING YOUR TIME and you must treat them as ruthlessly as you would any thief!

Don't think this makes you a bad person. The time you stop the Time Thieves stealing from you is time you can spend doing things you want to do; spending time with your loved ones, playing sport, exercising, relaxing, smelling the roses ... maybe even making yourself a better person.

And yes, I am aware that spending time writing this Blog is a strange way to spend the time I have argued so ruthlessly to fight for. Then again, Have I stolen your time by enticing you to read this?

The Weakest Link

2011-06-01T00:29:00.000-07:00

Your business success will be defined not by how well you exploit what you are good at but how well you address what you are bad at.

Too many people make the mistake of thinking they can build a business based on what they are good at; success or failure is far more likely to be determined by what you are bad at. The following are all summaries of specific examples I have witnessed;

A creative genius produces a sumptuous looking catalogue -- but their fulfillment operations and economics kill the business
A smart techy builds a wonderful website and succeeds in driving traffic to it through great SEO (Search Engine Optimisation) -- but the business fails because the product range is poorly sourced and not commercially priced
A consulting business that delivers great projects -- but dies because it lacks the individuals who can sell them
A designer creates a great product range, markets it well, prices it sensibly, succeeds in building distribution -- but lacks the financial savvy to finance the business properly, fails to understand the seasonal demands on working capital and the necessary stock needed to maintain service levels so business collapses when breaches bank covenants on over-draft

So what? Have you been honest with yourself about what you are bad at? Identify those areas and focus your efforts there, whether improving your own knowledge and skills or hiring in the right expertise -- chances are the thing you enjoy doing least is the thing you should be spending most time on.

Experiencing Narrative Backwards

2011-02-23T15:33:00.000-08:00

I realised something today: New Media developments have led to us becoming increasingly used to experiencing narratives in reverse. Three prime examples.

1. Twitter

Catching up on Twitter Timelines is a reversed narrative experience (nobody actually browses Twitter 'forwards' do they?).

2. Blogs

Most recent posts are the first you see, if you read on you travel back in time

3.Email Trails

Being copied in towards the end of an email conversation normally leads to another backwards narrative experience.

********

Don't have the energy to expand on this and work out if it is a meaningful insight. Think there is potentially something in this though, maybe there are already creative examples out there exploiting the possibilities offered by this in a 'Time's Arrow' (Martin Amis book) or Memento (Christopher Nolan movie) kind of way?

Whither Catalogues; Catalogues Wither?

2010-12-10T15:12:00.000-08:00

The recent publication of the Sunday Times Fast Track 100 provides me a great opportunity to return to one of my favourite topics. No, not self-promotion (although I am involved with two companies on the list; M8 Group and Endura Ltd) but something I enjoy *even* more: catalogue bashing.

Criteria for inclusion in the index are private companies with most recent year sales over £5m that have posted a profit in most recent year, ranked by turnover growth over most recent 4 years.

Now, this is "just a bit of fun", but a quick analysis of the supplement shows there are 10 dedicated online product retailers on there;

http://www.buymobilephones.net/
http://www.watchshop.com/
http://www.moonpig.com/
http://www.ukflooringdirect.co.uk/
http://www.saveonlaptops.co.uk/
http://www.gettingpersonal.co.uk/
http://www.petplanet.co.uk/
http://www.greenfingers.com/
http://www.wiggle.co.uk/
http://www.bookdepository.co.uk/

In addition, there are at least 7 other consumer websites featured.
http://www.staysure.co.uk/
http://www.globalpersonals.co.uk/
http://www.directline-holidays.co.uk/
http://www.bullionvault.com/
http://www.quidco.co.uk/
http://www.menkind.co.uk/
http://www.getabed.co.uk/

Number of catalogue retailers or mentions of catalogues? None.

Just saying, that's all.

Boots the Brand vs Ignorant Consumers

2010-10-07T05:09:00.000-07:00

I have had to buy a lot of painkillers in the last few months (as followers of my medi-blog will know) and my Boots Paracetemol buying experience has prompted me to post this quick blog.

Below are the two cheap paracetemol options you will find on Boots' shelves

Boots Paracetemol: 39p
Value Paracetemol: 16p
Both state "Each tablet contains Paracetemol BP 500 mg. Also contains E223."

They are exactly the same.
Exactly. The. Same.

But the simple addition of the Boots brand adds a 143% price premium.

I hope somebody at Boots loses some sleep over this - we are after all talking about a medicine here - but I doubt they do.

I know this is not news ... but it is a such a great illustration of pure Brand power I felt I should share for those who may have missed it.

*****
I did a quick search and found this rather good and thorough post on the subject for those curious for more detail http://bentsocietyblog.blogspot.com/2010/03/exploitation-of-public-ignorance.html
*****

How Google has Blinded Itself

2010-03-11T02:07:00.000-08:00

Page Rank: A Quick Refresher

Most people with an interest in SEO (Search Engine Optimisation) are aware of Google's Page-Rank Algorithm.

The way page rank works is in essence very simple: each link from a page (page A) passes 'page rank' to the page it links to (Page B) ... the value of 'page rank' passed is the 'page rank' of page A divided by the number of links out from page A. The same then applies for Page B to Page C and so on.

The smarter of you will recognise that this is an iterative calculation (as the network effect means that Page Rank passed down will eventually be passed back in some form). The really smart amongst you may conclude this would be a non-convergent iteration; I believe that Google build in a 'decay factor' to prevent the problems that would ensue as a result. Of course the Page Rank calculation is in practice more complex still -- Google has algorithms and methods for determining the quality of links and pages which significantly refine the calculation.

Rel = "Nofollow": Google's Blindfold

Back in 2005/2007? Google adopted a policy whereby if the link from page A to Page B was given a Rel = "nofollow" attribute then Google would effectively ignore that link for Page Rank purposes.

The logic behind this move appears to have been somewhat confused. The intention was to allow websites to qualify outbound links to help Google (eg. to ignore paid links, advertisments, reciprocal links etc.); the actual outcome was for sites to suddenly start to 'nofollow' as many links as possible to preserve their page rank.

This is potentially catastrophic to Google's Page Rank algorithm: there are very few websites out there now that don't now 'nofollow' their outbound links (eg. Almost every forum, most blogs, Facebook, Twitter, You Tube etc.). If you want to check, go to a page with outbound links, right-click, 'view source', ctrl-f to find the link in the source code (use the anchor text of page URL as your search) and look for rel="nofollow" within the reference tag.

By trying to prevent people artificially boosting Page Rank, Google seem to have cut-off their main sources of 'natural linking' Page Rank. Your site may be being talked about on plenty of forums, people may be recommending you to their Blog readers ... but if the links are 'nofollow' google is blind to them.

So then in 2009 Google (quietly) let it be known that the Page Rank of the outbound page would still be diluted by the 'nofollow' links (so there is no Page Rank benefit to our 'Page A' of 'nofollow'ing outbound links; they still dilute the Page Rank passed by the nomal links) ... but that the receiving Page (our 'page B') would still not get any Page Rank benefit.

I guess the hope from Google is that people will be far more sparing in their use of nofollow tags as a result. Personally I greatly doubt it -- and even if this changes webmaster behaviour going forwards, google is poking its own eyes out if it continues to ignore the inbound Page Rank from nofollow links. Think about it: as it stands Google ignores sites that are being talked about on Forums, mentioned on Twitter, linked to from Facebook .... how can that be a good thing?

So What?

My personal view is that Google will quietly revoke the 'ignore nofollow' policy (if they haven't already) or see the quality of their search results decline (and allow the likes of Bing to make real in-roads).

It will also mean that new websites will find it far harder to build Page Rank (and therefore strong search engine results) than the embedded encumbents (who have links to their sites pre-dating the whole 'nofollow' wave). So not all bad then :0)

If you want to know more about this, you should read what Matt Cutts (the most public 'Google Guy') has to say; this blog entry of his (and the ensuing comments) is fascinating (if you like that sort of thing).

If you've read this and think "that's far too geeky and dull for me to care about" ... I hope that your businesses' and/or your personal success does not depend on your website(s) performing well in Google searches!

Google’s latest data give-away

2010-03-06T02:05:00.000-08:00

Not sure how broad the awareness is of the Google / DoubleClick Adplanner tool … but if I was Experian/Hitwise I would be worried that this data is now being made available for free by Google. It is packaged as a tool for advertisers -- but it is also a pretty powerful Competitive Intelligence tool for online retailers.

Remember before Google Analytics came along and service providers and consultants would (try and) charge you significant sums for analysing your web-logs and providing click overlay analyses? In fact it’s not that long ago that I had a conversation with the MD of a large catalogue retailer who was telling me about the amazing analytics service they were paying (through the nose) for; from what I could see they did little more than repackage the Google Analytics data -- so there may be a bit of that still out there.

I wonder if we will soon be looking back on Hitwise (the excellent but expensive online competitive intelligence service, now owned by Experian) as another victim of Google’s policy of providing intelligence for free?

Let's look at what Adplanner does (and does not) provide by using one of my own sites (so I can compare the data given with Hitwise and own Analytics data)

Adplanner Data for Petplanet.co.uk

The data quality certainly appears solid in terms of overall traffic levels and, as far as I can tell, the socio-demographic data looks good.

Using this tool to compare with our online specialist competitors (I'll leave it to you to work out who they are!) I can see (and more importantly now potential advertisers and suppliers can see) that we achieve more than double the reach of any of these guys.

We (uniquely amongst our peers it seems) have elected to share our Google Analytics data (on the basis that we are proud of our numbers and aren’t shy about sharing). I see that as a result Google under-estimates our UK traffic and messes up the visits/user calculation; a bug I'm sure they'll fix and the overall picture is still accurate.

Indeed compare our reach to the pet retail giant that is Pets at Home and (allowing for how much of their traffic is store-finding and searching for the brand itself) I would argue the data supports my argument expounded in earlier Blog (Exploding the Multi-Channel Myth) that Online specialists occupy a competitive space that the off-line brands’ online propositions can't reach. The Pets at Home data also highlights some data glitches in the system – their traffic figues appear overstated (cf Hitwise) and I would very much doubt that 100% of www.petsathome.com traffic is from the UK.

Which brings us to ask the obvious question: how good is the data and is there any systematic bias? Google states

"DoubleClick Ad Planner combines information from a variety of sources, such as aggregated Google search data, opt-in anonymous Google Analytics data, opt-in external consumer panel data, and other third-party market research."

I think in practice what this means is the traffic data is google search based (unless the site in question elects to share analytics data) and the demographics data is triangulated from other sources. I suspect this means that sites who use a lot of email activity to drive traffic and/or have a high proportion of users who have 'favourited' them will be under-represented (as they will have a higher than average proportion of 'direct' traffic).
The keyword and site affinity data is also frankly pretty ropey; it does not triangulate well with Hitwise (or intuition) and is really of little commercial value at the moment. Take the example of our gardening / garden furniture site

Adplanner data for Greenfingers.com

Telling me that 'marks spencer' and 'sainsburys' keywords have a high affinity with my site is not of much use.

You have to wonder how long before Google extends/improves that information though (for a fee?) so that we can all see what keywords are driving traffic to our competitors and which ones they are spending PPC budget on (the main incremental value that Hitwise still offers). You have to wonder how long before Google extends/improves that information as well (for a fee?) so that we can all see what keywords are driving traffic to our competitors and which ones they are spending PPC budget on (the main incremental value that Hitwise still offers).

The 'sites also visited' data is fairly random at the moment too. To avoid getting too carried away with my own sites and hitwise data I tried checking eg. www.wiggle.co.uk versus www.chainreactioncycles.com (who are head-to-head competitors in their space as confirmed by Hitwise and common-sense) but they don't appear in each others' 'sites also visited' ... which is plain wrong.

Hard to be critical when you consider the data is free; it's pretty powerful data and a useful Competitive Intelligence tool. I'd be interested to hear others' perspectives.

Comment welcome

It's all about the Talent

2010-02-23T00:18:00.000-08:00

I have just spent a few days embedded with the Endura Racing (pro-cycling) team at their training camp in Nice and (apart from inspiring me to get out on my bike a bit more) it's had me thinking about the issues of 'managing talent' ... and the potential for the worlds of Sport and Business to learn from each other in this regard.

Talent in Business

The theme of hiring, motivating, nurturing, developing and retaining Talent is surely common to all business.
I started my career as an analyst in a strategy consulting business (OC&C Strategy Consultants) and went on to be a partner; so in that environment I have both been 'the Talent' and been responsible for developing 'the Talent'. The consulting approach to talent management is very simple and empirically very successful. In that world you find the smartest young things (academic over-achievers who can demonstrate an intuitive feel for business and a structured approach to problem solving) and you (implicitly) offer them the following deal:

You'll get well paid; you'll get well trained; you'll be on a constant rapid learning curve; you'll get to be involved in deals you read about in the (business pages) of the papers; we will support you to maximise your productive time. We will make you look good, feel good and be proud of what you do.

In return for which

We will 'own' you for the next few years of your professional life. You will find you are no longer 'comfortably the smartest person in the room' and this will make you insecure; we will use that insecurity to drive you to work harder; we will keep increasing the work-load you are given until you can't take any more (and only then will we back off); you will work harder than you have ever worked in your life.

It may sound harsh but in my view it's a good deal -- the consulting firm hires the best talent and motivates them -- the talent gets well trained and driven to achieve their best by being moved out of their comfort zone. Personally (if I am allowed to judge my subsequent entrepreneurial career as a success) I have to put a large part of that down to the learning I gained by accepting this deal.

Strategy Consulting may be one of the more extreme examples of a 'talent driven' business -- but anybody involved in managing and growing businesses will (or should) have some version of the above 'Faustian pact' in place. You seek to identify and nurture talent; you make a (normally implicit) deal with that talent; you succeed or fail on your ability to identify, develop, exploit* and retain that talent.

Talent in Sport
From the perspective of an interested but largely peripheral observer, the parallels with developing a pro-sports team appear striking to me -- let me repeat the 'deal' outlined above and see how much tweaking is required to fit this to the sporting world

You'll get (well) paid: in many cases simply being a professional sportsman meets the financial objective here
You will get well trained and be on a constant rapid learning curve: In the last few weeks the Endura Racing guys have been lining up and holding their own alongside seasoned Tour pros ... and are being coached by Olympic and World Championship medallists.
You will get to be involved in deals you read about in the (business pages) of the papers: Substitute 'deals' for 'races' and 'sports for 'business' and you are there -- next week the guys are competing in 'la Vuelta a Murcia' lining up alongside Armstrong, Contador et al
We will support you to maximise your productive time. That's what being in a pro-team and being looked after on trainng camps is all about
We will make you look good, feel good and be proud of what you do. Well, they are wearing Endura kit, riding top-end hardware and being well covered in the cycling press so they should!

In return for which

We will 'own' you for the next few years of your professional life. Of course you don't 'own' your riders (particulalry in an environment where individuals have Commonwealth, Olympic and World Champioship objectives and National Coaches to satisfy) ... but we are certainly looking to develop the riders while getting the best possible exposure of and representation for the Endura brand
You will find you are no longer 'comfortably the smartest person in the room' and this will make you insecure; we will use that insecurity to drive you to work harder. Switch 'smartest' for 'fittest' and this summarise perfectly how (hopefully) the step up to being in a competitve pro-team will lift the riders training work-load, motivation and ultimately performance
We will keep increasing the work-load you are given until you can't take any more (and only then will we back off); you will work harder than you have ever worked in your life. Again, for 'work' read 'riding' and this is surely what being in a pro-team is all about

The Common Lessons
I don't want to stretch the idea too far here or become overly prescriptive; let me make a couple of simple observations though;

Business people developing talent could do worse than read what David Brailsford has had to say about motivating athletes and building a team structure
Directeurs Sportives (or Sports Team Managers more generally) could learn a lot from the discplines that exist when it comes to developing talent in business (how about formalised appraisal processes and written reviews? Explicit 'promotion' objectives? Mentoring programmes?)

Enough: comments welcome

* Used here in the non-perjorative sense: to utilize, esp. for profit; turn to practical account ... to advance or further through exploitation; promote

Exploding the Multi-Channel Myth ...

2010-02-19T06:02:00.000-08:00

The following is developed from a reply I placed to a posting in catalogue-biz. The question was about online businesses developing catalogues ... what follows explains why I believe that specialist online retailers will always be able to exploit market opportunities that 'multi-channel' retailers can't reach if they stick to the pure online model (ie. avoid catalogues) ... It also explains why I believe there are opportunities for specialist off-line retailers to develop distinct online retail brands that are free to compete online without fear of conflict with the offline brand.

*****

I have worked in an advisory capacity for many catalogue and bricks and mortar retailers and (with Greenfingers.com) have a successful online business that used to be a catalogue business and has gone from strength to strength since we stopped producing catalogues. Also, with Petplanet.co.uk we experimented with catalogues a few years back and concluded they were a bad idea for us; Petplanet now dominates its category online in the UK.

My distilled view, for what its worth, is that there are very few successful online businesses that would benefit from developing a catalogue. Why? Some of the reasons would include;

The difference in the fundamental economics between offline and online trading (ie. the required margin structure and therefore appropriate pricing strategy),
The potential conflict between appropriate online and offline pricing (driven by the above)
The different buying and merchandising cycles required (print deadlines and mailing dates can come to dominate the rhythm of the business at the expense of the 'continuous' processes required to optimise the web; the optimum range online is different from the optimum range offline)
The problem of dependency on Royal Mail and their pricing policies for catalogue retailers
The 'big picture' issue that posting millions of catalogues is simply 'system inefficient'

... I could go on.

Of course if you already have an established retail brand with customers who value your 'range editting' on their behalf then catalogues may continue to play an important role ... but personally I believe (and have for a while) that print catalogues are the past and online is the future (and most if not all of those arguing the value of print are those with vested interests in keeping that 'channel' alive). *UPDATE* The Sunday Times Fast Track 100 adds some weight to my argument about the death of catalogues, read more here,

Similar arguments apply for bricks & mortar retailers developing the online channel. Of course this represents a great opportunity for them and is a fundamental requirement ... but they will always struggle to compete with online specialists because of the conflicts between optimising price and merchandising online versus off-line.

I would not be surprised to see 'off-line category killers' start to experiment with additional online propositions under a different brand from the off-line business so that they can compete properly online.

Basically I think there are 2 kinds of online retail businesses: 'off-line retail brands trading online' and 'pure online retailers' ..

IMHO off-line brands are missing an opportunity unless they realise that to compete effectively with 'pure online retailers' they need to develop a specialist online brand that can be managed without concern for conflict with the existing off-line brand.

Voucher Code Affiliates

2010-02-12T04:12:00.003-08:00

Why is it that so many e-commerce websites have failed to cotton-on to the fact that they are leaking enormous amounts of cash to Voucher Code sites through their affiliate programmes?

Here's How it breaks down ...

Affiliates are a 'good thing' if they drive traffic to your website that you would not otherwise receive and/or if they provide reassurance to punters (who have already found you but are searching further) by redirecting them back to you.
Voucher Code (aka Coupon Code aka Discount Code) affiliates rarely if ever do this ... having analysed the traffic paths in some detail (thanks to Hitwise) the reality is that most Voucher Code affiliate commissions are generated as a result of the user searching for your website brand name and 'voucher codes' (or equivalent) after they have decided to purchase from you and normally when they are at the point in your check-out process where a voucher code could be entered
Of course they don't need to succeed in finding a voucher code for you to leak the commission, they simply need to click one of the links on the Voucher Code site's page to now be tracked as the last referrer for this transaction
And if you think it through, it get's worse; if the transaction had been referred by another affiliate, the Voucher Code affiliate 'hijacks' that commission by being seen as the last affiliate referrer before the order is placed ... and of course if a voucher code does exist and the punter finds it on that site you are now paying affiliate commission and funding a voucher discount on that transaction (so chances are the transaction is economically marginal for you anyway)

Of course there is an argument in favour of the voucher code sites which goes something like this: bargain hungry customers start their journey at the voucher code site (or are prompted by an emailer having signed up to a voucher code site) and follow the journey that goes 'this retailer is offering a voucher so I will shop at this retailer now' (rather than its competitor, presumably). I simply don't buy this logic (even for those firmly established retail brands where the consumer is more likely to respond to the prompt to shop from this retailer because of the Voucher Code offer itself). Certainly for the majority of web businesses the cost of the 'leaked' and 'hi-jacked' commissions far outweigh the benefits of true 'new traffic' generated.

This is relevant not just for those running affiliate programmes of course -- if I was a 'good' affiliate myself I wouldn't want to be driving traffic to a website that is dominated by voucher code activity as I would know my affiliate commission is likely to be hijacked by a voucher code site at check ot.

Glad I've got that off my chest.

And yes, I have been through the process of paying a fortune to Voucher Code affiliates (when the programme was being managed for me by an idiot) and I have observed what happens when you tur them off (no discernible impact on traffic or revenue generated, massive saving on commissions and funded voucher discounts) so for my sites at least I have tested and validated the hypothesis that Voucher Code sites are mostly leeches and to be avoided.

And yes, it irritates me that I know they are highly successful and they make a fortune ... which is why I have written this blog in the hope that the bubble will burst for them soon!

Maybe we can coin a new term: "Vouchasites" (Voucher Sites + Parasites)

My Business Ramblings Blog ...

2010-02-10T12:59:00.001-08:00

Planning this to be a rambling blog about life at the bleeding edge of the New Economy (or should that be the 'och-aye-the-noo' economy?); a chance to get some issues off my chest and hopefully help keep me and others in touch with the issues that affect small and medium sized entrepreneurial business (with an obvious bias to my main business activity of ecommerce).

For those who are interested, my 'day job' involves looking after
Greenfingers.com
Petplanet.co.uk
... and I retain an active shareholder interest in
Endura