Category: Management

Why I Freelance

Recently, Linked-In reminded me that I have been an independent consultant for fifteen years.  Thanks to all who called and wrote with congratulations.  In fact, I have been either consulting, at a startup (or consulting for a startup) since business school.

I used “freelance” in the title because this word is in need of some rehabilitation.  There was a bitter post on Linked-In about how “freelance photographer” means “unemployed guy with a camera.”  I get that all the time.  I spoke with a recruiter recently who was startled to learn this is really what I do, and not just a placeholder on my resume.

According to McKinsey, there are 49 million of us “free agents,” equal in number to those who do it out of necessity.

I started consulting for a Big Six firm, back when there were six, and I noticed that our projects were always a big deal for the client staff.  They felt lucky to be on the client’s once-in-a-lifetime project.  We consultants, meanwhile, were continuously assigned to the good projects, client after client.  It becomes addictive.

If I were recruiting here, I would recount some groovy projects and then pitch the glamour and excitement – but I have a much more practical argument.  When you work for a long time at one company, you accrue specific knowledge about its organization, procedures, and history.  If you ever leave that company, the value of this knowledge falls to zero.

I was engaged by GMAC just before the crash.  Suddenly, my entire department was shuttered – desks empty, lights out.  It was a disaster for the faithful, lifetime employees.  Some were out of work for a year.  The consultants, however, rapidly found new jobs.

Job security no longer exists, and the good wages, generous benefits and secure retirement that used to be guaranteed with full-time employment are in decline or have disappeared.

It is a little scary not knowing where I’ll be working next year.  I won’t deny that.  My point about GMAC is that the people who thought they had job security were mistaken.  They were the ones most at risk.

Tom Peters writes that job security does not come from allegiance to your company.  It comes from having skills and accomplishments, plus a network of people who know about your skills and accomplishments.  This is where the exciting projects come in.  When I call around looking for work, I want people to recognize me as “the guy who created Provider Exchange Network,” or something like that.

Changing jobs enhances your value by exposing you to new people, technology, and business models.  This has certainly been true for me.  F&I is a small community, but it includes dealer groups, software companies, and finance sources.  This is great because it allows me to move around without violating any non-competes.

This article in Harvard Business Review echoes Peters’ observation about job security.  The author is a B-school prof, who writes that the gig economy is the future.  Focus on finding work, she says, not a job. I am lucky that this attitude (and related skills) were drilled into me at Coopers.   In case you’re inspired to quit your day job, I’ll follow up with a “how to” article.

Ten Networking Tips for the New Consultant

My son, Paul Virag, has hung out his shingle as an independent.  Paul’s challenge is differentiating himself as an ace developer, in a market dominated by price competition and cheap labor.  My boss at Coopers lamented the same thing, years ago, as a “buy it by the pound” business.

Mind your Rolodex.  Along with maintaining a marketable skill, this never-ending job tops the list of must-dos for the independent contractor.

The solution, of course, is assiduous networking.  The quote above, complete with antique Rolodex reference, is from the Tom Peters Seminar.  In today’s post, I present my networking routine.

call-roster

  1. I check Linked-In every day for news about people I know, and then I write or at least “like” the update. It has gotten Facebook-y over the years, but Linked-In is still the best (only) site for professional networking.
  2. I am not a “Linked-In whore,” though. I actually know most of my connections.  I call or email at least one of these people every day, especially when I am not looking for work.
  3. Maintain a web site, obviously. Mine is overdue for its periodic update.  Something like Mike Cohn’s blog will be more relevant to Paul.
  4. As a developer, Paul will also want to be noticed on Github and Stack Overflow – though this means mostly peer developers, not hiring managers.
  5. I post roughly twice a month on my blog. It gets about 100 views per month.  WordPress shares my posts to Linked-In.  They get more views on Linked-In than they do native on the blog.
  6. I collect relevant content for my Twitter feed, and then I load Hootsuite to make at least three posts every day. I find content using my RSS reader and the blogroll from my blog.
  7. This is in addition to spontaneous tweets, retweets, and conversations. I follow a great group of people, whom I rely upon for industry news, so for me this is a natural process.
  8. A few tweets every week lead back to my blog. I use bit.ly to track the hits.  Twitter provides analytics for free.
  9. Keep your resume up to date. People still like to see a resume.  When I was starting out (Coopers again) I maintained different versions tailored to our practice areas.  “Virag specializes in nothing but healthcare,” … and auto, and retail, etc.
  10. Go to conferences, and get on the podium if you can. My main one is the F&I conference held every fall in Las Vegas.  This is also an opportunity to hike Red Rock Canyon.

All of this activity takes time, especially writing original content.  I spend five or six hours per week.  Hootsuite helps because I can stoke Twitter on the weekend, outside of billable hours.  Bonus eleventh tip: write blog posts that start with “Top Ten Tips.”  People love that.

Dealer Megatrends Part 1 – Consolidation

In the 2006 data, NADA noted a “moderate consolidation trend.”  Since the recession, sales have recovered but the dealer population has not.  My chart, below, is based on the last eleven years of NADA data.  You can go back as far as you like.  The dealer population has been shrinking steadily for fifty years.

chart

This means the surviving dealers are selling more cars per store, but the real story is consolidation – the powerful trend toward fewer owners and bigger groups.

In 2005, the top 100 dealership groups were 9% of the total.  In 2015, they were 17%.  The Automotive News ranking is by gross revenue but, for simplicity, I am counting stores.  I imagine that the big, efficient groups command more than 17% of the total gross.

Gee group’s purchase of 16 Tonkin stores, backed by private equity, is instructive.  Both groups are family owned, with seven and 21 stores respectively.  Brad Tonkin will join the combined entity as president.  The Automotive News article also describes a Soros-backed purchase by the McLarty group, bringing its count to 19 stores.

The owners may be public, like AutoNation and Penske, private equity, or something in between.  Larry Miller group, for example, is still family owned but independently managed.  An IPO seems the next logical step.  Broker Alan Haig predicts his buy-sell business will continue strong in 2017.

This is about economies of scale, obviously.  The New York Times mentions efficiency in staffing, technology, and inventory management (as I did, here).  There is a lot of money chasing this trend, and only so many operators who know how to exploit scale.  That’s why Haig also has a recruiting arm.

Small dealer groups can compete online only by joining platforms that aggregate inventory.

If you are running a small group, you might want to start thinking about M&A.  That’s not my area, though.  I am interested in the related trends toward technology and process change.  I’ll examine these more in my next post.

One example is online retail.  Small dealer groups can compete online only by joining platforms that aggregate inventory, like TrueCar or Autotrader.  What I am proposing is that the (relatively) little guys compete with the consolidators by consolidating themselves online.

Dealers should seek help from their OEMs and software vendors.  Well, maybe not the OEMs.  GM’s Shop Click Drive only searches inventory for a single dealer, and it makes you choose the dealer first.  Not only will it not give you a price, it won’t even present a model list until you’ve selected a dealer.  No one shops this way anymore.

Modern shoppers will have found a model and trim level, a price, and even a lender, before landing on a dealer.  While Shop Click Drive has the machinery to structure a deal, and even sell protection products, some genius decided to make the “choose dealer” button its primary focus.  Most GM dealers I looked at were also on Autotrader.

I did a survey of platform capabilities last year, with Cox Automotive far in the lead.  The other guys seem still to be in the world of single-dealer web sites.  I also noticed that these sites are mostly hideous, and lacking consistency in even simple functions like credit application.

The consolidators have strong tech teams devoted to online shopping.  Dealers may fail to see the threat, because it’s not a physical presence.  If you owned a hardware store, and Home Depot went up across the street, you would notice.

Raising the Bar

Armchair strategists are feeling vindicated now that AutoNation CEO Mike Jackson has abandoned his “asinine” plan to ground all vehicles under recall.  I see the same argument whenever anyone tries to change dealer operations.  They estimate the reduction in profits and write about that, as if that were the end of the argument.  It’s not.  That’s not how competition works.

If you talk about disclosing product prices online, you will hear that F&I gross is now $1,500 and who wants to screw that up?  Same story with TrueCar and their diabolical plan to disclose transaction prices.  You even hear this complaint about vAuto and the velocity method, which sounds to me like the most logical thing ever.

My back-of-envelope calculation says that AutoNation carrying an additional 10,000 units of inventory, at maybe 2%, would cost them roughly $5 million per year.  That’s 0.02% of sales.  For comparison, the related “Drive Safe” ad campaign was $10 million.

AutoNation, with investment-grade credit, enjoys a lower carrying cost than its private dealer competitors.  Selling diverse brands, they are less exposed to a recall by any one manufacturer.  They can also exploit their scale to mitigate the cost of such a policy, not to mention the PR benefits.

If federal regulators had followed Jackson’s lead, this would have raised the bar for all dealers.  Two senators, now disappointed, were lined up to make that happen.  Jackson’s policy, a minor challenge for AutoNation, might have proved fatal for smaller dealers.  That’s how competition works.

It is a mistake to look at process change only in terms of the costs.  Athletes training hard for a competition don’t think about how much it hurts.  They think about how much it’s going to hurt the other guy.

Update:  Motley Fool estimates the cost to AutoNation at $0.06 of EPS, a little higher than my estimate (and Jackson’s) due to the Takata debacle.

Sprint Planning with Time Separation

Poland TimeHere is a short post on a practical problem for my readers who use agile.  My client is in Dallas, and most of the developers are in Poland.  That’s a seven-hour time difference.  We have enough overlap that daily scrums are not a problem.

“What I’m fixing to do today,” in Texas, comes at the end of the team’s workday in Poland.  This is a little weird, but not a problem.  Sprint planning is a problem.

With everyone in the same time zone, I like the rhythm of closing the sprint on Friday, doing the review, and then sprint planning on Monday.  If your idea of “sustainable pace” includes working weekends, the team gets that weekend off.  Then, we start Monday with a fresh scrum board.  This is probably everyone’s favorite rhythm, if you have the luxury of cotemporal teams.

By the way, I write “cotemporal” here instead of “collocated” because it’s the time zone that matters, not physical distance.  I know of at least one F&I company based in New York with developers in South Florida (an F&I “tech cluster” thanks to AutoNation and JM&A).

Replacing the initial eight-hour session with two separate four-hour sessions conducted over consecutive days is more practical.

With widely separated time zones, the problem is that you can’t leave the scrum board empty.  Unless the next sprint is planned immediately, one team or the other will have a day with no work.  So, we have adopted what Mike Cohn calls the two-call method.  The quote above is from his book, Succeeding with Agile.

We close the sprint on Friday, do the review, and begin sprint planning with the Dallas cohort.  We have the scrum master here, the product owner, and the lead developer.  So, that’s a quorum.  The downside is that the Polish team misses the initial discussion of the sprint goal.  Cohn lists pros and cons in the book.

Relating the big picture falls to the lead developer, who conducts a second session on Monday during the overlap period, and develops the sprint plan.  This approach doesn’t allow much debate over scope, so it places a premium on good stories with good estimates.  For more on agile, read my post Sales Driven Development (or buy Cohn’s book).

Say It to My Face

dbpix-people-ray-dalio-bridgewater-articleInlineTalking behind someone’s back can get you fired at Bridgewater.  If you have a problem with someone, you must confront them and sort it out.  The corporate culture is devoted to frank assessment of everyone’s strengths and weaknesses.

You can see why this might be important to functioning as a close-knit team, and to personal development.  Bridgewater founder Ray Dalio is famous for what he calls Radical Transparency.  There is even an app for that.

In most work places everyone is working two jobs. The first is whatever their actual job is; the second consists of managing others’ impressions of them, especially by hiding weaknesses

Some people think Dalio is a crank, but the movement seems to be gaining adherents.  Shopify posts employees’ strengths and weaknesses on the company wiki.  In this interview, founder Tobi Lütke sounds exactly like Dalio.

We are all … personal-growth junkies. So we really committed to giving each other feedback, and we’re trying to expand that to the entire company.

Personally, I like the direct approach.  I have worked with people who prefer to sulk silently, plotting revenge or whatever, instead of laying their cards on the table.  This is unhealthy, as well as unproductive.  If you find yourself mentally rehearsing what you should have said, or what will happen “next time,” you need to get that off your chest, and damn the consequences.

If you tell someone, “you screwed this up because you failed to do X,” you begin a productive dialogue.  Maybe he has never been trained in X.  Maybe he chose Y instead, for a reason.  Maybe Gartner Group just wrote a white paper on X, and it’s deprecated.

On the other hand, I can see radical transparency being limited to certain kinds of teams, like investment analysts and mountain climbers.  It requires people who are already high performers, committed to raising the bar, and mature enough both to give and to receive criticism properly.

Most people have a hard time confronting their weaknesses in a really straightforward, evidence-based way. They also have problems speaking frankly to others.

This is where Dalio’s idea diverges from Radical Honesty, the self-help program of author and psychologist Brad Blanton.  Blanton advocates brutal honesty from everyone at all times, which strikes me as impractical, even comedic (like the movie The Invention of Lying).   A more practical book for business people is Crucial Conversations.

The other thing that struck me about the Lütke interview was his remark that companies are evolving, still finding the right way to organize.  This I can believe from my long experience working with startups, and reading Tom Peters.  Companies certainly need less hierarchy and more authentic teamwork.  We will have to start being honest with each other.

Maturity Model for Software Startups

Software companies begin life at CMM Level One, and some of them die there. You may not be familiar with the Capability Maturity Model, but you will always remember your time at Level One. This is where the developers code all night because you need that next feature, to keep paying the rent. This is where you release new code and then spend all day patching it, in production.

How many users do you suppose we’ll drop, if we reboot it right now?

On the other hand, it is possible to have too much process control. I was at a Level Four company once where we had to three-bid a project to plan and initiate a second project that would develop the software. The chart below, from Ron Patton’s book, shows the levels as stair steps.

The model contemplates an otherwise stable company that has weak processes only for software. In a startup, all processes are weak and resources are limited. To be successful, processes must mature in step with revenue. In this article, I’ll illustrate holistic process maturity with some examples.

At Level One, you have limited HR capability, and therefore no diversity training or compliance. You have no benefits, no vacation policy, no travel policy, and no expense audits. Your exposure to liability is huge, for everything from “constructive termination” to respondeat superior.

The reason for Brad’s separation from the company is a private matter which I am not at liberty to discuss.

I looked into this, and found that there is indeed a maturity model for HR. The first step, in my experience, is to crib an employee manual and make everyone sign that they have read it. At least then you can disclaim any actions that go against the boilerplate in the manual. You might also invest in an employment law poster.

At Level One, you also have no marketing function. The sales people roll their own presentation materials, talk tracks, and brand message. The first step is to hire a dedicated “marketing person,” to do sales support and organize your booth at NADA. Actual marketing comes later.

Entrepreneurs are good at tracking their sales and market share. People I work with look forward to their first thousand dealers, a public dealer group, or a big agency. Celebrate each milestone by notching up your process maturity.

I would say that you should be out of Level One (for software) after eighteen months. If you are already taking distributions, while the business depends on “heroes and luck,” then you are gambling. Raise some capital, hire a good manager, and get it fixed. My earlier article, Sales-Driven Development, describes what I feel is a reasonable level of process maturity for a young software company.

Baby Steps

I will close this post with a few pointers for leaving Level One. Basic stuff. Most readers should be able to skip this list.

  • Create a maintenance window and stick to it. Only move code to production at 6:00 AM on Wednesday. If anything goes wrong, people are in the office. It’s also not Saturday, our peak volume day. If you are constantly having “emergencies” that can’t wait until Wednesday, you need to look at that.
  • Implement a code control system with a rollback capability. If the latest build has a problem, at 6:10 AM on Wednesday, you do not start debugging. You push the rollback button.
  • Set up a reliable QA environment, and sync it with the production database. I don’t know how many times I have heard that the build worked in QA but some new data was encountered in production, and it crashed the site.
  • Create a division of labor, such that the developers stop fussing with the servers. Developers love to fuss with  infrastructure, which is not their skill set.  At all.  Hire a professional, or rent one from your cloud service provider.
  • Implement a work order tracking system. Planning at Level One is a “pushdown stack,” which means that yesterday’s panic is still simmering when it is superseded by today’s panic. Start by writing commitment dates on a bulletin board, so that everyone has visibility into the backlog.

Sensitivity Testing Model Assumptions

We have all made them, those wonderful Excel models with their hockey sticks and their double-digit rates of return. You may have strong accounting and Excel skills, but a financial model is only as good as its assumptions. In this article, I’ll give some pointers on how to corral your assumptions and, most importantly, how to validate them.

Whether it’s a project or a new business unit, the typical financial model looks like an income statement. It will have rows for revenue and expense items, and columns showing these items as they change month over month. If this sounds too basic, you may skip ahead to the section on sensitivity testing.

You need to realize that the more you have played around with a system’s parameters so that it gives you better results, the less likely it is that it will work in the future – Marcel Link

The first thing you want to do is extract your assumptions from the formulas on the model sheet. For example, if you think you can add 100 users each month, type 100 in its own cell and label it “monthly new users.” Every formula that uses the 100 figure should reference this cell. Later, if you decide the correct figure is 120, you only need to change it in one place.

If you expect to add 100 users per month, this is a linear increase. A chart of your total users will be a straight line. If you think that transactions per user will also increase linearly over time, then your total transactions will show a quadratic increase – or order n-squared, as we old coders like to say. This chart will be a parabola. To validate your model, it is important to understand the order of its time series variables.

People sometimes mistake a parabolic increase for an exponential one. You will only have an exponential series if there is compounding, like an account that accrues interest, and then interest on the interest. For example, you may think that your user base will grow by 10% per year, but compounding it is optimistic. When in doubt, make a chart of the series and use the Excel “trendline” feature.

Ultimately, all your assumptions will flow to net income, like monthly user fees, the user adoption rate, and the associated expenses. You may also have constant values (or values considered constant for the scope of the model) like the number of U.S. car dealerships, and annual new vehicle sales. Extract all of these from the formulas.

The goal is to have only formulas on the model sheet, and all parameters on a separate sheet. By parameters, I mean the constants as well as the model assumptions. For example, you may have a variable date that marks the launch of a new phase, or a true-false flag that toggles a partner relationship.

Once you have the parameters on a separate sheet from the model, add formulas here to summarize the results. You might want to see a summary of the income variables, an IRR of the net cash flows, and maybe a chart. Now, for analysis, you don’t need to look at the model sheet. You can experiment with the parameters, and see the results on the same page. The model sheet sits in the background and does all the work, like a subroutine in a computer program.

I always include a time series chart with one or two key income items. This helps me to see the impact of changing parameters, plus it makes a great presentation. This is the ideal setup for analyzing the model – as well as goal-seeking a desired result, which brings us to the headline topic.

Demo Model

It’s human nature – the first thing you do with a financial model is set the parameters to justify your business case, and then you fixate on those settings. Psychologist Danny Kahneman calls this “anchoring.” All future discussions will now start with the anchor settings.

The way to prevent the model from misleading you, and your client, is to sensitivity test the parameters. First, though, let’s look at some common sense tactics that don’t require math.

  • Find historical data. Always, always, always work with actuals wherever you can find them. If your client has previously rolled out one system, that tells you how fast they will roll out the next system. Also, link your model values to reality, like – how many trainers are available?
  • Find objective estimates. Ask people for numerical answers to specific questions – without anchoring. How many dealers can you sign up in a month? At what price?
  • Use the buddy system. Do not be the lone modeler. The last time I did one of these, I reviewed all the assumptions with my client’s CFO. I also sat with a financial analyst and walked her through each and every formula. Consultants talk about getting “buy in,” but this is really about getting accuracy.
  • Write good documentation. For each row in the spreadsheet, write down what you think it means and how you got the number. This is a lot of work but, trust me, you will be surprised how valuable it is. Does your SAAR figure include used vehicles? Does your revenue include sales tax?

You also need to accept, and communicate, that the new project might not pencil. No one ever likes to hear that, but it’s better than making a bad investment. Sensitivity testing will show you what happens when the parameters move away from the ideal. For example, maybe it still shows a profit, but below your hurdle rate or outside your timeframe. By the way, it’s good form to establish these thresholds up front.

For each parameter in the model, you want to determine how “sensitive” the results are to a change in the parameter. Some of these, you will know from the order discussion, above. For example, if net income is linear with price, then a 10% increase in price will mean a 10% increase in income. On the other hand, if you modeled the decrease in sales due to increasing the price, then you have a downward sloping parabola (for which you should perform a separate supply and demand analysis – but, I digress).

Sensitivty Table

Set up a separate sheet, like the one shown above, and list what you think are the most realistic values for each parameter. Next to these, list what you think would be its best and worst case values.

Run the model for each case, changing one parameter at a time, with the others set at their baseline values. Record the results for each run. In this case, my result variable is cumulative net income over some time horizon. You might be using IRR, discounted cash flow, or a breakeven period. For a breakeven period, “strong” means a shorter period.

The sensitivity for each parameter is simply the proportional change in results, divided by the proportional change in the parameter. Geometrically, you would like to know the slope of the line defined by the change in results – except that the parameters all have different units.Triangle2So, what you are computing is the slope of this line on a logarithmic chart – rise divided by run, with your independent variable on the horizontal axis. The steeper the slope, the greater the sensitivity.

This analysis tells you which parameters you need to focus on, in terms of both model accuracy and critical success factors for the project. A sensitivity value of 1.0 is high. It means your results depend directly on this parameter. You will want to spend time validating this number and then, when the project launches, you will want to manage to it.