Happy New Years! Some 2012 thoughts on resolutions

Back in my military days, I had a small cubby cabinet.  Inside of it was tacked a sheet of paper that I hand wrote my goals, and the cost of those goals.  Somethings written there included renting an airplane ($60), or buying a book ($10).

A friend of mine commented that I was the only person he knew who wrote down his goals.

15 some years later, I’ve found that I don’t write my goals down.  Instead, I make them mentally and then work to achieve them.  In all reality, though, I suspect that I don’t write them down because the goals are much larger and a little more ambiguous.  For example, I have sales goals that are constantly changing with supplier and customer demands.  They’re not as fixed as renting an airplane for an hour.

But also, I have to admit, that I’m as stricken as anyone by the fear of failure.  Not writing these goals down means I’m don’t have to admit failure to myself or publicly.

Not this year.  Resolution one:  Publicly state my goals.
Before that, though, lets look at my personal 2011 achievements – all of which were un-written:

Bought a business (ok, that was in 2010, and we closed on Dec 21st, 2010.  Our first sale was on Jan 5th, 2011).   We increased sales by 20% in 2011, but more importantly we redid the marketing for the company and streamlined the supply chain so that we can target customers and streamline the entire sales process, including after sales support.  We effectively spent the year positioning the company for 2012 sales.  As a result, we just completed a bid that would increase sales by 500% in 2012.
Competed against 50 companies in the Seattle University Business Plan Competition.  Building a team of diverse, yet high performing, individuals we successfully placed third overall.  I walked into a room and gave a three minute elevator pitch to 10 complete strangers, and then stood on stage and presented our company’s business plan to an audience of 250 (one of which was my Dad).
Photographed an amazing wedding at the Newcastle Golf Course
Climbed a mountain with Fred Beckey
Helped my daughter feed a giraffe from her hand
Stood in an Alaskan river of red salmon with my Dad while a grizzly bear not more than 30 yards from us played with his dinner
Watched ice calve from a hanging glacier that won’t be there in 10 years
Climbed one of the most difficult mountains in the Cascades
With the help of three partners, launched a new business that took over 6 months to assemble.
Flew my family in a private plane to a christmas party in Portland.  By flew, I don’t mean I bought them tickets.  I actually organized and flew the plane.
Quit my job as an airline pilot
Finished grad school

I don’t post these as a means of bragging, but as a simple reminder to myself of the things accomplished throughout the year.  As I get older I’ve found that time moves faster, and the lines that delineate years blur.  This is my mental reminder of 2011.

Today, I’m again writing down my 2012 resolutions for the world to see.  I’ve always believed in goals, but now I believe in accountability.  There is no stronger accountability than the public.

So therefore in 2012 I resolve to accomplish:

Learn one complete song on the guitar, as well as speak (or sing) the words to it.
From a private boat with my Dad, watch a whale breach in the state of Alaska
Run 3 miles consistently
Complete a blog entry at least once a month
Meet my internal sales goals for my primary business
Position my family’s financial situation to purchase a toy (boat?  cabin?  airplane?)
Climb Mt Rainier for the 2nd time
Quit giving Starbucks $2 per day (this was originally ‘to limit coffee consumption to 1 cup a day’, but this is an unrealistic resolution)

There’s probably more, but these are the things that have been on my mind lately.

Thanks for reading.  My gift to you is an analytical MBA’esque attempt to research written goals. 

Randy Babbitt and Culture. Randy who?

Yesterday came the surprising news that on Saturday night the head of the Federal Aviation Administration, Randy Babbitt, was arrested for DWI while on his way home in VA.

There’s a lot of disturbing things about this, but for me the most disturbing is that the FAA oversees flight safety and regulations for every aspect of aviation in the United States.  Mr. Babbitt was a pilot for Eastern Airlines for 25 years.  He’s now the Captain of the largest aviation authority in the world;  one that every nation looks to when deciding how to implement their own aviation rules and regulations.

The Captain of that ship is charged with drunk driving.

There’s a lot more I could say on the topic, but it’s nothing you don’t already know.  What is more enlightening, though, is how this could happen.

I recently received an email from Victor Cheng on a very similar topic that has been in the news recently.  He too addressed how this could happen.   His answer?
Culture.

Victor commented this:

“As my mentor explained to me, the ONLY person in an
organization who can set the tone for the organization’s
culture is the #1 person… the person in charge.

You can’t delegate culture.”

Anyone who has been watching the news or the FAA in the past decade knows that there is a cultural problem.  As matter of fact, that’s why Babbitt was put in place; to change the culture of the Agency.

Victor also mentions that every organization has a mission….but many are lacking values.  I agree with this;  many organizations have value statements, but in reality they are little more than words on paper (or a web page).  Culture trumps these written values.

Lets look:

FAA Mission:

“Our continuing mission is to provide the safest, most efficient aerospace system in the world.”

I’d have to give the FAA credit on this one.  The United States enjoys the greatest safety record in history.  I would argue that it is not the most efficient, but we’ll save that for a later conversation.

FAA Values:

• Safety is our passion. We work so all air and space travelers arrive safely at their destinations.
• Excellence is our promise. We seek results that embody professionalism, transparency and accountability.
• Integrity is our touchstone. We perform our duties honestly, with moral soundness, and with the highest level of ethics.
• People are our strength. Our success depends on the respect, diversity, collaboration, and commitment of our workforce.
• Innovation is our signature. We foster creativity and vision to provide solutions beyond today’s boundaries.

This is where it falls apart. Clearly, as can be seen not only by this recent incident, but a google search of FAA in the past 10 years highlights the fact that these values are not being taken seriously.

Again, Victor says:

“It’s an organization’s values that defines its culture.”

Apparently there are some unwritten values within the FAA that have defined a culture where it’s ok for the Chief to have one too many.

Lastly, Victor mentions this:

“all missions should be constrained by an organization’s VALUES.  A mission might last decades, but one’s values should last
for an eternity.”

It’s these values that tell employees how to act or perform when outside of explicit instructions.  Without these values sealed in the culture, you’ll end up with lapses in judgement like the one we’re seeing here.

The real cost of contract manufacturing (it’s not what you think!)

One of my companies uses a contract manufacturer to handle a process that is beyond our capabilities.  Without them, we wouldn’t be able to finish our product into a form valued by our customers.  From the outset, we wanted to build our production processes on a completely contract basis, but – as many entrepreneurs have experienced – finding a company or companies that can do what you envision is really really difficult.  Manufacturing on your own is really really difficult, too. In searching for a facility that could accomplish what we needed, we learned a lot.  With the help my former University professor, we really really learned how to avoid a costly mistake.

Like any business, our goal was to keep costs to a minimum while producing a high quality product.  We searched far and wide for a company that could manufacture our product at a cost that made sense.  When we finally came down to discussing pricing for this service with the contract company, the prices came in all over the board.  What our professor taught us was incredibly simple, but incredibly important:

The price a contract manufacturer gives you includes their inefficient fixed costs.  Don’t pay for those inefficiencies.

Here’s how that breaks down.   Every company has variable costs and fixed costs.  Business 101 tells us that a variable cost is a cost that changes with the volume of business.  A fixed cost remains the same, not matter what volume of business you do.  Variable costs could include material, hourly labor, etc.  Fixed costs could be rent, salaried labor, etc.

In our case, we wanted to operate a variable cost based business.  The more we sell, the more we contract out.  The flip side to this is to own all of our own equipment, employees, and buildings.  This would be high fixed cost, and for obvious reasons is not where we wanted to be.

So when a company gives you a quote for their service, you’re paying for their fixed costs plus their variable cost plus a markup.

The issue in there is how that company is dividing up their fixed costs.  Assigning fixed costs to different units of a company is a very subjective exercise, and the quote you get may not have an allocation of those costs that accurately reflect the consumption of those fixed resources you’ll be using.  In fact, there’s probably a good chance that those costs being passed on to you are little more than a dart thrown at a dart board.

This is where you can gain some negotiating leverage.

Solving this problem is easy on paper, but difficult in practice.  The solution is to understand your contract manufacturers cost structure, and to negotiate based on that knowledge.

The first question you should as when presented with a quote is simply:  How did you arrive at this number?

An NDA may need to be put into place to really get into these numbers, but that’s easy.  The simple costs you want to look for are labor, equipment costs, and how they arrived at their overhead cost.

Overhead costs are those fixed things like rent, salaried labor, etc.   Clearly, you don’t need to be paying the full rent bill if you’re one of a thousand customers that company has.  Figure out how they allocated that rent or that salaried labor to your project, and see if you can figure out a way to better allocate it in your favor.

Finally, you need to look at if their operation is efficient.  If they have high overhead costs, and there’s no way you can get out of your portion of it, then you’ll probably need to look elsewhere for your contract work.  Unless that company is the only game in town, there’s no need to pay for their poor management.

In our case, we identified our manufacturers costs – the biggest of which was labor.  We then added our estimate of their overhead cost allocated to our project, and then came up with a final number that turned out to be incredibly close to what their quote came in at.  We had a little lady luck on our side, in that the company we were negotiating with was very open about their needs and how our project fit those needs.  It was very easy to come to agreement with them on terms that created a win-win for both parties.

Not only did we get the pricing that we needed, we got a long term partner that will work with us on intangible things in future – such as R&D on new products, supplier contacts and negotiating tactics, and other such ‘elegant solutions’ that go above and beyond the hard dollar amount that we agreed on.

Accounting, CBA’s, and the NBA

On July 1, 2011 the owners of the NBA locked out it’s players, and to date the NBA season has not started – with a real possibility that we may not see an NBA season this year. I won’t rehash the news on exactly whats going on here, but there’s two areas that I want to look at. The first is the rules of collective bargaining, and how sides ‘hammer’ each other into negotiating. The second deals with the last issue the owners and the players are dealing with, and that is the ‘escrow’ portion of the compensation package. It’s confusing, but at a fundamental level the two sides are really trying to reduce their own risk.

It’s estimated that 92% of airline pilots are Unionized. Say what you will about Unions, but if an industry has 92% of its labor force represented by Unions, then there’s probably a good reason. Needless to say, I spent a good part of my piloting career working with our pilots and our management as a representative of our Union. Airlines are a high fixed cost business (more on this later, with the NBA), and management’s core focus in life is reducing those costs (real ticket prices haven’t gone up in over 20 years, so there’s little method of increasing top line revenue, other than selling more tickets – which comes with more fixed cost. More passengers = more airplanes = more capital expense in aircraft).

Dealing with a cost cutting culture as an employee can be very difficult. On a larger scale, negotiating a labor contract in that culture can be downright infuriating. One side of the table says ‘cut, cut, cut’. The other says ‘no, no, no’. So how does anything ever get done??

This is where the Hammer’s come in. Every negotiating session starts well. The sides shake hands, make big plans, and talk about ‘win-win’ situations and ‘mutually beneficial’ contracts. The reality, though, is that either side wants to win, regardless of what happens to the other side. It’s the competitive nature of humans. Mutually beneficial agreements are pie in the sky when one party wants to ‘win’ over the other.

So, naturally, labor negotiations stagnate. A CBA, depending on industry, either expires, or becomes ammendable. Upon expiration of a contract, a labor group no longer is covered by that contract. Same for the company. An employer can now impose any work rules it wants. Conversely, a labor group may resort to ‘self help’, or strike (or any variation there-of). An employer may go so far as to lock out it’s employees, and either shut down operations or hire ‘scab’ replacement workers.

These are Hammers:

Strike by employees
Lockout by employer

In some industries (such as airlines), contracts just become ammendable. They don’t expire, and therefore a strike or a lockout cannot occur. There are no Hammers to bring sides to the table, and if often shows in negotiations that drag out for 5, 6, 7 years after the ammendable date of the CBA. Its usually an economic change that creates a need for one side of the other (usually the company) that causes them to come back to the table.

In the case of the NBA, the owners may have noticed that the NFL came to an agreement with the players after 2 weeks on lockout. In that case, the players could not bear the financial burden of not working.

Ok, so how does the escrow problem relate to the players and risk?

As it stands now, on a basic level, the players salaries are capped to 57% of the NBA’s gross revenue. That means that 43% of the remaining revenue goes to marketing, other expenses, and owners salaries. Basically, the owners are paying for risk. The players have relatively less risk, since their income is set, and it can’t be eaten into by operating expenses.

The NBA, obviously, wants to reduce its financial risk by lowering the already loose salary cap to around 50% of gross revenues. The players, obviously, want to keep what they have (57%).

This is called a fixed fee arrangement. No matter what happens to gross revenues, the players get paid their normal salary. The owners take the hit if the season produces weak revenue stream. There’s a break even point in there somewhere, and the NBA needs to generate enough revenue to create a contribution margin that covers its fixed costs. Every dollar of contribution margin above that is gravy – but it sounds like they’re not quite getting enough contribution above fixed costs to make it worth while. The only way to create a return on their investment that meets their needs is to reduce fixed costs (in this case, the salary cap).
But, what if the players went to a per capita arrangement? Instead of getting a fixed income, what if they took some risk, and put their income at a level commensurate with the fan base?

In per capita deals, players/employees/performers get a share of each ticket price. If the players are lackluster, then sales decline, and so does their salary. The negotiating point now becomes the per capita charge, and which side is bearing the most risk. As with anything, if the risk is out of balance, then a problem is brewing.

The NBA and the players certainly have a problem on their plate. It’s not an insignificant problem, but neither is it insurmountable. As in any negotiation, especially one as public as this, there’s much much more to the story. To find common ground, both the players and the owners need to understand each others financial position, including the fixed cost structure of each group.

Unsolicited Sales Calls

One of the many features of owning your own business is dealing not only with the sales calls you’ll have to make….but the sales calls you’ll receive.  There are days that I really feel I answer more sales calls than customers calls.  This irks me for two reasons:

1.  That is time that I could be spending with customers.
2.  There’s a 90% chance that what is being pitched to me is not even close to something that I need.

Before I dive into this, though, I must admit that either myself or my partners have done the above.  In almost every case, the people we’ve spoken with have been incredibly receptive, and in most case extremely helpful in pointing us in the right direction.  I’d wager that we did our homework, though, and targeted our calls better than most of the people that call me.

Today I received two sales calls.  One came in by phone, and one came through my LinkedIn account.  I would consider one of the calls successful, and one a complete failure.

Lets look at the failure first.  This one came through LinkedIn – a service that I hold in very high regard.  LinkedIn is a place for professionals to connect for whatever reason.  I’ve been introduced to many many good contacts through LinkedIn, and I hope I can say the same for my contacts.  I also use it for researching organizations.  For example, say I need some information on a particular field, or company.  I search my contacts to see if I know anyone in that field or company, or if anyone I know can introduce me to someone in that field.  I don’t use it for direct sales, but rather information finding.  This is one of the many powers of LinkedIn.

I believe the best way to approach a stranger on LinkedIn is by having someone introduce you.  This does two things:

1.  It gives you credibility.  Someone the stranger knows (and hopefully trusts) is connecting you, so you come with a referral.
2.  It disarms the receiver.  Most introductions come with a little background, as well as a reason for the introduction.  This sets the stage for the receiver.

In the case of this sales call, it was an unsolicited and un introduced email.  I had no idea who this person was, or why they were emailing me.  This is usually ok, but only to a point.

This person emailed me to ask if I would fill out a survey on a service his company provides.  It’s a company that I’ve never done business with, offering a service that I don’t need.  Both of these facts raised red flags for me.  While this person may have been, indeed, performing real research, I felt like they were just trying to gauge my interest in their product in an indirect manner.   I was also pretty confident that at the end of they survey  I would be required to put in my contact info.

That’s three strikes against this seller:

1.  Contacting me unsolicited through my personal LinkedIn account
2.  Pitching me something that I don’t need
3.  Asking me to fill out a survey

Lets look at this last one for a second.

Email/survey campaign best practices note a number of things.  The first is that to gain response from people, they must be INVITED to participate in a survey, before they are sent a link to it.  Not only is it courteous, but it makes the respondent feel like their opinion matters (which it does!).  Second, it was disingenuous.  I fully admit that this person may have really been trying to do some research, but it certainly didn’t seem that way.  I just felt like he was fishing for my contact info.

Now lets look at the call that made me ask for more info.

When I answered the phone, a polite person quickly (but professionally) told me not only who he was, but he indicated a product that I sell by name.  This told me very quickly that he was not a customer, and that he actually did some research into what my company sells.  Had he not used the product by name, I would have quickly ended that call.  To be honest, no sales caller has ever actually done this to me.  I was impressed.

The caller then told me what his company does (this was a standard pitch) and how they could help me generate some sales.  The difference between this caller and all the others, though, was that he actually told me – very quickly – how his company would market this particular product to their customers, and at what price.  Again, this person did his homework.  He connected with me, and got me thinking about how I could use this service.  His analysis on marketing and pricing my product made sense.

In the end, the service he was selling did not fit my business.  To his defense, though, the information he had available to him regarding my company wouldn’t have told him this.  When I explained my concerns about why I didn’t think it was a fit, he agreed completely, and commented that the information available and his research on my company appeared to fit their service, which I couldn’t argue with!  I was certainly intrigued, though, if I would be able to use them in the future, and asked that he send me information on his company.

See the difference between the two calls?

In aviation, an unwritten rule is that ‘if your approach is bad, you ain’t gonna land’.  Better go around and try it again.  The first salesman had a bad approach.  When I emailed him back and asked to be removed from his email list, he commented that he ‘thought I would be a good recipient of his survey, based on my background in aviation and entrepreneurship’.  Why didn’t he mention this in his first email?

His research into my background would have connected with me, and the outcome of the emails may have been different.

Pricing

NY Times blogger Paul Downs writes about a topic that my company has been struggling with lately:

It’s a difficult topic, one in which there is never perfect information, and you just have to do the very best you can.  At least in his case, he’s learned (and gone through!)  the different methods of modeling your prices.

For a masters level of exploration on the topic:

Ambiguity: The Camera Ball

Last month, The Atlantic brought our attention to a cool new product:  The ‘Throwable Panoramic Camera Ball’!

Lots of issues here with this product.  I think it’s cool, but seriously.  Who’s the target market?  How is it going to be distributed?  What’s the price? What problem does it solve??

Or is it a product looking for a market?

This is an ambiguous problem, for sure.  I have my doubts if this thing will ever see the light of day, but it certainly is a novel idea.

The ending is the new beginning

A number of years back I found myself on a layover in a small town.  Sick of being in my  hotel room, I headed downtown to visit the library.

Interested in starting a business, but having no idea on earth where to start, I headed for the business section and grabbed a book on business plans.

That book is why I decided to go back to school.

Without reason, I flipped it open to a random section and started reading.  What I read made both great sense, and no sense.

The book told me to start my business by first deciding how I was going to get out of business.  What a concept!  Except, why would I ever want to get out of business?  Here I was, working in a career that I entered thinking I would be at until I retired.  Why wouldn’t owning a business be any different?

Well, it turns out owning a business is a lot different.  Business owners get out of business for lots of reasons (we’ll call it ‘exiting’ from now on).   Some reasons to exit your business:

• Its time to retire, and cash out on all the work you’ve put into building your business

• You’ve lost interest in your business, or have found another one you’d like to pursue

• Owning a business is a lot of work, and maybe you’d like to go back to working for someone else

• It’s payday.  You’ve built your business buy taking little income draws, and now it’s time for it to pay up.

• Your investors want their money back.  The only way to raise that money is to sell

These are just a few reasons you might exit….but the most important thing you can do is to set an exit goal before you ever open your doors!

Here’s a story about a good friend of mine who owns a phenomenally successful retail store.  She opened it after deciding that she no longer wanted to be an accountant for a big firm.  The skills the learned at that firm, though, were the driver of her success.  She knew exactly what she was doing, and it showed in the awards she won, and the business she brought in.  There was one problem, though.

She never thought about how she was going to get out of the business.

Entrepreneurs are notoriously curious people, and that doesn’t lend itself to sitting still for very long.  Sure enough, the bug hit her, and she wanted to move on….but she had no idea how.  3 years later, she still owns the business, but is actively marketing it for sale.

So.  Think about what your goals are in regards to getting out of your business.  Not only will this force you to think about it ahead of time, it will drive the strategy you use to run your business.  For example:

• A manufacturer of small electronic components wants to be bought in 5 years.  Their strategy is to only break even; they sell at cost, they underbid their competitors, yet they make great products that are well designed.  They don’t care about day to day income…they want a large top line which will create a large valuation when it comes time to exit.

• A reseller of car parts wants income to support his lifestyle.  He’s comfortable making XXX amount per year, and therefore thats what he hits.  The company has great potential, but the owners comfort level keeps it where it is.

• An ecommerce company wants to grow its owners income for as long as it can. The owner focuses on developing markets, identifying needs, and fulfilling those needs.  Energy is spent on acquiring customers, and tracking market trends.  Acquisitions of other ecommerce companies are possible.

• A IT developer wants an IPO in 5 years.  This developer is going to focus all his or her attention on meeting the needs of the IPO market, and the investors he or she is going to need to get there.

For me, I start businesses not only to stimulate my mind and sense of adVenture, but also to have a payday at the end of it.  Day to day income is somewhat important, but I’m not going to be jetting to Paris or yachting the Puget Sound on that income.  My goal is to build the business to a certain valuation, and then sell it.  That’s where my long term financial goals are.  Because these are small businesses, I invest in them to create a sustainable customer base and marketing strategy that, should the buyer not continue the effort in those strategies, they will still have a successful stream of business.  This is the value I add to the business.

If you’re thinking about starting a business, or already have one, plan your exit.  It’ll bring clarity to your strategy and give you both comfort and a goal to work towards. In another post down the road, we’ll look at specific exit strategies, and where to find those willing to give you money for your honey.

An introduction

Hi,

Thanks for stopping by to read my blog! My name is Barry, and I am an adVenturer.

I’ve always been drawn to things and places that are unique and tell a story. Oddly, most of these places are right here in my own back yard.

Over time, I’ve learned a few things:

1. I don’t sit still very well.
2. The world is really, really, really big
3. There’s no way I can see it all

To me, adventure now means discovering things that I didn’t know before. This is what I’ve become passionate about: Continual learning.

In all honestly, this was probably always in my DNA, but I didn’t know it. All these little adVentures I had were just a part of it.

So what does this have to do with business?

A long time ago, I had to make a choice. That choice was to follow one of two loves: Airplanes, or business. Because of the experiences I had early in my career, I chose airplanes. I followed that path that led to an airline here in the Northwest, which I spent nearly a decade flying for. Eventually, though, I outgrew it.

That’s when grad school happened. I went back to follow my second love, business. In doing so, I reignited my passion for learning (something that is sadly missing from the airline world), and dove head first into the art of Entrepreneurship.

This is how I ended up where I am today. Instead of navigating the black and white world of commercial aviation, I’ve learned to navigate the incredibly grey world of business! Like learning to fly to remote places, or climbing complex mountains, learning to start and operate a business is an incredible adVenture – one that makes you want to get up and do it again!

So these are my adVentures in Business. Everyday brings something new, whether it’s a problem that needs a creative solution, or a solution I learn about that heads off a problem.

These posts are about what I’m learning in this adVenture. In the mean time, I’m happier and more engaged that I’ve ever been….

…and that’s really the point, isn’t it?