What a great blog post from Chris Dixon, “Who should learn how to program?” :

Businesses all over the world need more programmers. Every company I know is hiring engineers (e.g. see this list of NY tech startups). Top programmers can make $100K+ right out of college. Yet there were only about 14,000 computer science (CS) majors last year. Meanwhile about 40,000 people got law degrees even though demand for lawyers has been shrinking. America is suffering from what economists call structural unemployment:  jobs are available but our labor force isn’t trained for those jobs.

Plentiful job opportunity is just one great reason for people to learn how to code (program).  Unfortunately, after the dot-com bust, the news media and many cynical people convinced many college students that software jobs were going overseas and never coming back.  It was a classic market-driven overreaction to a correction. In places where students have good data about market dynamics (e.g. Stanford) the number of computer science majors are up double-digit percentages each of the last 3-4 years.  Additionally, there’s been a big increase in software-related fields, not typically classified as Computer Science (like Symbolic Systems, electrical engineering, and certain types of engineering and product design).

Chris also points out that programming is a great foundation for starting a tech company.  Hard to argue with that.  If your goal is to start a company, knowing how to code will give you a much better chance of achieving that dream than just about any other skill.  Taking BP3 as an example-  a services company that you might not think requires programming skills to start: I have a computer science background, and Lance knows how to write code, though it isn’t part of his job description(!).  Knowing how to code and being able to do it were what allowed us to start BP3.  And those skills translate well to nearby fields like statistics, that require structured or algorithmic thinking.

Programming is good for your brain – to misquote (slightly) Steve Jobs, it is like a bicycle for the mind. You’ll be amazed at how well you can remember not only where specific lines of code are in your work, but by how long you can retain this knowledge, often even years later being able to trivially skim through your code to the right spot to fix a defect.

An even better point Chris brings up is this one:

  Programming is an important part of being “culturally literate.”

It is hard to underestimate this today.  I’m raising two children.  We’re exposing them to an immersion school that teaches them to speak fluent Spanish (as well as their native English).  But the school (and through some help from outside of school) we’re also teaching them Mandarin (and a little Cantonese).  If our children graduate from college fluent in English, Spanish, and Chinese – they’ll be able to do business almost anywhere in the world and converse with people from all over the world.  They’ll be much better off than their monolingual father, to face the challenges of the future.  But there are two more “languages” I will try my best to pass on to them:

• programming.  If our children learn how to write software, it will open up vast opportunities to them.  It isn’t about how many software languages they learn – even one will be a big head start heading into college.
• product design.  I don’t think it matters if it is physical design or software design, but I want to impart to the kids something of the language of design – the terminology, the flavor, the subtlety of how you talk about it.  I once compared “design language literacy” to the way chefs talk about food and cooking.  If you want to communicate with a chef (or a foodie) about food, you need to learn their language and vocabulary.  Similarly, for design, we need to learn the vocabulary and thought processes to communicate effectively – even if we don’t intend to become a designer.

These programming and product design skills are “meta” languages in a sense.  They transcend national borders and historical language affiliation.

The comment section of Chris Dixon’s blog puts the exclamation point on the value of this post to the general school of thought about coding.

So who should learn how to write code?  You should.  Your children should.

In Brakoniecki’s post on Lean Start-ups and the idea of Entrepreneur, he delves into the apparent conflict between the Taylor “Great Man” theory, and the Lean Startup’s emphasis on leadership, and learning (all while in essence refuting the idea of the Great Man). I commented on his blog directly but thought I’d share my thoughts here as well:

The relationship between the Great Man theory and Entrepreneur is a bit of a quandary in the lean startup community.  On the one hand, many people in the startup business contend, paraphrased, that “entrepreneurs are born rather than made.”  But the lean startup seems to say that entrepreneurship can be taught, learned, rather than born inside you.

The “born with it” argument, to me, seems to be in alignment with the idea of building companies around Great Men (very Ayn Rand, in my humble opinion).  But that doesn’t make it correct.  In my experience, these things aren’t mutually exclusive.

I’d put it this way.  For some people, being a good entrepreneur *appears* to be innate.  We don’t know the person well enough to know how this talent developed, and what their experiences were – they’re a black box. To us, as if by magic, they are really good at entrepreneurship (and leading).  For others, it is more obviously a learned, thoughtfully acquired skill.

But I would argue that for literally everyone – born with it or not – if you decide to begin the journey of entrepreneurship, you can improve your chances if you learn.  And learning what Lean Startup has to offer is clearly a benefit- even if you choose not to apply lean startup methods to your efforts, at least you’re making an informed decision.  If you do apply lean startup, then of course the goal is that you also learn about your potential market and customers faster as well.

One thing clear to me is that lean startup (any startup) still requires leadership.  It’s hard to imagine any other possibility.  Critical decisions, pivots, and hires have to be made.  I just don’t see how you do that without good leadership.

And of course the other wrinkle is that not all leadership looks the same.  Contrast Tony Hsieh‘s style with Steve Jobs for example…

I never considered myself a Mark Cuban fan.  But when I read his blogs and excerpts from his book I find him very convincing.  It just doesn’t translate into most of the TV appearances I’ve seen.

One Entrepreneur.com, they’ve run an expert from his book “Mark Cuban’s 12 Rules for Startups” that really hits the spot for us at BP3.  A couple of highlights for us:

1. “Don’t start a company unless it’s an obsession and something you love” – well, I’d have softened this a bit- either starting a company, or what the company is focused on, needs to be an obsession and something you love.  You need one or the other. Preferably both, but one or the other are mandatory.  When Lance and I started BP3, we were passionate about BPM and convinced we needed to start a company to achieve our vision around BPM services delivery.  But it started with passion on the subject matter for us. That said, it wasn’t the first time for either of us to venture off on our own and attempt to start something, and we’d both worked for other people’s startups.
2. “If you have an exit strategy, it’s not an obsession.” Very true.  Another bad sign: you have hobbies.  When you’re starting up, if you’re passionate about the startup and the subject matter, where is the time for hobbies? Many founders are like Lance and I – married with kids.  There’s no time for hobbies for the time being.
3. “Hire people who you think will love working there.”  Right.  If they think BPM is boring, we don’t hire them!
4. “Sales Cure All.”  Absolutely.  Almost any problem your company has can be fixed if you sell more (or more profitably) so that you have the funds to invest in fixing the problem.
5. “Know your core competencies and  focus on being great at them.”  - If you’re doing a services startup, this is a must.  Time is really precious, focus is really precious.
6. “An espresso machine?”  I think coffee is critical – for me even if it isn’t for everyone else!  But we also dig the free sodas.  And there’s a deli on the first floor.  And a small gym. It matters.

There’s more in the article, worth reading.

What a great year for BPM 2011 was.  And it was also a good year of blogging for BP3!

Not that volume page views is our goal per se, but something happened in 2011 as pageviews jumped from a ~3000/month range to a 4500-5000/month range.  Hopefully this means we’re doing our job well, which is writing about BPM, startups, staffing, and other topics that affect business processes.  Our main goal is to communicate our passion for BPM and foster discussion and thought in the space.

One change in 2011 is the iPad2.  With this new device, I was able to take notes at conferences more comprehensively than before – no concerns over battery life, and it is lightweight enough to lug it around all day without needing to see a chiropractor.

Most popular posts in 2011:

1. Apple and Business Process Management
2. Penny for Your Thoughts (IBM BPM 7.5)
3. BPMN 2 Examples Courtesy of Camunda
4. IBM Quietly Updates BPM
5. The Battle of TLAs: BPM is Transforming ECM
6. Consulting Math vs. Software Math
7. Why use BPM over other workflow tools? – A succinct explanation of why you use BPM
8. Migrating to IBM BPM 7.5
9. SXSW 2011 day 2. The Lean Startup Phenomenon
10. Beauty is in the Eye of the Beholder with IBM BPM 7.5. #ibmimpact

Clearly posts about IBM’s products were well-received, perhaps because of the practical and immediate value of this kind of information.  But it is nice to see the staying power of a few other topics.  The most surprising thing about this list is that the most-read blog is from 2009.  Yes, Apple and BPM is still a hot topic in 2011… and that post still shows up regularly on our daily top-reads list.  Perhaps the reason it is still well-read is that it didn’t become quickly dated.  Similarly, I wouldn’t be surprised to see Consulting Math vs. Software Math on the list next year. Finally, “Why use BPM” is a post that is from 2008 – and still cracks our top-10 for 2011.  It is as relevant today as it was 3-4 years ago.

For a second year in a row, despite plenty of posts and comments, the ACM posts did not crack the top 10 most-read posts.

1. Search engines -> Search results
2. Twitter
3. Google
4. LinkedIn
5. Lijit
6. brsilver.com – thanks Bruce!
7. activiti.org
8. paper.li
9. Google Reader
10. BP-3.com

So search is the #1 way people find our blog posts apparently.  But what were they searching for?

1. IBM BPM 7.5
2. Apple business process
3. Apple operational processes and procedures
4. bpms definition
5. bpmn examples

Look for more guest posts from our team in 2012, and more about BPM!

According to Naval, we’ve got the problem all wrong:

“There isn’t a shortage of developers and designers. There’s a surplus of founders.”

He makes a compelling argument as to the “why” :

The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap.

Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.*

Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.

Basically, he makes the point that if you’re pre-traction, you have to expect to give up a lot more equity to grow your company than if you’ve already got traction.  In the microcosm of the overall market that I see, in professional services, you could easily argue the surplus of founders argument. If you consider all the individual contractors as “founders” that haven’t gotten traction yet.

We’ve always felt that it was important to hire people who valued being part of a team, and building something bigger than themselves.  Being part of a team enables us all to execute at a higher level for ourselves and our customers. It makes it easier to take a vacation and still sleep well at night.  It makes it easier to get health insurance.  It is a long list of benefits to being part of a firm.  Including, building value that is sustainable even after the point when you’re ready to move on to another phase in your life. For builders, this is an attractive proposition.

Eric Jackson of Forbes recently wrote the Top Ten Reasons Why Large Companies Fail to Keep Their Best Talent.

The article lays out some very good reasons why top talent gets frustrated with big companies. But the focus is still too much on secondary effects.  My thoughts on a few of the points:

#1 : Bureaucracy. “No one likes rules that make no sense. But, when top talent is complaining along these lines, it’s usually a sign that they didn’t feel as if they had a say in these rules.”  Actually, there are just too many rules.  Big companies have the resources to actually have bureaucracy that makes the lives of top talent easier, not harder.  But they don’t take advantage of that capability, because it shows up as a hard expense that can be cut.  When the economy is strong you see startups and smaller firms offering free dry cleaning or laundry service (or if not free, convenient in-office pickup).  There are free meals and caffeine at the office.  This is convenient for employees and saves them time out of their lives.  But for some reason most companies cut back both on the perks, and on the benefits of large size, as they get bigger.  Instead of requiring employees to fill out a lot of paperwork for expense reports, make it easy for them to send in their expenses and pay lower-skilled labor to process them.  Or set policies that require fewer receipts for reimbursement and thereby reduce the total bureaucracy.  Use per diems.  Have a travel group that adds value in booking and rebooking flights and hotel reservations.  Have administrative help that helps produce critical paperwork without a lot of barriers to entry and TPS forms to fill out. These are trivial examples, but wherever you can reduce the exposure your team has to bureaucracy or administrative work, the more productive and happy they’ll be.

#2 : Finding the right project.  “they usually don’t have people going around to their best and brightest asking them if they’re enjoying their current projects or if they want to work on something new…” This item in particular seems hopelessly vague.  It almost sounds like the idea is that the top talent shouldn’t have to do any of the tough, dreary projects.  Who wouldn’t want to opt out of the project that takes them to Ottawa in the winter? (No offense intended, Ottawa!)  But there’s a kernel of truth within this point:  big companies have really interesting jobs to offer high performers.  But they (typically) don’t.  Those top performers aren’t afraid to ask for a better assignment or put their name in for promotion.  But they’re told they have to wait – “we don’t promote someone twice within one year.”  Or “you can’t get a raise of more than 3% a year”.  So they realize that to move up, they have to get some experience and then move out.  Possibly getting hired back in later on.   It isn’t that no one gets these fast-track promotions and assignments at big companies, but the percentages are vanishingly small.  The top 1% not the top 10 or 20 percent.

#3 : Poor Annual Performance Reviews.  “You would be amazed at how many companies do not do a very effective job at annual performance reviews.”  Actually, no one with a job would be amazed by this.   Performance reviews are a broken process at nearly every company I’ve heard of, let alone worked at.  There are companies trying to fix that, like Rypple (now part of SalesForce), but the fix isn’t actually about annual reviews.  The fix is more feedback.  Reviews are largely a waste of time, and condescending to the employee.  The employer or manager sits in judgment and the employee is judged and much good feedback throughout the year is saved for an annual review instead of happening spontaneously.  The Annual Review becomes a marker around which unrealistic expectations get set – employees expecting golden reviews and promotions, employers disappointing them with perhaps neither.   The review process can make employers look quite petty.

So what’s the fix?  When you have negative feedback for an employee, tell them right away.  Tell them what they’re screwing up.  While they can still do something about it.  When they’re doing something great, tell them quickly, while it is fresh on your (and their) minds.  Make sure other people hear about it so that good behavior becomes infectious.  We don’t do “reviews” at BP3, but our team communicates.  They can call to talk to me anytime, and I don’t hesitate to hit them up on Instant Messenger or the phone.  We don’t do raises on an annual schedule, we just do them when we think the timing is right.  We do regular bonuses which force us to acknowledge good or bad performance monetarily, in case our words – spoken and typed – aren’t getting the message across – good and bad.

#4 : No Career Development.  Well, this is actually nearly impossible in small companies to do in a structured way. The promise a small company can hold out is that as the company grows, opportunities for employees will grow as well.  A lot of the career development is personal growth and attacking ambiguous problems (filling in the white space).  At a large company, I’d recommend managers talk to their top talent about their own aspirations for those people.  What do you want to help them achieve?  Don’t expect them to come to the table with an answer when they may not have a sense of what is possible.  But experienced executives and managers do know – and can help lay out a path or ladder that actually motivates talented people. But keep in mind, there are always some people who aren’t motivated by a ladder, or competition.  They’re good at what they do, and they know it, but they don’t care about your external validation of that performance.  These are the toughest people to keep happy on a purely professional basis.  If you have one of these high performers on your team, make friends.  Friendship and loyalty may be the only thing that keeps you two working together. And someday you may want to get a job working for them instead of the other way around!

#5 :  Shifting Whims.  “The challenge for most organizations is not setting up a strategic prioirty, like establishing an incubator, but sticking with it a year or two from now.  Top talent hates being ‘jerked around.’”  Well, this one is spot on.  What’s worse than not having a good recruiting program?  Setting one up and then stopping it 3 months in.  It takes time to recruit the right talent, develop a talent pipeline that works.  When you shut it down for more than a week or two, starting up again takes another 3 months or more for the pipeline to pan out.  You’ve lost all the momentum.  Having the rug pulled out from under something you’re excited about sucks.

#8 :  The Missing Vision Thing.  This one can be hard when you’re smaller.  It is helpful to have a humble or modest bearing in general.  Under-promise, over-deliver.  But as you grow, as things start to fall into place, you can share the vision with your early conspirators (your team!).  Eventually you step out and communicate with the world at large.  The same approach works well for team-level vision at a company.  But big companies can have bigger visions of how they’ll change the world or the landscape.  Then the real trouble coming up with something that is expansive without sounding too trite or generic (I don’t have to name names, we can all think of a few in this category).

It is just a matter of using your size to your benefit, and to the benefit of your top talent.

Really interesting progress on the state of the art for startup process.  It recently got some coverage at Austin Startup, with a great infographic included. But it has previously been discussed on Steve Blank’s blog.

The Genome Report is 68 pages of great reading.  Lots of details go into the general conclusions that you see in the info graphic.  It is included at the bottom of this post as well.  Interestingly, they go even farther than just producing a report. There’s an a survey you can fill out, the startup compass, which will help determine how your startup compares to other startups they did their research on for the Genome project.  I went partway through this survey myself, but at some point it becomes apparent that it is not really a good match for services businesses, it is really about product businesses.  And that’s fine – it is still far and away the most interesting pattern-matching tool I’ve seen for startups.

And the key finding seems to be exactly what Austin Startup focused on:

One of the big findings amongst the data was that almost 7 out of 10 companies failed due to premature scaling or inconsistency. Peeling back the data, the lessons seem really simple: don’t act like a big company.

Fascinating stuff… or scary stuff, if you’re running against the statistics they’ve collected… The statistics definitely back the idea of the lean startup.

(Side note for BPM practitioners… how can we apply this kind of data and thinking to our own BPM efforts as we grow them from projects to programs and beyond?)

Startup Genome Report 01

One anecdote from Isaacston’s Steve Jobs that really resonated for me was this amusing exchange between he and Ellison:

At this point Jobs got real close to Ellison and said, “Larry, this is why it’s really important that I’m your friend. You don’t need any more money.”

Ellison agreed with that general sentiment, but thought it was stupid that some “fund manager at Fidelity” would make more money on Apple’s success than he or Jobs.

Jobs responded by saying, “I think if I went back to Apple and didn’t own any of Apple, and you didn’t own any of Apple, I’d have the moral high ground.”

Ellison’s response: “Steve, that’s really expensive real estate, this moral high ground.”

Ellison is so right. That moral high ground is really expensive real estate.  And it is much more expensive real estate for people like Larry and Steve than it has ever been for someone like me.

So the question: is that expensive real estate really worth it?

We know the answer is supposed to be yes, but so often we see people make decisions that yield that moral high ground.  We might face that temptation ourselves. Just remember that holding the moral high ground isn’t something you start doing after you’ve made your millions (because, for most people who do this, there are always more millions to chase… and then billions).  The moral high ground is something you start doing today, if you weren’t doing it yesterday.  It is something you build up piece by piece, day by day, until it has real value. That value is in reputation, trust, personal relationships, business relationships.

In my experience, in the long run, the moral high ground is worth it.  If you stick to it, you’ll find that while some of your friends and colleagues end up with more money in the short term, or even in the long term, you’ll end up with the friends.  The lifelong friends.  And if you’re in Steve’s rarefied air you end up with not only friends and loyal executives, but admirers far and wide.

That moral high ground gives you the moral authority to lead more effectively.  In an information economy, that’s important.  Your talent can walk out the door any time.  And while the economy may not be good, the job market for high tech workers is quite good.

I’ve never regretted holding that expensive real estate.  No question, the really expensive real estate is still worth it. I hope Larry went ahead and bought a few Apple shares while he was at it, though.

Fred Wilson has one of the best blogs on the subject of startups and investing.  Which is really no surprise given his cat-bird seat on the whole industry.  As a services startup, I occasionally find passages in his writing that really resonate, like this one:

Roelof Botha, a leading VC with Sequoia, once gave me a great piece of advice in helping founders start to focus on company building. He said founders should think of their company as a product and build it and shape it with the same passion and care. I’ve taken that to heart and passed it on a few times.

No matter how or when you do it, building a company is a required step to sustainability. Positive cash flow is not enough to keep the company independent and solvent. You need a culture, systems, and processes to keep everyone happy and functioning well.

This is so true.  We’re still a work-in-progress at BP3.  We’ve been building our culture, and our team of amazing individuals. But we’re still learning the right processes for the new situations we’re finding ourselves in as we get bigger and are tackling more projects simultaneously.

How you handle these situations has a big effect on how the company performs for its customers.  When we have a “process failure”, if all we do is firefight in a one-off fashion, that will help the customer and solve the short-term problem.  But we are trying to build a lasting company.  We need to not only put out the fire but adjust our operating guidelines so that we identify these issues and situations early – and have an organization and response in place to resolve the issue without firefighting.

Every time we put out a fire we’re also taking a step back and trying to think about whether this is something we need to address systemically or organizationally, or whether this is a one-off event.  And even for the one-off events- what’s the best escalation path for dealing with those without derailing core business functions?

Great comment down below the main article by Charlie Crystal:

That’s one of the most enjoyable parts of building a company–defining what kind of people you want to be, the impact you want to have on the world, your employees, your community; and then cheerfully getting it done and evangelizing what you do, why you do it, and how you do it.

This is company building, and it is good stuff.

There’s a theme about management that has cropped up over the years regarding owning the outcomes, rather than the excuses (Steve Jobs’ definition of the Vice President versus the janitor comes to mind).

Ben Horowitz (of Andreesen Horowitz) captures this perfectly in his “Nobody Cares” post.  It is both great advice, a great reminder of something you should already know if you run a startup, and an admonishment that you need to be tough if you’re going to go down that road:

That might be the best CEO advice ever. Because, you see, nobody cares. When things go wrong in your company, nobody cares. The press doesn’t care, your investors don’t care, your board doesn’t care, your employees don’t care, even your mama doesn’t care. Nobody cares.

And they are right not to care. A great reason for failing won’t preserve one dollar for your investors, won’t save one employee’s job, or get you one new customer. It especially won’t make you feel one bit better when you shut down your company and declare bankruptcy.

This is so true. As consultants we see this all the time – customers don’t care about our excuses, they just want their projects and processes delivered as promised.  Sometimes there are really important mitigating circumstances but we’ve got to help them climb over those obstacles.

And at the end of the day – nobody cares about the excuses.  You have to make payroll, pay bonuses, grow your firm, and make it happen.  And if you don’t, no one will care about the excuses.

We’re pleased to announce that BP3 placed #11 in the “Under $10M” category of the Austin Business Journal’s 2011 Austin Fast 50 listing:

The Austin Business Journal honored the 50 fastest growing companies on Thursday at its annual Fast 50 awards ceremony at the AT&T Executive Education and Conference Center. The awards rank Austin-area companies based on compounded annual average sales growth over three years.

Numbers reflected calendar 2008, 2009, and 2010 performance – so the data is already a bit out of date!  Perhaps surprisingly, we’re growing faster in 2011 than we have in previous years, due to the great environment for BPM consulting services, and hope to be back on the list next year as a result.  Quite an array of companies and industries are represented in the Fast 50 list – congrats to all the other small firms who made it – it is these fast-growing companies that are driving employment in Austin (all the little #’s add up).  Every year the ABJ honors the “Fast 50″ – 25 fastest growing companies over $10M in revenue, and the 25 fastest growing companies under $10M in revenue.  There are restaurants,  consultancies, medical firms, financial firms, and real estate.  You name it.  For those of us in Tech, it is a good reminder that the main-street economy is alive and kicking.

The other interesting thing from our perspective: growing quickly just isn’t part of our goal-set.  We’re just trying to build the best team and capabilities in the BPM space, and provide great value for our customers.  If we can do that, then growth will likely follow as a side-effect.  I don’t think there’s a better way to do it a consulting business without taking outside capital.

Additional text in the print version of the article:

WHAT IT DOES: BP3 is a boutique business process management software consulting business.

HOW IT’S DIFFERENT:  Primarily, we differentiate ourselves with the quality of our expertise in the BPM space.  We’re the most experienced IBM BPM consulting vendor, as a result of our deep ties to its predecessor, the Lombardi BPM product line, dating back to 2003.

KEYS TO GROWTH: The key to our growth is finding more great people to join our team.  Our business is a people business.  Beyond that, the foundation of our growth is that the BPM software market in general is growing.  And, specifically, IBM BPM is growing nicely.

BIGGEST CHALLENGES: Already in 2011, we’ve added six employees to our firm.  Our big challenge will be to support our great people.  When you’re smaller, you can simply be a collection of amazing individual talent.  As we get bigger, to get the most out of this band of talent, we need to optimize our teamwork and organization.

Neil Ward-Dutton is following up on previous work he’s done looking at BPM practices at big firms. We’ll start with this, wherein Neil tells us Capgemini are lining up their ducks:

Top Line Initiatives within Capgemini are identified where a need is seen for an internal ‘accelerator’ (my word) that can place the company to play in high-growth market sectors – and furthermore, where the potential is seen for the company to grow at twice the overall market growth rate. In line with BPM having been identified as a Top Line Intiative, Capgemini is looking to grow its BPM project delivery business 40% per year for the next 4-5 years.

Well, this is both what is right and wrong about the big consulting firms.  What’s right: they’ve realized BPM is a growing market opportunity and worth investing in.

What’s wrong:  that’s the only motivation behind these companies getting into BPM.  There’s no passion for business improvement, process improvement, or business process management.  There’s no raison d’être.

But there are a few other positive notes here to pick out:

The company has realised that the traditional body-shopping approach doesn’t work; and it’s also realised that trying to push a significant proportion of project work offshore is also going to be difficult – particularly in the early stages of engagement with a customer. Rather, it aims to create small project teams of between 6 and 12 consultants, working onsite with customers and getting business and technology representatives from the customer’s side collaborating with them as much as possible. It’s aiming to structure projects to deliver results in 3-6 months, and its goal is to build relationships with clients so that it can set up sequences of such projects that overall create engagements that last 2-3 years.

It is encouraging to hear that some of the big consulting firms are finally coming to grips with this – the project work for most BPM projects needs to be local.  Now if only customers will come to the same conclusions…

What Capgemini sees as small teams (6-12) would represent large BPM teams if they’re only focused on the BPM parts of the business (and not supporting aspects, e.g. technology integrations, etc.).  CapGemini is focused on the right time-frames:  3-6 months for results. The “2-3 year’s” for overall engagements however- when you’re a smaller firm like BP3 that longer term relationship has to be earned, we don’t go in assuming it will be there.  We execute the project, and try to acquit ourselves well enough that if there are additional projects we’ll be invited into planning discussions – or better yet, invited to help funnel additional project ideas into funded projects.

Great read on Capgemini – and instructive for other companies looking at BPM services…

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.

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).

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!

Actually, my least favorite seat on a certain model of plane that flies in and out of Austin is 27E.  Some planes manage to pack the lavatory, the kitchen, the divider wall right behind you (no reclining!), and engine noise all in one truly fantastically bad seat.

Jason Cohen asks the question: why?  Why not spend time either improving the worst case experiences for your customers – or better yet, eliminating them entirely?  Would it be such a bad idea for the airlines to eliminate a few of these bad seats?  To put more insulation in? To offer some freebie or consolation prize for the bad seat?

Eliminating these worst-case experiences doesn’t mean radically changing your business. It just means saying no to customers or projects that aren’t a good fit:

Bill impressed them and they were ready to begin, but Bill decided this was too far outside his experience and so told them, while it would be interesting and fun for him, and he was confident in his abilities, he isn’t comfortable accepting this job, because he wants no chance that they’ll have a bad experience.

Of course this only won the customer over still more. Bill won’t do this particular gig, but I guarantee that when something else comes up in six months, he’ll automatically be offered the job. As for me, I’m going to continue connecting customers with Bill because there is no seat 32B with Bill.

Saying “No” requires that you know yourself- or your firm – well enough to know what you’re not going to do.  Buried in the example is the fact hat Jason’s startup is referring this consulting business to a consultant – rather than doing it in-house.  Another example of knowing when something is outside the suite spot.

Now I need to go think about how to eliminate seat 32B for our customers at BP3!  Looking at this from a BPM/process perspective, however, I’ve often see customers look at this the wrong way – focusing on all the exceptions before they have the average case nailed down tight.  What Jason has described here isn’t handling every exception, it is recognizing a bad situation and either avoiding it (saying no), or figuring out how to make it not feel like seat 32B. A precursor to this is actually getting the average case nailed down and sorted out.

In a recent Austin Technology Council (ATC) CEO Summit, talent shortage were a hot topic.  Which sounds crazy when the unemployment rate is north of 8% in Austin, and in Texas.  AustinStartup’s George Dearing did a good job addressing a few of the key issues.  It’s a really good read.

• 77% of respondents agree that there will be a shortage of technically skilled talent in the future.
• 71% of respondents agree that there is a shortage of technically skilled talent at the present time in Austin.
• More than half of respondents believe that talent issues have limited their organization’s productivity and efficiency.

Future Talent Shortage:  I think the overall concern for the future is valid – but overstated.  Technology and productivity advancements often have surprisingly dislocating affects on employment.  In the 1990′s, VLSI and CAD tools got to the point where 4 Electrical Engineers could do the work that had required 100 engineers just a couple years previously.  I watched my fellow class of ’94 graduates in EE go into software companies instead of working for Intel and the like – there just weren’t the number of new jobs in electrical engineering and chip design that there had been in previous years.  In Austin I’ve followed the chip business with some interest – and I would venture to say that the number of chip designers employed here probably declined into the early 2000′s… until the market changed.  Now there are a lot of different chip applications – mobile devices and analog applications have created opportunities for a lot more applications – and for more engineers.  And, with the tools at our disposal today, it may make economic sense to tweak chip designs for much smaller volumes than in 1995.

What’s my point?  Technology employment is volatile.  That results in under-representation in STEM (Science Technology Engineering Math) majors, and it results in people with little STEM education joining STEM-related fields in boom times… and it results in people with STEM backgrounds exiting these fields when the boom eventually turns to bust.

When I was entering college I heard and read the same concerns about there not being enough engineers.  Somehow we made it to 2011 anyway. All I know is, STEM majors are going to be good choices for college students for many years to come.

Shortage of Talent in Austin Right Now:  I don’t see it.  I was just talking with someone today at a local software company who commented how hard it was to find the right people in Austin.  I expressed sympathy – after all, BPM is a bit of a niche business,  so I can relate in that not everyone is an expert in BPM software.  But his complaint was that people don’t spend enough time retraining themselves to be prepared for the technology shifts – learning a new platform or language.  He has a point – if you’re in high tech and you’re not willing to invest in your own skills you’re making a mistake.  But it seemed clear his expectation was that his company shouldn’t have to make an investment in someone ramping up.

But, on the other hand.  This reminds me a bit of companies who hire interns but don’t expect to teach the intern anything.   If you’re hiring high tech workers, you have to be willing to mix it up.  Sure, hire a few people with expertise in the relevant technologies.  But don’t be afraid to hire people with varying degrees of learning curve required to be proficient in the job.  We hired an intern this summer who didn’t know how to do what we wanted him to do this summer.  And he figured it out.  And I dare say he probably has a bit more confidence that the next time someone asks him to just figure something out, he will.

Talent Issues Limiting Growth.  All I can say here is – developing talent and growing costs money.  For many years, many companies have gotten by with minimum investment in people.  I don’t mean training classes.  I mean investing in real opportunities for people to learn by doing as well as training.  And then investing enough in retaining talent so that the investment in education and self-improvement pays off.

I have to quote a telling paragraph from the original post:

Brooking’s analysis opens up several discussion points. With diversity and the educational pieces presumably in place, what then are the  obstacles to acquiring the right talent? Are companies just terrible at recruiting? Are all the good engineers are in Silicon Valley or overseas? Perhaps even more provocative, are companies really investing in people and training their employees to become more highly-skilled instead of sourcing things out to get the razor-thin margins necessary to sustain their models? Whatever the case, the NYT surfaced data from the National Employment Law Project [below] showing low-end jobs are actually the ones making a comeback, again leading me to question how aggressive some companies are really approaching the recruiting process.

Great work.  By next summer, I’ll report on some of our own talent investments at BP3.  Maybe it is just the lack of VC funding that allows us to look further out for our investments than just the next year.  We have time to invest and grow with the team we hire.

Many of my peers in software came of age during the age of Web 1.0 – where profit was never really part of the metrics for running the business.  Even in Web 2.0 – or in the whole set of startups going on now whatever the label – there isn’t as much focus on making money as you might think.

Partly, there are forces that teach us to use free products and services:

1. Great free services:  Gmail (and others), Google Maps, freemium models for everything from dropbox to tripit.
2. Open source:  lots of commercial products are facing real competition from open source projects focused on the same space.

But some of us were never comfortable with businesses that don’t make money (there is a difference between not making money yet and not making money at all).  If a product or service is compelling enough, customers will pay for it.  If it isn’t, they won’t.  At times, the price they’ll pay is less than the cost of providing the product or service – and then it makes sense to find other means of funding or monetizing (ads for Google’s Gmail for example).  But typically, a good product will command a price more than the cost of production.

Also, making money is a good habit to get into as a company.  Companies that are profitable early in their history tend to stay that way for a long time.  Companies that lose money early tend to keep losing money.

One difference between the software and hardware world is that lack of profit seems to come to light faster.  When Apple released the iPad, its claims that it was priced aggressively were scoffed by industry pundits who were used to Apple being “the most expensive car on the lot”.  But as more recent “tablet” entrants have shown, Apple really did price the iPad aggressively.  And yet, aggressively still means at a healthy profit!

As HP WebOS tablets fly off the shelves at $99 a pop, some have now argued that HP should have pushed a bunch of tablets into customers hands at $99 or $199.  But that’s not aggressive pricing, that’s profit-killing pricing.  John Gruber covers this really well on Daring Fireball :

That wouldn’t fly. Selling TouchPads at a steep loss wouldn’t just burn a ton of cash “at first”. It would burn a ton of cash continuously, every time one was sold.

[...]

Sustainable businesses are built on profit.

Amen.  And John’s point is right, in my view – without a way to make money post-sale on each of these tablets, the prospects for a loss-leader strategy are not good.  Making money is a habit, and a discipline.  In this case, HP tried to do the right thing at first – price them an aggressive, but profitable , price.  That wasn’t working.  The value proposition wasn’t good enough vis-a-vis the iPad.  But a lower priced device isn’t viable for HP’s business.

When I work with vendors, I want to know they’re making money.  Otherwise their business isn’t sustainable – and how do I know I won’t be holding the bag when I needed them most?  And as our business and our needs grow, how will they continue to support our business?  They have to have profits to reinvest!

If a company isn’t making money, it should still be in search of its scalable business model – it isn’t a real business yet.   If the model is set, and the company is losing money, it isn’t a business anymore, and the company should be in search of a recovery path.