Never one to let a chance to say “I told you so” pass me by, I thought we should recap coverage of this year’s SAP TechEd 2011 in Las Vegas.  I’m not surprised by the lukewarm reactions to the BPM part of SAPs presence, because I’ve written about SAP’s lack of BPM vision before.

First, there’s Jim Sinur, of Gartner:

Bottom Line:
If the SAP BPM architects and technicians can show customer value that catches top managements eye, the wait will be shorter. Right now, it looks to be another two years. With that said, look at what SAP has done in BPM from two years ago. http://blogs.gartner.com/jim_sinur/2009/10/14/teched-09saps-bpm-and-brm-progress-to-date-watch-out-for-construction-cones/

I guess Jim and I are on the same page.  It is *always* another two years with SAP.  Two years from now you’ll be amazed.  Except you aren’t – because two years later, they tell you it’ll be another two years.

But, let’s turn our attention to Bruce Silver’s coverage.  After all, earlier this year he was pretty optimistic about SAP’s BPM.  So what did Bruce have to say?

At this week’s SAP Tech Ed conference in Las Vegas, BPM is definitely off the main track.  The only other BPM analyst here that I recognized is Jim Sinur of Gartner.  The keynote sessions were all about HANA, SAP’s new in-memory analytics platform that is the key to reinvigorating the entire SAP portfolio (at least the parts they still care about).  HANA-enabled BPM won’t come until 2012, but it should provide a significant performance boost (process transactions per hour) as well as powerful real-time process analytics.

Started out sounding pretty down on BPM… But Bruce hasn’t given up on BPM with SAP:

But it would be a mistake to say that SAP has not made significant progress in BPM.  It has, but you had to skip the analyst sessions with the execs and go to the breakout sessions from the BPM product managers to hear about it.  Those sessions were, on the whole, excellent, many of them hands-on with the tools.  In that sense, Tech Ed is the mirror image of IBM Impact, where BPM sizzle was all over the keynotes, but almost no details were available in the breakouts.

(Actually the IBM breakouts had a lot of detail – and got some coverage on our blog.  The analysts just need to break out of the special analyst sessions!)

Bruce notes: “Where conventional BPM (such as NetWeaver BPM/PI) emphasizes BPMN-based activity flow, embedded processes involve transaction events where the order of occurrence at runtime is more flexible.”  But later notes that the embedded processes can be visualized as BPMN diagrams.  Hm.  It sounds contradictory on the surface, but I’ll assume not.

Bruce also mentions “Gravity” – the Google Wave integration and BPM implementation.  But, he’s comparing a (still) “shaky” beta product with BlueworksLive, which has been in production and serving customers for more than 5 years (updating roughly every 6 weeks).

Focus matters a lot for big organizations like SAP, IBM, and Oracle.  At IBM, I’m seeing the focus (for now).  At SAP, I’m seeing some progress, but it looks uneven.  Driven from a level lower down the management chain.  It doesn’t get top billing.  Instead – top billing is HANA and in-memory analytics?  Odd.

Or it would be, if BPM were on the front burner.

I’ve been getting tired of reading about “The Melt” – the new company / concept from the folks behind the Flip camera company.  Press like this quote from the interviewer: “You’re not just trying to build a restaurant, you’re trying to build… an empire…”  Wow.  Well that makes it a tech company right?  Well, actually, all of the big restaurant chains have become technology companies to varying degrees.  They’re also process-centric businesses (though they use specialized software and hardware, not general purpose BPM software).

Tons of name dropping in the video below (which only makes me more skeptical):

This should be my dream come true – I love grilled cheese sandwiches, and I make a pretty good one myself.  Their focus on process would be really interesting if we already knew they were a success (we don’t yet know this).  It is nice to see process and process tech getting top billing, in a sense.

And despite my visceral negative reaction to the coverage of The Melt, it *is* a tech company.  Comparisons are made to McDonald’s, Starbucks, Chipotle.  These are all process and technology companies that happen to be pretty good at producing food and coffee.  But extra emphasis is given to the processes and technology that go into the restaurant chain:

The same thing goes with The Melt. Kaplan went with grilled cheeses because he found machines that press and grill a grilled-cheese sandwich in record time, which ensures fast turnover, which improves profitability. The grilled cheese comes with soup because it’s cheap, and easy to store and manufacture. You can order from your iPhone, again, because this improves turnaround time.

Let’s hope they don’t forget to make a grilled-cheese sandwich that is absolutely better than what I make at home – and the soups better be good too.  If the food isn’t great, they won’t need fast turnover because they won’t have enough customers to eat the food.  Fast turnover only matters once you have volume.  Descriptors like “cheap”, “easy to store and manufacture”, “record time”, “fast turnover” – these aren’t encouraging adjectives at this stage of the enterprise.

The article closes with:

It’s a manufacturing and technology process. It’s really not that different from making portable cameras.

At the end of the day, you can’t taste a Flip camera.  You’re customers are going to eat these sandwiches – they better taste good.  I hope the folks at The Melt understand that better than the Business Insider.

I’m sure several BPM firms could comment on this article by Jacob Ukelson, as so many of them have been acquired over the last few years!  Jacob gives “10″ rules for doing this successfully, and they’re all good.  In particular:

Rule 5 – Pretend you are a doctor and have taken the Hippocratic oath – first do no harm. Don’t change anything until you have learned the landscape of the new company. I know successful US executives have a penchant for action – but this is a case where early action can be disastrous. Understand that it will probably take a year until the company is more or less integrated. Maybe I should have put this rule first.

Companies that are acquisitive tend to have a very well-oiled acquisition process.  But companies that don’t do a lot of acquisitions likely put together a team on the spot to go make it happen.  I observed the Lombardi acquisition from the outside, but even so it was obvious that IBM has done a few acquisitions before – the terminology, the process, the time taken, were all indicative of years of practice.  When a company has jargon like “Bluewashing” you know they’ve integrated a few companies.  In the particular case of Lombardi, you have to give IBM credit for giving expression and voice to the “Lombardi” DNA they  acquired, and not just stamping it out with IBM-ness.

Keith has posted a summary of his notes from Forrester’s BPM Forum – great read and good insights into several topics – in particular he has a great writeup of Derek Miers’ session on designing your BPM engagement program around the customer experience:

He draws a correlation between process maturity and focus on customer experience. Maturity level 1-2 cost reduction is the top category (74%). Level 2-3 customer experience is the biggest. levels 3-4 and 4-5 customer experience remains high but value innovation becomes most important. Waste elimination remains that the same levels at all levels. The “ah-ha” moment was that if at level 2-3 you don’t focus on customer experience improvement, you will never get to level 3-5. (Survey is mostly business people, not IT – Forrester/QPC business process maturity survey)

Looks like a great day of sessions, but I agree with Keith that 7:30am is inhumane in any timezone.

Dave Brakoniecki writes about Technical Debt:

The fundamental metaphor underlying technical debt is easily understood in technology circles but nearly incomprehensible outside of them. Unless you understand in detail the technical trade-off you have no appreciation for how you are ‘borrowing’ which makes it a trust issue between the business and IT teams. If this trust exists, then you don’t need the metaphor to make the problem explicit. If the trust doesn’t exist, then the metaphor won’t help you.

A counterpoint to this – I recently saw a talk by HomeAway’s CEO, Brian Sharples (at Capital Factory).  I also had a chance to talk to one of their lead developers (a friend of mine from way back).  When I asked my friend how it was going these days, he said (paraphrased) “we’re paying down a ton of technical debt right now… and when I look back, and ask if we should have done anything different, the answer is no.  I think we made the right call.”  Interesting. Thanks to Eric Ries, I knew what he meant by Technical Debt.  I also knew what he meant about paying it down (HomeAway has been acquiring companies, and paying it down in this context means they are consolidating these companies onto common software systems instead of maintaining fragmented systems… )

In their terminology, technical debt is a cost that has to be paid in the future.  It can be estimated in terms of work effort.  But consider a variable interest rate – you have the same problem. You estimate costs, but you don’t know for sure what the future cost will be.

Finally, I actually heard the CEO refer in his talk to paying down technical debt.  He had the same meaning the developers had.  What this told me is that he’s invested in the whole company, not just the “business part” of the company.  Those techies are his people too, not just an IT arm to be offshored later.  And they explicitly understood they were postponing a cost (integration) into the future, a future in which they could afford to pay it down (IPO money helps with that).

Dave goes on to say:

The reason the metaphor doesn’t hold is that the unit of borrowing can’t be quantified. Technical debt is an attempt to use the well-understood concept of financial debt to explain a software development problem but everyone (business and technical) understands what happens when you borrow money and the cost of that decision. It’s explicit.

If you borrow $1, well then the amount you owe is $1. People have mortgages and credit cards and use them to make decisions to borrow money so both everyone in an organization can be reasonably expected to understand the basic concepts of financial debt.

The same is not true of technical debt. The unit of measurement is entirely a trust issue between people. Most technical debt conversations are really the engineers saying to the business stakeholders: If you make me do it this way and in this timeframe, it will cost you more in terms of effort to support per month.

But, unlike the financial debt, the interest may not materialize. On your mortgage, you know exactly how much interest you will pay. It’s not a random number.

Getting a handle on the cost (future cost) of technical debt is hard, but it can be done.    You usually have an ongoing cost that you can think of as interest (the cost of maintaining two systems, for example, or supporting two databases when you only need one).  When you remove one of the two systems, it may have a lot of accumulated debt-  which is now all retired debt.  Presumably its functionality was either no longer needed, or replaced by implementing (and paying for) another system.

As to quantifying – this all comes down to estimation and convention.  A proxy is just lines of code (each line of code incurs some maintenance cost, in theory).  Another proxy is to put work estimates against it and cost those.

One might expect me to come down against metaphors – I’m not a fan of using them as proof in arguments or debates.  They’re better used to explain yourself or your thinking, than they are as “proof”.  But in this case, technical debt is a decent short-hand for work-effort we need to plan for in the future.  It avoids people thinking they’re avoiding cost when they take shortcuts – they’re really just spreading that cost out over a longer period of time (for perhaps a much higher overall cost).  Similarly, it assigns cost to gold-plating the software implementation (more lines of code = more debt).

Pretty interesting perspectives on the concept… for more about applying this concept to processes, check out these posts.

Momentum for Austin startups continues – with news that Austin startup Spredfast has raised a $12Million round of funding.  Rod Favaron, our Lombardi CEO, is running the company:

The company, which launched its service last year, received the funding from InterWest Partners of Menlo Park, Calif., and Austin Ventures. It has raised a total of $16 million.

Spredfast’s software lets clients manage campaigns and conversations on social media sites, including Facebook, Twitter, LinkedIn, YouTube and blogging platforms. Rather than going to each social site, Spredfast lets users publish and monitor social activity from one central platform.

[...]

“This is a big step for us, and we’re ready for the next stage of growth,” said CEO Rod Favaron, who joined the company in February. Favaron was previously CEO of Lombardi Software Inc., which was acquired in 2010 by IBM Corp. for an undisclosed price.

It is both a vote of confidence in Spredfast, and in Austin.  In 2010 it was common to read about the dearth of funding in Austin, but almost ever since then, we’ve been seeing more news about funding in Austin than I can remember since the ’90s.

In a followup to the previous post about recruiting talent to Austin, I think news like the above fundraising does more to recruit industry veterans to Austin than the recruiting trip they recently embarked on.  The coverage on MarketWatch wasn’t flattering:

In fact, I have to report that the Austin group’s recruiting night in San Francisco was something between a bust and a learning experience for the group.

It sounds like the two main events were, basically, a tough learning experience.  But hopefully the CEOs took advantage of the trip to prearrange a bunch of meetings with likely recruits rather than just depending on the group events.  Still, the target and the optics are all wrong.  Instead of getting a story about what a great place Austin is to work, and that people are coming here to work at our high tech companies, we got an article essentially about indifference in the Bay Area and how hard it is to find talent in Austin (which isn’t quite as dire as the article makes it out).

Imagine if these same CEOs had gone on a tour of Universities in California (or other states) to recruit talent?  To put the idea out there for college students to think about Austin as a destination.  University is the right place to strike.  The experienced industry veterans don’t need to go to a job fair to find companies in Austin – they’ll leverage their connections to find a job.  Its the college kids who need some help discovering Austin and Austin companies as a place to land.

The rest of the article focuses on “solutions”… and here’s one perhaps the 30 tech CEOs could get behind – an Austin-funded scholarship at several universities – giving us some press out there on the coasts.

Update:  This article on Austin startups finding funding via Angel List is probably relevant as well.  It just speaks to how the world of fundraising is changing, and there are fewer barriers than ever for Austin entrepreneurs:

Even for Austin startups that aren’t actively raising money, AngelList is becoming a way to get on the radar of potential investors, partners and customers.

Bill Boebel, an Austin entrepreneur and angel who has invested in 15 companies, calls it the “LinkedIn for startups.”

“It’s a startup’s resume,” he said. “Just like when you’re recruiting an employee and want to learn a little more about that person, it’s a great way to find out more about a company.”

And further, Ravikant says:

“Entrepreneurs inside Silicon Valley already have access to investors here, but it can be harder for a promising startup in Austin to break in,” he said.

“We have helped Austin startups get exposure to Silicon Valley and New York investors, and we also give those investors the lay of the land in Austin.”

Has there been a better time to invest in people and talent?

If you’re interested in reading a near-treatise on first impressions of IBM’s Blueworks Live, Joe Pluta has provided it on IBM Systems Magazine:

The Lombardi Blueprint tool has a different focus: it concentrates on the capability to allow members of a business community to collaboratively define business processes (see Figure 2). So where Teamworks is Rational or PDM, Blueworks is the step before that which really has no parallel in the midrange community. Well, there is a parallel; typically it’s a whiteboard. Whiteboards are huge in the midrange development world; people get together in a big conference room and start spitballing. Someone writes the group’s thoughts on the whiteboard, things get drawn, redrawn, added, removed, and hopefully a consensus emerges. Then it was usually up to someone to transcribe the whiteboard for the group. That part often didn’t get done, and instead you saw “DO NOT ERASE!” in big red letters on the board. And occasionally someone forgot that and important information got overwritten. In fact, I remember one of the biggest technological innovations we had back in the 1980s was a super-nifty printing whiteboard! It was a freestanding whiteboard on wheels with a soft plastic surface that you wrote on, and you could hit a button and the writing surface would rotate past a scanner and print on thermal paper. Whoo hoo! No notes!

If you saw a few tweets referencing “DO NOT ERASE!” – they’re referencing the paragraph above.  And I think Joe has it right – Blueworks Live has a really interesting value proposition to the mid-range company.  But unlike Joe, I always hated those whiteboards that printed- the printing never worked as well as advertised, typically wasn’t in color, and the machines didn’t work as well for just plain old whiteboarding. These days if I use a whiteboard for something important, I can just take a picture and add it to Evernote.  I’d have rather those whiteboard machines just email me a PDF file!

Finally, he picks on the pricing as being too expensive outside of a corporate context.  As he notes:

For individual users, $600 a year is a hefty price; without a truly usable free version I don’t see Blueworks being a go-to product for the casual user. On the other hand, the license fee is not terribly onerous for corporations

I think the addition of less-expensive licensing for contributors (versus process authors) has helped with the pricing issues (I believe the community members are $10/month instead of $50).  But I agree a lower price point would push more adoption – and there really are network effects at play here.

Jason Cohen, a local Austin startup hero, paints a bleak picture for consulting in “The unfortunate math behind consulting companies.”  The basic thesis is that it is really hard to ramp up from a single-person consultancy to a bigger company that makes money.  He’s right. It *is* hard.  But it is also harder to be an individual consultant than he lets on:

• Most independent consultants have a hard time relaxing when they’re “off”.  They get enough time on the bench or on vacation to live a good life, but when they’re on the bench they’re worried about when the next project starts. It makes it hard to truly enjoy time off.
• Lack of camaraderie.  There’s no team as an independent.  At first that is liberating, but later on it is frustrating for those of us that are more social.
• Lack of vision.  Being an independent consultant does lack a certain vision.  What are the goals? What are we building toward?  What gets me excited about getting up in the morning to do this work?  You know, besides paying the bills?
• Not to mention, your income is clearly a function of hours worked * billable rate.  Not everyone likes that.
• You have to do it all: sales, contracts, insurance, delivery of the project, project management, QA, etc.

Most happy independents that I know offload at least a couple of these things:

• Having a spouse with insurance.
• Having another company produce most of their leads/business, while they just focus on delivery.
• Paying other independent consultancies to do things like accounting, benefits, and other bits that aren’t in the sweet spot.

So this leads to the question:  should you hire?  Should you try to grow your consulting firm to a bigger practice?  Jason writes:

Consulting can be a great way to fund a startup or make a bunch of cash. It’s easy to start; Just pick an hourly rate and jump in.

But someday soon you’ll notice there’s only so many billable hours in the day, and you’ll be tempted to expand. Maybe hire an employee for $30 per hour and re-bill them at $60. Easy money, right?

Unfortunately the math doesn’t work that way.

Jason is right. It isn’t that easy.  But it isn’t quite as bad as he makes it out to be either.  First, let me lay out some of the ground rules you can use as assumptions if you’re building a consulting company.

1. Base your budgeting on 2000 hours in a year.  It is a nice swag (2 weeks off), and it also makes the math easy!
2. Expect 80% billable as your realistic maximum, though some of your people will do better than this.
3. A good rule of thumb is that your minimum billable rate is 2x the hourly cost.  At 80% billable this is better than break even.  But at 50% billable you’re losing money. This isn’t a good billable rate, but it is the minimum billable rate. Because you do have costs: Medical benefits, 401k contributions, office space, vacation, downtime, sales & marketing, etc.  But there’s no reason to settle for the minimum rate.
4. If you are using a contractor (1099) in the US, you shouldn’t expect to markup their rate by more than 50% (ie, 33% margin for you at most).

So, even with all that, Jason paints a pretty bleak picture for your prospects of making money as a consultancy.  The primary issue is scaling the size of your business so that you can (a) reduce risk, and (b) make more profit.  If you talk to friends at startup software companies, they’ll spend lots of time discouraging you about the scalability of consulting companies (something investors and software folks are pretty convinced of).  Here are my thoughts about how to address scale, risk, profit:

Start with a co-founder.  If you don’t have one, find one who is also a specialist in the same area, or who has a tightly complementary specialty.  Make sure that you have enough skills overlap that you can cover for each other in a bind, but that you also have some different skills to augment each other in unique ways.  Starting as a company of two partners is easier than being the sole founder with one employee.  (Who wants to be your first employee, anyway?).  It allows you to reduce your risk – and if you charge correctly you can be break-even if one of you is billing.  And you’ll have more flexibility to chase leads, take vacations, etc. – without company revenue declining to Zero while that is happening.

If you’re going to grow, you’re going to forgo profits.  The independent consultants I talk to don’t want to admit that, but it is true.  At BP3, Lance Gibbs and I certainly could have had a more profitable first 3 years of operation if we just ran a two-man shop.  But we saw an opportunity to grow a bigger business.  We hired great people – and held on to the team through lean times in 2008 and 2009 – taking lower salaries ourselves and paying people when they were on the bench for long periods of time.  That scrappiness and determination got us into a great position to grow our team in 2010 and 2011 – from a bigger base.  But remember – every time you hire, you’re investing profits – reducing your cash flow for 60-90 days (or longer if training is required).  A good way to think about it is that people you hire in 2011 will add materially to your business in 2012 – it makes you plan conservatively around what you can afford.   Now that we’re a little bigger, it is easier for us to hire when we come across the right person – we don’t have to work as hard to time each hire just right.

This also means that it is better to not grow, than to hire the wrong people.  If you take this approach, when you can’t find enough talent to grow, you’ll be more profitable.  When you can find those people, you’ll grow the business at a little lower margin, and with a little tighter cash flow – but with your future baseline performance at a higher level.

Those early hires are really important.  See the previous point.  Early hires in a consulting firm set the tone: culture, discipline, follow-through, work-ethic, reputation, skill.  Don’t hire someone on reputation alone – better to hire someone whose reputation hasn’t caught up to their real performance than to hire someone whose reputation exceeds their real capability. If you hire the right people at the beginning, it actually gets easier to attract the right talent later on.

Forecast next year’s revenue based on your current staffing.  Don’t fall into the trap of building a consulting-based business plan that depends on hiring people in the same year that they contribute to your bottom line.  I’ve seen a lot of these “plans” before: “we’ll hire 3 people in Q1, 4 people in Q2, 6 people in Q3…”  To which my response is typically “which 3 people? which 4? which 6?”  If you don’t know who they are, take that out of your plan.  A better way to write it would be:

Based on our forecast we can afford to hire 3 people in Q1, 4 people in Q2, 6 people in Q3.

Point being: there’s a difference between what you can afford, and what you can actually execute.  Given how important each person is to the growth of your company, are you going to hire the best 3 people you can find in Q1, or will you only hire 2 if you can only find 2 you’re excited about?  Intellectually we all know what the right answer is but it is important to actually act on that knowledge.

Get Financing.  You may not think you’ll need it – but as soon as you can, get it.  When you’re a small consulting company, usually one customer has an outsized influence on your cash flow.  Having a line of credit or a loan can give you some cushion against the vagaries of their accounts payable.  Word of warning: it is very difficult to get a traditional bank to do this until you have 3 years of history as a business.  Second, you’ll be referred to operations that do receivables factoring, but I would recommend steering clear of those companies because their contracts are horribly one-sided and may make it difficult to get traditional financing later on. If you and your partner have the capital for it, it may make sense to put some money into a corporate savings account – to be tapped only in certain situations that all the partners agree upon.

Have a sharp focus.  You have to know how to say no to work that isn’t in your sweet spot.  Saying yes to all the opportunities that come your way will cause the following problems:

• You won’t build the necessary depth in your chosen area of expertise, or any particular area at all.
• Your win rate will be a lot lower – because you’ll be competing with people who specialize in each area, whereas you are essentially presenting yourself as a generalist.
• You can’t effectively partner with other people or companies because you always feel like you could be competing with them for business.  Ask yourself what kind of work you would refer to the partner firm, and what kind of work the partner would reasonably refer or sub to you.  If you can’t answer that question, one or both of you is lacking focus.
• You won’t build a reputation in your niche.  Reputation in the age of twitter and blogs is really powerful.  Lack of one is similarly powerful in its absence.  Start blogging, get on twitter, and learn your niche and who the experts are.  Those experts are rarely wanting for work.

Back to Jason’s Post:

Jason terms it “unfortunate” math for consulting… but the real problem is that consulting is an EQ business, rather than an IQ business.  It requires more emotional maturity and awareness, and the smartest guy in the room is not necessarily the best consultant.  Ideally you’re both high IQ and high EQ.  But don’t forget which one will get you further in consulting – EQ.  If you don’t have a high EQ, partner with someone who does!  There’s no one “right answer” to how to succeed as a consultant.  But there are definitely higher or lower risk plays on the business.

Jason points out in his post a series of problems a small consulting firm will face.  There are remedies to the problems Jason points out, and he offers a few himself.  But as you ramp up your team, in my experience when the firm is ~5 people is the hardest phase in growth.  At that stage you need everyone billing as much as possible, you can’t afford to pay for overhead (a non-billable person working for your company), and somebody (hello, founder) has to work a lot of extra hours to get things like invoicing, sales, and recruiting done – because customers don’t pay you to do that work with billable time, you don’t want to pay someone else to do it for you, and it has to be done right.

As you head north of 10 people, the math starts to work more in your favor.  You can hire non-billable help with administrative or sales work, or one of the knowledgeable billable people on your team can explicitly spend less time billing.  Another thing I’ve often heard from bigger companies is that getting past 15 people is a tough barrier – that you run out of “people you know” to hire, and have to get your operations in much better order than you required as a smaller company. I agree that somewhere between 10 and 20 people, the nature of your firm changes and you need to change with it.  I’m sure that is true at many inflection points further on as well.  If you just look at this as another interesting business problem to solve, you’re in good shape.  If someone tells you there’s a glass ceiling to how big your services business can get, just ask them if they know how big IBM’s professional services business is.

Jason’s thought on running the business at smaller sizes:

• None of these new tasks are fun or creative. It’s drudgery, and it’s on you. Congrats, you’re a business owner.

Well, don’t go down the path of building a business unless you enjoy being a business owner and running or building your business.  If you enjoy doing this sort of thing, it won’t feel like drudgery – it will feel empowering and gratifying*.  If you don’t enjoy this sort of thing… partner with someone who does, or get a job!

His other recommendations are in bold, my comments in regular typeface:

Recommendation: Charge more.  Well, this one is a bit obvious.  If you have too much demand for your services, you generally need to raise your rates or hire more people (increase supply).  Figure out which one you can do.  The basic issue is, pricing is incredibly important in consulting businesses.  Mimiran is a great resource for better pricing techniques.  But regardless, you have to understand that your consulting value is worth more than the hourly wage you put in.  You have uniquely differentiating value.  You’re likely committing to provide your customer with an outcome or else lose your “job” (contract) – which is something their own team may not be putting at risk.  An hour is not what you are truly charging for, you’re charging for the output you produce, and dividing it by the # of hours. There is a difference.

Recommendation: Bill more hours.  Generally consultants bill more than what Jason was describing in his post. While this is true, so long as you bill by the hour, I’d phrase this differently:  provide more value.  That might mean billing more hours.  Or it might mean that you will either raise your rate or the demand for your services by providing “better outcomes”.  Focus on the value.

Recommendation: Build a product.  I’d be very careful with this one.  Most consulting companies don’t make the transition.  The product you’re going to build has to be something that will get a lot of your attention and TLC – and likely something that earns money for you right away.  What you don’t want to do is take a profitable consulting company, plow the profits into a product that isn’t profitable (most products aren’t), and then find yourself with a less valuable enterprise overall.  Make sure the product is truly something you want to invest in, and make sure you understand how it will yield revenue.

Recommendation: Use subcontractors instead of employees.  This is lower risk, but lower reward – and I don’t just mean financially.  This choice comes down to what you want to be when you grow up. Is this a business or a body shop? There’s a difference.  If you’re building a business, you use contractors as a minority of your business or to augment specific skill sets or deal with variability of demand.  But if you’re building a business, it is your team, your employees, that will really build it with you.  You need to hire those people – contracting them won’t cut it.

Concluding Thoughts…

Jason’s conclusion:

It’s always hard. Most consulting companies don’t make much profit, and it’s one in a thousand that has the discipline to launch a successful product during off-hours. If you’re going to make it happen, you yourself need to be serious, disciplined, and relentless.

The idea that small consulting companies don’t make much profit doesn’t ring true.  A well-run consulting business is a good business.    Of course, for many consulting companies their margins may look lower because they do certain things:

• Provide generous benefits, from vacation to medical insurance, to 401k or profit sharing.
• Pay generous salaries & bonuses.
• Buy the latest and greatest hardware gadgets and software tools.
• Keep overhead (non-billable head count) low.

These tend to reduce margins in the short run, but retain top contributors in the long run.  Usually a tradeoff worth making.  But the biggest question for the independent consultant moving toward a small consulting firm:  What’s next?

Is the goal to build a big consulting firm?  To make some money?  To solve a particular problem in your industry or specialty?  To have a boutique firm of good friends and rock star specialists?

It really is up to you.  But the answers will help dictate what makes sense as you build your business…  For BP3 it is to be the best business process firm we can be – which is compatible, for now, with being a growth business.

*  Author’s note:  One of the things I enjoy about building the business, as a consultant, is the opportunity to practice our craft (BPM) internally.  As we get bigger, there are real payoffs to improving processes. And we have time to actually think about our business and improve it.

** Another note: Perhaps the title should just be “Consulting Math” since we didn’t discuss Software Math… but I think the prevailing public opinions about consulting businesses largely come from people with a software background – primarily that they don’t make much money and can’t scale, and are inherently riskier.  But, most people don’t mention the fact that these days, most software companies are probably less profitable than consulting companies.  There are really significant exceptions (e.g. Google, Microsoft) which is what people focus on.  But in enterprise software most of the money is in consulting these days.

Adam Deane strikes gold again with this post on a “Request for Answers”:

There is a difference in the amount of work needed in “simple process”, and a “simple process, but by the way we want it also to integrate into an old legacy system, run through a thousand steps, and automatically make coffee”
The difference usually results in a quick deployment where everyone is happy, or a project the drags on for ever, a vendor looking to run away, costs spiralling and everyone feeling that they have been screwed by the other side.

But the best part are the 20 questions he’d ask back to the customer… I’ll just list the first five to give you a taste of how spot-on they are:

1. What is the business problem that we are trying to solve?
2. What impact does this have? Who does this impact?
3. Why do we want to resolve this now?
4. How critical is this process to the organisation?
5. What would be considered a project success?

 

 

Hard not to revisit this subject when there is so much material out there right now.  Vivek Wadhwa in the Washington Post:

American companies must be provided with the incentives to invest in their workers as they used to. As recently as the 1970s, America’s most respected companies would make significant investments in workforce training. IBM, for example, took non-technical workers and taught them technical skills. They then trained these technicians to be computer programmers, sales reps, or product managers. New recruits received a year or more of training before they were expected to become productive.

I don’t know any company doing this anymore.

Today, nearly all American companies, including IBM, expect new hires to be productive on day one. These employees are given a day or two of “orientation” at best. Companies routinely fire people whose skills are obsolete and hire replacements with the right skills to maximize quarterly revenue and profits. Employers often fear that if they spend too much on skill development, employees will become more marketable and leave.

I’m afraid we are guilty as charged.  At a small company, I can understand this problem more than at a larger company.  At a small company one might not have the resources to invest in training in the early days.  And yet, it is precisely at these small companies that many people investments are made.  Are being made. Right now.  If you’re one of those small companies making excuses about investing – stop.  Stop making excuses.  Just start figuring out how to invest.

Keith Swenson just put out an interesting blog post on Self-Organizing Business Networks- there’s a focus on what makes for enterprise social software, and what the “social” part really means.  But this particular bit caught my attention:

Most current systems are built in such a way that they require a technically knowledgeable person to make these reconfigurations.  I am NOT suggesting that we simply open these capabilities up to business users.  Instead, I am suggesting that the system should be built from the very beginning to allow this kind of change; so these changes are safe for users to do.  It needs to be easy as well.  A system that requires coordinated changes in multiple places (such as adding a network user, and adding them to access control) is going to be difficult and error prone.

Directionally this is right – it isn’t about exposing business to the complexities of IT administration, it is about writing software, apps, or mediums that don’t require such technical reconfigurations.

Our very own Flournoy Henry recently contributed to a new IBM Redbook: “Scaling BPM Adoption from Project to Program with IBM Business Process Manager” :

Your first Business Process Management (BPM) project is a crucial first step on your BPM journey. It is important to begin this journey with a philosophy of change that will enable you to avoid common pitfalls that lead to failed BPM projects, and ultimately, poor BPM adoption. This IBM® Redbooks® publication describes the methodology and best practices that lead to a successful project and how to use that success to scale to enterprise-wide BPM adoption.

The intended audience for this book includes all people who participate in the discovery, planning, delivery, deployment, and continuous improvement activities for a business process. These roles include process owners, process participants and subject matter experts (SMEs) from the operational business as well as technologists responsible for delivery including BPM analysts, BPM solution architects, BPM administrators, and BPM developers.

PDF and HTML versions are available (I recommend PDF version, it is just easier to read because some of the sections are short but flow well together).

This is just part of our (and Flournoy’s) commitment to give back to the BPM community we are a part of.  But it wouldn’t be possible without some of the folks at IBM organizing and bringing a group of experts together to do it.  Congrats to Flournoy, Lisa, Ines, Fahad, Wim, Jonas, and Duan for producing this (RedBooks are team effort).  Hopefully we’ll be able to participate in more Redbooks in the BPM space in the future.

I missed this in the news cycle on TIBCO acquiring Nimbus, but Theo Priestley of BPM redux posted on the acquisition as well:

And this is where it gets interesting. If you think on it, it’s actually an admission of failure (and of lessons learnt) because both are squarely pitched in the separate worlds of Business and IT. [...]

It’s also interesting because TIBCO had a ‘social’ element to it’s suite with TIBBR, does this mean they think got the social collaboration functionality wrong ?

I think the likely answer is “yes”.

Martin Zwilling’s post on 7 startup co-founders that can lead to conflict reads like a greatest hits of imminent failure.  Not that there aren’t notable exceptions to every problem cited, but at this level we’re talking in generalities.

His advice?

If you think about it, you should realize that not everyone is ‘ideal partner material.’ Most of us learn that in other partner relationships, like dating and marriage. First you have to be clear on who you are, and who you can co-exist with, what complementary skills and resources you need, and what decisions in the business you are willing to relegate.

Lance and I are often asked how we make our partnership work at BP3.  We’re different.  Different personality types and different kinds of career experience and skills.  Martin addresses this neatly:

4.  “We are so alike, we finish each other’s sentences.” You really need a partner who is complementary, and can tackle the operational roles, like marketing, finance, and sales. A partner who is a carbon copy of you will likely mean two people working on every problem, rather than a natural separation of duties. Most startups can’t afford that.

I couldn’t agree more.  Lance and I are good complements.  And we each respect the other person’s strengths.  And we know how to step in for each others’ weaknesses.  I really think respect is the foundation for people who are truly different to have a good working partnership.  Without the mutual respect, conflict is inevitable.

Lance and I were fortunate (in a sense) – we had the opportunity to test our partnership while we were still working at Lombardi.  We had a 13 week assignment – with 8-hours of travel required each way, and traveled 5 days a week for 13 weeks.  We spent 2 hours in the car each trip, we ate three meals a day together, and we worked together with our customer for 8-12 hours a day.  And that was just the MINIMUM amount of interaction we had for 13 weeks.  In this environment, you either earn mutual respect or you never want to work together again.

At BP3, it hasn’t all been roses.  2008 and 2009 were tough years for the US economy.  We grew in those years – but we had to scratch and claw are way through it.  Our previous experiences of trial-by-fire prepared us to get through those tough years as well – we didn’t give up or play the blame game, we just got to work.  And it prepared us to be able to tell each other tough truths.  I recall taking a call, the day our son was born, about taking a new assignment for BP3 – one which I needed to personally handle and travel to – at what we might say is a sensitive family time.  But we talked about it and we knew what the right decision would be for the business.  Lance has similarly taken tough assignments in Europe and other places hard to travel to – when it was what the business needed.  Sacrifice is required to build the business up.  Make sure you’re in the hole digging with someone you respect.

Our point of view – that co-founders who really do have different backgrounds are a better fit – is actually backed up by research done by the Startup Genome project, which shows that co-founders with a mix of business and tech background are more likely to succeed than co-founders with the same background (I’m paraphrasing badly – but that’s the implication of the research so far).

Well this is interesting news – it isn’t every day you see a major BPM announcement on TechCrunch after all!

BonitaSoft has raised $11M in an effort to take on the big software vendors with their open source BPM solutions:

BonitaSoft, a provider of open source business process management (BPM) solutions, this morning announced that it has landed $11 million in funding in a Series B round led by Serena Capital. Existing investors such as Ventech and Auriga Partners also participated.

It makes me wonder if Alfresco (Activiti) or others will be exploring more funding in the current environment.  It seems inevitable to me that an open source vendor or project would emerge as an interesting alternative to the commercial vendors.  I just wonder which one it will be – or is it possible that I’m wrong and it will be more than one?

There’s an argument that says the world is too complex for humans to understand.  Further, that by thinking we understand cause-and-effect, we’re doomed to act in ways that have unforeseen (usually negative) consequences.  It is a really interesting debate, and informative on the more than two sides represented.

Personally, I found myself rejecting this notion as useful.  Not that the notion of complexity isn’t useful – but letting it paralyze you is not useful.  When it comes to running your business, simplicity is more powerful than complexity.  A combination of relatively simple interactions has more power than a complex single interaction.  Simple interactions are more replicable, more scalable. I would focus more on enabling “emergence” than disabling decision-making by leaders.

Simplicity and abstraction go hand-in-hand.  The iPad has a significant amount of complexity baked in – from the hardware, to the software, to the production processes that lead to its creation, to the design processes that lead to its conception.  But to me, it is just a glossy glass enclosure that responds to my touch.

Does my touch cause the apps to do what they do?  Actually, it doesn’t matter whether touch is causal or not – it is, at minimum, so highly correlated between action and reaction that it feels like causation.

And that’s what we should be striving for in our businesses – that our actions would achieve the results we’re looking for – will feel like causation – though there may be a complex choreography and it may not be driven top-down.

There was a truly fantastic quote in the original HBR article:

“If you want to build a ship, don’t drum up people together to collect wood and
don’t assign them tasks and work, but rather teach them to long for the endless
immensity of the sea.”

- Antoine de Saint-Exupéry

Sometimes simple is best.

BP3 has made the Austin Business Journal’s Austin Fast 50 list for the top 50 growing Austin companies over the last 3 years – a reception event is planned for October.  An alphabetical listing of the companies in the top 50 growing companies has been released, but the full story will come out closer to the actual event.  We’ll publish an update when they publish the full story!

John Gruber on Daring Fireball refers to this as “The New Apple Advantage“:

But now that Apple’s products are more popular, we’re beginning to see another benefit to Apple’s lesser degree of configurability: greater scalability. Apple needs larger quantities of fewer different components to manufacture the same number of computers as other companies. It’s not just the economies of scale that all companies get when they sell 3 or 4 million laptops in a quarter — it’s greater, because Apple’s 3 or 4 million laptops sold share a larger number of the exact same components.

In other words, the old advantage was the “it just works” advantage… but the new advantage is the scale gained by having fewer products and configurations and still having high volume.

But it isn’t new.*  It just sneaked up on industry analysts, Apple watchers, and Apple skeptics alike.  When Tim Cook pointed out that all of Apple’s products would fit on a single table, that was an allusion to this advantage.  Last year I wrote about this in response to an article by Allan Breillatt:

Second, what struck me most is that Apple’s design process doesn’t consider these throw-away prototypes as waste – it considers these prototypes as a valuable part of the creative process – and that the TRUE waste is producing less than the best product design.  Or worse, producing multiple products that are inadequate.  Imagine if Apple had released 4 iPhones instead of 1 in the first run.  That would have been the real waste – because each of those products would require significant production costs, engineering costs, support costs, and marketing costs on into the future. So Apple is making a trade-off of design-cost against production-waste, from this point of view…

Allan characterized 9 of 10 prototypes being discarded as waste – but from the point of view of production, waste would be producing products that don’t increase sales, or disproportionately increase costs.  The benefit of this focus was apparent in the MP3 market – and it was apparent as Apple entered the smart phone market by introducing the iPhone.  Apple was already (if I recall correctly) the largest buyer of NAND flash memory chips.  Apple already had a pricing advantage on this critical component over every other handset manufacturer in the world (except perhaps Samsung).  And it showed.  The iPhone shipped with more flash memory than the other phones (and still seems to ship with more storage). John writes:

This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

One thing I’d point out – the supply chain advantages Apple currently enjoys are much like the supply chain advantages that Dell once enjoyed.  These advantages can be copied, but it takes time, and it takes a different organization and mindset.  Dell had a successful model and Lenovo and HP were eventually successful in equaling Dell’s supply chain efficiencies.  But they all gave up much of their design prowess in the process…

Apple’s approach retains design prowess, and embeds that prowess deep into the component and supply chain.  So John’s right – it takes years (maybe a decade) to adapt.  And the reason that these firms will have trouble adapting isn’t so much a supply chain management problem as a cultural problem.  It is like a blind spot for these firms, and until they demonstrate that they’re aware of the blind spot and are addressing it, I don’t expect them to find the right adaptations to compete effectively.  If I had to guess, Samsung is closer to adopting (copying) the right model than the other firms, and this is part of the contentiousness between the two firms.

* I think you could argue that the advantage was less apparent in the notebook lineup because the volumes were smaller – but there was still a benefit to the focus that Apple already had – and a cost to the lack of focus that the other vendors already had.

This is the third year for Demo Day, and the third year I was fortunate enough to be in Austin and able to take time out from BPM to attend.  Josh Baer’s signature event has been refined each year.  Two keynotes book-ended the startup pitches – Bob Metcalfe, now of UT; and Brian Sharples, CEO of HomeAway.

Bob Metcalfe

Bob’s keynote was an exercise in entertainment and information.  He cautioned the audience not to buy into the two extremes of startup mythos: Luck on one extreme, and virtue on the other.  The truth is that you have to be ready – ready to deal with uncertainty that will be there, and ready to take advantage of opportunities that present themselves (and often, later, look like luck).

Bob refers to the complex “ecosystem” around startups as an ecology – because a system sounds like something designed by man.  However, an ecology is something that comes into being, unplanned, through the independent actions of a larger number of people.

A few minutes into his talk, he dedicated it to the consummate entrepreneur – Steve Jobs – and followed up with an interesting story about how he turned down a job at Apple… only to have Steve Jobs help him make the connections he needed to make to get 3com off the ground!

Bob’s list of five things you have to be good at to be successful at scaling your startup:

1. Energy – keeping healthy: “Don’t buy into the bullsh** that you need to kill yourself.  Figure out when you need to get up and go to bed 8 hours before that!”
2. Writing: you’re going to need to do a lot of this.
3. Speaking:  you’re going to need to persuade others to your cause.  You need to give a lot of talks to practice and hone your skills.
4. Selling:  you may hate the idea of selling, but you have to understand it and be good at it for your company to succeed.
5. Planning:  you need to have a plan.  You can’t change your plan or pivot if you didn’t have a plan in the first place.

Bob’s story was that after doing an inventory of Austin’s startup ecosystem, he saw a need to improve the University of Texas’ association with startups.  As he pointed out, surprisingly, Austin has a better reputation for startups and innovation than UT itself.  Bob is energizing professors at UT about startups, but his new class, 1 semester startup, is also inspiring students.

It was a compelling kick-off to the morning.

Startup Pitches

The five companies presenting gave some great pitches.  The hard work preparing these presentations really paid off.  Stacey Higganbotham on GigaOm had great coverage of the 5 startups:

I was struck by how product-oriented these startups were, and how all of them had paying customers. I also thought these companies didn’t really spend a lot of time on their “big vision” as some Bay Area startups tend to do. Maybe it’s Austin’s general orientation toward the enterprise market, where products talk, and big vision may get you financing but few customers, or perhaps it’s just the way these startups think.

The article goes into detail about each startup as well.  My personal favorite presentation was HelpJuice’s Emril Hajric – his style was perfect for a technical founder presentation – honest and rough around the edges.  But he also had a great value pitch to make for his product, which helps spruce up FAQ’s and customer service. Another startup, SwimTopia, was anchored by the former CTO of Frog Design – Mason Hale.  The maturity of the companies presenting was impressive.

Even BusinessInsider had modest coverage of the event, but the local journalists did a more thorough job of it.  Lori Hawkins of the Statesman also covered the event:

The companies made eight-minute presentations to a crowd of 300 people — mostly entrepreneurs and investors — at the University of Texas AT&T Executive Education and Conference Center. Later in the day, another 15 Austin startups made three-minute pitches to the audience.

Brian Sharples, CEO of HomeAway

After the pitches, Brian Sharples of HomeAway gave another keynote.  He basically explained how HomeAway happened – with some background about his life experiences that allowed him to seize the opportunities as they arose, and to do the risk planning to avoid some previous failures. He had some interesting advice that I jotted down as notes, paraphrasing:

• Look intensely at competition. Be curious. Call anyone you can find to learn about the business you’re entering. Try to figure out who has tried this and failed. And figure out why?
• Business is about game theory. You have to plan for the fact that those other companies will react. it is such a fast follow environment. Groupon was a great example of the fast followers being really crazy right now. Airbnb is another good example.  (In my opinion, one of the really smart things HomeAway did was raise a truckload of money, early, which discouraged some of the fast followers when the recession was in full swing).
• Hard to get a big team, so make it a good one.  “The team at HomeAway saved the company.”
• Have a profit model. The figure it out later model- “It ain’t reality”. You have to have a business that makes money. HomeAway has been 30% free cash flow since early on (I think I’m quoting that right).
• Really want to pick investors rather than the other way around – and profit or free cash flow is what allows you to do that.
• Do what it takes to get there- to get the funding you need. Don’t hoard equity if it costs you the capital you need to execute your strategy.
• Shhhhhh! Everyone likes press and PR, but keep quiet until you’re ready for competition.  If you’re a PR machine but you’re not ready to beat the competition, you’re just inviting competition.  (Note: this is not the same as stealth mode).

It was a really entertaining talk – but you had to pay attention to pick out the bits you could use to improve your own startup.

Fast Pitches

The afternoon fast-pitches were actually pretty good.  I’ve seen these kinds of pitches before and been disappointed – these were actually quite good, and entertaining.  A couple of these fast-pitches clearly have real traction and real customers already. I didn’t take notes during this section, however, I just enjoyed listening.

Startup America

John Price, CEO of Vast, gave a pitch for Austin startups recruiting more people to the Austin area – which ties into previous posts on this blog-  as well as for Startup America.  I loved his comment that Austin startups need to get better at using one of our “unfair advantages” – SXSW-interactive.  22,000 badge holders hit the conference in 2011, and it is a once-a-year opportunity to recruit talent to Austin.  Or, from the Austin Chamber of Commerce point of view, to recruit startups to Austin.  We could write an entire blog post just about that.  I’ll just take a moment to hit on a theme I’m stuck on:  it is time for software companies to invest in people.  That means challenging them with opportunities they’re not prepared for – that stretch them.  If they don’t have the opportunity to fail, it isn’t an opportunity at all.  But it also means investing in their success – with your time, energy, knowledge, and experience.

Wrapping Up.

The event wrapped up with networking and a tour of local Austin startups (The ATX Startup Crawl). 

The biggest takeaway for me is that Josh and the other contributors and participants in Capital Factory are on their way to building on the virtuous cycle in Austin.  I saw a lot of startup CEOs and entrepreneurs in attendance, as well as investors.  Not everyone at the event has “skin in the game” but they’re still engaged, interested, offering free advice, and making connections.  I definitely left full of positive energy for Austin and for our mission at BP3.

My thanks to everyone involved in Capital Factory for a great contribution to Austin – and thanks to Red Velvet Events for putting on a great event!

Great post from Theo Priestley on the unending quest for roles.  It just gets tired, in the way that the endless pursuit of The Next Three Letter Acronym gets tiring.

My favorite quote:

The article starts with “If you have not yet heard the term “business architect”, you soon will…”

I’ll end with “If you have not yet heard the term “business architect”, you’re not missing much…”

Roles are better when they emerge organically than when they are handed down from the mountain.  Better to talk about them as hats you put on or take off as needed, rather than titles you will put on your business card…