Most of us go to university and college and find something that looks like a lawless, unruly form of school where the lecturers and professors are the biggest outlaws. And so we go out into the world thinking of universities as schools with no business-imperative and no business-sense.
The business of universities
Nothing could be further from the truth. Universities are businesses, or enterprises; but with a business model that is so opaque, few people understand it, unless they have worked in one for quite a while. If you do business with universities, if you are in a knowledge business, if you have to hire graduates to get work done, you might like to read this brilliant description of university business models.
As greedy as bacteria
“As organisms in a system, universities evolve. They eat up smaller institutions to dominate a niche, or split of side campuses to enter new spaces. They relentlessly share their DNA, as Universities heads look over their shoulders and shamelessly copy the innovations of others. Universities fight for resources, funding, students among themselves, where a Society usually co-opts all of the resources in it’s zone of control and operates without competitive challenge.”
As disregarding as dinosaurs
“Make no mistake, Universities are dinosaurs. They can crush you, outrun you and outbreed you. They dominate their ecosystem to the exclusions of all others, existing in astonishing diversity, and repeatedly adapting to environmental change. What it took to get rid of the dinosaurs wiped out almost everything else as well. The same is true here. If Universities become non viable institutions, then their collapse will be the least of our worries.”
As mutative as viruses
“Universities are not going to go gently into the night. They won’t wave their hands in the air, cry that it’s all to complicated (or was it complex?) and shut their doors. Some will no doubt go under, but most will adapt and survive, ruthlessly ripping out the DNA from models that work and re-engineering themselves for Internet Age. They will do it in University Time, not Internet time, but they have enough inertia for that not to matter. In fact, a slower response to change will insulate them from short timescale fads (Would you wish you had bet the farm on CD-ROMS? WAP?).”
Brilliant description of the strategic model of universities. But who would know when you are yawning your way through another lecture?
To the accountants who read my blog, this post won’t tell you anything new, except possibly the details of muddled-thinking that the rest of us bring to corporate valuation. If you spot anything egregiously incorrect, please do say.
3 times when we want to know if a company is makes money or not
For the rest of us, let’s begin with the basics of valuing a business. There are three times when we want to know if a company is healthy or not.
When we are thinking about investing in a company by buying stocks & shares on the stock exchange, or lending money to somebody running a small business.
When we are thinking of joining a company
As an employee
As a supplier who will sell the company something
as a buyer who depends on goods & services being delivered on time and the warranties and other long term commitments being met.
When as general citizens we trying to understand what is happening in the economy and how to position ourselves for growth, decline or stagnation.
The key step to judging whether a business makes money
The first step is to “think company”. Accountants do this all the time. Their job is to worry whether the company is a “going concern”. Will the company still be there tomorrow?
Corporate financiers ask a slightly different but related question. If I put $1 into the company, will I get back 10c a year, or 20c, or nothing, and moreover find that when I sell my share I get back 85c not $1?
Can lay people really judge the value of a company?
We might ask whether it is so easy to do this. After all, look at all the people who mistook sick banks for healthy banks.
One thing is for sure, though, if we don’t start paying attention, we will get bitten again. We as employees, suppliers, buyers and citizens will pay the price of not paying attention.
4 basics for understanding whether a business makes money or not
Yesterday, I came across an article valuing companies in the shipping industry. I am not particularly interested in shipping but the article was well structured and it provided a checklist that we can use as a starting point for understanding any business.
#1 How does organization or company finance itself?
Does the company finance itself by borrowing money from a bank or from other lenders of money? That is, with debt.
Does the company finance itself with money from investors who will put money into the company for a share of the profit and if it comes to that, be prepared to lose their money? That is, with equity.
Does the company finance its new ventures out of profits they are making? That is, from revenue.
The answer will tell you a little about the pressures on the company. Who are they answerable too? And what for?
#2 What kind of contracts does the organization or company finance itself?
Does the company have any long term agreements with customers or do they come and go?
What are the advantages & disadvantages of the ways they have chosen to structure their relationship with their customers?
#3 What dividends does the company or organization pay?
This question about dividends looks as it is for investors who buy stocks & shares. And so it is. If I buy a share for $1, how many cents can I expect back in each 6 monthly dividend?
We can also ask the question more broadly. Where does the money go in the business?
Have a look at the director’s offices & vehicles? Check out their bonuses. Company’s like to flash money around in a rather school boy manner and it is a bad sign not a good sign. Flash means money is being used to show off and not being used to run the business.
An agricultural economist once said that he could see on arrival at a farm whether or not it was viable. If they had more vehicles than drivers, then they were in trouble because their money wasn’t being used well.
So look around and followed the money. Use some common sense. Sound business people don’t skimp on the necessities, and they don’t allow money to sit around unproductively either.
If they must have to have ‘flash’ assets to impress people in the business they are in, are they really flash, or are they copies, and do they look after their assets. Do they protect their re-sale value?
If they give high bonuses, do they look after their staff, or do they exhaust their staff and then wastefully buy more expensive ones from the market.
It can be tough to separate the appearance of money with sound business. When money is being chucked about, quite naturally we would like to get our hands on some of it. Just stop to do a proper evaluation. How long is this money-wasting going to last? And when it goes bang, will you be sucked down with it?
#4 What are their assets?
In a shipping company, this is easy. Which ships de they own? In a mining company, we can ask what mines do they own?
In some businesses, they organization owns very little. Is it the John Lewis Shops who deliberately don’t own the buildings they use? Holiday Inn and Coca-Cola are the same? They own some of their hotels and some of their bottling plants but they generally stay out property business.
Universities are the opposite. Their wealth is usually in their real estate and you can see immediately the problem. The need to protect their real estate value might become more important than anything else.
With banks in recent times, and indeed now, we have to ask what exactly do they own. This is the ‘mark to market’ debate. The value of their assets is volatile.
But let’s keep it simple for now and ask, what exactly does this company own and how do the assets impact on the business?
Will your career make money?
Now if you see you career as a business, will your career make you money? Would it be better to start a business. Let’s compare two scenarios.
Let’s take a young person who leaves university and goes to work. The 4 questions apply equally to them.
They support themselves through revenue and are paying off the debt of their student loan.
They have committed themselves to one customer to whom they are wholly dependent.
Their income is their salary and their profit is their salary less their debt repayment, their taxes, insurance, and the expenses of going to work (which in the UK can hit 10000 before tax)
Their assets are their qualification which is declining in value by the minute as knowledge replaces itself.
They have one more intangible item which is “career capital”. But I’ll leave that to another post.
Now let’s take a young person who leaves university and starts their own business (or who prepares to while they are taking some starter jobs to get some experience).
They support themselves through revenue and are paying off the debt of their student loan. They could look for venture capital and share their profits with a financier or they could work with friends and share their future profits as partners. They can also borrow more money from family and friends. Those are their basic choices.
They will be thinking through who their customers are. In their early stages they probably go to one of two extremes. They have lots of small customers on B2C model or they desperately look for one large customer who acts like an employer. They have many choices though. Will their customers be consumers or businesses? What kinds of contract go with the services they offer? How can they encourage repeat business & loyalty? What mix of customers do they want? For many people, solving this puzzle is the key to future autonomy and freedom for dependence on “rats & mice” business at the one extreme and dependence on an employer at the other.
The income of the young person is now salary & revenue from the business, less student loan, less taxes, insurance and going to work & of course, expenses of running the business. Other choices the young person needs to make are whether to spend their free money on travel, on property or investing in the business. It is very likely that someone climbing the corporate ladder looks fairly flush. They are travelling to and from work (at 10 000 per year), they are buying expensive clothes for another 1000 or so, and they are probably buying a good house. A large salary helps get consumer credit and living will look good. Look twice though. What is their eventual wealth going to look like> And what will happen if their one and only customer lets them down? And what is the probability of their own an only customer, their employer, letting them down?
Their assets remain their qualification and their ability to keep it up-to-date. What else do they have? What exactly are they working on that has value over and above their own skill and know how? You can see I am in services because this section is thin. Maybe somebody else can flesh this section out.
4 questions to manage your career and your business
So there you are. Here are your choices.
How do you intend to finance your company? Debt, investments or revenue.
What kind of contracts with customers match your style of business (and why)?
What do you intend to spend your proceeds on? Consumption or building your base further?
What assets are you developing that you could sell or convert into regular revenue?
That’s not hard, is it? Now why didn’t we understand the banks were in trouble? Because we confuse consumption with wealth. Consumption is the opposite of wealth. Look twice when someone is living large. Something is wrong. At best, they don’t know of any way to make their money work for them.
In the olden days, our job, you and I, was to consume.
Today, we consume, create and share.
And because we all create and share, we have greater choice, overwhelming choice. Suddenly, we have to take responsibility for our choices. Like it or hate it – we can no longer blame poor outcomes on lack of choice. Nor can we assume that the creator of what we consume is acting responsibly, thoughtfully, competently, or in our interests. Anything and everything is out there. A terrifying world for people who cruise along on auto.
Filter, filter, filter
The scared will run inside and slam the door. The reckless will try anything. The bold, the curious, the inquisitive and the thoughtful will learn.
But how do we filter? Who can we learn from?
I put “filter” into Flickr and this is the first image that came up. A scientist folds his filter paper in a special shape so that when he filters soil, the thingymebobs that he wants to look at naturally fall around the edge. Have a look.
Confusing filtering and hoarding
I didn’t put the image here because it is “all rights reserved”. That is the scientist’s choice.
Quite likely, he assumes our only possibility is consuming with permission from him (and fee). Sadly, for him but not for us, in this day, people will create and share as well. His work has no value as scarcity. His work only has value if it is used.
Let me explain the alternative. He could have put a creative commons license on his picture, with attribution and share-alike. Then I would have put his picture here and publicized his work for him. True, some of you will trek over to Flickr but I can guess only 0.5% of visitors will – the typical CTR – click through rate.
Understand our value to the world . . . and be rewarded for it
This person’s ability to do science is of far greater worth than his ability to post a picture on Flickr.
A much better bet would be to post the picture and ask for comments and alternatives. By become the central point for discussions on scientific filters, his knowledge and reach grows, and commercial opportunities of far greater value would emerge – from his filtering ability – not from his hoarding ability.
To demonstrate his ability, we will want to see it in action. Junk, comment, redirect. Junk, comment, redirect. Rinse & repeat. Finding one good product from the process and trying to sell it doesn’t advertise the process. The process advertises the process.
That is the nature of filters that we have to get our head around!
1. Filter so as not to be overwhelmed by junk.
2. Filter because it is our ability to filter in a specific domain (not to be confused with hoarding) that will have value to others. And people will want to see the process. What is our raw material, how do we evaluate it, what advice do we give.
My mind is racing. This works equally well for the baked beans and irradiated apples at the supermarket as it does for scientists, psychologists, politicians and newspapers.
This post is a little presumptuous. I have never met Tim Ferris, but like most people who spend a lot of time with computers, I have read his blog and watched some of his talks. I want a 4-Hour Workweek too!
So what does Tim Ferris do?
As a trouper in first year lecture halls, you must forgive my penchant for turning everything into a 3 part list.
These are my thoughts.
1. Tim’s sells “action art”
Tim decides to learn the tango, and wins the world championships. He wants to gain muscle and he is The Incredible Hulk in weeks. He learns to swim as an adult and is winning races in no time.
Whatever Tim does is breath-takingly audacious and gob-smackingly successful.
2. Tim doesn’t just make art. He packages it for sale through his blog & public speaking.
His big sale, of course, is his book, The 4-Hour Workweek.
3. Tim also does his own marketing and he is his own agent
Tim has an active blog. He watches his numbers. And he manages the office for the “Tim Ferris” enterprise.
What Tim doesn’t do – is his own accountancy or his back-office operations. He outsources the clerical work of his business to offshore firms offering clerical services.
What is Tim’s business model ?
1. Tim centres his business on what he loves to do, what he does well, and on what we love him to do.
2. Tim takes his work directly to the marketplace.
3. Tim took the initiative to create a business structure around himself and does a fair share of the skilled and expensive management work himself.
What can you and I copy?
Do what we love, do what we do well and do what the world loves us to do.
Finish the task and go out to meet our audience.
Take the initiative and create and run the business we need to support the work we want to do.
Are you in a hurry?
Oh, we usually are!
So much so, we scamper over the first question. Then we freeze in fright as soon as we think of selling our work for money. And we never get round to thinking about business processes, let alone take charge of them.
Can I persuade you to spend 10 minutes trying?
Grab your favouite beverage, a pen and an old envelope!
1. Of all things you do, what brings you that sense of deep pleasure of a job you know you do so well? Write down three things in 30 seconds!
2. Done that? Now turn the envelope over and draw your value chain. On the left, put the raw material that you work with, draw a line across the page, and jot down all things you need to turn that raw material into whatever it is you make.
You can make a fish bone diagram with fish bones coming into a spine. My fish bones included headings like “access”, “willing people” “time”, “credibility” – all the deal breakers if I don’t get them right.
3. Now you have your fish. On the tail at the left is your raw material. You probably have five or so bones coming in from either side. And the head to the right is the finished work.
Let’s finish off.
Draw some more lines (3 to 5) parallel to your fish’s spine. Label each line with things that need to happen for you get the resources you need.
It is quite likely that each of these represents a learning curve for you. Which one’s can you get help with, and which one’s will you take responsibility for?
Do a quick cross-check that you have covered all the functions.
Operations: The work you love
Marketing: How you build connections
Sales: How you close deals
Buying: The source of critical physical resources and knowledge
Technical: Any equipment and technical skills you need
Accounting: Keeping count and keeping the taxman happy
One more business model for a 4-Hour Workweek done-and-dusted!
Does this work for you? Did it take you closer to an action plan?
Do you feel you could surround yourself with the business you love?
Can you list what you need to learn to do and cheerfully put your learning goals in order?
Can you identify what you need to learn and throw the questions at Google?
I hope so. I made progress once I could get myself to pick up the envelope and the pen.
Apologies, Tim. I don’t know how much I’ve distorted your business but this is what I learned from you. So thanks.
I set 5 hard questions about business models in the age of the internet that I am having difficulty answering myself.
So let me start close in, so to speak. Which flower represents the commitment a psychologist has to client?
A red carnation – I am carrying a torch for you.
Which flower captures the heart of your work?
Do bookmark my blog and come back to tell me. Please.
Sorry, the flower page seems to have been removed. I’ve looked around the internet and haven’t found one I like so much. Have a look at pages listed under “flowers meaning”, just to help you put your finger on the essence of your relationship with your customers.
Hat-tip for the picture of Kariba Dam wall: acidwashtofu on Flickr
Metrics, marriages & dams
We had a good session on metrics at Bucks08 Social Media Camp at the weekend, and no sooner than we had got home, Dan Thornton, a community marketing manager with Bauer, and Paul Imre, a web specialist from High Wycombe, had translated our discussions into models.
Dan used the parallel of a marriage, to ask how well our social media functions. Paul asked about how much we should invest in social media. He followed up Toby Moores of Sleepy Dog, who had commented that social media was essential infrastructure, much as electricity in our office – essential and not debatable.
Does social media increase our collective potential to act?
Can we estimate in advance how much we will increase in our capacity to act collectively?
And, consequently, can we judge how much to invest in social media?
He used the metaphor of a dam to capture these ideas.
Collective potential and the amplification factor
As luck would have it, there was a lull in the American elections this week, and several articles on how the Barack Obama campaign used social media.
Look at this profile. One of the factors prompting Barack Obama to run for President was that supporters, not his official campaign, his supporters set up a campaign in My Space with 160K members.
Obama expects ultimately to raise USD1bn online. As online donations tend to be around 10 dollars a pop, there is, by my calculations, an amplification factor of 650.
I like this example because it provides a working example for Paul’s metaphor of a dam. The My Space campaign captures and concentrated the energy of 160K supporters. That reservoir helped provide the energy or impetus for a ‘real-life’ action – Obama throws his hat into the ring.
Obama’s campaign is using social media formally. He has a media strategy and staff. Certainly, his use of social media has helped his campaign. It is nice to go to You Tube and pick up his latest speech when I want to.
But I doubt that social media has had a large impact on his campaign. His campaign is still led by ideas, policy, rallies, phone calls, etc. etc. What social media has allowed, are additional forms of communication and additional forms of donation. If it is easy to donate USD10 or 5 pounds, you are more likely to do it.
The amplification effect is reciprocal. The social media concentrates loyalty. Loyalty affects the leader. The leader amplifies loyalty. And we see the effect in the social media.
When it comes to investment, these figures illustrate the size of things. If I suspect I can swell my audience from 160K to 100 million, with the corresponding increase in revenue (4 times I believe the last record), then investing in the infrastructure is worth it. It would be nice to know the cents spent on social media per vote. I suspect the money spent on social media is trivial compared to the money spent on conventional advertising, air travel, etc.
A quiver full of questions
I like any idea with heuristic value and the dam metaphor prompts several questions and rules-of-thumb.
1 Community first
We don’t locate a dam anywhere. We need a catchment area where rain falls, dribbles into rivers which flow into a wider river which flows onwards to the sea where we can no longer use it for drinking, etc.
In social media, we need to understand our community and where they hang out in the social media – Facebook, LinkedIn, and so on.
2. We add a new marker for our community
We don’t build the dam wall anywhere. We must capture the water. With a dam, we build the wall in a narrow place with a natural basin behind it to store the water.
The same principle applies in social media. in LinkedIn, asking a question temporarily captures interest. I understand Second Life works around events. We need to understand the topography of the medium to know how to cocoon our community.
3. Engineer in context
We don’t build the dam wall anyhow. The wall must be an effective piece of engineering and it must work in situ.
Most writing about social media is about the engineering. Less is written about engineering in context. We need to know about the context too.
4 Be very, very responsive
We need to maintain the wall. I know that Kariba, the second highest dam in the wall, is constantly maintained by divers who swim with giant crocodiles (trolls?)
We know that we must be very responsive and very honest in our dealings with online communities. We are likely to learn more.
5 Why are we getting together online?
And we need a reason for the dam. We build dam walls to provide us with hydroelectric power, water and irrigation.
We need to know why we are building the ‘container’ of interest in the media space. What is it that many of us can do together that we cannot do alone? Do we understand the power of community in the context of our business? I would begin by asking business clients about their community and how they relate to it.
6. Where does our business stop and where does our community begin?
We need to understand that we are changing the patterns of interaction. With real dams, water upstream and downstream is owned and used. When we build a dam we have to negotiate water rights far afield and it is very likely that our interaction shifts a level from the individual to the collective. We might even shift from the private to the public domain.
I ‘hear’ this as being the biggest mental shift for business people. In ‘dirt-space’, usually a strong community leader emerges who talks about the possibilities of things like dams and mobilizes people to imagine the possibilities.
7 Lest we forget
Some people lose out altogether. When we build a dam, we flood peoples land.
Who will lose out and what do we intend to do about it?
Dams also change the pattern of use. If you search for Kariba on Flickr, most pictures are about recreation and tourism. There are very few pictures about hydroelectric power or the people who live alongside the lake.
Every action has a reaction, and a heap of side effects!
9 What is the multiplier effect?
And ultimately, can we imagine the impact of our dam? When we understand electricity, we can imagine the benefit of a national grid – or can we? Massive amounts of reliable electricity transform the potential of the economy. We aren’t talking about more of the same. We are talking about infrastructure that liberates us from drudgery, from limiting our work to daylight hours, from winding up our USD100 laptop, from lugging paraffin to power the fridge for our medicines. If your business is based upon that drudgery, you may not be happy to see electricity on tap, or on switch, rather.
This appears to be the second place where we stumble. I would look for the opportunity precisely at the point we say “I’m alright Jack”.
And is I suspect that ultimately, we are going to have to walk-the-talk. Like Obama, we are going to have to throw our hat into the ring and prove the point. And to do that takes confidence in yourself, your community and a critical mass of believers (or hopefuls – sorry!).
Next social media unconference
If you are interested in social media, the next unconference is in London on July 5.
Sign up social media style on the wiki. It’s free. And present if you would like to.