Actions have consequences—mostly unintended.

One of my clients in Texas acquires houses out of foreclosure, rehabs and rents the properties, then sells the properties to investors.

Yep, they “flip” houses—one of the emerging business models in this new economy. The secret sauce in this business is in acquisition and resale, not in the rehab.

This company acquires houses through county foreclosure auctions, which are an amazing example of the unintended consequences of government regulation.

At every step in the foreclosure and auction process, the government regulations are clearly designed to protect an abstract concept of fairness. As a result, the process inflicts the maximum financial damage possible on the unfortunate homeowner, who is already losing a house.

Foreclosure processes are controlled at the state and county level, so we’ll use Texas as the example, although many other states are even more peculiar.

Big problems often start small, then grow.

To give some perspective, each month Harris County (Houston), Texas has around 4,500 bank foreclosures and 500 county tax foreclosures. This is about ten times more than 18 months ago. That’s growth on the scale of the internet—or health care.

After a hundred years, things may change…

Texas foreclosure laws, mostly written in the past 50-100 years, require that all foreclosure auctions must be conducted on the first Tuesday of every month, on the county courthouse steps, in an “open outcry” auction. Rain, shine, or holidays, eager bidders convene on the courthouse steps every first Tuesday to search for bargains.

But this is not just one auction. Harris County has eight precincts, each with several constables, and each constable conducts his own tax auction. To add to the confusion, trustees, who hold the property title for the foreclosing banks, also must conduct their auctions, at the same time, and on the same courthouse steps.

So, on the first Tuesday a property investor will find ten to fifteen constables and thirty to fifty trustees all auctioning off foreclosed property in open outcry, at the same time. It’s more like a flea market than an auction.

Texas law specifies the method of notification. Foreclosure notices must be posted on the courthouse wall by the 18th of the month preceeding the auction. An investor has only two weeks to review 5,000 properties, estimated a market price, and make a personal inspection.

Texas law also specifies the method of payment – cash or cashier’s check – and the bidder qualifications. A bidder can bid only for himself. Stand-ins are not allowed. So an investor may find 10-20 properties of interest, only to discover that they are being auctioned by different people, in different places around the courthouse, at the same time.

Constables and trustees do not identify the property by its street address, but use a tax ID number – a string of 14 digits, with no alpha characters or other breaks, so there’s yet another challenge for the potential investor in identifying his selected property, attempting to listen to a soft-spoken constable amidst many other auctions.

Government regulations tilt the playing fields.

Finally, Texas law specifies the remedies for a buyer at the auction who may make a mistake. There are none. Once the bidding is done, the county cashes the cashier’s checks and the investor owns the property.

No possibility to recover from any mistake. It’s a huge opportunity for investors with lots of cash, lots of time to do the homework, and with nerves of steel. As a result, bid prices are very, very low.

It looks almost as if the state of Texas designed a process to minimize the bids on foreclosed properties at auction. While each of these regulations made some sense at the time, they look very dated now and one significant unintended consequence is to destroy any homeowner equity remaining in the foreclosed property. Another major unintended consequence is to shift the advantage heavily to full-time investors with lots of cash—the “fat cats” who have the time and knowledge to game the system.

It’s easy to poke fun at the process; but that’s not to the point. If we investigated government-run insurance, government-run construction projects, or any other government operation, we would find exactly the same situation.

Regulations create exceptions and processes that experts can exploit.

More regulations create more exceptions, more experts, and more gains.

Is there any solution for the unintended, unfair consequences of government regulation?

Next week we will explore goals, judgment, and transparency. Can these play a role in reducing unintended consequences? What are their unintended consequences?

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Actions have consequences, mostly unintended.

Ready, fire, aim.

In response—mostly—to the financial crisis, the US government has taken so many actions that the list is almost too long to chronicle here. To pick a few…

• The government has picked survivors in the banking industry.
• The government has picked survivors in the auto industry.
• The government has picked executives in many companies.
• The government has set compensation levels in many industries.

And the government’s intrusion into previously private enterprise sectors has only just begun.

Of course private enterprise has never been a model of virtue and discretion. But, just because private enterprise has executed a series of excesses, is it reasonable to assume that federal regulation will produce unalloyed goodness?

If executives in private enterprise cannot foretell catastrophes ahead, is it reasonable to assume that those same executives, when working on behalf of the federal government, will have better foresight?

Massive Actions, Unintended Consequences

The economy is in uncharted territory. This is the first major crisis of the integrated, global economy. It simply has too many moving parts for any individual or organization to identify all the inter-relationships, much less to forecast the results of all those interconnections. The chart below makes the point exquisitely.

Historically the money supply has grown by 2-7% annually, with spikes prior to Y2K and following 9/11. In the past nine months, the Fed has increased the money supply by over 100%, almost ten times greater than the largest previous increase, during Y2K. The Fed might argue that this increase was needed to offset the loss of a comparable amount of bank lending, when credit dried up in the past year.

But how and when does the Fed unwind this massive increase? What are the long-range consequences of this action?

At the moment, no one can guess. However, we can be certain that many of the consequences will be significant, unforeseen, and unintended.

Transparency – The Only Cure for Unintended Consequences.

The Federal government now controls almost 25% of all domestic economic activity, not to mention 100% of the money supply. We need much more transparency, particularly with government sponsored enterprises such as Fannie Mae and Freddie Mac.

Recently our culture has cheapened transparency to the cliché “full disclosure…” after which the author lists some relationship, often trivial.

The US government pumped over $170 billion into AIG late last year, to prevent its collapse. This expense received very little exposure, either from the press or by the Treasury Dept. execs who made the “investment.” Where did this $170 billion go? Why was this expense necessary?

Neither elected congress people nor Presidential staff exhibited any curiosity or outrage over this “investment.” However, when AIG paid out $165 million in bonuses—only 1/1000 of the amount the Treasury Dept. had spent a few months earlier—elected officials went into hysterics. Selective transparency is no transparency at all.

“Sunshine is the Best Disinfectant.” –Supreme Court Justice Louis Brandeis

Meaningful transparency can have considerable impact. Witness the recent publishing of the expense accounts of British Members of Parliament.

In the US, the Federal Election Commission (FEC) regulates campaign contributions. Of course every politician running for office has thoroughly computerized records of donors and amounts and the FEC requires that every candidate report all donations to the FEC. That information might be interesting to voters making voting decisions. But candidates provide those reports to the FEC in thick, printed volumes, specifically to delay the FEC in compiling the results. As a result the FEC finally publishes the donation reports months after the elections are done.

Follow the Money—Post Everything on the Internet

With the expansion of the government into finance, autos, energy, and insurance, as well as health care, public disclosure is critical if our economy is to respond positively. Encourage your elected representatives to post budgets, and expenses on the internet.

Over time, we can recapture our democracy.

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“I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion than a white male who hasn’t lived that life.” –Judge Sotomayor, 2001

“I’m sure she would have restated it… But if you look in the entire sweep of the essay that she wrote, what’s clear is that she was simply saying that her life experiences will give her information about the struggles and hardships that people are going through — that will make her a good judge.” – President Obama, 2009

By now the political press has replayed Judge Sotomayor’s statement ad nauseum. Setting aside the political opinions, this quotation and President Obama’s interpretation of it dramatically illustrate the importance of perception, context, and diversity in human relations.

How you perceive or interpret Judge Sotomayor’s remark depends heavily upon the context you bring to it. President Obama believes that “she would have restated it” because it is inconsistent with his understanding of “entire sweep of the essay that she wrote…” In other words the context of his understanding overrode her words.

Perception and Context

Let’s extend that concept to the workplace, and the importance of your company’s relationship with your employees.

Employee perceptions can and often do override the actions of the company.

The Employee Free Choice Act (EFCA) will affect the vast majority of growing companies. As discussed in the previous post, the proposed EFCA legislation enables unions to organize many more companies, and gives unions tools, access, and a simplified method—card check—to gain approval as the company bargaining unit.

Pat Lynch, Ph.D., an expert on union history and CEO of Business Alignment Strategies, points out that an employer should know its “employees’ perceptions of how their employer treats them on a daily basis.”

An employee may be comfortable with the supervisor, the compensation, and even the work content, but still have a poor perception of the organizational culture. In this case, the context will open the door to possible unionization of that workplace.

Conversely, in difficult economic times such as this, an employee may not be satisfied with the supervisor, the compensation or the work content; but if the employee perceives the organizational culture to be fair and to value the employees, then that context will discourage potential unionizing.

Last week Pat called me with a request to clarify the EFCA and correct information that was in the previous post and I’m happy to do so.

Key Provisions of the EFCA

1. Unions will be certified without a secret ballot election by employees if more than 50% of affected employees sign authorization cards.
2. If management and union do not reach agreement on a contract within 120 days, a two-year contract would be imposed by a panel of arbitrators.
3. The Act imposes treble damages on employers who retaliate against employees who are involved in union organizing efforts.

Additional Considerations Regarding EFCA

1. Specific employers are excluded from the EFCA, such as those in the public sector, those covered under the Railway Labor Act, agricultural workers, and independent consultants, to name a few. The company size limit for EFCA is covered in the existing National Labor Relations Act, which would be amended by the EFCA.
2. The EFCA does NOT expand the definition of “employee” to supervisors. This proposed expansion is addressed in a different bill before Congress called the Re-empowerment of Skilled and Professional Employees and Construction Tradesworkers (RESPECT) Act.
3. The EFCA does NOT give unions the right to access a company’s e-mail directory, although there is a National Labor Relations Board (NLRB) case that addresses this issue. The NLRB may change the existing ruling (which has the force of law) to enable unions to gain such access under certain conditions in the future.

Diversity

Back to my opening comments.

Our perceptions of diversity are often singular, as in the case of Judge Sotomayor, but in fact, diversity exists only within the context of a group. Any single individual is not diverse. Any single person makes decisions within the context of his or her individual experiences. The benefit of diversity is in its improvement of the collective decision-making of a diverse group–be it employees or the panel of judges on the Supreme Court.

But the power of diversity only works where each person has a perception of respect and value within the context of the workplace.

Perception, context and diversity—a powerful combination to improve employee relations and, not coincidentally, employee performance.

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Possibly the most difficult question for any is business:

“Is it time to pull the plug?”

Business Bankruptcies up over 100% since 2006

In this difficult economic environment, many businesses are answering that question simply, “yes.” As the chart below shows, business bankruptcy filings grew dramatically in 2008, up over 100% from 19,695 in 2006 to 43,546 in 2008.

This chart is deceptive, because the average annual number of business bankruptcy filings for the 28 years 1980-2008 is 52,667 and the number of filings in 2005 was 39,201. So the 43,000 filings in 2008 are 20% below the long-term average and just a little above the number in 2005. But, regardless of the long-term average, the short-term trend is up over 200%.

Time to Pull the Plug on My Business?

Setting aside statistics, the question at hand is real, personal, and immediate for many small business owners. As a professional business consultant, I work with several clients struggling with this question.

One of my clients generates approximately $3,000,000 in revenue and supports 25 employees. For the past two years, this company’s revenue has remained flat, with annual losses of $250,000 or so. This year revenues have declined and the owner has kept the monthly losses to $20,000 by reducing expenses. So far, so good, right?

Will the situation improve in the near future? Is a turn-around in sight with just a little more patience and persistence? When does persistence become stubbornness? When is it time to pull the plug? How do you know? Forgive this barrage of questions—this is an extremely difficult, emotional question for a business owner.

What Are Your Choices?

As a business unit manager, you have the opportunity and responsibility to make major changes in your business. 2% solutions don’t count.

What few significant changes can you make to improve the problems facing your business?

• Eliminating People Means Eliminating Work. You simply cannot eliminate people and leave the workload unchanged. How can you reorganize your business to reduce the work? Can you automate or outsource back-office services or sales? Can you move more functions online? Can you move your customers to self-service online? Can you use online order / payment to simplify the sales and collection processes?
• Don’t Eliminate Products. Eliminate Production Costs. Can you shift inventory and fulfillment services to suppliers or third parties?
• Don’t Eliminate Value. Eliminate Overhead. Do you need all the office space, telephones, equipment, and software? Eliminate, reduce, or find it for free.
• Grow Revenues. Be careful here, as increasing revenue is extremely difficult, especially in this recession economy. It’s easy to forecast big growth, only to be surprised three months later when the growth has not appeared on schedule. First, find a few customers for your services, and then forecast the growth based on their orders.

You Already Know the Answer

Three business aphorisms provide some insights into this question:

• The universe rewards action.
• Ready, fire, aim.
• Follow the money.

Taken as a set, they offer a road map to making this difficult decision.

If your business is struggling, then do something! The business (universe) will respond to your actions.

If the business situation is getting worse, you have limited time and budget to make meaningful changes. This is not the time to be shy. Take some dramatic action. That’s the “ready, fire” advice.  Observe the result. Based on the result, quickly adjust your actions to improve the outcome (aim).

Finally, follow the money to your desired outcome. You know your budget for time and money. When either one runs out, you lose your freedom of action. Take action now, while you still have freedom to choose.

The biggest obstacles to meaningful business change are usually not intellectual understanding of the problem, or a lack of options, but emotion and fear.

For instance, most business owners truly care for their employees so layoffs are difficult. “What will my employees do without this job? How will they survive?” If you are considering major changes in business direction, fear raises similar questions about you; “How will my company survive if I make this change? What will I do with my life if my company fails, or if I have to shut it down?”

Together, emotional attachment and fear of the future create a paralysis, even in the face of clear impending disaster. When you wake up at 2 AM, what is on your mind? If you can get past the emotion and fear, I believe you already know the answer. “Don’t go wobbly,” as Margaret Thatcher famously advised George Bush senior when he was preparing for the first Iraq war. “I just don’t know,” is a cop-out.

What is Your Biggest Fear?

If your company is losing money each month, you must make changes. In this economy, your business will not get better by itself. What is the single change you fear the most?

Turn off the computer, put down the cell phone. Be still for a few moments, sitting with your fears and emotions. What is your biggest fear? Go there. Do it.

Wishing you the courage to make the difficult decisions,

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The world is changing. We are witnessing the de-industrialization of America. As a consequence, home and work life are blending together again and the means of production are moving back to the home. Sound like the medieval era? You bet.

The Industrial Revolution

The printing press, invented by Gutenberg circa 1440, helped to introduce the Renaissance and end the Medieval era. The printing press sped the transmission of knowledge, planting the seeds for the Industrial Revolution about three hundred years later.

But even though the printing press created a flood of knowledge, it did not affect the daily nature of work. Family life and work life occurred in the same place—the home. The loom occupied a central place in the home. For carpenters, potters, and other craftsmen, the home was also the workshop. Workers (back then they were peasants) lived with their personal means of production—knowledge, skill, and their own personal production tools.

Since the beginning of recorded history work and family were largely inseparable within the house—then came the Industrial Revolution.

With the advent of mechanical production equipment (ironically, some of the earliest were mechanical weaving looms) the Industrial Revolution (circa. 1750-1850) centralized the means of production around the production equipment, and later around the power source which drove the production equipment. Within a few years craftsmen and laborers began to commute to the local factory.

The factory lowered production costs and eventually improved living standards for everyone. But its immediate impact was putting some workers out of work and inflicting further indignities on others.

Centralized production dictated fragmentation of work. Just like the mechanical devices, laborers became cogs in the factory wheel, doing small, repetitive, de-humanizing tasks.

Mechanization intensified throughout the 1900’s, leading to the famous “lights out” factories in Japan, which could operate in the dark without any human intervention. Workers migrated away from factories and into offices.

The Information Revolution—De-Industrialization

Initially, the information revolution (circa. 1950) appeared to be an extension of the Industrial Revolution. Manufacturing jobs peaked (as a percent of all jobs) at 30% in the 1950’s. Then workers began to shift from factories to offices.

At first the new information work itself remained fragmented and repetitive, just like the old factory jobs. Computers and communications, the means of production for information work, were large, centralized, and expensive, just like the old factory equipment.

In the 1980’s the PC and the internet started to weaken the chains of office workers. The de-industrialization of America picked up steam.

Back to the Future – Working from Home

The peasants of the new century are knowledge workers. With an internet connection and a laptop computer they typically work from home. Some remain as employees, but an increasing percentage work as independent contractors paid by the job, just as medieval craftspeople did. Job satisfaction may be better, but job security has plummeted.

This information revolution is only now working through the economy.

The industrial revolution changed the face of America and the nature of work. The information revolution is changing us.

The Biggest Unknown—The Power of Human Creativity

As Mark Twain said, “history does not repeat itself, but it does rhyme.” The Renaissance unleashed a tremendous wave of knowledge and human creativity that reshaped the world. However the Renaissance was only a small foretaste of the coming explosion of creativity and knowledge from the Information Revolution.

It will reshape everything, even our bodies and our minds. A little frightening perhaps, but what an exciting time to be alive.

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Among the annual flood of business and economics books, two recent ones caught my attention.

Shaking the Globe: Courageous Decision-Making in a Changing World by Blythe McGarvie (230 pages, John Wiley & Sons, 2009) addresses the fragmented, multi-polar world of global business.

In this book, targeted to execs at mid-to-large businesses, Ms. McGarvie surveys the plethora of challenges and opportunities that companies face in the new century. She details the diversity in three major areas: cultures, nations, and generations.

Simply put, companies no longer have the luxury of ignoring any of these diverse constituencies. Even if a company is not competing internationally, then it is defending its domestic market against a multi-national competitor.

Likewise for multi-generational workforces and multi-generational customer bases. For the first time ever, many companies have up to four generations in their workforces, and possibly four or even five generations in their customer bases. Illustrating this trend, a recent survey identified the fastest growing age-group of employees in the US as people in their seventies.

The book amply documents the simultaneous interconnection and fragmentation of businesses, people and markets across the globe.  It identifies various segments and constituencies in each major area, providing a good overview for readers wanting an introduction to the topic. The book concludes with three key messages:

“First, we need to understand how the world is interconnected and that all people in it are interdependent… We need to transcend our nationality.

Second, we must face the financial realities that created this need for going global.

Third, we should become aware of the six forces shaping personal courage if we are to go global. Namely, we experience different cultural norms as evident through beliefs, family, and time horizons; communicate with youth in new ways; tap into the talents of women; understand shareholder interests; capture the entrepreneurial drive for innovation; and respect individuals’ value systems.”

Most interesting are the personal vignettes which Ms. McGarvie uses to illustrate particular topics.

As a reader, I look forward to another book by the author, possibly in a case study format, in which she explores specific situations in much more depth, based on her personal experience.

Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Tom Woods (194 pages, 2009, Regnery Publishing, Inc.) is a timely analysis of the underlying causes of the current recession. Although the style is light, the analysis is thorough and detailed. Mr. Woods explores and debunks a number of myths about the current recession.

“In both cases [the Great Depression and the current recession] an inflationary credit boom brought about by the Fed’s lowering of interest rates led to massive resource misallocation and a distorted capital structure. The Fed tried in vain to inflate each of these booms back into existence, and grew frustrated with banks that refused to lend out the new money it was pumping into the banking system. In both cases the federal government sought to prop up prices… rather than allowing them to fall to a level that made sense [in the market].”

Comparing this recession to the Great Depression and many other recessions in the 1800’s, the book identifies the common culprit in the boom/bust business cycles – government manipulation of the currency. Although this conclusion is no great surprise, the compelling analysis makes for good reading. He defends free markets, pointing out that the money supply is not a free market, but a government-controlled monopoly.

Mr. Woods makes a damning case against the Federal Reserve, condemning it for hidden dealings, a bias toward inflation, and backroom collusion with banks. His analysis demonstrates that government action not only causes the booms and busts, but that same government action significantly delays and cripples the eventual recovery.

As if on cue, in December the Fed strong-armed Bank of America to complete its acquisition of Merrill Lynch even when that purchase significantly weakened the bank and increased the risk to the economy. Of course these machinations occurred in secret, with no disclosure and no transparency for investors, customers, and employees of either company.

In his conclusion, Mr. Woods calls for the abolition of the Fed, proving that he is an incurable optimist. Failing that, Mr. Woods predicts significant inflation ahead, due to government debasement of the currency. Government tampering with money is not just a recent phenomenon, as the author illustrates with examples as early as the tenth century, of governments (then kings) cheating their subjects by debasing the currency.

Even in the age of the internet and electronic commerce, some things have not changed.

Image credit: Amazon

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Many economic pundits are predicting the end of this economic meltdown (see previous post). Chalk those predictions up to the optimism of springtime and the need to fill a news cycle.

While rates of decline for various economic indicators may be decreasing, the excesses that created this meltdown will take years to work through. The ham-handed responses by government and many businesses will only delay the eventual recovery. This is only a break in the winter weather.

But even as the economic meltdown is only now approaching its nadir, a few new businesses may find this to be a fertile time to set up shop.

Consider the single greatest expense and challenge of most new businesses – finding and attracting talented workers, trained and immediately available for interesting work.

Currently the US economy provides 155 million jobs. This meltdown has reduced employment through five distinct mechanisms shown in the table below:

Given that the measured statistics are usually undercounts and that these unemployment/underemployment numbers will grow in the next 12 months, likely over 32 million workers (over 20%) in the US will have talents and time available to participate in another business.

For many companies, payroll costs represent over 65% of total expenses. For new ventures, personnel costs can be much larger, up to 90% of expenses. In this environment, many workers are searching for work.

New ventures traditionally offer below-market compensation for their workers. However, they offer other significant benefits.

Typically, new ventures offer broader scope in each job, better growth opportunities, ability to make large, direct, measurable contributions to the organization, and the enthusiasm of working in a small, close-knit team. Some new ventures offer profit participation or stock options. For unemployed or underemployed workers, these benefits can be significant, even when the cash compensation is low.

Technology and the recession have dramatically reduced other business operating costs. The cost of computers, phone systems, and tele-conferencing have dropped. Office space is cheaper, and home-based employees can cut that cost even further. Travel, where necessary, is cheaper than any time in the past ten years.

Even without easy availability of capital for start-ups, this recession may offer fertile ground for new ventures and with the added benefit of retaining far more of the equity.

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Economic pundits, eagerly searching for signs of the recovery, are grasping at almost anything. “The rate of decline has slowed.” “Unemployment has stabilized.” “The cardboard box index has bottomed out.” And the shape of the recession and recovery has been predicted to be a V,  W,  L, or even a double-bounce W.

I think they’re all wrong.

The old economy will never come back.

This economic meltdown is much like a forest fire. After the fire burns itself out, the storm may be over, but the burn area is fundamentally changed. It does not “bounce back.” It starts at a different place.  Sometime in 2010, the economy will stabilize, but it will not “come back.” We will go forward from a fundamentally different position. This new starting point will reflect the impact of deep, long-term, global trends in the nature of work, the value of the dollar, and our relationship to our government. The current recession is a convenient marker to recognize these trends.

Work Is Changing

The nature of employment will continue to change. The United States will continue to shift to a “just-in-time,” service-based workforce. The manufacturing sector will continue its decline, from 29% of GDP in 1950 to 15% in 2000 (see analysis by Dr. Mankiw). It will drop below 10% by 2010. You can construct your own labor trend at indeed.com. ( This website is a fascinating example of the business of data, which we discussed in the last three posts.)

Many new service-sector workers will be involuntary. Growing unemployment and under-employment in the United States (which will exceed 15% this year) is driving many people into self-employment as service workers. An analysis of Japan’s Lost Decade by Tom Coyner, long-time resident of Japan and Korea, provides one instructive example of this phenomenon, and some associated risks.

These new service sector workers will be driven to a “do-it-yourself” model for almost everything. They will have to provide their own health care plan, retirement plan, office arrangement, and business planning. Many of these workers will be home-based, with little differentiation. The most common product/pricing model will be piecework, with unit pricing based on the alternative of being completely idle. Ironically, one result will be the re-integration of work and home life.

Entrepreneurship is Changing

Investment capital will no longer be available for any but the most solid businesses; and the vast majority of these newly-independent service workers do not have plans to build large businesses. As a result, the successful ones will exhibit four common, positive characteristics:

Local—In a global world, being present still counts. A local service provider who can show up in person has a distinct advantage. In addition, some services simply cannot be outsourced. When your car is broken or your roof leaks, you need a local service person. For locally-based services we may see an increase in a local, personal relationship with service providers.

Immediate—Without investment capital to fund long-term research and development, independent service-providers and small businesses must focus on services that provide immediate value. The “cash-to-cash” cycle must be less than one pay period. Fortunately, credit/debit cards and other immediate payment methods support this trend.

Information-based—Information will provide significant improvements in service quality and competitive differentiation. For instance, simply finding a customer is difficult and expensive. Irritating prospects with unnecessary and unwanted sales promotions is also costly. Successful service providers will use information to target customers on a “just-as-needed” basis.

Green—Setting aside the discussion of whether the earth is warming or whether green is good, government policies will reward green activities preferentially. Independent service providers will offer green services or enhance green aspects of their existing services.

Start-Ups Will Explode in Unlikely Niches

The availability of many talented people and the flexibility of independent service providers will fuel new start-ups. While these may not completely replace the loss of investment capital, they will certainly provide an alternative path of low-cost labor for new businesses. The change may be refreshing, for us individually, and for our economy.

This is perhaps the greatest unknown—how much will individual creativity and inspiration replace financial engineering.

I am hoping for a few delightful surprises ahead.

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Data: Salt for the Information Age

Roman soldiers were often paid in salt; this was so common that the Latin root for “salt” and “salary” is the same – sal.

As important as salt was in ancient ages, just so is data in the information age. Data is the raw material for information. Just as salt improves food, today data enhances the value of products and services.

In the two previous posts we explored how “the data is the business.” For many information age businesses, the collection, maintenance and distribution of data is, in fact, the primary revenue source.

But, based on questions from readers, I’m not getting through, so let me spell it out.

Every business collects, maintains, and distributes data.

The better businesses use data to enhance the value of their products and service.

The smartest businesses use it to generate revenue directly.

There are only two types of Databases…

At a high level, databases collect information about only two things – population identities or activity trails.

For instance, the company accounting system may be the original business database.

• The balance sheet is a database of population identities – how many dollars in cash, accounts receivable, inventory, accounts payable, bank debt, equipment, and owner’s equity.
• The income statement is a database of activity trails – what was the activity in sales, in collections, in payments.

The accounting system integrates these two databases into a unified view of the entire financial situation for the company.

The Census Bureau is the granddaddy of population identity databases; others include Monster.com (resumes), Dun & Bradstreet (small companies), Hoovers (public companies), MarketWatch.com (mutual funds), Google (websites and search words), to name just a few.

Databases of activity trails are just as common: stock price websites (stock price activity over time). FedEx, UPS and other shipping companies offer activity trail databases for every package they ship.

Of course, just like the accounting system integrates population identities and activity (audit) trails, the most powerful databases integrate population identities and activity trails. See if you can think of five or ten more.

There is really only one type of Database that really matters—yours

This is the key point. Your company already collects population data and activity trails for every product and service you sell. You have a database of all the products and services for sale (the sales catalog) and a number of databases that support those products—bills of material, inventories, historical demand, price histories, revisions, replacements, and a cluster of support products and services.

Your company also has a natural user and customer base for the data you collect. Customers, suppliers, service partners, and competitors all have a great interest in that data. So here already are the beginnings of a data business—a database and potential customers for that data.

A Few Small Bumps

Externalizing a database can be a significant challenge. It’s worth investing some time and even a few dollars in developing strategies for these key issues before rolling out your new business. A little planning and caution in building a good foundation will pay handsome rewards later.

Operational Concerns

Who owns the data? Does your organization have clear, unambiguous title to the data? For instance, are prices negotiated as confidential in certain supply and delivery contracts? If ownership is not clear, then how can you anonymize the data to honor the agreements? Can you change the agreements so that your ownership is clear?

How is the data refreshed? Data gets old. As the database grows data maintenance rapidly grows and soon exceeds data collection as the primary challenge. Some companies, such as D & B and Hoovers, use an army of employee agents to check and update the data.

Historically this approach worked, but the scale of modern databases has rendered the “internal data army” impractical. Consider two other approaches

• automation and a
• user community.

Automate the data collection and refresh. Google uses automation to refresh its database of websites. By some estimates Google has several million computers (really just CPU data blades) crawling the web to update its website database. Many other databases receive data feeds periodically from their sources. For instance, foreclosures.com gets feeds of foreclosure information from almost every county in the United States. The conversion and translation must be a nightmare, but the resulting database is incredibly powerful and a great business.

Motivate the user community to collect and refresh the data. With the emergence of web 2.0 and social networks, many companies are creating and using a user community to do data collection and refresh. YouTube.com, MySpace.com, Facebook.com, and LinkedIn.com are good examples of social network databases created and refreshed by user communities. Wikipedia.org, Jigsaw.com, and credit reporting agencies have created or adapted user communities specifically to provide business data. Travel websites such as Expedia.com use both automated data collection and business user communities to collect and present their databases of airline and hotel prices.

How do users access the data? Online access is rapidly emerging as the only method to sell data. Intermediated purchases, which require you to process the purchase request, are simply too expensive. Customers want instant access. Put the database online and develop search/selection capabilities that allow customers to find exactly what they want.

How do users pay for the data? A la carte or by subscription. Subscription is emerging as the preferred approach, both for data suppliers and data consumers. Tiered subscription access appears to be acceptable, so long as it is not too complicated.

Legal Concerns

The law on ownership and distribution of data is under construction. Quite simply, these are brand new businesses—often there are no regulations, limited historical precedents and even more limited applicable case law. And since the web is global, multiple national laws may apply. It’s complicated, so invest heavily in the two basic legal agreements—Purchaser Agreement and Contributor Agreement – to protect your company and your data. Limit your liability and do not compromise on your exclusive ownership. Others have found that shared ownership is simply an invitation to an ongoing dispute.

There is Wisdom in Metadata

If the data is the salt for the information age, then metadata is the spice. “Best selling, fastest growing, most popular, most expensive, Top Ten and cheapest” are all metadata lists generated from databases.  What trends are hidden in your databases? What trends do your customers and suppliers track?

Track the trends in database businesses to identify the best opportunities for your company.

Again, please feel free to call me at 925.858.9017 or email rbarrett@one-one.net for clarification on any points.

Hope to see you in the Top Ten New Database businesses soon!

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Back in the late 20th century the business model for dot-com businesses was “Attract the eyeballs (website visitors), and the business will follow.”

Many businesses executed that model, such as AOL, FlyFishing and an embarrassing host of others, almost all gone by now.

Over time the model of attracting eyeballs simplified to Google—just Google.

Since then Google has created an effective advertising model for websites that attract eyeballs. It’s called AdSense, and the model is very simple.

Attract a large number of visitors (eyeballs) and Google will monetize those visitors through its AdSense advertising program. Google selects ads that match the profile of visitors to your website, posts the ads on your site and shares a portion of the ad revenue with you.

Google keeps all the control and can limit your revenue.

Social networks and blogs are perhaps the poster children for this Adsense business. Social networks such as LinkedIn, Facebook, and MySpace generate revenue primarily from advertising.

The community creates the content that attracts the eyeballs, and the eyeballs attract the advertisers.

Blogs are only a little different. For a blog the author creates the content, rather than the community. But after this, the model is the same. The content attracts the eyeballs, and the eyeballs attract the advertisers.

Write a compelling blog and the eyeballs/advertisers will come.

Unfortunately this is a model for a lifestyle business, not a long-term business. Over time the competition increases and Google lowers the payout, so the revenue decreases.

Is there an alternative to the model of ever-declining revenue from Google Adsense?

Yes, create some old-fashioned value from the data itself.

The Data is the Business

Last week I discussed the concept of creating business value by collecting and selling data. That is a good alternative to the Adsense advertising model:

Create value in the data.

The benefits of a data sales business model are compelling:

• Low start-up costs. Use the cloud for your computing and storage. Google and others offer free access for applications with small bandwidth demand.
• Easily scalable. Add storage as the database grows. Add bandwidth as customer demand grows.
• No delivery cost – the user shops and selects and takes delivery online.
• Minimal cost of goods sold (COGS). This really depends upon your data collection model.
• Immediate global access and delivery.
• Captures the value of the “long tail.”
• Relatively easy to protect. Compared with code, a database is easy to protect.
• Even the meta-data (data about the data in the database, e.g. statistics) has value. Think of the top 10 lists, such as the “most popular search phrases” that Google publishes.

But if this business model is so good, why isn’t everyone starting a data sales business? Maybe they are…

Join me next week when we discuss what type of data sells.

See you all then.

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