The Network Garden - Mark Sigal's Blog

Product Sanity Check: Vitamin, Aspirin or Penicillin?

In working with entrepreneurs (and donning the cap myself), a few fundamental questions that I always ask are:

1. Who needs this?
2. Who needs you to succeed?
3. What has to go right for you to succeed?
4. Is there a trigger ‘event’ when the customer knows that they need to buy NOW?

I would add to the mix “Vitamin, Aspirin or Penicillin?”

Specifically, is your product or service a 'vitamin' (you really SHOULD take it; it will make you healthier; but of course, many don’t), 'aspirin' (when you have a throbbing headache, you know that you NEED this) or 'penicillin' (you may die if you don’t take this NOW)?

We often lose sight that while our offerings may be sexy and cool, or even deliver lots of utility, they may not be essential or drive clear buying triggers.  In tough economic times, especially, vitamins are often (but not always), the first to go.

Related Posts:

1. The Paradox of Developing New Products and Services
2. Start in the Middle: a user experience product management methodology
3. Innovation, Inevitability and Why R&D is So Hard
4. Pattern Recognition: Secure the Design Win, Capture the High Margin Dollar

Thought Streams – Rape of Europa, Fundamental Asset Re-Pricing & The Movie Marketer’s Playbook

It is a well-known fact that Hitler was a failed artist before he became a monster.  How that failure fueled what came next is largely an unanswered question, but one thing is certain.  It fueled a rampant desire to possess for himself and The Third Reich all of the world’s great art.

‘Rape of Europa,’ a compelling documentary (now on DVD), tells the lesser-known true story of how Hitler’s war and killing machine facilitated an art thievery machine that is beyond belief.

We see the micro level of Jewish art dealers sent off to death camps, in tandem stripped of their citizenship, leading to the cynical and evil capture of literally thousands of masterpieces that are suddenly ‘owner-less.’ 

We then see the curators and staff of France’s famed Louvre and Russia’s Hermitage scrambling to strip the walls bare of their museums to hide treasures like Mona Lisa before the Nazi onslaught arrives.  Next, we see the Nazi machine in action, systematically pillaging antiquities, furniture, paintings, sculpture, etc.

What follows is the Allies’ wartime dilemma of whether to fight the Axis with a blind eye to protecting classic monuments and artifacts, or instead, to measure blows and bombs, putting human life (soldiers) at greater peril. 

Finally, as the Allied victory takes hold, we see the saintly role America played in doggedly chasing down (over a multi-year period) the Nazi’s ill-gotten gains, and repatriating them to their rightful owners. 

It is a beautiful bookend to Donald Rumsfeld’s lame “stuff happens” mea culpa after the complete looting of the Baghdad Museum (following the invasion of Iraq), and a reminder of why America was so globally revered after World War II, and what we need to return to.

Side note: To fully understand the brutal efficiency of Hitler’s Germany, you really have to see Ken Burn’s brilliant documentary, The War (links to my post); it's lengthy at 15 hours (6 DVDs) but a life changer, to be sure.  Let us never forget.

Without financing, the same identical underlying asset is worth much less!

Leave it to Andy Kessler to find the perfect allegory that captures how when the financing engine seizes, assets are suddenly worth less.  A lot less.

In ‘Chicago Cubs Economy,’ Kessler assesses Mark Cuban’s aborted attempt to buy the Cubs, and what it says about asset values, now and into the future:

Here’s an excerpt:

"So here we sit in early 2009. Banks aren't lending much, so assets are being quickly revalued back to some rational cash-flow multiple. A house is increasingly worth what your income cash flow can afford to carry mortgage payments, not what the next sucker will pay to take it off your hands. Same for stocks. Earnings were and are king. Low-debt or debt-free companies with earnings potential once the economy bottoms out will be the next wave of winners. Debt-ridden companies have a long workout ahead."

"The trick is to get as quickly as possible to rational pricing. What is something worth with normalized profits and cash flow? That's what forms market bottoms and gets bankers lending again."

Like Having Bad Speakers on a Great Stereo

Perhaps it’s a bit unromantic to look at the business of movie making as being as much about the packaging as the product. 

On the other hand, those of us in tech have long appreciated the sad fact that good marketing of mediocre products often trumps poor marketing of great products (see: Microsoft v. Apple: Chapter 1).

In 'Inside a Movie Marketer’s Playbook' (in The New Yorker) we learn about the rules that studio marketers have cobbled together for making their films seem broadly 'relatable'; how audience segmentation shapes what gets 'green lighted' and how much of the science of marketing is determining which OLD movie your NEW movie is most like, so you can turn to that movie’s playbook as a rough guide. 

Sounds like the classic VC query "So who do you look like?"

Here’s an excerpt:

"Most of a movie’s opening gross is about marketing,” Clint Culpepper, the president of Sony Screen Gems, says. "You can have the most terrific movie in the world, and if you can’t convey that fact in fifteen- and thirty-second TV ads it’s like having bad speakers on a great stereo." At Sony, executives ask, "Can we make this seem ‘babysitter-worthy’? Will it get them out of the house?"

"The big studios’ average marketing budget of thirty-six million dollars is one-third the total cost of making a film; Lionsgate’s average marketing budget is twenty-two million dollars, about two-thirds of the film’s total cost. In other words, Lionsgate is making much cheaper films that rely disproportionately on their marketing."

"If we weren’t making decisions based on marketability, John Malkovich would be in every movie,” a top studio marketer says. "Great actor, but not someone you want to see half-naked in the sheets next to Angelina Jolie."

The Restaurant: On Partnering and Purpose

Before I ventured into tech, I cut my teeth professionally in the retail real estate business, and as such, have always had a passion for retail.  As somewhat of a foodie, restaurants hold a particularly fond place for me.

What enables some restaurant operators to consistently deliver crave-able dishes and an inspired, memorable experience from location to location, and menu item to menu item in the real world of changing tastes, economic cycles, fatigue/boredom, employee turnover, competition and the like?

How is it that Cheesecake Factory is able after 30 years to consistently deliver high quality, great-tasting food, good portions and warm service while supporting a menu with ~200 items, all the while spread across 30 states and packing crowds in every day/night seven days a week?

The Restaurant as Metaphor

What got me thinking about this topic is two things.  One is recent memorable eating experiences at both a casual dining spot, Mixt Greens, and at a more white tablecloth spot, Houston’s. 

Mixt Greens is largely a gourmet salad spot for people on the run, but it’s their concept and execution of what they call Eco-Gourmet® that makes them standout. 

They proudly adorn their menu board with the framing that the menu was designed by executive chef, Andrew Swallow, and it’s the old axiom of when you put your name on the product, you are holding yourself and your team accountable to a different standard. And here, Mixt Greens delivers.

From fresh, high quality ingredients and imaginative, but not overly exotic, creations to serving your food in china-like plate ware, this place gets it. 

They even nail the basics of asking the customer if they want light, medium or heavy on their dressing. 

Simple, obvious, but in my experience, most places default to “one size fits all,” and when you ask for lite dressing, the retort is usually to offer on the side.  So much for have it your way.

Meanwhile, Houston’s is at once a somewhat pricey steakhouse/grill and a place that is incredibly accommodating for kids.

It’s casual and formal at the same time, and delivers simply the best, most crave-able ribs and the most mouth-watering chili ever.

I have now visited locations of Houston’s in LA, New York, Miami, Atlanta and San Francisco, and at my local SF branch in particular, seen the cycle of managerial changes, new waiters come and go (albeit much less turnover than their peers) over a 10+ year period, and again, remarkable consistency, inspired food creations and warm service week after week, year after year.

A Metaphor for Partnering and Purpose

The second thing that got me thinking about the concept of ‘The Restaurant’ is its metaphorical goodness. 

Let me explain.  I am happily in one of those cycles where I find myself surrounded by a lot of aspiring (and practicing) entrepreneurs, and a recurring theme in my ‘advise and assist’ process is on the topic of codifying the purpose of the business as specifically and meaningfully as possible, so as to use that definition to choose good partners (be they business partners, strategic partners, investors or customer partners) and make sound operational and prioritization decisions.

After all, when you define the core essence of the idea, the universe that it operates within, its ‘have to haves’ and ‘can’t haves’ a whole heck of a lot of the going forward path starts to become really clear.

Given that, it seems that a good, universally understandable exercise is to (metaphorically speaking) envision your business as a new restaurant opening, and frame up the business you are creating as if it was a restaurant.

For example, what type of restaurant? Is it casual, fast food, white tablecloth, delivery? 

What type of food? Do you want to serve Chinese, Italian, Indian, salads, burgers? 

Are there any governing principles?  All organic, locally sourced, small plates, special salsas, vegetarian? 

What about specialties of the house?  How about days/hours of service, type and number of locations, assumptions about the restaurant space itself? Is there a dress and grooming code for employees?

The key point is that when you frame your equivalent answers to these types of questions, you start to get a sense of how you think about ingredients, recipes and dining experiences; what impressions you want to leave your customers with and the role of team members in bringing it all together.

Related Posts:

1. Pattern Recognition: Accent Your Brand; Just Like Lucca Deli
2. The Paradox of Developing New Products and Services
3. Start in the Middle: a user experience product management methodology
4. Brand ME and the Changing Face of Brands
5. Innovation, Inevitability and Why R&D is So Hard

How do you like them Apples? Apple's Earnings Rock!

“Apple beats Street in holiday quarter; shares soar” (AP)

“Apple trounces Wall Street estimates” (CNN Money)

“Apple Understates The Insanely Great” (Forbes)

In a very tough environment, where consumers (supposedly) aren’t spending and high-end products don’t get bought, Apple took industry analysts’ projections out to the woodshed and gave them a good old fashioned whupping (see detailed projections chart put together by Andy Zaks HERE).

How much of a whupping? Well, on average, analysts were projecting for Apple a profit of $1.39 per share on $9.75 billion in sales, and the company instead delivered $1.78 per share and $10.2 billion in sales, respectively.

But that doesn't tell the real story since it does not take into account Apple's adjusted earnings when you factor out a quirky decision (by Apple) to spread revenue recognition on iPhone and Apple TV sales over two years, based on subscription-accounting revenue recognition. Add those numbers in, and the real sales are actually $11.8 billion - $1.6B HIGHER!

All of this dropped an additional $3.6 billion in cash to Apple’s coffers during the quarter, and the company now sits with a $28B war chest.

Why should you care? As noted in my recent post, ‘Punishing the Wizard: On Apple and Steve Jobs,’ most people give analysts and business media way too much credit for parsing the salient details that separate the wheat from the chaff in the investing universe.

This is compounded by the fact that we all look for the simple story, meaning that the complexities of different revenue recognition across product lines, relativity to industry peers and aggregate versus relative growth metrics across product lines, are thus lost.

Net it out, and the one company that actually seems to have a differentiated strategy, instead, looks like a laggard, and not surprisingly, ends up trading at a discount to its so-called peers.

On a personal level, I am simply left wondering, "Who looks better against the template that Apple has put together; namely, differentiated products, diverse revenue lines, a deep product pipeline, stellar management team, huge profits, high operating margins, massive cash reserves and ungodly cashflow?"

After all, shouldn’t any analysis of how Apple's strategy is working fit within the larger context of who's doing better at delivering technical, marketing and cash generating wizardry?

(Disclosure: I sold Me.com to Apple last year, so I have a vested interest in being right on my analysis.)

Other Notes of Interest from the Earnings Call:

1. 22.7M iPods sold in the quarter: this is a jaw-dropping number considering how the device is a logical step path into iPod touch (a subset of the overall iPod sales numbers) and iPhone (a different unit count bucket), and increasingly part of one unified ecosystem.
2. Apple will continue to invest in Apple TV: The company noted that it has received a tremendous uptick in sales performance, thanks in part to iTunes rentals, and that unit sales, though unpublished, are three times higher than they were last year. While they continue to refer to the device as a "hobby," I think that the tea leaves are clear on this one (also, see my posts on the Apple-centered Media Center Universe: 'Apple, TV and the Smart Connected Living Room' and 'What it Means to be a Social Media Center: Boxee, Apple TV and Square Connect').
3. Apple sent a clear warning shot to competitors that it is going on offense to protect its intellectual property, something that I blogged about in 'Upward Mobility, Land Grabs and the iPhone Universe.' Palm Pre, which is the first device to incorporate multi-touch functionality, feels like a lawsuit in the offing.

Related Posts of Note:

1. Holy Shit! Apple's Halo Effect: how Apple has turned gravity into its friend.
2. Ringing Up Apple's Earnings Call: analysis of last quarter's earnings call.
3. iPhone 2.0 - What it Means to be Mobile: a detailed summary of my experience to date with the iPhone 2.0 platform.
4. Innovation, Inevitability and Why R&D is So Hard

See Waltz with Bashir: It's Escher meets Cinéma vérité

In my home office, I used to have M.C. Escher’s ‘Hand with Reflecting Sphere’ hanging on the wall.  What I liked about it was the way it played with perspective, shining a light on the general elastic nature of reality. 

I thought about this concept a bit after seeing ‘Waltz with Bashir,’ Ari Folman’s disturbing, evocative and brilliant animated documentary on the 1982 Lebanon War.

Capturing the various senses of war in vivid terms, ‘Bashir’ is one part nightmare, another part hallucination. 

Or, as A.O. Scott puts it in his excellent review in The New York Times (‘Inside a Veteran’s Nightmare’), it “…is a memoir, a history lesson, a combat picture, a piece of investigative journalism and an altogether amazing film.”

Part of what makes the film so special is that the director is a central character in his own movie; so the story is intensely personal and real. 

Following a conversation with a friend who is haunted by a recurring nightmare related to his own experiences as a member of the Israeli Defense Forces in 1982, Folman realizes that he cannot recall any of his own experiences (as a 19 year old, Folman was a member of the IDF units that went into Lebanon).

This realization leads Folman on a journey that (re) captures his personal truth in a manner that is unflinching, and beautifully rendered, without editorial or justification.

The fulcrum in the story, and where the nightmares and horrors unfortunately become unmistakably real is the notorious occasion in September, 1982 when Christian Phalangists, ostensibly driven to avenge the death of Bashir Gemayel, Lebanon’s newly elected president (who had been assassinated a few days before), entered the Sabra and Shatila refugee camps in West Beirut (whose entry points were controlled by the IDF) and massacred as many as 3,000 civilians.

I won't say more than that, as the movie is best experienced with the beginner's mind, the less details, the better. 

If ‘Apocalypse Now’ moved you, as it did me, then 'Waltz with Bashir' is a film that you just have to see, as it is a cinematic kindred spirit, albeit a completely original animal in its own right.

Other movies have captured the horror of war, the sense of abandonment, the automaton-like adherence to duty as a cog in the war machine and the grizzly state where life (seemingly) has no meaning.

But few films truly enrich AND complicate our understanding of real-world events, and do so with the courage to NOT attempt to resolve awful riddles for which there are no easy answers.

Be forewarned, though.  The ending is very powerful, a body blow that brought tears to my eyes.

Related Posts:

1. Slumdog Millionaire: See this Movie

The End: A George W. Bush Cartoon

Very funny...and says it all in two words (from Sunday's SF Chonicle)

 

(Tom Meyer)

Punishing the Wizard: On Apple and Steve Jobs

John Paczkowski of All Things Digital nails it in 'Apple Investors Are Wusses.'  He wonders aloud how Apple investors can be so faithless in a company that in the last quarter reported earnings of $1.14 billion on sales of $7.9 billion, all the while growing their cash hoard to nearly $25 billion in cash.

Yeah, I get it. Consumer company with high-end products in a bad economy with a seemingly irreplaceable leader who is ill, and a less than transparent corporate culture. 

Heck, I will go a step further and say that for planning purposes, investors should assume that what's gone from "common bug" to "hormone imbalance" which was easily fixed to something more "complex," and a formal medical leave, probably suggests that Steve Jobs isn’t coming back – at least not in a full time capacity.

Run for the hills!

But you know what; I think that something else is at play in the battering of Apple's stock (it’s lost ~60% of its value since peaking out at around $200 late last year).

For lack of a better term, let’s just call it the Yin-Yang of Apple's Reality Distortion Field. 

On the one hand, Jobs & Co have taught us to expect magic, and when they deliver (iPod, Mac, iPhone), it's what we expect because there is no company like Apple.

Yet, when they merely execute, we hammer them because we expect magic. 

It's almost as if they've lost their premium for wizardry, which is ironic since isn't the whole moral of the re-pricing of our financial markets about a return to quality?

And who looks better than Apple on a long-term basis in terms of differentiated products, diversified revenue sources, depth of product pipeline, quality/depth of management team, operating margins, profits, cashflow, cash reserves and absence of debt?

So go ahead, punish the wizard, but remember: who looks better against the "quality" template?

UPDATE 1: Good summary by Jim Goldman of CNBC in "The Little App Store that Could," on the runaway freight train that is the App Store: "Do the math and you'll see that a total of 500 million apps have now been downloaded, or 200 million over the past six weeks, doubling the download pace of the preceding six weeks.  Back on December 5, an ad stated that there were 10,000 apps available. Today, that figure has swelled to 15,000...probably not enough to change the mind of RBC Capital, which essentially slapped a "sell" on Apple shares yesterday with $70 target (down from $125, incidentally) but it should send the message that despite so many serious distractions facing this company, some fundamentals continue to work. And this is the kind of fundamental that separates Apple from so many of its smart phone competitors.

UPDATE 2: Excellent analysis by Andy Zak, railing on the impact of Apple’s decision to pursue subscription-based accounting on iPhone and its deleterious impact of Apple’s PERCEIVED financial picture based on GAAP.  Also, good fodder on how iPhone/iPod touch are natural cannibals (you buy one or the other), but rather than the story being about aggregate unit growth, it is ALWAYS about one coming out of the hide of another, and then how slowing growth of the particular product becomes the story, not the rising tide for Apple Co. in total.  A lot of this is a natural by-product of business media and analysts’ inability to parse nuance, focusing instead on selling the sound bite.  His provided tables (see thumbnails below), showing Trailing Price-to-Earnings and Price-to-Cash ratios relative to peers is particularly instructive.

Trailing Price to Earnings

Price to Cash

Related Posts:

1. iPhone 2.0 - What it Means to be Mobile: a detailed summary of my experience to date with the iPhone 2.0 platform.
2. Innovation, Inevitability and Why R&D is So Hard
3. Holy Shit! Apple's Halo Effect: how Apple has turned gravity into its friend.
4. The Chess Masters - Google versus Apple: why partners Apple and Google are without peers, and (seemingly) destined to become frien-emies.
5. Ringing Up Apple's Earnings Call: analysis of last quarter's earnings call.

Book of the Year: Read 'The Angler'

You know the axiom about not wanting to see how sausage is made.  Well, before the final credits roll on the Bush Presidency, it is instructive to look at how our country came to be put through the meat grinder that is Iraq, Katrina and the worst financial crisis since The Depression.  How did such a poisonous political culture foment, and was it born of ignorance, arrogance, ideology, greed, evil, or something else?

If the answer to this question is even remotely of interest (lest we repeat the same mistakes in our generation), read ‘The Angler’ by Barton Gellman, a brilliant, exhaustively researched, powerful tome on the Cheney Vice Presidency.  It is arguably the book of the year.

While I think that in the abstract, most of us “get” how government works, i.e., the three branches of government – Executive, Legislative and Judicial – when taken out of the petri dish and applied to the handling of real world events, the people involved, how they rise to the occasion (or don’t) and the protocols that drive those outcomes, the specifics are illuminating and instructive.

In The Angler, we really see how government works, or at least did in this administration.  We see how Cheney drove the Executive branch to reclaim power that was lost post-Nixon. 

While it is trite and easy (for some) to paint Cheney as an evil Darth Vader, in truth, the key takeaway is that he was a true believer and an arrogant son of a bitch who was playing chess to everyone else’s checkers game. 

Cheney's depth of detailed knowledge on everything - policy, law, protocol, people and process - is scarily impressive.

He had a clear game plan and a president who, while ultimately the final decision maker, was highly manageable, allergic to detail and stubborn to the point of blindness.

The book raises all sorts of questions on the delineation between Cheney and Bush, and how that defines culpability.

It provides rich detail behind the scenes on key events in a manner that is not partisan, preachy or editorializing, but at the same time, it offers very strong analysis and an excellent narrative from many of the key players.

As a book of fiction, it would be gripping.  As a book of truth, it is a searing, essential read, especially if you like the game politic.

In the interim, here is a tantalizing snippet from ‘Farewell to All That: An Oral History of the Bush White House’ in the February edition of Vanity Fair:

from Lawrence Wilkerson, top aide and later chief of staff to Secretary of State Colin Powell:
(On the culture of wiretapping/snooping): The Cheney team had, for example, technological supremacy over the National Security Council staff. That is to say, they could read their e-mails. I remember one particular member of the N.S.C. staff wouldn’t use e-mail because he knew they were reading it. He did a test case, kind of like the Midway battle, when we’d broken the Japanese code. He thought he’d broken the code, so he sent a test e-mail out that he knew would rile Scooter [Libby], and within an hour Scooter was in his office.

(On Cheney’s management of Bush): As my boss [Colin Powell] once said, Bush had a lot of .45-caliber instincts, cowboy instincts. Cheney knew exactly how to polish him and rub him. He knew exactly when to give him a memo or when to do this or when to do that and exactly the word choice to use to get him really excited.

As they say, truth is stranger than fiction.

Related Posts:

1. Obama’s First Cuts: On Administration Team Building
2. Course Correction: What Obama's Victory Says About Us
3. Why Experience Matters: On Palin, Putin and Prudence

Pattern Recognition: Prepaid Karma, Home Building & Identifying with Columbus

There is a great excerpt from ‘The Choice,’ PBS’s excellent documentary on the presidential elections, where the year before formally deciding to run for president, Obama dedicated himself to campaigning tirelessly on behalf of candidate after candidate. 

When the time came for Obama to launch his own run, the IOU box was full of politicos pre-disposed to support the new guy, and the rest was/is history.

Now, think about how you can invest in the success of others in the coming months, either through mentoring, working your network on their behalf or more formally rolling up your sleeves to help them get to the next level. 

Maybe it will yield you nothing more than the soulful knowledge that you’ve “given back,” maybe it will yield fruits down the road for you, but trust that only good can come from such efforts, and remember that no EARNEST effort is too small.

On Home Building
Now is a great time to codify your life’s purpose. 

Every house has a foundation, plumbing and electrical systems, four walls and a roof, but that doesn’t make it a “home.” 

Answer This: What is the home that you are building, what is your plan to build it and with whom?

Identifying with Columbus
Actor Dustin Hoffman offers up a great analog in this month’s issue of Vanity Fair:

(Interviewer): Which historical figure do you most identify with?

(Hoffman):  Columbus – if it’s true that he knew where he was going, got lost, and found a place that was better.

Asymmetries: On Free Markets and Financial Predators

Dictionary: asymmetry (ā-sĭm'ĭ-trē); noun.

Any absence of balance or equivalence between two things that are otherwise comparable.

When does a meme become a virus?

Last night, 60 Minutes ran an excellent expose called ‘The Price of Oil.’ It traced oil’s rise in a year’s time from $69 a barrel to $150, and subsequent collapse in a little over three months to under $40. 

Somehow, a commodity that is theoretically priced according to supply and demand ignored a simultaneous increase in worldwide supply and a drop in global demand (according to US Department of Energy statistics) to nonetheless register the single largest price increase in history. 

But there is an explanation, of course. While real demand for actual ‘physical’ oil was dropping relative to supply, investor demand for the virtual crude oil ‘asset class’ was off the charts. 

In other words, just as stocks, credit swaps and other derivatives became completely unhinged from the real value of the underlying asset, so too was the case with oil. 

In fact, 60 Minutes’ expose shows that this unhinging was so resplendent that 27 barrels of crude oil were trading on the commodities market for every one barrel of physical crude that was actually consumed, the very fingerprint of rampant speculation. 

As should be no surprise, with high rates of flipping come increased volatility levels, and an offspring of Enron, whose sole purpose is to corner the market and control/manipulate the price, the needs of the general consumer be damned (remember the never before seen, and never since seen, rolling blackouts?).

Now I don’t know about you, but when I net out that the predominant reason that $2 gas was replaced by $4 gas was that the major investment banks, hedge funds and other speculators were playing the free market game in a manner that unquestionably comes out of the hides of many to enrich the pockets of a few, something feels terribly wrong with this picture.

Specifically, cast in doubt should be our unconditional worship of the god of free markets, our blind faith in its systemic efficiency and lamb-like trust in the immutability of the laws of supply and demand.

Enough! Quit Enabling Financial Predation

The Crude Oil Bubble that predates the Credit Bubble, which follows in the footsteps of Enron, the Internet Bubble, fall of Long Term Capital Management and the S&L Crisis before that is just the latest example of how our financial system seems tilted more towards enabling the predator than protecting the prey.

Put another way, while we as consumers may not like getting gamed an extra $2 a gallon, seeing our 401Ks wiped out and the equity in our homes vaporize, understand that this is a feature of the system, not a bug.  And as they say, doing the same thing over and over, and expecting a different outcome is tantamount to insanity.

So where do we go from here?  In year’s past, we turned away from allowing the robber barons to run completely unfettered; we moved instead towards embracing a public, political, proactive role for government; as the gatekeeper, the maintainer of the delicate balance between the laissez faire free market engine that we hold dear and the regulatory cop that controls, curbs and breaks up large concentrations of power when extreme imbalances occur.

How to Repair a Broken Financial World

In ‘The End of the Financial World as We Know It’ and its companion ‘How to Repair a Broken Financial World,’ author Michael Lewis and hedge fund manager David Einhorn do a really good job of spotlighting the asymmetries that currently exist within our financial system, noting that “the fixable problem isn’t the greed of the few but the misaligned interests of the many…and the lack of checks and balances to discourage it.”

As they note, the market only cares about short-term performance, and ruthlessly penalizes those who forget its eminence.

Even worse, as Lewis/Einhorn note, “The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.”

Some examples:

1. Imagine the financial services CEO who failed to jump on the derivatives bandwagon, or worse, was the whistle blower for the industry.  If politics didn’t result in his/her dismissal, then a couple of quarters of under-performance relative to his more aggressive industry peers would.
2. The annual bonus structure that is central to the financial services industry cares not one iota about long-term performance.  Specifically, there are no bonus holdbacks or repayment mechanisms to entice rainmakers to take the long view.
3. The credit ratings agencies whose job was to expose and quantify financial risk, instead systematically disguised it.
4. The SEC has become so emasculated that a culture of avoiding short-term political heat and a culture that discourages active governance became institutionalized.  No less of a motivator to not making waves is the knowledge that SEC personnel can look forward to high paying jobs in the private sector if they play their cards right.

While we can’t and shouldn’t try to legislate greed, we can and should kick the credit agencies to the curb; we need to regulate exotic financial instruments like credit default swaps, setting stringent capital and disclosure requirements; we need to set limits on the ability of SEC personnel to work in the same industries that they are trusted to govern (but encourage private know how to move the other direction into the public sector); we need to balance our knee jerk instincts to fund trickle-down rescues (i.e., protect the AIGs of the world) with an embrace of bottom up direct relief to homeowners (haven't we been told ad infinitum that as the consumer goes, so does our economy?).

Netting it Out

Unsurprisingly, much of this is fairly intuitive. Reward the behavior that you want to encourage.  Penalize the behavior you want to discourage.  Never trust the foxes to watch the hen house.  Avoid obvious conflicts of interest.  Set stringent, transparent capital requirements to ensure that participants in the financial marketplace can meet their commitments.  And never, EVER, be afraid to use a big stick when talking softly fails to yield the desired results.

Related Posts:

1. Capitalism 2.0: TED Spreads and Lessons from Japan’s Lost Decade.
2. Engine Failure - When Financial Markets Fail: an analysis of the current financial crisis.
3. Black Swans and Bank Runs: on why this crisis was predictable.
4. Financial Tsunamis: connecting the dots in the sub-prime mess.

Pattern Recognition: SupportBot and The Spiral Model

Once upon a time, I co-founded a device management software company called Rapid Logic (eventually we sold it to Wind River for $67M), and we had an idea for a new product called SupportBot.

The idea behind SupportBot was that as we were in the business of making software tools that enabled network equipment vendors (think: Cisco, Nortel, Alcatel) to make their products (think: hubs, switches, DSLAMs, routers) smarter and more systematically manageable, we could build a type of gateway for watching when things go wrong, and then automatically either fix the problem or alternatively, notify the equipment operator (enterprises, carriers, datacenter operators, etc.) how to fix the problem.

Having had lots of behind-the-scenes access to the technical support department at our predecessor company, we knew that 95% of the support incidents have known resolution paths to them but that there is a huge inefficiency (read: cost) that occurs when trying to translate the customer’s non-technical explanation of what’s gone wrong into a “root cause” and then guiding the customer step-by-step to resolve the problem.

Needless to say, this was a big problem to solve, especially for a start-up, but also one with a very clear ROI since support incidents cost both vendors and consumers double digit dollars every time a support incident occurs.

One small fly in the ointment.  As the end-customer would invariably have a heterogeneous, multi-vendor environment, the SupportBot solution, to be practical, would need to work across different hardware and software systems. 

It would also need to be malleable enough to support a wide variety of different support incident use cases.  

To do this, it would need to communicate with such systems in a pretty deep manner so as to get the data needed, track events when they occur and orchestrate configuration changes when necessary.

In past blog postings, I have referred to a strategic modus operandi called “ship the idea, fix it, and then iterate” whereby as rapidly as possible, you ship the most minimal, but meaningful, implementation of your product, with a goal of soliciting user feedback on bug fixes, usability snags and feature requests, which in turn drives a rapid release cycle until you hit a stasis point in the product.

In the case of SupportBot, we went a different way, and it literally saved our hindquarters. 

Instead, we embraced The Spiral Model, a systems development methodology (conceived by Barry Boehm), whereby you assess the highest risk items of the project first -- BEFORE beginning development. 

This way if there are core assumptions that have to go right for the project to succeed in realizing its outcome goals, you have not invested months in designing, coding and prototyping only to discover that you should have avoided the effort in the first place since, euphemistically speaking, the new vehicle is dependent upon a fuel that is commercially unfeasible.

After all, once man-months, dollars and reputations have been invested, undesirable truths are more difficult to see.

By contrast, before man-months, dollars and reputations have been invested, realization of those same hard truths is pretty much all you need to avoid going down a dead end road.

In the case of SupportBot, the core risk was that the support desk software vendors, whose infrastructure would already be in place in many of the environments where our solution would live, would not have any standardized way to share information on support cases and resolution paths with our system, leaving us with a bridge to nowhere.

After some research, however, we discovered that there was a nascent standard being pushed called the Solution Exchange Standard (SES) that promised to resolve a lot of these issues. 

Of course, this only helped us if a broad range of vendors were poised to adopt it timely.

Understanding this as the binary risk, we reached out to the head of the consortium, bought him dinner and picked his brain on the likelihood of this protocol being adopted in shipping products any time soon.

The net-net was that vendors were paying lip service to the concept but when it came time to prioritize development decisions, SES never made the cut. 

Armed with that knowledge, the SupportBot project was terminated on the spot, and we focused instead on more productive and profitable endeavors.

Related Posts:

1. The Paradox of Developing New Products and Services
2. Start in the Middle: a user experience product management methodology
3. Innovation, Inevitability and Why R&D is So Hard

A Mantra for a Monster 2009

You’ve probably heard Warren Buffett’s axiom about being fearful when others are being greedy, and greedy when others are being fearful.

Well, to watch the news, listen to the radio, read the papers and listen to the prognosticators, you can't help but notice that the 2009 narrative is replete with story after story of pessimism, fear and caution.

What should that tell you?

Well, here’s my mantra for the year ahead:

1. Hold my Ch’i High: Why? Because now is the time when poise, a clear mind and standing tall in the face of uncertainty will be rewarded.
2. Lean into Life: Why?  Because Buffett logic just makes sense at times like these.  Plus, timidity has a way of leading to self-fulfilling prophecies.
3. Maintain a Measuring Stick: Why? If the meltdown has taught us anything, it is that blind faith is a recipe for disaster.  Besides, you can’t improve what you don’t measure, and by qualitatively understanding your surroundings, you can better read when gravity is your friend or enemy, when you are in the right body of water or not, and adjust accordingly.

I wish you all the best in the year ahead. Cheers!

Related Posts:

1. Metrics of Success: You can't improve what you don't measure.
2. Bikram Yoga: Sweating in a 105 Degree Room.
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Pattern Recognition: Accent Your Brand; Just Like Lucca Deli

One of my favorite places to grab lunch is Lucca Delicatessen in San Francisco’s Marina District. 

Here is a place that has been in business for almost eighty years, standing the test of time across generational hand-offs of a family-run business, changing tastes of the populace, demographic upheavals (the Marina was once predominantly the home of Italian immigrants, now its yuppie-ville) and economic cycles. 

Obviously, they are doing something right; namely sticking to a core that they do really well, while incrementally changing with the times for the better.

One thing, in particular, that they do is ‘accenting,’ a strategy that is both inexpensive and easy to emulate. 

Basically, two thirds of the items in their refrigerator case are salads and prepared pastas (think: shrimp salad, ceci bean, caprese, potato, macaroni, ravioli, etc.). 

As such, a lot of the first impressions of Lucca occur when you look in the refrigerator case.  Does the food look fresh, homemade, standout in flavor? Is it worth the premium you pay?

What Lucca does here is essentially put two accents on each salad.  One, finely chopped parsley, adds color, and just amplifies the “this is fresh” sensibility. 

The other depends on the dish, but is basically a flavor enhancer, like grated hard-boiled egg or cheese shavings.  In a subtle, but effective way, it tells the customer “this is not a garden-variety (read: commodity) dish.”

Taken together, the use of accenting visually conveys that Lucca has not lost sight of the importance of attention to detail, and of course, you can taste the difference when you eat the food, so this is not mere marketing optics. 

In the tech arena, Apple is the master of such brand accents, and of course the current reigning high priest of the “minutiae matters” religion.  Similarly, Google uses seasonal graphics on search pages as a simple way of reminding you that humans are behind its magic.

How might you apply accenting to your business?

Related Posts:

1. The Paradox of Developing New Products and Services
2. Start in the Middle: a user experience product management methodology
3. Brand ME and the Changing Face of Brands
4. Innovation, Inevitability and Why R&D is So Hard