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Alternatives to Layoffs

Published
by
Michael McKay
on 8 October 2008
in Business Planning, Financing, Information Technology, Management and Virtual Corporate Desktops
. 0 Comments

If you are preparing for the downturn by cutting costs, consider the advice of Mike Elgan. In his article on “Three Ways SMBs can Survive the Economic Meltdown“, Mike highlights three alternatives to layoffs that can help reduce the overhead costs of running a business:

  1. Send people home. Companies often consider transport and associated costs as included in employee pay. Consider cutting a portion of this pay and let employees work from home.
  2. Use all the on-line tools to travel virtually and collaborate without actually leaving home.
  3. At the extreme, consider closing your office and becoming a Bedouin organization.

I like these ideas but I have to ask, why wait for a downturn?

Remember the Dollar?

Published
by
Michael McKay
on 8 October 2008
in Business Planning, Financing and Management
. 0 Comments

It wasn’t long ago that the strength of the Canadian dollar compared to the USD was a source of major concern for Canadian manufacturers. With the recent turmoil in the markets, the Canadian dollar is weakening again as traders speculate that the recession will reduce demand for the commodities, oil in particular, that are the backbone of the Canadian economy.

USD/CAD currency exchange prices over the last few years.

USD/CAD currency exchange prices over the last few years.

I’m sure many in the manufacturing sector are torn between the impacts of the recession and the benefits they will get from the weakening dollar. To survive the plunge in the US dollar from the heights of 2002 when it was trading at over $1.50 CAD to the lows in November 2007 when it hit nearly $0.90 CAD, manufacturers that sold into the US economy had to become very efficient. It was essential to manage Canadian dollar costs to ensure profitability. If goods were sold in US dollars, there was a double impact of falling revenue in Canadian dollars. Many were forced to raise the prices of the goods they sold into the US. A strengthening of the US dollar will reverse these impacts and the now efficient firms will benefit.

For most of 2008, the dollar has been trading near par but it has risen nearly 10% to $1.10 in the last three months. [Update: As of the 10th October, the USD/CAD rate had increased to over $1.18] That has to be a relief to manufacturers that sell into the US. It represents free revenue in foreign exchange as well as the opportunity now to reduce US prices in the face of a recession.

The question is whether the recession will have more of an impact than the dollar. My own guess is that the coming year will be a bad one and that the Canadian economy will again start to look good compared to the US which will reverse the trend in the dollar. So enjoy the bump while it lasts but don’t depend on it. More belt tightening will be required in the future.

Buffett’s Law and Cloud Computing

Published
by
Michael McKay
on 6 October 2008
in Financing, Information Technology, Management and Virtual Corporate Desktops
. 0 Comments

In an interesting post on the future of Cloud Computing, Jake Smith says that one of several antecedents of wide-spread cloud computing is the impact of “Buffett’s Law”. Basically, the law states that Warren Buffett, the billionaire investor is driving change in the business world through the principles of value investing in ways that promote conservative innovation as opposed to radical or flamboyant visionary creation. “The value of an enterprise is a direct correlation of it’s ability to deliver consistent return on invested capital, regardless of market conditions.” What does this mean?

Return on Invested Capital (ROIC) is a measure of the ability of a company to generate EBIT or earnings before interest and taxes compared to the amount of investment in long term debt or equity. To maximize the ROIC, the company must do two things: first, maximize its operating profit which translates to maximizing sales, minimizing the cost of good sold, minimizing the overhead involved and working with a low tax rate; second, the company must minimize the debt and investment required which translates into minimizing the working capital requirements and the non-current assets.

The first part is about efficiency of operations. The second part is about business models. Efficiency of operations is the realm of lean manufacturing - a philosophy of organizational efficiency that can be applied to just about any process. Business models relate to how you make money and the decisions about what you do and what you outsource. Take the decision to outsource PCB assembly rather than purchase the equipment and build the components in house. If the cost of goods remains the same, out-sourcing is preferred since it lowers the non-current assets which will result in a better ROIC. To make the purchase of the PCB assembly line attractive, the cost of goods would have to drop significantly compared to what could be produced through outsourcing in order to generate the same ROIC.

How does this apply to cloud computing? Cloud computing is essentially an outsourced IT model comparable to the outsourcing of PCB assembly. The cloud offers lower infrastructure for similar performance which means that, even if the cloud is just as expensive as tradition IT, it will be a preferred simply because it lowers the ROIC - hence the impact of Buffett’s Law.

For more on the trends in cloud computing read Jake’s article here or my own take on the changes in IT here.

MJM Consulting - Helping companies grow.

Quintessential Canadian Experience

Published
by
Michael McKay
on 5 October 2008
in Uncategorized
. 0 Comments

Today, I had a very Canadian experience: portaging a canoe through downtown Ottawa. Portaging (carrying the canoe on ones shoulders) is typically done in the woods, between lakes or around rapids that are too dangerous to traverse, hidden by trees. In the city, it is a different experience, both for me and for the people I passed. It was a short trip from my house to the Ottawa River - probably a few hundred yards - yet I managed to pass in front of a tour group and a number of other people on the street. Thanks to the Frantics, the Rideau Canal and the Ottawa River , it is not unusual to see someone walking down the street of the nation’s capital with an 18 foot canoe on their head. Still I hope the tourists enjoyed the sight as they bought some Maple Syrup candies.

Between the portages from and to home, my wife and our youngest daughter spent several hours on the Ottawa River seeing the sights, the ducks and swans and the leaves which are just about to peak with the autumn colors. With the rocking of the canoe, my daughter only lasted a short while before she was snoring in the bottom of the boat, leaving my wife and I to talk.

It was a great day.

Pragmatism Always Wins

Published
by
Michael McKay
on 3 October 2008
in Business Planning and Management
. 0 Comments

Pick your niche and stick to it. Focus focus focus. Stand for something. Don’t waiver. Stay on message. Stay on target. Damn the torpedoes. And while you’re at it, go down with the ship.

Following the tech crash in 2001, Sun Microsystems did not change its strategy. It continued to invest heavily in R&D at a rate nearly twice as large as its competitors. It did not adapt its product lines to meet the customer demands for cheap off-the shelf products. They stuck to their strategy but they lost their competitive advantage.

Now consider the Republican move to shore up the financial system. (Shore-up is a much better description than bailout, don’t you think?) This is a clear departure from their message. It is a socialist move that is not consistent with Republican values. Does that make it wrong or is it more likely that these extraordinary times do not fit nicely with the policies of any political party. New thinking is required because sticking to the message in times like these does not make sense.

Being dogmatic about your strategy in the face of external changes that affect your business is wrong. Predict, plan, adapt is better advice. There are things that happen to businesses that require you to change. Being stuborn and dogmatic about it won’t help you. In these cases, pragmatism always wins.

Thanks to Seth Godin for getting me on the soap box.

Open Source Software: an Inferior Good

Published
by
Michael McKay
on 2 October 2008
in Financing, Information Technology and Virtual Corporate Desktops
. 0 Comments
Image from “Romance gets a market correction”Please have a read of Steven Vaughan-Nichols’ blog Lets Talk Cheap Software. The comments are especially good.His point is that, in these turbulent times, expensive software licenses and contracts are not the place to put your money. If cash is now king (but hasn’t it always been?) it is better to trade effort for a product than cash. With open-source software, their is little cash outlay but you do have to spend the time to learn how to use it.

Like most inferior goods (I’m using inferior in the economic sense - see wikipedia definition here), open source software may not be seen as an attractive option when times are good. When you feel rich, you have options. It is easy to throw money at a problem and buy the expensive stuff and the consultants to install it. On the other hand, when times are bad, throwing money may not be an option and is likely a dumb move in any case. Its in the bad times that open source software is an especially attractive choice.

This doesn’t mean that you have to put up with something less, just something different. An attitude adjustment is required. Like in the article in The Globe And Mail today “Romance gets a market correction“, don’t worry that because you can’t afford expensive dinners any more, your marriage will suffer. If you think back to when you were young and at the beginning of your relationship, those were happy times. “You were pretty close to broke, but you were having fun.”

Network Governance: Sharing the load of decision making

Published
by
Michael McKay
on 1 October 2008
in Business Planning and Management
. 0 Comments

Can a single board of directors, informed by a single CEO effectively manage a corporation and avoid ethical risks? According to Dr. Shann Trunbull, a Principal and the International Center for Self Governance in Australia, the answer is no. Firstly, with only one board and with only one source of information, the board is both overloaded with information and poorly informed - despite the best efforts of the CEO - leading to a situation where decision making is fraught with risk. In addition, the single line of oversight can lead to conflicts of interest that are incredibly hard to resolve without a separation of operations and oversight.

Dr. Turnbull suggests changes to the governance structures that will enforce this separation by creating multiple boards and ensuring multiple sources of information feeding into the boards as well as the CEO. The different boards would have various roles aimed at the decomposition of decision making labour, the reduction in information overload, increased quality of decisions, and a reduction in conflicts.

The governance model is not that different from the model being used by several open source communities.

His full paper can be downloaded here. All his papers can be found here.

Fleeting Competitive Advantage - Sustainable Innovation

Published
by
Michael McKay
on 30 September 2008
in Business Planning and Management
. 0 Comments

What does sustainable competitive advantage mean to you? Is it a competitive advantage that has a half-life longer than Uranium or do you use sustainable in the sense of a renewable resource?

I much prefer the later analog. Despite IP protection, despite trade secrets, there is nothing so fleeting as a competitive advantage. Sustaining the competitive advantage takes real work.

Innovation is the key, and not just product innovation. Last year, I attended a presentation from Larry Keeley from the Doblin Group as part of the Wisdom Exchange. His message was simple: Innovation is a discipline - which means there is a process involved. People commonly think of innovation in the narrow context of products. However, there are at least nine other areas commonly used to innovate a business in addition to product innovation. Product innovation alone has a 4% success rate. Better innovation tackles change in at least six of the following ten areas:

  • Finance

    • Business Model - how the company makes money

    • Networking - enterprise structure, value chain and partnerships

  • Process

    • Enabling Processes - Assembled capabilities you typically buy from others

    • Core Processes - proprietary processes that add value

  • Offerings

    • Product performance - basic features, performance and functionality

    • Product systems - extended systems that surround the offering

    • Services - how you help the customers

  • Delivery

    • Channel - how you connect your offering to the customer

    • Brand - how you express your offerings ideas and benefits to the customers

    • Customer Experience

As a small case study, consider Nescafé reacting to competitive entrants such as Starbucks. Here is a blog on the subject by Thomas Otter entitled Simplicity, elegance and the Java bean. In his post, Thomas describes his adoption of the Nespresso Cube - a coffee maker with a cartridge system that is very easy to use. The product highlights a brilliant piece of innovation in the face of competitive pressure.

Nescafé`s problem: as the dominant coffee company is the world, they missed the boat on speciality coffee shops which changed the way people view coffee and created a stigma around Nescafé`s dehydrated products as inferior.

The Challenge: Regain competitive advantage by getting people to drink coffee in their homes again.

The Solution: Convert an office coffee product originally invented in 1975 into a household device (Product Systems and Core Processes). Partner with a leading design firm and create an elegant and simple device that provides espresso quality coffee with little fuss and much faster than a regular espresso machine (Product Performance and Customer Experience). Change the distribution model from grocery store sales of a commodity product to a web-based subscription service with home delivery (Channel). Use advertising and an excellent web site to build a brand (Brand). Build a community around the machines and coffee (Networking).

The Result: 25% annual growth since its launch in 1988.

The key here was not the product - that existed since 1975. It was the change in the channel. This was innovative brillance.

No Strategy Survives Contact with the Market

Published
by
Michael McKay
on 29 September 2008
in Business Planning and Strategy
. 0 Comments

The recent collapses of the financial markets highlights the existence of change as a force of nature in the business world. Change happens. All the time. If stability doesn’t exist, it doesn’t make sense to plan strategy around stable business markets.

To paraphrase Helmuth von Moltke the Elder, the Chief of Staff of the German Army in the 1800’s: no strategy survives contact with the market. Rather than indicating that strategy is pointless, the comment is meant to show that strategy must react to changes in the market. It must be fluid rather than fixed, open-minded rather than dogmatic. It is a game of options and optimization.

The key, then, to effective strategy development is to ensure you have options and contingency plans and that you are continuously working to develop and optimize these plans. To quote Moltke again, “Plans are nothing, Planning is everything”. The essence of this thought is that the plan will invariably change before it is completed so don’t concentrate on the plan, concentrate on the processes of planning. The plan will be obsolete as soon as you e-mail it.

Tradeoffs in Desktop Virtualization: No Showstoppers

Published
by
Michael McKay
on 27 September 2008
in Information Technology and Virtual Corporate Desktops
. 0 Comments

In a recent post on ZDNet.co.uk, Jason Hiner, says that the cloud is not ready for desktop virtualization.

I’m more confident in the success of virtualized desktops. I have, along with many others, been using them for years as remote desktops. First with GoToMyPC and later with Microsoft remote desktop. I would leave my desktop computer running at work and then access the desktop remotely from home or on the road. My primary access method was a laptop connected on my home’s wireless network or the hotel Internet. Never needing to transfer a file or install software, after two years, my laptop was in the same condition it was when I bought it.

Yes there were limitations. Editing a Power Point presentation was annoying and multimedia files were poorly displayed. If the Internet was slow, the mouse and keyboard screen updates could be jerky. If I didn’t have Internet, I couldn’t work. But there were always work-arounds and compromises. For Power Point, I learned to turn off the background graphics or use a different template altogether. I spent more time on content than format. For surfing, it was often better to do the surfing locally - but not always. I read on the plane and worked in the airport terminal.

However, the benefits of a single working desktop, of not having to sync files, of always being able to get to the desktop no matter where I was or on what machine: these things outweighed the reduction in the “user experience”. I was willing to put up with less in order to get these benefits. It was a classic cost-benefit trade-off that I think many people and companies will make in the cloud’s favor.

I’d also like to point out that many companies are not using state of the art multimedia machines as desktops. A quick walk through some local offices shows 14″ monitors, e-mail and word processing, two-tone text based data entry screens that look like they were programmed in 1970, no multi-media capabilities - basically bare bones corporate only workstations. These are also the targets for virtualization.

What I am looking forward to with the virtualized desktop approach is being able to get rid of the corporate desktop altogether. Virtualization has been a key term in servers since it allows servers to be consolidated. If I had 10 servers, I may be able to get away with five or three or even one with the appropriate virtualization technology. If you can virtualize the desktop as well, consider the additional savings. How many computers are there out there in total? What is the ratio of desktop computers to servers? Its a probably more than 2 to 1. If employees have a desktop at work and a laptop for home or the road, the number of non-server computers is even higher. Now consider that desktop virtualization can reduce the number of redundant computers by up to a 50:1 ratio (as claimed by Qumranet’s President Rami Tamir in April.) Yes, there will still need to be terminals with screens and keyboards but these can be much cheaper than the multi-cpu, multi-core machine that currently sits on my desk. In all, this means a dramatic reduction in the amount of desktop hardware out there with a concomitant reduction in the IT support requirements. The savings are too hard to ignore.

I agree with Jason that the importance of latency in the network will be important. But just as working with remote desktops in a hotel, it is still possible to do even with tardy connections. In return, the bandwidth requirements are significantly reduced. A terminal for a virtual desktop will only need a fraction of the Internet bandwidth since it handles no files, transfers no data and only displays updates to the graphics. The server in the cloud, on the other hand, has access to the Internet backbone and can deal with files over a high-bandwidth link. For many companies, the server may have access to more Internet bandwidth than their own servers.

Jason’s article also mentions a bridge approach from MokaFive. I realize the appeal of MokaFive’s approach, but I have lost (and given away) more USB keys than I can count and would not want to be dependent on one in order to use my computer. I want the freedom of the web even with its restrictions.

What would you be willing to sacrifice to implement virtual desktops in your company?