This struck me because the notion of having a ranger buddy was drilled into us in countless ways during Ranger School, not the least of which was doing lots and lots of pushups if you strayed too far from your Ranger buddy.

The non-military world takes this idea a little less seriously, but many of the benefits are still available, and I tried to explain some of them that we see.

Here’s my comment on Rex’s post.

How do you find ways to mix or balance individual work with camaraderie, different perspectives, and teamwork? Do you assign subordinates to group projects with real dual responsibility?

It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.

– Albert Einstein

The variant

Make everything as simple as possible, but no simpler.

is what we want to do on TSC with our proprietary performance management systems. It no longer makes sense to track financial performance based on 10-Qs that are stale by the time they’re released. And internal management doesn’t always have better information available, despite what you might think. We’ve written before on the need to refine masses of data to the appropriate level of abstraction for the decision at hand. Remember, there’s little sense shooting yourself in the foot with the wrong data, which is the same as too much relevant data that doesn’t have an empirical impact on your decision.

Make everything as simple as possible, then stop.

Going further is how we lose richness of data or information and make ourselves more limited than the original data required. The hallmark of data preservation in BI systems is the ability to “drill down” to the underlying data. (CapitalIQ does this with financials in their very nice interface.) What we add, what we demand, is deliberate, thoughtful organization at each and every level of abstraction of the firm’s data.

NB: In the wikiquote article, this quote is identified as “Einstein’s Razor,” which is a great name for it. If I ever take up yachting or buy a spaceship, that’s the name I’m using.– RJC

In short, the study tracked yet another big collection of mutual funds over a span of some 22 years, then doing “10,000 simulations.” (That sounds to me like a NYT-ish description of what might have been a Monte Carlo simulation, but I can’t fathom why the WSJ wouldn’t just say that. After all, if a lawyer with an English degree knows what it is, don’t most Journal readers?) I had to sleuth around for the paper, since the article doesn’t say where or when it was published. Why? Perhaps it’s because the paper doesn’t appear to have been published, per se, but is available on SSRN: Luck Versus Skill in the Cross Section of Mutual Fund Returns.

What the abstract doesn’t say, and the journal article does, is whether the high-performers can be distinguished as being good rather than lucky. Clearly the EMH requires us to conclude that the top-performing funds are lucky rather than good. I know that I have recently seen references to articles tracking the movement of funds from the top-tier of performers over time.

Where TSC has become involved in this type of analysis, we’ve chosen instead to focus on the massive amount of data that is in fact sitting on the books of financial advisors. In working with a high-net-worth family, we sought to track not just overall performance of their investment portfolio as a whole, but the effects of each major component: stocks, bonds, and cash. But we wanted to go further. We knew that the “relationship manager” at the high-end wealth management arm of a global bank wasn’t making the individual stock picks. Rather, there were a wide range  of analysts and traders involved in making decisions for the family, ranging from individual trades to funds to allocations across whole market segments.

What TSC’s proprietary process, tools, and knowledge allowed us to do was create an analysis, decision, and guidance framework by breaking down the overall performance into its component parts and using that information to provide guidance to the investing activity.

That’s why, for us, the article leaves us wishing for more: managing performance at the “fund” level is like talking about Brazil world cup teams as if the players don’t matter: who’s gonna tell that to Pele? Or Ronaldo? Or Ronaldinho? Not me, especially after seeing this, this, and this. Even (especially?) on a great team, individuals matter.

Imagine a mutual fund model where you could package together individual traders or analysts? The new crowdsourced investment sites let you track individuals and will someday almost certainly offer the opportunity for you to follow their trades. But that’s working backwards: large funds already track every single trade because of compliance reasons as well as the simple expedients of getting everything executed. There’s no reason that a wealth management firm couldn’t implement this tracking, or at least provide the data, for its high-net-worth clients.

TSC is looking for family offices, investors, or even CFOs managing cash investments for a pilot project to implement our proprietary systems in your live environment to create a robust reporting and risk management tool. Please contact us for details.

start with these two simple and profound questions: what is your organization’s mission and how are you trying to accomplish it? It’s amazing how many organizations can’t answer this.

I read a recent article in Forbes that expressed the other part of this quote that I left out: that administrative expense/overhead ratios are not as big a deal as donors make them out to be. (NB: I’ll find the link and add it later.)

The problem, as always, is that it’s sort of true and sort of not. The examples the author uses seemed to me to demolish her point rather than support it: Apple’s SG&A is in the 60-80% range (look it up if you care; it doesn’t matter here). She uses this to “prove” that overhead doesn’t matter because we think of Apple as “good” and theirs is *this high.* But Apple doesn’t get measured on that: it gets measured, millions of times a day by thousands of people, against every competing investment. Apple’s ROIC is what matters, and the implications for the future of that number are the real driver of the stock price. From the market’s perspective, capital used is capital used: it doesn’t matter if you’re selling high-priced stuff because there’s a lot of gold in it or because it took smart people to put it together.

For the nonprofit board member or executive director, the problem is that there are few real benchmarks for organizations that measure effectiveness. (Heck, even in the stock market we’ve all learned that we can’t really trust GAAP “net income” numbers either and have to look at the cash flow statement.)

What you can do as a nonprofit is start with the advice in the quote above: figure out what you’re going to do and how you’re going to do it, an objective and a strategy. Here’s my homelessness example: there are probably at least a dozen strategically distinct ways to *fight* homelessness:

1. provide meals
2. provide shelter generally
3. provide support for public benefits filings
4. connect veterans with VA services
5. connect the mentally ill with programs
6. provide shelters for victims of domestic violence
7. provide jobs
8. provide job training
9. lobby legislatures and executive officials (think police) for changes in law and policy
10. build more houses
11. litigate on behalf of the homeless when rights are violated
12. ???

I can’t say with any certainty which of these is the best way to end homelessness. I can say that it’s very hard to compare nonprofit efficiency (which is effectiveness using the same resources) of Habitat for Humanity (strategy #10) with a soup kitchen. I can say that it’s easier to compare one soup kitchen to another.

That type of comparison, which segregates data about overhead ratios from apples and oranges, nevertheless helps organizations and donors find a path to improvement. And that’s good for everyone.

Without solid data-driven analysis, both parties are stuck with the status quo: law firms are reluctant to take on the risk inherent in any other arrangement, when their superior knowledge of the process, their internal performance on prior related matters, and their ability to analyze information across all clients should allow them to take on that risk and, of course, be paid for bearing it. Companies are reluctant to accept the possibility of occasionally overpaying for services (we’re assuming, in general, that the alternative arrangement is a fixed fee, based on a stage-by-stage negotiation between the client and the law firm), but it will be unable to know whether the suite of services it purchased in times past will be sustainable under a new payment scheme.

We’ve offered a variety of analytical services to law firms and clients of such firms. There are plenty of internal hurdles, since good law firm-side analysis almost demands a profitability (FCF, actually) analysis of practice groups and senior lawyers. On the client side, firms with some bargaining power generally expect that they will be able to cram down the lawyers if necessary, and GCs with relatively pedestrian legal needs can shift retention of that talent to the company’s internal purchasing department, where the low cost provider will be more likely to be successful.

… sophisticated [parties] are reluctant to negotiate the nontraditional payment plans because they don’t have the historical data they need….

If this description fits your firm or your company, contact us to arrange a discussion; we can help you figure out how to structure an alternative fee arrangement that improves net FCF more than any other option.

Sure, there are commentators who complain that a buyback signals that management has “nothing better to do with its cash,” but that’s a simplistic position, designed to play well in sound bites. There’s no scenario in which we would expect one of these businesses to put all their eggs in one basket, to put all their resources into a single product. Apple didn’t turn its entire company into an iPhone factory; Nike sells more than just sneakers; even Google is more than just search.

We should want companies to use their cash in a variety of ways; doing this reduces overall risk by mitigating volatility. Putting some portion of cash into buybacks is the corporate equivalent of principal-guaranteed investing. (In a guaranteed principal investment, the fund takes investor money, buys sufficient zero coupon bonds to pay back the principal on the desired date, and invests the rest.) Putting some cash into buybacks, as part of the portfolio of uses of cash, gives shareholders a tax-favored return over dividends; the reduction in cash on the balance sheet improves ROIC by reducing invested capital in the business; and other investments stand ready to provide the returns sought by investors.

To us, returning capital to investors isn’t a sign of weakness: it’s a rejection of the hubris that can lead to hoarding of resources that can’t be efficiently employed. We don’t have enough space here, even where it’s free, to list some of the companies we’ve analyzed where they’ve destroyed value by not earning back the cost of capital, let alone some arbitrary hurdle rate. And that’s not just in the “current economic environment:” it happens in all markets, in all industries, across all types of companies. It’s hard to create value, it really is. We keep trying to develop the tools that make it easier for companies to understand, and then to manage, how they actually create free cash flow on a day-to-day basis.

Our original post described the features and functions, with an original bounty of $250.

New Bounty: $500 (work-for-hire) and 40% of profits from App World (including recovery of initial $500 R&D).

Submissions go here. I will be posting this on rent-a-coder as soon as I can get to it.

This recent Seth Godin post was another timely suggestion from him. He seems to really have a finger on the pulse of what is going on, with timely, succinct, no-fluff posts on issues that are popping up for us literally right before or right after his posts. That’s helpful. In any case, this post addresses what people should do with their newfound free time at work (whether it’s wanted or not):

1. Learn something.
2. Earn a following and reputation.

We’ve added another option in expanding our own business:

3. Help your clients, even if you have to get things rolling by kicking the ball downhill.

We’ve gone to our best contacts, our closest friends and colleagues, and offered to help them by helping their clients. We’ve created the ability to start some of our top-shelf analytical work easily without running up the usual fees and expenses, and so we have hoped that that will initiate a virtuous circle where we help those companies, they generate new work or transactions for our colleagues, and then maybe some additional work trickles up to us.

I’ve long held that a good part of the present malaise in the economy is primarily one of expectations (both past over-expectations aka delusions and current under-expectations aka fear). After all, houses aren’t actually falling down, unable to serve their primary purpose; factories aren’t closing because machinery is decrepit and no longer working. The economy will move when people decide that they need something enough to go out and buy it, whether it’s a nicer house in a better neighborhood or a new couch. The same holds true for companies, whether it’s buying assets that will create future cash flows or hiring better people to upgrade the talent pool.

Starting projects, adding value with your slack time, is not only a way to join arms with your clients and customers but also a great way to keep your own talent engaged. I saw the downside of slow times during the dotcom bust in Silicon Valley: I was at Brobeck’s Palo Alto office at that time. Returning from my honeymoon in August 2000, it turned out that I billed a grand total of 7 hours in September. Now, I didn’t spend the other 153+ hours at work that month doing nothing: I helped other lawyers on their matters and did my best to train and develop younger lawyers as they worked on other matters.

I just met a recent law school graduate working at an AmLaw 100 firm in New York City. This grad and other new grads are apparently not very busy, which isn’t hard to imagine given the happenings at so many large law firms. However, the response described to me of both partners and associates was to often hunker down and hide, working behind closed doors. My advice: partners should be sending these new associates out to client offices, with a no-fee guarantee if needed, to help their clients out. If these associates aren’t billing, it’s better that they be learning as part of an investment by the law firm in its clients than sitting and waiting for work to come to them. Will every client accept? No, but those that don’t are fools. Will every placement generate billable work? No, but those that don’t will generate good will and training. What firm wouldn’t do this? What justification is there for passing up on this opportunity if there isn’t enough billable work?

What are you doing to turn the crankshaft on the engine of commerce? Please pass on your stories and ideas in the comments.

Incentive stock options are not subject to the new law, and this point has been widely reported, since ISOs are an extremely common form of deferred compensation, particularly at companies that do not have more complex plans. However, the exception is almost never reported: if the options do not in fact qualify (i.e., at the time of a later investigation) as ISOs, they are subject to 409A. Since the most likely reason for stock option grants believed to be ISOs to “lose” this status is because they were not granted at the proper fair market value, not only is the status determined ex post facto, but there will be no opportunity to cure the defect at the time of discovery.

As a reality, every private company issuing stock options has to address prospective 409A liability as part of its risk management activities. For this reason, ThoughtStorm has developed a specific valuation service offering for companies facing 409A compliance.

How do 409A valuations differ from traditional valuations? The statute sets out a number of parameters and procedures, but any quality valuation expert already knows these things. The key issue, where in-house finance and accounting personnel typically have much less experience, is in valuing not only the company as a whole but rather the specific security that is or may be subject to 409A. Private, venture-funded companies in Silicon Valley have issued options to purchase common stock at 10% of the most recent preferred round as a rule of thumb. What 409A tells us is that this “as a matter of course” approach is no longer permitted and subjects companies, and optionholders, to substantial risks.

This summary (PDF) of TSC’s 409A valuation service offering can help you decide whether you should take the risk of a 409A violation or capitalize on this opportunity to actually improve your business.

We have worked hard to integrate the 409A valuation process into corporate governance, budgeting, strategic planning, and finanfcial analysis work that we have been doing for our private and public clients. We can help you use this new legal requirement to actually improve your overall governance and planning initiatives. To discuss your 409A valuation needs, please contact us at info@thoughtstorm.com. ]]> http://www.thoughtstorm.com/2009/03/use-409a-risk-expense-to-improve-the-company/feed/ 1