Thoughts (original and otherwise) on the Banking Crisis

So yet another week passes and we see ourselves in deeper and deeper into this, as yet named, financial crisis (somehow “Sub-Prime” just doesn’t seem adequate anymore, the generic ‘2007-08 Banking Crisis’ will probably be what we settle on.)

And this topic has certainly been on the minds of many of my fellow classmates (primarily because of recruiting) and faculty members (primarily the value of their 401k’s I guess) here at school.  In fact, our school felt it necessary to host no less than separate 2 discussions on the crisis on consecutive days to given everyone a forum to discuss and share their views and opinions.

To you, the inquisitive reader, I thought I would take a couple of minutes to jot down some of the jumble of thoughts on the banking crisis:

“What is the root cause of the banking crisis?”  A broad and vague question posed to me by my social enterprise professor on the 2nd day of class – prolly more to seek out answers he could reuse by polling the collective intelligence of the class for answers – rather than as part of his lesson plan.

• My first response was: “Relaxed borrowing standards for home mortgages to the point that any fool and his dog could take out a loan.”  If you inherently believe in  having free markets that are efficient and will allocate resources to areas that maximize economic return of the participants than this has to be your starting point.  I’m not going to blame the banks for their securitization and structuring activities – this made money and therefore was worth doing, this was the invisible hand at work.  Which brings me a corollary:
• If it’s legal and it makes money (and yes securitizing and repackaging home loans made a boatload of money for them), the investment banks will do it.  The nature and structure of investment banking remuneration (i.e.  focus on big year-end bonuses) rewards bankers for taking risks that pay off in the short-run, long-run risks be damned.  This creates a culture which increases systemic volatility as all the bankers race to get a share of their slice of the pie (in whatever is the latest reward of scene of the day) before the party ends.
• Profit-driven Debt rating agencies which had massive conflict of interests that corrupted their ability to fairly rate debt and that assigned investment grade ratings to the eventually toxic mortgage-backed securities and CDO’s.
• The regulatory environment was all of:
  • too outdated (current structure of financial regulation has not been updated since the 1930’s)
  • too slow or cumbersome (perhaps the US’ rules-based regulatory framework should be sunset in favor of the UK’s principles-first regulatory framework to financial innovation can be automatically matched instead of waiting for lawyers to update the books)
  • too weakened by successive cuts in the funding of the regulatory agencies

to be able to respond.

What about the issues of low historic yields distorting the markets? I heard this sentiment several times and I agree that this definitely contributed to our problems but I don’t agree its the root cause.  As the Fed (re Alan Greenspan) kept rates artificially low for too long (remember Greenspan’s argument that productivity gains from info tech would allow for lower rates of natural unemployment?) this distorted the capital markets.

Related to  Alan Greenspan’s low-rate management policy of the overnight Fed Funds rate were the lessons learned from the Asian Financial Crisis of 1997-98 which instilled a “best practice” of running current account surplus, stockpiling foreign currency reserves and maintaining weaker currency in order to stave off a repeat of ’97-’98.  Of course this had the unintended consequence of flattening out the rest of the US debt market’s yield curve as Asian countries furiously bought treasuries to park their current account surplus and keep their currency relative weaker.

Asset managers, with their trillions of dollars, could no longer rely on a decent real interest rate from the bond markets to earn a reasonable return for their income-seeking fundholders eventually turned to more risky ‘alternative investments’ fueling a boom in hedge funds and private equity.

(These hedge funds with their “2 and 20” payout structure likely contributed additional volatility in the capital markets by fostering a ‘go-big or go-home’ mentality as these fund managers sought outsize risks in order to make outsize gains for their 20% carry.)

Where do we go from here?

I guess this is where things get interesting.  A lot of folks talked about the notion of ‘delevering’ or essentially borrowing less.

For example – now that Goldman and Morgan are commercial banks, they are going to have to run their operations and balance sheets like them.  Whereas they are currently levered 40 and 33 to 1 respectively, they will now have to come in-line with the rest of the commercial banks at 10.   Which means selling off 66% to 75% of their assets (i.e. loans to their customers).  This does imply that GS and MS are now likely to be less profitable and less valuable as they can only lend (and collect interest income) on 1/4 to 1/3 what they could previously have done?

Broader implications to the US economy is that money supply will be tighter, less money flowing around as regulations will (hopefully?) rein in irresponsible lending.

In the medium run, low-yield market distortion could see itself worked out as foreign investors – re Japan and China switch their target instrument of treasuries into alternate and equity investments and out of US dollars into more diversified basket of currencies – this latter treend is already happening and will likely continue.  This will of course have implications on the alternative investments financial management industry.

Longer-term, of course, there is another looming issue which seems to have submerged back from mass consciousness – that of the twin deficits (budget deficit and current account deficit) triggering US-confidence crisis which result in spiking interest rates and falling US dollar (I guess that is already happening) as foreign investors turn their back on US economy.  The potential saving grace here is that given the risk adversity of these investors and the unsettled state of the world and other economies, the US still represents the safest destination for investors…for now.

 

CDN$1 = USD$1: Canada on the Threshold

Today was a great day for the Canadian Loonie.

Today was the day that 1 Loonie was worth 1 greenback. In fact, briefly the Loonie was worth MORE than the greenback.

Let’s put this into perspective: in my lifetime the Loonie has never traded this high before so for me, this is a lifetime event.

Personally, this is going to make my grad school education just a little bit more palatable and I’m certainly glad I held off converting my loonies to greenbacks until now. But other than this small personal benefit, I thought I’d take a moment to assess what exactly all this means for the Great White North.

Canada on the Threshold

Already manufacturers from Ontario to BC are crying out in pain, and I’m sure we’ll be hearing that much more from the CDN news outlets in the future, I really have little sympathy for this nonsense. Instead I would urge them and the country as whole to take this historic opportunity to rethink who they are.

It’s absolutely clear now that Canadians and Canadian companies should no longer see themselves as a low cost outsourcers to the United States.  If Canadians really wanted the better life with the world class social program they have been screaming at their government to deliver, they better start trying to build a world class economy that can support it.

That’s what the Brits did in the 90’s with Blair’s Third Way economics. That’s what Canada needs to do now.

It’s not that we haven’t been trying but the whole 60 cent dollar gave Canadian businesses a crutch they could complacently lean on. Why try to improve the processes and product quality of your company when you this natural low cost advantage working for you?

And the results show. Canada’s productivity growth has perpetually ranked below that of the US since, no surprise, 1980 – just several years after the Loonie started tanking. By PPP, Canadians earn on average $8000 less per person. For a country that is better educated and blessed with more natural resources than its southern neighbour, this is atrocious.

Well back to the future, Loonie companies have a new reality they have to adjust to – a world in which they can’t rely anymore on being cheap. So here’s a quick list of suggestions:

1. Invest in Information Technology. Did you know that the much of the US productivity growth in the 90’s was driven by massive IT investments? And yes I know Canadian companies couldn’t similarly invest at the time since the Loonie was in the crapper.  And yes, I know, IT has for a long time been really expensive and risky to do. But that’s no longer the case. with a $1+ Loonie, IT costs as much to you as well an US company does. Moreover, software manufactures from Microsoft, to Oracle to SAP are falling over themselves to go after smaller companies, companies more like what a typical Canadian company looks like.
2. Labour productivity matters. This might be cultural, but yes, there are better ways of doing things sometimes. Maybe Canadians workers and middle managers are too nice or they aren’t thinking and like to keep their head down and do things the same way they were done 5, 10 even 20 years ago but this has to change. That’s not enough anymore. Execs needs to be pushing harder to work smarter. Your company’s survival depends on it.
3. Invest in mangement talent. Having worked in both Canadian and US companies, I can tell you, Canadian companies could benefit from an upgrade in management talent. I can’t exactly put my finger on it but I can say that US managers seemed to have a more strategic view and make better quality decisions. This was a major motivation for my decision to go back to grad school. In Canada, the % of MBA’s in the workforce is significantly lower than than in the US. Maybe I’m biased but I think this makes a difference. With a $1+ loonie, now is a great time to invest in some human capital – maybe you can re-import some top flight US-educated expats back. (hint hint)
4. Stop getting bought out. For all the PE funds and global companies that bought out Canadian HQ, congrats – you could not have timed your moves better. I guess it helped that there was this niggling loophole in the Canadian tax code to help you fund all these acquisitions. For the remaining Canadian companies out there -stop selling yourself short. You’re better than that and should be looking to be a player in the global economy instead of the wallflower waiting to get picked up by the player. Speak of which…
5. Start looking at Foreign Acquisions. It’s sad to say but I’m not sure the whole $1+ dollar think will be a permanent fixture. As such, you could use this opportunity while costs are relatively low, to snap up promising foreign companies that could diversify your income, give you scale economies or get access to proprietary capabilities or resources to be the next engine of growth for your company. Carpe Diem!
6. Start Innovating again. Hey guess what – one of the biggest IPO’s in the 2007 was Lululemon (NASDAQ: LULU) a little company from Vancouver! How did LULU do it? It created a whole new niche category in atheletic apparel, something totally unique from what was already in the marketplace. Today, LuLu is worth as much as Oakley and it’s offerings are taking the US market by storm. Canada as a whole needs more LULU’s and needs to spend more time innovating, thinking up new products, retail concepts or processes instead of building call centers to take US jobs. Speaking of innovating…
7. Canadian Venture Capitalists – starting funding again! Your job is gamble (in an intelligent, calculated way) with other people’s money – not lock your funds in T-Bills. Go forth and fund the next RIM, Crystal Decisions and ATI’s! Your loonies go further now and setting up that critical SiliValley sales office is now a whole lot cheaper.

All through the 80’s, 90’s and 2000’s Canada has been content to be a economic colony and low cost nearshoring location for the US. Today, marks the opportunity, however fleeting, to step out from that role and become that world-class ‘North American’ tiger economy it has the potential to be.

Canada stands on the threshold. Whether it chooses to cross it or step away depends on how well it responds to the challenges and opportunities presented by $1 loonie.

Go Canucks.

 

Lululemon – Too Expensive!

Okay  – before I get flamed from all the Lululemon fanatics out there, I want to say my comments are limited strictly to the Lulelemon the stock.   I love the stores, the brand, the product and the employees. 

Heck, Katy bought 2 pairs of lulu-pants for me which I *occasionally* wear.  Though, truth be told the reason most guys love lululemon is because it girls look *hot* in them.  (There’s even a Facebook group dedicated to this fact.)

(FYI – for those unfamilar with the company, Lululemon is a sport apparel manufacturer and vendor that sells mainly in Canada that specializes in clothing for Yoga.  They sell mostly to women but have been trying to develop compentent men’s offerings  – branding and perception issues here more than anything else – and have been trying to expand beyond Canada where it has been phenomenally successful.)  

Anyways, having said all that, after hearing from friends that Lululemon recently IPO’d on NasDaq and TSX (NAS:LULU) I decided to look at LULU’s financials to see if it was worth plopping down some of my tuition $$ for shares.  As I said, I’ve always been a fan of the company and following Buffet’s ‘buy what you know mantra’ it made sense…

Good thing I did my due diligence.  From my limited pre-B-school financial analysis skills, this was the picture I painted from spending a couple of hours with their prospectus:

• At USD$31.01 a share and ~67.5m shares outstanding LULU sports a heft market cap of $2.1B. 
• Of course this is all relative, but LULU currently only has a $149M in revenues and for it’s last fiscal year registered $7.6M in earnings – giving it a nosebleed trailing PE of 273.
• To put this into perspective, Tim Horton’s (NAS:THI),  another beloved Canadian icon sports a market cap of $5.9B but has 10x the revenue at $1.6B and a PE of 24.
• Or a more reasonable comparable – Oakley (NYSE:OO) has a lower market cap of $1.9B but sports $870M in revenues and a PE of 38.
• Most of the proceeds of the $164M IPO goes to existing shareholders cashing out with only $20M going to the company’s coffers to fund expansion
• 73% of the common shares in the common are shares still locked up but will be shortly available including 42% of the company to come available on Jan 22, 2008 and another 31% to come online next year.  In effect – probably much of the high price of the stock is the result of limited supply of the stock – expect the price to come done significantly in late Jan and early Februrary as more shares come available on the market.

So here’s where I’m thinking with this – assuming this whole IPO thing doesn’t screw up the company (it sometimes happens), check the stock again in 5-6 months and if the stock is more reasonable, say $10-$12, which BTW, was the originally suggested IPO price, pick up some.

The fact of the matter is that while I like Lululemon the company, based on their stated, ‘community-based’ grassroots marketing strategy, their revenues are not going to explode over night like a dot-com would.  It will take time to build up the customer loyalty and goodwill, but it will pay long term dividends.  Hopefully the mad dash to cash out with an IPO has not blown-up the company’s successful DNA which has made LULU all the rage of  20-40-something women in Canada and – to LULU’s ambitions – the world. 

 

Guerilla Negative Marketing?

So, in randomly surfing, I found this video on YouTube.

It totally bashes the PS3 – in a very creative and entertaining manner I might say.

However in watching it, I couldn’t help wondering if this video was actually some guerilla negative marketing on the part of Microsoft?  On the face of it, this video looks like it was produced by a hardcore gamer, who cares enough about console religious wars, actually spend the time to build this video. However several things stood out that just didn’t fit:

• The production values were too high. This just didn’t look like the product of a fanactical teenager who put this together overnight on his MAC or, more likely Alienware rig.
• The backing track wasn’t just some cheap cover version of the Fray’s ‘How to Save a Life’ – it was the backing track to that song.
• Ditto for the lyrics which were very catchy, very well written – too well written
• The graphs intermittantly shown in video were well put together, very professional and featured some pretty obscure/proprietary stats.  They looked like slides from some gaming exec’s powerpoint deck.
• The messaging points in the video – the importance of online gaming, cool exclusive games and the message that ‘no one cares about BluRay’ – (not true, if I get a BlueRay player, it probably will be a PS3) all play to the XBox360’s strengths and PS3 weaknesses.
• Though the video does reference the Wii, the references to the 360 are much more numerous.  In fact the video ends with a cut to the XBox360 logo – this is a dead giveaway and more than anything else in the video raised my suspicions.
• When I looked at the other videos posted by the user on youtube, all he had were XBox360 games.
• Just the name of video ‘How To Killed Your BRAND’? – raises eyebrows.  What hardcore gamers do you know think/care enough about brand equity to create a video? The only gamers I can think of are Microsoft XBox 360 marketers.
• Similarly the video raises the point about relative costs being an issue?  But seriously, what hard core gamer do you know that are really price conscious?  I know some gamers that literally have all of XBox360, PS3 and Wii sitting on their TV stands.  Clearly cost wasn’t an issue for them.

So having laid out the case this is a Microsoft-produced video (good to see the evil empire hasn’t lost its touch), I guess there are two possible explanations:

1. Either this was some internal video a Redmond employee put together to show some company rally that was overzealously posted to YouTube
2. this was intentionally produced by the evil empire as part of a guerilla negative marketing strategy.

Maybe I give them too much credit but I think it’s the latter. 

Well, give the boys in Redmond props for being creative in their marketing efforts.  They’ve taken the concept of SwiftBoat Veterans and adapted it to consumer marketing.

 

The Salesforce.com Way

Love them or hate them, Salesforce.com did something right when the tackled the enterprise software market with their intentionally inflammatory, yet attention seeking ‘End of Software’ rhetoric.  But that’s not the only thing they did right in the age of Internet.  In this podcast, SFDC EVP Tien Tzuo details some of the ideas about the ‘salesforce.com’ way in contrast to their more larger, traditional software rivals Siebel and Oracle.

Among the highlights:

• customers want to do their own research before approaching vendors – give customers more information by putting it up on the website so they can educate themselves
• build a presence of the Internet – bloggers, and press, easy to find on Google
• let your customer trial your software – this gets you in the backdoor, so to speak, and often you can win the deal without even having to contest it with your competitors
• design your software to be high usable, easily discoverable and layer the complexity into the details
• leverage the creativity, energy and expertise of your customer and partner base to extend your product’s functionality footprint (e.g. AppExchange) instead of investing in more developers

 

The Advantages of Private Equity firms

There is an informative article in the latest issue (Nov 27,2006) of Fortune Magazine that examines the differences in management style between public and private equity-owned companies how these differences favour the PE firms. For example, in the 12 months to June 2006, returns from investments in PE firms averaged 22.5% vs 6.6% for the S&P 500 and over the last 20 years, the respective performance has been 14.2% vs 9.8%.

The specific factors the article cites in operating mentality in PE firms specifically are:

1. Management @ PE firms have short term objectives (2-5 years) to sell the company or take it public creating a more focused decision-making environment.  This is contrast to management of public companies run the company as a ‘going-concern’ with a time horizon stretching to infinity.
2. Management @ PE firms often are required to have a significant portion of their personal wealth invested in the company.  This creates true alignment between owners and managers.  Remuneration techniques in public companies such as stock options or restricted stock which, while they do provide upside, have little downside for the ownership.  This potential creates a misaligned incentive structure where management will take greater than prudent risks (‘increase the beta of the company’ in finance parlance) to get their options and restricted stock to actually be worth something.
3. PE firms can afford to pay executives a lot more.  Free from the scrutiny of the press and ‘goverance activists’, PE firms can afford to recruit the truly elite talent with pay offers that would be impossible for a public company to offer.
4. This one is generally well known but PE firms don’t have to worry about pleasing the gods of Wall Street with offerings of regular and consistent growth in quarterly earnings.  Management at PE firms are free to do what’s right for the long terms health of the company instead of handcuffed to managing the share price
5. Management at PE firms can devote 100% of their time to minding store.  Managers at public companies are lucky to be able to spend 60% of their time to actually running the company and the rest managing the investing public.
6. PE firms are the primary focus of the activity, not a far off business unit that is peripheral to the corporate mission.   This focuses and raises the morale of management.
7. Boards of PE companies are smaller and focused on making the company a success vs. thinking pondering corporate governance issues.
8. Because they ARE the ‘old boy network’ PE funds can leverage their connections to benefit the business.  Think Keireitsu capitalism on a massive scale.   
9. PE firms are laser focused on cash flow – not EBITDA, EPS, ROE or corporate social responsibility.  Think of Gordon Gekko’s "Greed is Good" speech.  "Greed clarifies and cuts through."

That’s the theory of PE funds inherent advantages anyways.  But never forget that PE funds are merely traders and like any other traders, their objective is to buy low and sell high.  Whether they are actually aiming to create long term value or merely put up a facade of value-add is debatable.

 

Rules of the Road for the Modern Desk Jockey

In any company, there is always going to be folks in some organization somewhere who believe you are useless and/or overpaid.  (If not, you are spending too much time at work.)  Just make sure your boss or your boss’ boss aren’t one of those folks.

Always ask yourself if you are adding value to the company – if not, you are useless.

Always ask yourself if you are learning new transferable skills in your current job – if not, you are unemployable outside your current company.  Can you live with being a slave to your company?

Always compare your career progress to the overall job market.  Don’t let the company waste your time.

Your workload will always grow to occupy all your free time.  The faster you get your work done the more work that will be assigned to you.

There is often little correlation between how hard you work and how fast you get promoted and/or how much you are paid.

Don’t blindly take on assignments.  Often they are merely distractions.  Ask if they will still need to complete that assignment 2 weeks from now.  When someone says "it’s urgent" it’s often code for "I screwed up in planning and now my ass is on the line"

Try to figure out if an assignment is critical and/or high visibility before you pour your heart and soul into it.

A good manager will communicate all the important things to you and shield you from the crap.  A good manager will clearly communicate the goals and objectives of the team.

A good employee will always try to see things from the perspective of his/her manager and work to the benefit of his/her manager and the team.  – A good manager will see and appreciate this.

Bitching and getting distracted by events beyond your control does not advance your career or help the company.  Stay focused.

Often you have more power over your manager than you realize.  Firing and rehiring is a bitch.

Your manager is not responsible for your career development.  You are.

However a good manager will give honest career guidance in your best interests when asked.   Bad managers will give you advice that only benefits themselves. 

Don’t waste your time.  Don’t let your career stagnate.

Titles and jobs come and go.  Your relationships and your reputation are your most important assets.

People would rather work with the competent likeable guy than the brilliant asshole.  Be brilliant but don’t be an asshole.

Any other rules you would like to add?  Add a comment.

 

The Internet and the Knowledge-Based Organization

Knowledge Management (or ‘KM’ as it was known to be called) was a buzzword and nebulous management best practice that received considerable attention in the late 90’s as a panacea about the then pending ‘Knowledge-based Economy’ reached new heights of media overexposure. I remember reading a business plan about a KM solutions company a few of my peers in our New Venture class had written about some 8 years ago now.

KM as a concept, like B2B ecommerce and application service providers was a concept that overpromised and underdelivered at least in it initial iterations.  A KM strategy for an organization is especially difficult in that

1. it’s ROI can be difficult to measure and therefore difficult to justify spending on and
2. that in order to execute properly, requires a wholesale change in attitudes and culture of the organization.
3. the tools did not existing, even conceptually, to cost effectively perform knowledge management

While the first obstacle remains and probably will remains until a visionary CIO and saavy product marketer can coalesce a Mooreian ‘tornado’ around the concept.  What is interesting is that a whole new generation of workers reared on Internet technologies – specifically – Google, IM, mySpace, blogs and podcasting are set to enter workforce in the next 5-10 years. 

Organizations that can successfully harness the ‘net saavy of this generation to remake their organizations into inherently knowledge-creating, highly collaborative and scalable organizations will be able to achieve a (relatively) lasting competitive advantage against their competitors. 

I think many organizations are correct in studying the organizational culture of Google (‘Controlled Chaos’ as a recently dubbed by Fortune magazine) or its predecessor ‘W.L. Gore & Associates’ for clues on the future of the KM organization.

It is also in my mind – the only path of salvation for American companies desperate to seek a way to compete against the more cost effective and determined yet more hierachical Chinese and Indian competitors of the future.

To the subject of knowledge management tools – it is unsurprising that consumer Internet technologies should lead the way.  There is a rule of them that Internet technologies typically start in the consumer space and after some time (typically for cultural acclimization and securing of the technologies) are adapted and adopted for the corporate environment.

So too will this be for KM.  Consider the following hypothetical scenario some 10 years from now and evaluate for yourself how realistic this will be in the KM-practicing organization of the future:

• email *yawn*  ubiquitious and generally accepted form of communication.  Check out Yahoo Desktop search as a great tool for the easy search of your e-mail communication – so much better than Outlook’s native search.
• corporate and departmental intranets allow companies to quickly disseminate information about the company and department to its employees.  This has already come to pass in most large organizations and some medium companies – notably in the technology industry.  The rollout will continue
• Instant messaging to allow employees to make short work related inquiries with each other
• corporate based search engine technology will be perfected allowing employees to easily search on documents on past projects as easy they search for escoteric topics on the internet using Google.  Currently the key challenge in corporate search, besides lack of content, is finding a new method of determining relevance as the current algorithm of using the volume of backlinks to determine relevancy on the Internet is less relevant in the corporate world.  What might work best is something akin to the ‘I found this article useful’ rating feature found on popular B2C websites to help rank consumer-generated links
• employees work blogs allow employees to track notes in realtime and share findings and thoughts with colleagues and store role related knowledge ensuring continuity even as employees change positions or leave the company
• podcasts and web recordings that are posted on the corporate intranet to allowing a new media of knowledge capture and dissemination away from the typical staid offerings of Word document and powerpoint slide decks
• corporate social networking sites (the label is an oxymoron I know) but the infrastructure for employees to allow determine the interests and skill sets of their peers, identify their current and past projects so they can  easily identified and leveraged for new and existing initiatives.  Our company is so big we can are bound to have the knowledge on almost any technology topic we can think of – the trick is identifying that person in the organization
• project management websites such as sharepoint and sourceforge to faciliate the management of ad hoc projects for informal work teams in the future.

 

The Business Models the Internet Created

Back in 1997, Esther Dyson, one of the Dot-com’s most prominent digiteri famously pronounced in her book, Release 2.0, that the "the Internet will change the world." 

About 4 years later, in 2000, Larry Ellison once remarked as if in retort to Dyson’s euphementistic pronouncements that there wouldn’t be that many companies created by the Internet. 

As Fortune magazine recently commented however, many of the ‘outlandish’ predictions made in 1996 largely came to pass in 2006. 

This is the first of a series of articles that will try to realistically asses the impact the Internet has played in the grand world of business. 

First up, lets take a look at the entirely new business models and businesses that use them, that would not have been possible without the Internet…

[Humans have] a real tendency to overestimate how much things will change in the next two years; but also…a tendency to underestimate how much things will change in 10 years…Bill Gates

Let’s look at how much we may be underestimated change in the last 10 years.  Let’s take a look at how the Internet has created entirely new online industries:

Etailers

• Amazon.com – the original e-tailer
• MTGSoldHere – niche e-tailers of CCG’s

Online Marketplaces

• Auction based:
  • eBay – online marketplace
  • Ariba’s Free Markets
  • e-lance.com
• Matching Buyers and Sellers:
  • Match.com/Online Dating – marketplace for personal relationships – or – intimate encounters.  Aggregates supply and demand
  • Monster.com

Online Classifieds

• Craiglist

Library/Resource Sharers

• Netflix – Film Library – the Internet was the only cost-effective channel to field requests and preferences

Online Advertising

• Google – Automated online advertising placement agency, traffic monetizer and the world’s leading search engine to drive traffic
• Yahoo – custom online advertising to its audience

Critical infrastructure providers

• Paypal – electronic payment systems
• Google – search engine for easy identification
• Local Webhosting provider
• Akamai – high capacity content hosting

Online Gaming:

• Subscription based: World of Warcraft, Everquest
• Transactional based: Online Poker, day trading
• Virtual Products: Guildwars, Magic Gathering Online
• Negative Expected Value Gaming: Online Casinos, electronic lotteries, kino

Software as Service:

• Salesforce.com, Netsuite

 

This Ain’t MSN Messenger – the Real Cost of Business Software

Eventually for most of us, the shoe falls on the other foot.

Having worked in the business software industry, trying to get software sold for the better part of 5 years now, it was enlightening talking to a friend of mine yesterday about her company’s experience trying to buy ERP software for her company.

Her company is a small venture-funded start-up that provides R&D business process outsourcing, contracted primarily on a project-basis, for large companies.  They are trying to get an ERP system in place to get good cost accounting capabilities obviously so they can geneate a true P&L of their business.

The specialized nature of their business and the fact they are small of course limits the field of possible vendors.  Because of they small company with insignificant revenues and limited financial resources, whatever system they choose, because of the critical task the system performs and because the ‘Total Cost of Ownership’ of the system relative to their available cash, this is going to an important purchase no matter who they choose.  In fact, I can easily see this deal coming down to ‘no decision’ as we say in the SW industry. 

The Real Cost of Software

First, the important thing to realize is that the ‘license cost’ is not the final cost of the purchaser.

1. In this case the stated license costs is around $25,000.  Not bad as software license costs go. 
2. Second, you need to look at yearly maintenance costs.  This is a yearly charge customers pay to software vendors ostensibly to provide telephone and web support, updates and patches and frequently for upgrades to make the SW work on new versions of the operating system, database, etc… and sometimes for new features and functionality included in those upgrades.  In this case, the company was charging 18% of the license cost per year.  This is a pretty standard rate in the software industry.
3. Third, you need to look at the cost of installation and set up.  Now this is a bit of an open secret in the industry, but not every piece of software is as easy to install as your latest version of Microsoft Office.  Given the complexity of software these days, especially for web-based business apps, you can expect some head-scratching moments.  However, one could argue that any somewhat technically savvy guy or gal should not have to attend a 2 week training class to understand how to get the software up and running.  Sadly, this is often the case industry.  While some cynics chalk this up to deliberate obfuscation of production functionality so companies can charge juicy professional services fees, in most cases the reasons are much more benign:  companies would rather spend their valuable R&D resources adding more features than simplifying the install.  Companies can charge more for new features, attract new customers and are the basis of good marketing ‘story’ we can take to market.  Face it, how attractive would be the new version of the product if its headline feature was "Now More Easier to Install!"? 
4. Ongoing maintenance:  This is sometimes considered a hidden cost, but companies need to consider the cost of keeping the servers and the software updated