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A modest proposal for rescuing the auto industry

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You know, I just can’t help feeling outrage, depression, and cynicism at the Big Three auto companies asking for a taxpayer bailout. Twenty years ago, we read cases in business school about how American auto manufacturers had already fallen behind foreign imports in production capability, cost structure, and market responsiveness. At the time, this was not new information.

And now, the Detroit top brass are showing up to Congress, hats in hand, for mega-billion-dollar cash flow loans that they project will last them … oh, a few months. And they’ll do what, exactly, in those few months? Why in the world should we believe that the same people who willfully ignored their competitive situation for two generations have any relevant skills, abilities or motivation to fix any of the problems? Aren’t they exactly the people we know won’t solve the problem?

Yeah, they’re saying they’ll reduce their salary to $1 until the mess is cleaned up. How generous of them. Are they taking huge stock grants instead (Iacocca did, back when he reduced his salary to $1 when saving Chrysler. That part of the story doesn’t sound as noble, so it’s often glossed over)?

Even if they’re genuinely giving up their compensation, they’ve taken home seven- or eight-figure salaries for years. They’re way, way past the point of needing another dime as long as they live. What a sacrifice, to reduce their salaries. I say they’re not going nearly far enough. How about giving back a big chunk of what they’ve been paid over the last twenty years, since it’s now apparent they did a piss-poor job at CEOing.

Startups can’t afford the luxury of incompetent, overpaid CEOs

In the startup world, we don’t have much money to pay CEOs. So we look for CEOs who are passionately committed to the success of our idea, our customers, and our company. We give them stock options, sure, but honestly, that’s not what we count on to motivate them. We count on them loving what they do enough to go the extra mile. And not in a private jet. In fact, founder-CEOs often put in their own money to fund the company and work for free until the company is proven viable.

So here’s my proposal…

I’m happy to have taxpayers bail out Detroit, but with a condition: we auction off the CEO jobs at Ford, Chrysler, and GM. The highest bidder gets the job. They receive a total compensation package equivalent to a shift supervisor at one of their plants. No stock, no options, and no bonuses. If they want better health insurance, for example, they pay for it themselves. Why would anyone take this job? Simple. It’s the chance of a lifetime to do something that almost no one in the world will ever have the chance to do: reshape an industry.

It’s pretty clear to me that the logic of “pay the CEO big money” isn’t getting competent, committed people into the position. It’s getting incompetent leeches whose main interest seems to be in feeling self-important while relieving the company of the burden of millions of dollars of vaule.

By having people ante up real money to take the position, we would quickly narrow the playing field to people who genuinely care, are excited by the opportunity, and who are being driven by the challenge or the love of the industry, not by personal greed. And remember, this isn’t the string bean industry, it’s the auto industry. There are many superbly successful businesspeople in the world who are passionate about cars as an industry. I’ll bet we would be surprised at the number of excellent candidates who stepped forth.

I’ve had enough with this absurd logic that says, “you can’t motivate people unless you pay them.” That’s bull pucky. It may be true for assembly line workers, because those jobs are mind-and-body-numbingly dehumanizing, but when it comes to C-suite jobs, I’ve met hundreds of people in those jobs whose motivations have everything to do with passion, challenge, creating, and doing a job well-done. Most of them are already rich enough that they don’t need to work, anyway.

In fact, even Warren Buffett acknowledges this. He points out that the CEOs of Berkshire Hathaway subsidiaries are extremely successful, already independently-wealthy people. They don’t need money and aren’t motivated by it. That’s why they do such a good job.

The least we can do is take Buffett’s example and get CEOs motivated by passion, superb skill, and challenge to turn around an industry that’s had none of the above for a long time.

How 23-year-old Ryan Allis created a $10 million business in three years

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Ryan Allis is the 23-year-old founder of iContact.com, the web’s second biggest marketing website. Ryan spoke in this podcast about how he ended up where he is and the role passion plays in business. This is a companion interview to the Get-it-Done Guy podcast, “Passion Play.”

Podcast: Play in new window | Download

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Profit and Cash Flow Explained

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What’s the difference between profit and cash flow?

Often, it’s the difference between success and bankruptcy.

Before we begin, let’s use clear language. I won’t say “income” because different people mean different things by that word. I’ll say “revenue” to mean money that comes in from selling a product or service.

Imagine two kids who want to start a lemonade stand. They plan to charge 50 cents per cup. If they sell 100 cups, they will make 100 times 50 cents, or $50 of revenue. Of course, they know it takes money to make money. They figure each cup costs 13 cents to make: 10 cents for ingredients, and 3 cents to pay protection money to the neighborhood bully. Their expenses will be 13 cents times 100 cups, or $13. They will have revenue of $50, expenses of $13, and their profit–revenue minus expenses–is $37.

Profit is the money left once expenses are paid. Some people think business owners can take profit to the bank. If only! Profit is used to pay for any new equipment or materials needed for the business to grow. And unless you buy a politician or two, you pay taxes out of profits as well. (Sometimes, profit is given as “pre-tax profit” and “after-tax profit,” so you know what the business produced on its own.) Only after paying for growth and taxes do owners get to take money home.

Our kids are ready to go! They needn’t buy equipment or pay taxes, so they’re eager to start their business and bank their $37.

But wait! If only this story were so simple. There’s a dastardly twist!

On the very first day, the kids go to the store to buy lemons … only to find out neither of them has any allowance money left. The store won’t loan them the lemons, so they can’t even get started. They’re out of business before they begin, thanks to cash flow.

Cash flow refers to when a business needs money. Often, businesses spend money on salary, utility bills, and lemons before they bring in any revenue. By plotting out when cash will come in and when it needs to be paid out, a business can identify when it needs cash on hand, and can do what it takes to make the cash available.

Companies often take out loans to survive until revenue comes in. If our kids must pay the grocery store $5 for lemons today in order to make $50 by selling lemonade this weekend, they can ask Mom or Dad for a loan, to be paid back once the lemonade sales come pouring in. They borrow $5 today, make and sell their lemonade, and then pay back the loan next week.

(What about the protection money for neighborhood bullies?, you ask. Well, the bullies are kind, generous people who understand cash flow. They’re willing to let our entrepreneurs pay after the revenues come in, avoiding a cash flow crunch.)

Cash flow and profit don’t always match up.

A company can be profitable and still go bankrupt from cash flow problems. If they must pay for materials in January but don’t get paid by their customers until June, they need a loan to survive until June. If they don’t get that loan—even if they have guaranteed sales in June—then they will go out of business. Sometimes customers themselves will pay in advance, effectively giving an interest-free loan to a company to help cover cash flow.

A company can have great cash flow, but not be profitable. Amazon.com raised so much money by selling stock in the mid-1990s, that they had $2,000,000,000 in the bank. Every year, they spent more money than they made, so their yearly profit was negative. But because they had so much money saved up, they could afford to make up the difference out of their bank account. The big stock market cash inflows made up for the continual losses. Only after a decade did Amazon actually start making a profit as a company, so they now have good cash flow and are profitable.

So remember: profit is how much money you have left after you get your revenue and pay your expenses. Cash flow is when you actually get and pay the cash. In the long-term, you must eventually get profitable or find someone like stock investors to keep giving you cash to make up for your losses. In the short-term, even if you’re profitable, you survive or fail based on whether you have cash to pay the bills. That’s why they say Cash Flow is King.

What does a CIO do, anyway?

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A CIO job description

For a CEO job description, see my article on CEO job descriptions.

For a podcast of this article, see my Podcast entry.

What does a Chief Information Officer do, anyway? Most of the descriptions I’ve heard make them sound like a glorified purchaser. “They make sure our systems are up to date.” Mega-yawn. CIOs fill a very important role, it’s just no one knows what. Well, today’s podcast will outline the four things you want from your CIO (and probably don’t get).
read more…

No one really knows how to measure software productivity

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I just ran across this article on how consultants (mis-)measure productivity in software development.

http://www.joelonsoftware.com/items/2006/11/10b.html

Sad to say, I couldn’t agree more with the article. I started my career as a software engineer, and I’ve met very few people who understood what software is or how to measure it. When it comes to measuring productivity of software development, give it up entirely. The best software engineers can be 100x to 1000x more productive than merely “good” engineers, if you measure productivity as debugged-line-of-code-written-per-hour. If you measure ability-of-code-to-meet-business-goals, the best engineers can be ten thousand times more productive or even more. Much, much more.

The problem is that software is the codification of a business process. The best engineers take the time to understand the business, so what they codify can meet business goals. People Express airline ($1Bn in sales in year 2) went out of business, according to its CEO, because their reservation software had constraints that kept them from strategically changing their pricing. If their original programmers had understood the link between their software and the business, a single design decision would have had multi-billion-dollar implications and saved the business. What would the productivity be of the engineer who made that connection?

Similarly, the best managers understand that software development is, itself, a business process. The engineers hired, their skill sets, the languages they use, etc. all affect the speed to create, deploy, and support the software. As it is, I’ve only seen one manager (an ex-engineer) who understood the connection enough to use a specific programming language for business reasons. He made a couple hundred million from that decision, by the way… (It was Paul Graham of Viaweb. Read about it here.)

So if you’re a manager, take the time to understand the strategic implications of who you hire and how you have them design your product.

If you’re a programmer, you might be amused by learning to connect your coding with the business implications so you can save your company two billion dollars. But unless you work for the manager in the previous paragraph, don’t even expect anyone to understand your contribution, much less appreciate it. Even if your manager “gets it,” expect at most .01% of the bonus that she gets. Sadly, the business world is built to reward them, not you. (You can find the Harvard Business School admissions office by clicking here.)

Long-term thinking: Water shortage may bring business opportunity

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I was just reading an article on the impending water shortage. Most of us are totally in the dark about it, but for years, people who track such things have been warning that our water usage is coming close to surpassing the world’s available fresh water supply. MIT’s Technology Review magazine was writing about it a decade ago.

If you’re a forward-looking entrepreneur, there’s tremendous potential here, and still some time to do something about it.

You can try to be part of the solution:

  • Develop new desalinization technology.
  • Create distribution systems to help water most quickly move to where it is needed most.
  • Reduce the cost of waste treatment.
  • Breed less water-intensive crops.

If you’d rather be part of the problem:

  • Buy up water rights and start jacking up the prices.
  • Heck, buy up water itself and store it away where you can later sell it for high prices.

This is a long-term strategy, but since we don’t seem to be looking ahead as a race to solve this problem, we’ll have to do it as individuals and businesses.

How to Set Salaries for Entrepreneurs

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“How to Set Salaries” is an article that first appeared on Entrepreneur.com in May, 2006.

Setting salaries for your staff is always a tricky thing to do. It’s especially hard if you’ve never done it before, because you probably don’t even know where to start. On the one hand, you want to pay enough to get the best possible talent. On the other hand, you don’t want to overpay. What’s an entrepreneur to do?

First of all, don’t panic. Remember that your goal is to attract good talent and pay them fairly… (continued at http://www.entrepreneur.com/humanresources/article159438.html)

From Idea to Business: I have an idea … how do I turn it into a business?

I have an idea… how do I turn it into a business?

Many businesses start with a great idea. But a great idea isn’t enough; you have to make it a great business. If you know business, that might be easy. But if not, here’s an overview to find out what’s involved in going from idea to business.

Building a business takes four things: a product or service, a business model, a team, and money. There is no standard order to gathering these, though they all affect each other. For instance, raising money first makes it easier to attract a top-notch team, but you will have to give up more of your equity to raise the money. Having a prototype first makes raising money easier, but without money, prototyping must be done on a shoestring. The tradeoffs will reflect your judgment, willingness to take risks, and the circumstances that come your way.

One word of advice: beware “equity paralysis.” I’ve seen entrepreneurs stall their business to keep as much equity as possible. It is better to own 10% of a $10,000,000 company than 80% of a $1,000,000 company. And if your idea needs to come to market quickly, giving up equity may make sense if it will buy speed.

You need a product or service

Most entrepreneurs start with a product or service idea. Make sure that your idea fills a real market need. Better technology rarely wins in the marketplace. It must meet a real need, and must be marketed in a way that the customers are willing to buy it.

In fact, you don’t always need a new product category. Microsoft was a late entrant in window systems, spreadsheets, word processors, and presentation software. Yet they virtually own those product categories.

Without a product or service, it is harder to raise money or a team. But even so, some entrepreneurs raise money for a “search fund,” where they take a year to find a business to buy or a product idea to develop from scratch.

If you plan on raising venture capital funding, you will find that products/services that alleviate customers’ pain are easier to fund than products/services that simply make life nicer. In general, people buy immediately to eliminate pain, while they are less urgent and motivated to make things better. A leaky roof gets patched before a homeowner adds ornamental trim.

You need a business model…

This article is continued in the “Entrepreneur’s Companion” volume 1. Click here to purchase.