Many of us share the frustration of ‘horrible bosses’…and as a valuations expert, I find ‘horrible bosses’ inconsistent with the ‘profit maximizing’ paradigm of companies…why would a company nurture a culture of ‘horrible bosses’? In this blog I try to explain the evolution of the ‘horrible bosses’ phenomena and how senior leaders are clueless.
Based on my research, inertia is a main contributor to the creation of a company culture that creates its own demise. Leaders lead under the faulty assumptions of growth even when the company stops growing. Inertia keeps leadership from accepting the new paradigm of maturity.
There is nothing more rewarding to be part of an organically growing organization where employee opportunities for growth and to be challenged are abundant. That environment attracts top talent and leadership has little to worry andhas little need to invest in maintaining top talent.
As organic growth begins to slow, the organization finds itself with a leadership team who grew up with the company during its growth phase and operates under outdated assumptions of growth.
When interviewing senior leaders of companies with recent growth history, I found a common thread of outdated assumptions that they all fell into. Almost uninamously they said:
1. We are not hierarchical
2. We are pure meritocracy
3. We have plenty of growth opportunities
4. We value diversity
5. We are listed as one of the top places to work
What is unfortunate is that all these assumptions used to hold when today’s leaders were the new associates at the company. However, they fail to weigh in the new evidence. In fact, #5 blinds them further.
Well, #5 is the most dangerous of all as it typically holds true for mature companies. But what changes from the organization’s early growth phase is how and why and by whom it was voted as the best place to work. In its early stage, employees who value growth and challenging opportunities are the ones tipping the scale on the “best place to work” ranking; and these employees tend to be the top talent that brings the company’s success. However, as growth slows down, the middle talent who is more likely to value “flexible” hours and “work from home” abilities far more than “ability to make an impact” tips the scale. Therefore, evidence from the average employee working there is weighed more heavily than from the top talent the company needs to build up its pipeline of new leaders.
And, diversity falls prey to that as well for 2 reasons. As the company becomes more established, the stakes become higher to truly value diversity of opinions. Leaders will reward those who think and act like them. A lively example is when I heard a charismatic and Type “A” leader support the promotion of an associate with the remark “I think Jim is great and deserves a promotion! He takes a stand and defends it strongly even when he is very wrong; unlike Kim who is open to hearing different perspectives BUT does not hold her ground as strongly.”
Secondly, diversity falls prey to the slowness in growth and the failure of meritocracy based promotions. When promotions take 7 instead of 2 years, women lose the ground. As Sheryl Sandberg (Facebook COO) says “Women leave before they lead”; the longer women have to wait for the well deserved promotion the more likely they will be at-risk of leaving the promotion arena…well, women are the ones with the most child rearing responsibility…. (Even Harvard Businss School recognized this pitfall in MBA recruiting when it used to require 5-6 years of pre-MBA experience and opened enrollment to students with no work experience – simply to accelerate women to leadership positions)…and thus, the organization’s pipeline of leaders will begin to skew towards male dominance, risking to lose its truly diverse culture.
Well the slowness of growth kicks meritocracy out the door. Technicalities become more important to filter down the promotion pipeline. Promotion guidelines grow and thus it will be rather easy to find an unchecked box from that long list to hold back a truly deserving candidate. Rather than “ability to manage and lead” being the primary criteria, the mature organization begins to generate leaders who are their mirror images (of personality and not of talent)...after all, Jim got the promotion even though he is opinionated and is often wrong compared to Kim – but he is loud and outspoken just like his boss.
Yet, when interviewing senior leaders I was shocked at their stronghold belief that their organizations are flat, meritocratic and diverse!!! Leaders may be the victim of the 80/20 rule where the average talent may be satisfied, but not the top 20 and most deserving talent.
How many of us have had bosses that we have questioned how did they get so far ahead? Well, when technicality overrules meritocracy and promotions begin to take longer and longer, the truly deserving talent leaves the scene and the average Joes rule the team.
Therefore, questioning their stronghold beliefs is necessary for leaders to resist the powerful pull of inertia. And, that is what Bayesian economics suggests. Bayes’s theorem addresses this issue: How should we modify our beliefs in the light of additional information? Bayesian asks three questions:
1. How confident am I in the truth of my initial belief?
2. On the assumption that my original belief is true, how confident am I that the new evidence is accurate?
3. And whether or not my original belief is true, how confident am I that the new evidence is accurate?
Leaders need to re-evaluate their apriori beliefs of meritocracy in light of evidence of company’s growth slowing down. They need to question the rise of unhappiness among top talent, and question whether true top talent is falling through the cracks or being recognized. And, if it is truly the top talent with morale issues, leaders need to alter their original hypotheses and develop new guidelines for promoting a truly meritocratic culture away from technicalities. Well, the recipe for such culture is not simple and companies need to devote resources to identifying what works best for them. However, ignoring the issue and still operating blindly under old beliefs can be suicidal for the company. After all, leaders are known to act only when employee morals hits bottom low.
The one advice to our leaders is that if you are not thinking like a Bayesian, perhaps you should be.
Tuesday, December 6, 2011
Tuesday, November 29, 2011
The education bubble…perhaps we need less investment!
As a recent MBA graduate and re-entrant to the workforce with a higher education, I could not help but question the value of higher education in the United States. What feared me the most is the uncanny similarities I found with the Mortgage Bubble. Both have asymmetry of risk tangled with government policy detaching it from free market forces, and a society with psychologically deep rooted beliefs on the merits of its value.
Here’s a brief history of the student loan market that highlights the never ending cycle of ever increasing tuitions.
As banks withdrew from the student loan market, the Department of Education (ED) became the direct lender to students. Because the ED can borrow at low Treasury Bill rates, student loans at 7.9% interest rates became a hugely profitable business for the government - especially when the ED does not bear the risk of delinquencies.
As a result, maximum loan amount available to students continues to soar. As students can borrow more each year, schools have been raising tuition keeping up with the increase in loaned funds. In fact, according to ED statistic, college tuition increased from 6% of average household income in 1990 to 17% in 2010 – almost tripling!
The effect of combining a government who profits from lending to students, colleges who benefit from raising tuitions and students who believe higher education is worth any price, is the creation of a reinforcing cycle of ever increasing student debt.
However, this cycle is detached from the reality of demand and supply. The flood of highly educated work force has increased the price of entry to the corporate world – well, price is a misnomer since corporations are demanding graduate diplomas for jobs that can be performed by interns, yet the global competitive forces bar corporations from paying salaries commensurate with a rate of return on the education investment. And hence, we have created an environment of defaults and delinquencies. According to another statistic only 37% of the 2005 borrowers have made timely payments.
As with the mortgage bubble, the lending risk is absorbed by a third party other than the lender. In case of mortgages, it was the holders of the asset-backed-securities and for education loans it is ultimately the taxpayer – as government is the lender. This asymmetry of risk creates a moral hazard. The ED only reaps the benefits of the higher profits from ever increasing loans without the need to look at the risks of lending. Sounds familiar?
That moral hazard created easy money for the housing industry and thus sellers could sell a house at a price based on how much a borrower can borrow – completely detached from the fundamentals of the borrowers’ ability to pay based on his/her earnings. It is the identical pattern in the education industry where tuitions are increasing according to the availability of funds detached from the earnings potential that education investment will generate.
And of course all this is possible by creating a culture that values the asset beyond rational limits. The idea of the American Dream made the average American value its investment in the house more than the reality of market forces. After all, the Germans and the French rent their homes. The same cultural belief in the value of higher education has made the American public ignore the forces of demand and supply and the market equilibrium price of education - whereas global forces have kept the earning potential in check and return on education investment in the negative.
However, when the education bubble bursts, the taxpayer will absorb all of the costs, unlike the mortgage crisis where some of the loss was absorbed by shareholders. And given that education loans, at $830 billion, have surpassed credit balances at $825 billion, we have more than the overpricing of education to worry about.
It’s perhaps that we do not need more investment in education to exacerbate this bubble further, but less. To compete in the global field, perhaps we need to set the price of education working backwards from the potential earnings it can generate in this global world. Perhaps the woes of the American downfall is not that we score poorly in math, but that we pay too much to score poorly in math. After all, how many scientists do you know who work as business analysts rather than working on that next invention. Do we really need more scientists then?
Here’s a brief history of the student loan market that highlights the never ending cycle of ever increasing tuitions.
As banks withdrew from the student loan market, the Department of Education (ED) became the direct lender to students. Because the ED can borrow at low Treasury Bill rates, student loans at 7.9% interest rates became a hugely profitable business for the government - especially when the ED does not bear the risk of delinquencies.
As a result, maximum loan amount available to students continues to soar. As students can borrow more each year, schools have been raising tuition keeping up with the increase in loaned funds. In fact, according to ED statistic, college tuition increased from 6% of average household income in 1990 to 17% in 2010 – almost tripling!
The effect of combining a government who profits from lending to students, colleges who benefit from raising tuitions and students who believe higher education is worth any price, is the creation of a reinforcing cycle of ever increasing student debt.
However, this cycle is detached from the reality of demand and supply. The flood of highly educated work force has increased the price of entry to the corporate world – well, price is a misnomer since corporations are demanding graduate diplomas for jobs that can be performed by interns, yet the global competitive forces bar corporations from paying salaries commensurate with a rate of return on the education investment. And hence, we have created an environment of defaults and delinquencies. According to another statistic only 37% of the 2005 borrowers have made timely payments.
As with the mortgage bubble, the lending risk is absorbed by a third party other than the lender. In case of mortgages, it was the holders of the asset-backed-securities and for education loans it is ultimately the taxpayer – as government is the lender. This asymmetry of risk creates a moral hazard. The ED only reaps the benefits of the higher profits from ever increasing loans without the need to look at the risks of lending. Sounds familiar?
That moral hazard created easy money for the housing industry and thus sellers could sell a house at a price based on how much a borrower can borrow – completely detached from the fundamentals of the borrowers’ ability to pay based on his/her earnings. It is the identical pattern in the education industry where tuitions are increasing according to the availability of funds detached from the earnings potential that education investment will generate.
And of course all this is possible by creating a culture that values the asset beyond rational limits. The idea of the American Dream made the average American value its investment in the house more than the reality of market forces. After all, the Germans and the French rent their homes. The same cultural belief in the value of higher education has made the American public ignore the forces of demand and supply and the market equilibrium price of education - whereas global forces have kept the earning potential in check and return on education investment in the negative.
However, when the education bubble bursts, the taxpayer will absorb all of the costs, unlike the mortgage crisis where some of the loss was absorbed by shareholders. And given that education loans, at $830 billion, have surpassed credit balances at $825 billion, we have more than the overpricing of education to worry about.
It’s perhaps that we do not need more investment in education to exacerbate this bubble further, but less. To compete in the global field, perhaps we need to set the price of education working backwards from the potential earnings it can generate in this global world. Perhaps the woes of the American downfall is not that we score poorly in math, but that we pay too much to score poorly in math. After all, how many scientists do you know who work as business analysts rather than working on that next invention. Do we really need more scientists then?
Saturday, September 17, 2011
5 Factors that increase the value of your patent
Patent quality is key in driving valuation and defensibility in the courtroom. Although the subject matter (the essence of invention) itself is important, the quality of the patent application will drive a significant portion of the value. Factors, as simple as number of words, or citings influence your patent value, and therefore, it is crucial to read the following five factors when drafting your application.
Disclosures – The more thorough your patent disclosures are, the higher your patent will be valued at. Often, the mere number of words contained in patent specification and the number of figures described will drive up valuation. So, keep the words flowing.
Claims – The breadth and quality of the claims made, as measured by the number of words per claim, and the number of independent and dependant claims, influence the patent quality. The more words and the more claims you have, the better your patent is deemed. More surprisingly, the choice of words can enhance or detract from its value. Words, such as “means” are regarded as limiting language, and if used in a patent application, it negatively impacts value.
Inventors and Ownership – Although the more inventors listed correlate with higher value, it is interesting to note that patents that are assigned tend to have higher valuations than patents owned by the inventor. Of course, the larger the entity they are assigned to, the better are their valuation prospects.
Prior Art or Backward Citations – The number of cited prior art references, and the average age of the references enhance value. Backward citations and number of claims have been related with the novelty of the patent, i.e. technological distance between the protected invention and the prior art.
Forward Citations – Although cannot be controlled at time of application, if you have a portfolio of patents, keep in mind that future citations of your already existing patents, enhance their economic value.
Read more about patents: "When is it a good idea to patent your invention" and "Get patents cheaply and don't worry about quality."
Disclosures – The more thorough your patent disclosures are, the higher your patent will be valued at. Often, the mere number of words contained in patent specification and the number of figures described will drive up valuation. So, keep the words flowing.
Claims – The breadth and quality of the claims made, as measured by the number of words per claim, and the number of independent and dependant claims, influence the patent quality. The more words and the more claims you have, the better your patent is deemed. More surprisingly, the choice of words can enhance or detract from its value. Words, such as “means” are regarded as limiting language, and if used in a patent application, it negatively impacts value.
Inventors and Ownership – Although the more inventors listed correlate with higher value, it is interesting to note that patents that are assigned tend to have higher valuations than patents owned by the inventor. Of course, the larger the entity they are assigned to, the better are their valuation prospects.
Prior Art or Backward Citations – The number of cited prior art references, and the average age of the references enhance value. Backward citations and number of claims have been related with the novelty of the patent, i.e. technological distance between the protected invention and the prior art.
Forward Citations – Although cannot be controlled at time of application, if you have a portfolio of patents, keep in mind that future citations of your already existing patents, enhance their economic value.
Read more about patents: "When is it a good idea to patent your invention" and "Get patents cheaply and don't worry about quality."
Sunday, August 28, 2011
Valuation of Motorola patents – a deeper problem of the U.S. patent culture
The ever increasing valuations in the mobile and telecommunications space signal a deep rooted problem of U.S. patent laws, and its litigious culture. Although some claim the “bubble is over” with Google’s recent acquisition of Motorola; the war is far from being over. However, in the short-term, an early stage start-up can ride the wave by improved valuations and larger venture pay-offs.
Those who believe that the bubble is over, miss out on some key factors driving the recent intellectual-property (IP) arms race in the smart phone industry. These believes cite that Google by acquiring Motorala, has put an end to the race of acquisition craze, because Google’s entrance to the smart phone marketplace will establish the much needed balance of power and will end the IP hoarding race. It is partially true that patent acquisitions and valuations are driven by strategic factors; however, fending off litigation has been at its core.
The basic principle to determine the value of a technology patent is how much it could allow a company to gain price elasticity and market share. When the industry witnesses a flurry of patent suits, the value of a company’s market share will be highly correlated with how well it can protect itself against litigation liability. Hence, the IP valuation and IP litigation become intertwined; patents deriving their value not by how much value they create, or strategic value, but how much negative value (damages to pay in lawsuits) they can defend against, or defensive value.
The rise in litigation is highly due to the complex nature of smart phone technologies that connect different innovations both from computing and the mobile telephony, that have to be interoperable and work together. Google’s chief legal counsel, David Drummond states in one of his blogs a smartphone “might involve as many as 250,000 (largely questionable) patent claims.” Such patent complexity makes the smart phone industry a hot bed for litigation. Although, the slowing of the IP acquisition race may influence valuations, the industry will increase its IP litigation, thus driving up the defensive value of these patent portfolios.
Mr. Drummond is not alone in his assessment of these patents to be “questionable.” The USPTO office has been under attack for loosening up its standards on technology patents. The most famous attacks on the USPTO dates back to 1999 with Amazon’s 1-click patent, which is the technique of allowing customers to make online purchases with a single click. The 1-click patent application has been denied in Europe; while it has been widely contested in the U.S., it still stands as a valid patent and online companies have to pay Amazon for the right to use 1-click purchase technology. Many of smart phone “patents” are claimed to be questionable. With a price tag of $1 million to challenge questionable patents for validity, many of them remain uncontested until they become involved in infringement lawsuits.
But, this is not the only cause. Apple, Miscrosoft, Nokia, Samsung have all used the International Trade Commission (ITC) to file their patent lawsuits, instead of filing in federal court. Although ITC was formed to help companies find speedy resolutions to their claims, it has caused increased litigation by technology companies eager to capitalize on the speed and expertise of the specialized venue. ITC specializes in patent litigation (85% of lawsuits filed at ITC are patent related), making it an attractive venue for the smart phone industry. And, with the lower cost of litigation and speedy resolution of claims, it has attracted lawsuits that the slow federal court system would have otherwise detracted.
More troubling is the size of patent damages awarded. While the average patent award in Chinese courts is $25,000, in the U.S. it has risen to $12M, more than doubling in size since the last decade, although the award in the U.S. can easily be as high as $1.5 billion.
Therefore, the economics of patents encourages litigation - driving up their defensive valuations. Without any serious reform on how patents are granted and litigated, the smart phone industry will remain to be the hotbed of litigation and the defensive value attached to their patents will continue to rise.
However, regardless of the reasons underlying these valuations, if these acquisitions are indeed priced solely on a cost-per-patent basis, as looks likely, it would set a benchmark for valuing intellectual property portfolios, and hence help your early stage start-up valuations. Recent acquisitions of Motorola and Nortel, each give a valuation of $510,000 per patent acquired. And since venture capitalists heavily rely on relative valuation methods, it is good news for the early stage start-up.
Those who believe that the bubble is over, miss out on some key factors driving the recent intellectual-property (IP) arms race in the smart phone industry. These believes cite that Google by acquiring Motorala, has put an end to the race of acquisition craze, because Google’s entrance to the smart phone marketplace will establish the much needed balance of power and will end the IP hoarding race. It is partially true that patent acquisitions and valuations are driven by strategic factors; however, fending off litigation has been at its core.
The basic principle to determine the value of a technology patent is how much it could allow a company to gain price elasticity and market share. When the industry witnesses a flurry of patent suits, the value of a company’s market share will be highly correlated with how well it can protect itself against litigation liability. Hence, the IP valuation and IP litigation become intertwined; patents deriving their value not by how much value they create, or strategic value, but how much negative value (damages to pay in lawsuits) they can defend against, or defensive value.
The rise in litigation is highly due to the complex nature of smart phone technologies that connect different innovations both from computing and the mobile telephony, that have to be interoperable and work together. Google’s chief legal counsel, David Drummond states in one of his blogs a smartphone “might involve as many as 250,000 (largely questionable) patent claims.” Such patent complexity makes the smart phone industry a hot bed for litigation. Although, the slowing of the IP acquisition race may influence valuations, the industry will increase its IP litigation, thus driving up the defensive value of these patent portfolios.
Mr. Drummond is not alone in his assessment of these patents to be “questionable.” The USPTO office has been under attack for loosening up its standards on technology patents. The most famous attacks on the USPTO dates back to 1999 with Amazon’s 1-click patent, which is the technique of allowing customers to make online purchases with a single click. The 1-click patent application has been denied in Europe; while it has been widely contested in the U.S., it still stands as a valid patent and online companies have to pay Amazon for the right to use 1-click purchase technology. Many of smart phone “patents” are claimed to be questionable. With a price tag of $1 million to challenge questionable patents for validity, many of them remain uncontested until they become involved in infringement lawsuits.
But, this is not the only cause. Apple, Miscrosoft, Nokia, Samsung have all used the International Trade Commission (ITC) to file their patent lawsuits, instead of filing in federal court. Although ITC was formed to help companies find speedy resolutions to their claims, it has caused increased litigation by technology companies eager to capitalize on the speed and expertise of the specialized venue. ITC specializes in patent litigation (85% of lawsuits filed at ITC are patent related), making it an attractive venue for the smart phone industry. And, with the lower cost of litigation and speedy resolution of claims, it has attracted lawsuits that the slow federal court system would have otherwise detracted.
More troubling is the size of patent damages awarded. While the average patent award in Chinese courts is $25,000, in the U.S. it has risen to $12M, more than doubling in size since the last decade, although the award in the U.S. can easily be as high as $1.5 billion.
Therefore, the economics of patents encourages litigation - driving up their defensive valuations. Without any serious reform on how patents are granted and litigated, the smart phone industry will remain to be the hotbed of litigation and the defensive value attached to their patents will continue to rise.
However, regardless of the reasons underlying these valuations, if these acquisitions are indeed priced solely on a cost-per-patent basis, as looks likely, it would set a benchmark for valuing intellectual property portfolios, and hence help your early stage start-up valuations. Recent acquisitions of Motorola and Nortel, each give a valuation of $510,000 per patent acquired. And since venture capitalists heavily rely on relative valuation methods, it is good news for the early stage start-up.
Friday, August 12, 2011
How to use social media to predict stock price performance?
As engaging as it may be, social media is a powerful tool to predict stock price performance. As a business owner, not only you have to worry about the impact of tweets on your brand perception, but also on your market valuation. Here’s why:
Many investment analytics are being built on social media opinion mining; those innocent feeds are no longer so innocent. On the bright side, as an investor, you can capitalize on those tweets to bet your way into fortune.
With the advent of the internet, it is now possible to measure the impact of online news and social media on stock prices. Hardly a novel concept, as market sentiment has been a core element of behavioral finance and investment theory. One of the two building blocks of behavioral finance is cognitive psychology, or how people think; this is where social media plays an important role. Behavioral finance success has been fueled by the inability of traditional investment theory to explain bubbles and market crashes. Who does not remember the housing bubble or the tech bubble and their subsequent crashes?
A recent study found that language usage is a powerful predictor of stock markets. The diversity, or lack of, of vocabulary used across the web, highly correlates with stock market performance. In simple words, when stock markets are rising, online conversations use similar words of “rise”, “fall”, “gain”, and share similar stories of optimism of the recent past. However, as sentiment goes negative a far more divergent vocabulary is used across online channels. Stories become more divergent as well; people recalling independent moral stories of bubble investing dating as far back as the tulip bubble of the 17th century. Perhaps, this phenomena can be explained by Tolstoy’s quote: “Maybe it’s a bit like happy families are all happy in the same way, but unhappy families are unhappy in many different ways.” The chart below shows such correlation.
Besides language usage, tone can be analyzed to identify sentiments such as fear and joy, uncertainty and urgency, which all directly influence stock market performance.
Although, to-date most investment social media analytics has focused on predicting the overall stock market performance – same can be applied to companies. A negative sentiment of companies voiced on tweets can not only affect the brand perception, it may lead to massive “sell” signaling, exacerbating the downward spiral of the valuation. Therefore, in the age of social media, perception management has become even more crucial than in the offline world.
However, as an investor tuning your ears to tweets, social posts and blogs can pay off by helping you pick winners & losers and avoid bubbles & crashes.
Of course to an skeptic, correlation and causation will remain a point of analysis. However, since overshooting of stock prices are rare phenomena, you can still catch the winner in the beginning of its rise. And, most importantly you have another tool to identify bubbles to help you decide if you want to avoid them or take part in their rise.
A few more insights can be found in this article.
http://socialtimes.com/sentiment-analysis-socialmedia-marketing5_b60015
Many investment analytics are being built on social media opinion mining; those innocent feeds are no longer so innocent. On the bright side, as an investor, you can capitalize on those tweets to bet your way into fortune.
With the advent of the internet, it is now possible to measure the impact of online news and social media on stock prices. Hardly a novel concept, as market sentiment has been a core element of behavioral finance and investment theory. One of the two building blocks of behavioral finance is cognitive psychology, or how people think; this is where social media plays an important role. Behavioral finance success has been fueled by the inability of traditional investment theory to explain bubbles and market crashes. Who does not remember the housing bubble or the tech bubble and their subsequent crashes?
A recent study found that language usage is a powerful predictor of stock markets. The diversity, or lack of, of vocabulary used across the web, highly correlates with stock market performance. In simple words, when stock markets are rising, online conversations use similar words of “rise”, “fall”, “gain”, and share similar stories of optimism of the recent past. However, as sentiment goes negative a far more divergent vocabulary is used across online channels. Stories become more divergent as well; people recalling independent moral stories of bubble investing dating as far back as the tulip bubble of the 17th century. Perhaps, this phenomena can be explained by Tolstoy’s quote: “Maybe it’s a bit like happy families are all happy in the same way, but unhappy families are unhappy in many different ways.” The chart below shows such correlation.
Besides language usage, tone can be analyzed to identify sentiments such as fear and joy, uncertainty and urgency, which all directly influence stock market performance.
Although, to-date most investment social media analytics has focused on predicting the overall stock market performance – same can be applied to companies. A negative sentiment of companies voiced on tweets can not only affect the brand perception, it may lead to massive “sell” signaling, exacerbating the downward spiral of the valuation. Therefore, in the age of social media, perception management has become even more crucial than in the offline world.
However, as an investor tuning your ears to tweets, social posts and blogs can pay off by helping you pick winners & losers and avoid bubbles & crashes.
Of course to an skeptic, correlation and causation will remain a point of analysis. However, since overshooting of stock prices are rare phenomena, you can still catch the winner in the beginning of its rise. And, most importantly you have another tool to identify bubbles to help you decide if you want to avoid them or take part in their rise.
A few more insights can be found in this article.
http://socialtimes.com/sentiment-analysis-socialmedia-marketing5_b60015
Friday, July 1, 2011
Why will GroupOn succeed?
GroupOn’s ability to survive lies solely in its ingenious appeal to the psychology of the consumer and merchant – its valuation is outrageously irrational; its business model equally flawed from “rational” economic players perspective, yet I will confidently say it has high chances to succeed, as long as the psychological game persists and remains unchallenged. In a series of bogs, I debunked the valuation of GroupOn and the deal industry in general; however, why do I still believe they will succeed?
The underlying success of GroupOn is pinned in its appeal to the psychology of the consumer and merchant. GroupOn is the first deals based business model that went viral, even though its business model has been around for decades. Since the advent of ecommerce, retailmenot.com, coupons.com among others, preceded GroupOn inviting far larger user base, but far too small valuations. Then, what is the secret sauce of GroupOn?
The ingenious strategy of “prepaying” for deals & “framing” of savings is where GroupOn innovated. The prepaid nature of GroupOn creates commitment and anticipation which have viral elements.
Well, merchants also like the immediate cash flow infusion, giving them immediate gratification over other long-term marketing investments. In addition, it is a great tool to solve for overcapacity and slow moving inventory. But, is the cost justifiable to a small business? Rice university research states over 32% of merchants find GroupOn deal to be a financial disaster.
However, as long as demand for GroupOn remains strong, merchants will learn the price elasticity of the GroupOn psychology and pass on the cost to the consumer in terms of higher list prices or smarter framing of deals. After all, how do you determine the fair price of a hot air balloon ride? Your willingness to pay for the service is the GroupOn adjusted price - but, what makes you confident that the GroupOn adjusted price would not have been the true price had GroupOn never existed?
Although some myths dominate the GroupOn controversy about its lack of targeting …these are easily solvable. With time, GroupOn will possess enough consumer data to allow it to data mine and target offers to consumer preferences. As for GroupOn fatigue, well, that is no different than any form of direct marketing…
Despite all the controversy, GroupOn has the potential to succeed as its innovation appeals to the consumer psychology and merchants will continue to supply it, as long as consumers are willing to buy.
The underlying success of GroupOn is pinned in its appeal to the psychology of the consumer and merchant. GroupOn is the first deals based business model that went viral, even though its business model has been around for decades. Since the advent of ecommerce, retailmenot.com, coupons.com among others, preceded GroupOn inviting far larger user base, but far too small valuations. Then, what is the secret sauce of GroupOn?
The ingenious strategy of “prepaying” for deals & “framing” of savings is where GroupOn innovated. The prepaid nature of GroupOn creates commitment and anticipation which have viral elements.
- Commitment – Unlike a 10% coupon which you can let expire, when prepaying for a saving, you commit to make the transaction. While a 10% savings offer may be lost in your memory, prepaying keeps it fresh in the mind …you'd better remember that you have already paid for a service that you have not yet consumed… so it’s on top of your mind to buzz about it at parties, among friends…
- Anticipation - Most consumer research shows that the prolonged period between commitment and delivery of experience creates additional excitement. Moreover, anticipation keeps the excitement of the experience fresh, exacerbating its viral component. Remember that anticipated vacation you were telling your friends months in advance?
- Framing – Even when the deal is ordinary, GroupOn can make it sound exciting by framing it in a way that resonates with the customer better. How would you like to receive a $20 for $10 GroupOn for Old Navy instead of 20% off $50? Cialdini spends volumes talking about the psychological pitfalls framing leads us to, but when manipulated smartly by a marketing company, it can attract consumer’s wallet share.
- Addiction - Studies show the happiness factor associated with an experience decreases significantly at the time of payment…hence; we tend to enjoy prepaid vacations more. GroupOn allows you to partially prepay for your experience, thus mitigating the displeasure of payment associated with a service you bought…making you “enjoy” your GroupOn dining experience more than otherwise, and in turn, causing you to come back for more GroupOns.
However, as long as demand for GroupOn remains strong, merchants will learn the price elasticity of the GroupOn psychology and pass on the cost to the consumer in terms of higher list prices or smarter framing of deals. After all, how do you determine the fair price of a hot air balloon ride? Your willingness to pay for the service is the GroupOn adjusted price - but, what makes you confident that the GroupOn adjusted price would not have been the true price had GroupOn never existed?
Although some myths dominate the GroupOn controversy about its lack of targeting …these are easily solvable. With time, GroupOn will possess enough consumer data to allow it to data mine and target offers to consumer preferences. As for GroupOn fatigue, well, that is no different than any form of direct marketing…
Despite all the controversy, GroupOn has the potential to succeed as its innovation appeals to the consumer psychology and merchants will continue to supply it, as long as consumers are willing to buy.
Wednesday, June 22, 2011
GroupOn is like “dating in NYC”…therefore, every merchant’s nightmare!
Well, you can replace “NYC” with “LA” or any other major metropolitan city that offers too much of a good thing – a proliferation of single eligible men & women (which is a paradox in itself.) The simplistic theory that explains this paradox is the non-committal factor, since everyone is waiting for the “next best thing.” Why commit to a relationship when you are swimming in a sea of options? Too much of a good thing can be dangerous for commitments.
And this is the story of the avid GroupOn user. For GroupOn to succeed, it needs to generate excitement and loyalty to its business. However, GroupOn loyalty outrightly means non-commitment to a merchant, the merchant that GroupOn is designed to serve … and hence, the nightmare of the small business begins.
Loyalty is what most businesses thrive on. Loyalty makes a business sell not 1, but 100 widgets to one consumer, increasing profits. But, the case with GroupOn is a bit more complex. When GroupOn creates loyalty to its business model, it creates a vulture who thrives on deals…a vulture that is waiting for the next best deal…this vulture is not the ideal customer that the small business had in mind when signing up for GroupOn. The merchant’s viability and interest in GroupOn is to attract a new user base who will eventually become loyal customers of its establishment and not of GroupOn. But, that is in absolute contradiction with what will make GroupOn thrive & explode in success.
The conflict of interests is deepened by competition that has innovated in the deals space to further shape the future phsychology of this vulture to become even fiercer deal hunter. Such recent innovation is the “instant deals.” With instant deals, the consumer can plan its day around the deals available to him on that day.
Although, the instant deal can be a fantastic “just-in-time” inventory clearing mechanism, or extra capacity management for a merchant, when adopted by the majority it will become the merchant’s nightmare. Everyday, one of your competitors, featuring the deal, will be stealing your customer base, who now have become GroupOn loyalists.
Of course, this theory is only valid if GroupOn and the deals industry become really successful. So, let’s revisit the numbers from GroupOn. In my first blog of this series -“GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…” I visit GroupOn’s valuation. The $30 billion valuation for GroupOn tells us how optimistic investors are about the industry. For GroupOn to be worth that, it needs to become at least a $15 billion business, therefore, needs to sell at least 600 Million deals a year (based on average revenue of $23 per deal see S-1 filings). Either U.S. will more than double its population or GroupOn will have to create a lot of loyal customers who will buy quite a few deals per year. Now if we add Living Social, Facebook’s deals, we can picture the gigantic success investors expect.
Unfortunately, the small/local business who is the GroupOn user is so fragmented that they will not have the typical power to restrain GroupOn’s empire. The death of the small business will come slowly and ‘unexpectedly’ by the vulture that GroupOn will create. “Unexpectedly,” because a small local merchant will fail to see beyond the short-term effects, meanwhile the downfall will be building up and will be macroeconomic in nature.
GroupOn creates a conflict between its success and the success it promises to the small business. However, GroupOn has a potential to succeed, which is not based on “rational” theory, but the pshychology of the merchant and consumer. Read “Why will GroupOn succeed?” for more.
And this is the story of the avid GroupOn user. For GroupOn to succeed, it needs to generate excitement and loyalty to its business. However, GroupOn loyalty outrightly means non-commitment to a merchant, the merchant that GroupOn is designed to serve … and hence, the nightmare of the small business begins.
Loyalty is what most businesses thrive on. Loyalty makes a business sell not 1, but 100 widgets to one consumer, increasing profits. But, the case with GroupOn is a bit more complex. When GroupOn creates loyalty to its business model, it creates a vulture who thrives on deals…a vulture that is waiting for the next best deal…this vulture is not the ideal customer that the small business had in mind when signing up for GroupOn. The merchant’s viability and interest in GroupOn is to attract a new user base who will eventually become loyal customers of its establishment and not of GroupOn. But, that is in absolute contradiction with what will make GroupOn thrive & explode in success.
The conflict of interests is deepened by competition that has innovated in the deals space to further shape the future phsychology of this vulture to become even fiercer deal hunter. Such recent innovation is the “instant deals.” With instant deals, the consumer can plan its day around the deals available to him on that day.
Although, the instant deal can be a fantastic “just-in-time” inventory clearing mechanism, or extra capacity management for a merchant, when adopted by the majority it will become the merchant’s nightmare. Everyday, one of your competitors, featuring the deal, will be stealing your customer base, who now have become GroupOn loyalists.
Of course, this theory is only valid if GroupOn and the deals industry become really successful. So, let’s revisit the numbers from GroupOn. In my first blog of this series -“GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…” I visit GroupOn’s valuation. The $30 billion valuation for GroupOn tells us how optimistic investors are about the industry. For GroupOn to be worth that, it needs to become at least a $15 billion business, therefore, needs to sell at least 600 Million deals a year (based on average revenue of $23 per deal see S-1 filings). Either U.S. will more than double its population or GroupOn will have to create a lot of loyal customers who will buy quite a few deals per year. Now if we add Living Social, Facebook’s deals, we can picture the gigantic success investors expect.
Unfortunately, the small/local business who is the GroupOn user is so fragmented that they will not have the typical power to restrain GroupOn’s empire. The death of the small business will come slowly and ‘unexpectedly’ by the vulture that GroupOn will create. “Unexpectedly,” because a small local merchant will fail to see beyond the short-term effects, meanwhile the downfall will be building up and will be macroeconomic in nature.
GroupOn creates a conflict between its success and the success it promises to the small business. However, GroupOn has a potential to succeed, which is not based on “rational” theory, but the pshychology of the merchant and consumer. Read “Why will GroupOn succeed?” for more.
Sunday, June 19, 2011
The myth of the deals industry
To understand the basics of the deals industry, it is important to go back to how and why deals originated in the first place. If we begin from the “rational” player’s point of view, then prices will be set at the equilibrium point where demand equals supply. However, that requires businesses to have perfect information about consumer demand and price elasticity. In reality, such perfect information is non-existent, leading to mispricing of goods.
As economies got more competitive, the problem of mispricing extended to overflooding of businesses. Typically, there is an optimal supply of any good or service that will yield the highest societal utility from pricing and profit maximization perspective.
A third pervasive problem that deals came to solve was the miscalculation of demand and hence, inventory mismanagement. In a perfect world, where information can solve the problem of misprcing, inventory management, and the number of ideal competitors, then there will be no reason for deals. The deals industry will simply vanish.
The wide success of the likes of GroupOn is indicative of a deep rooted problem of over-supply, and inability of businesses to get perfect information. As such, the deals industry is only a primitive attempt to solve the imperfections of the capitalist economy. The advances of information technology, optimization tools, data analytics and innovative crowdsourcing business models are more advanced techniques designed to solve the same problem of imperfect information, and therefore, are a serious threat to the viability of the deals industry.
The simple question to ask is “would Macy’s prefer to split its revenue with the likes of GroupOn or, would it prefer to have a crystal ball, that can help predict with great accuracy how much to produce and how to price to clear all inventory?”
Clearly, that crystal ball has more futuristic movie appeal than immediate implementation, but that time horizon is not far away. Today, predictive polls, using the wisdom of crowds are being experimented. Data analytics has taken a wing of its own. The predictive models still lag behind, but the momentum is driving us in that direction.
So, the question remains…if you had to bet your money in the future, which would you pick, deals or information technology /optimization tools/ crowdsourcing for predictions? It may be a good exercise to revisit the “Wisdom of Crowds” before calling your bet.
But, this is not a solution residing in the faraway future. It is a problem requiring deep soul searching today. Valuations are predictions of the future. GroupOn’s $30 billion valuation is a bet on that future.
THIS IS the cautionary tale of the deals industry.
However, I had opened my earlier blog “GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…” stating that
GroupOn’s ability to survive solely lies in its ingenious appeal to the psychology of the consumer and merchant …I will confidently say it has high chances to succeed…
Before I reveal the secrets for GroupOn’s success, read another cautionary tale “GroupOn is like “dating in NYC”…therefore, every merchant’s nighmare!” explaining the conflict between the loyal GroupOn customer and the merchants GroupOn serves.
As economies got more competitive, the problem of mispricing extended to overflooding of businesses. Typically, there is an optimal supply of any good or service that will yield the highest societal utility from pricing and profit maximization perspective.
A third pervasive problem that deals came to solve was the miscalculation of demand and hence, inventory mismanagement. In a perfect world, where information can solve the problem of misprcing, inventory management, and the number of ideal competitors, then there will be no reason for deals. The deals industry will simply vanish.
The wide success of the likes of GroupOn is indicative of a deep rooted problem of over-supply, and inability of businesses to get perfect information. As such, the deals industry is only a primitive attempt to solve the imperfections of the capitalist economy. The advances of information technology, optimization tools, data analytics and innovative crowdsourcing business models are more advanced techniques designed to solve the same problem of imperfect information, and therefore, are a serious threat to the viability of the deals industry.
The simple question to ask is “would Macy’s prefer to split its revenue with the likes of GroupOn or, would it prefer to have a crystal ball, that can help predict with great accuracy how much to produce and how to price to clear all inventory?”
Clearly, that crystal ball has more futuristic movie appeal than immediate implementation, but that time horizon is not far away. Today, predictive polls, using the wisdom of crowds are being experimented. Data analytics has taken a wing of its own. The predictive models still lag behind, but the momentum is driving us in that direction.
So, the question remains…if you had to bet your money in the future, which would you pick, deals or information technology /optimization tools/ crowdsourcing for predictions? It may be a good exercise to revisit the “Wisdom of Crowds” before calling your bet.
But, this is not a solution residing in the faraway future. It is a problem requiring deep soul searching today. Valuations are predictions of the future. GroupOn’s $30 billion valuation is a bet on that future.
THIS IS the cautionary tale of the deals industry.
However, I had opened my earlier blog “GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…” stating that
GroupOn’s ability to survive solely lies in its ingenious appeal to the psychology of the consumer and merchant …I will confidently say it has high chances to succeed…
Before I reveal the secrets for GroupOn’s success, read another cautionary tale “GroupOn is like “dating in NYC”…therefore, every merchant’s nighmare!” explaining the conflict between the loyal GroupOn customer and the merchants GroupOn serves.
Thursday, June 16, 2011
GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…
GroupOn’s ability to survive lies solely in its ingenious appeal to the psychology of the consumer and merchant – its valuation is outrageously irrational; its business model equally flawed from “rational” economic players perspective, yet I will confidently say it has high chances to succeed, as long as the psychological game persists and remains unchallenged. In a series of blogs, I will debunk the valuation of GroupOn and the deal industry, in general.
Since its IPO announcement, a lot of investor mania has surrounded GroupOn. But, is its value of $30 billion justifiable?
The true value of an asset, theoretically, equals how much cash it can generate in the future. Using this simplistic theory, GroupOn’s $30billion valuation assumes that the company soon will grow to at least $15B in revenue (estimate arrived using 10% discount rate, 20% margin and other projections by GroupOn). Given its revenue growth and consumer’s willingness to pay, such projection seems aggressive, but well within the realm of reasonableness. However, the challenge lies on the supply side. $15 billion of GroupOn revenue equates to $45 billion a year that small/local businesses will have to part with and hand it to GroupOn as marketing expense. (GroupOn keeps 1/3rd of the deal)
As all valuation models are based on the assumption that decisions are purely “rational”, a merchant shall accept a deal with GroupOn only if it can generate positive ROI. From the macroeconomic scale, the GroupOn model simply crumbles.
The fundamental question to ask is if GroupOn actually contributes to value creation or redistribution of funds? Are you, as a consumer, spending more of your income or simply allocating your disposable income differently because of GroupOn? The simple answer is the latter. GroupOn has no capacity to create economic value, but it merely redistributes revenue from non-GroupOn merchants to GroupOn merchants. The question that bags itself is: If all merchants participate in a GroupOn offering, then where will the redistribution come from?
Based on data provided by the SBA and Economic Census Bureau, it is estimated that small businesses, at best, in the consumer sector, generate about $1-$2 trillion in annual sales. Assuming 10% profit margin, all consumer small business profits are around $100-$200 billion. For GroupOn to generate the revenue it forecasts, at least, ALL small businesses shall sign a deal with GroupOn and decide to give away $45 billion out of $100 billion profits they make. Wow, that’s a whopping 45%.
If not all merchants participate, the story is even more bleak. The $45 billion will have to come from smaller number of merchants.
Aha, two fallacies in the valuation are exposed. Is it reasonable to assume that ALL small businesses will sign up? And second, will a rational business owner simply give away a quarter, or half, of its net cash receipts to GroupOn, when there is no promise of true revenue growth or positive ROI? Let’s remember that GroupOn’s valuation of $30billion requires that almost all small businesses sign up for a deal with the Company…therefore, no net redistribution of revenue will be possible. Month 1, one merchant will pocket more revenue as a result of its GroupOn deal; however, in months 2-12 it will forgo its revenues to fund the redistribution of industry receipts to its rivals featuring a GroupOn deal.
And of course, let us not forget the copy cats proliferating the market. One might ask if international expansion is their basis for growth…that sounds too optimistic - China alone has already launched over a 100 GroupOn competitors. It’s an industry with zero barriers to entry, and therefore, competition is rampant.
If GroupOn’s valuation appears so optimistic, the entire industry taken together appears highly speculative. I would highly caution any venture capitalist, and investor pouring funds into the industry.
But, where did this all start? The deals industry… The power or bargaining power… The concept of offering a deal to seduce customers… Read “The myth of the deals industry” for more.
Since its IPO announcement, a lot of investor mania has surrounded GroupOn. But, is its value of $30 billion justifiable?
The true value of an asset, theoretically, equals how much cash it can generate in the future. Using this simplistic theory, GroupOn’s $30billion valuation assumes that the company soon will grow to at least $15B in revenue (estimate arrived using 10% discount rate, 20% margin and other projections by GroupOn). Given its revenue growth and consumer’s willingness to pay, such projection seems aggressive, but well within the realm of reasonableness. However, the challenge lies on the supply side. $15 billion of GroupOn revenue equates to $45 billion a year that small/local businesses will have to part with and hand it to GroupOn as marketing expense. (GroupOn keeps 1/3rd of the deal)
As all valuation models are based on the assumption that decisions are purely “rational”, a merchant shall accept a deal with GroupOn only if it can generate positive ROI. From the macroeconomic scale, the GroupOn model simply crumbles.
The fundamental question to ask is if GroupOn actually contributes to value creation or redistribution of funds? Are you, as a consumer, spending more of your income or simply allocating your disposable income differently because of GroupOn? The simple answer is the latter. GroupOn has no capacity to create economic value, but it merely redistributes revenue from non-GroupOn merchants to GroupOn merchants. The question that bags itself is: If all merchants participate in a GroupOn offering, then where will the redistribution come from?
Based on data provided by the SBA and Economic Census Bureau, it is estimated that small businesses, at best, in the consumer sector, generate about $1-$2 trillion in annual sales. Assuming 10% profit margin, all consumer small business profits are around $100-$200 billion. For GroupOn to generate the revenue it forecasts, at least, ALL small businesses shall sign a deal with GroupOn and decide to give away $45 billion out of $100 billion profits they make. Wow, that’s a whopping 45%.
If not all merchants participate, the story is even more bleak. The $45 billion will have to come from smaller number of merchants.
Aha, two fallacies in the valuation are exposed. Is it reasonable to assume that ALL small businesses will sign up? And second, will a rational business owner simply give away a quarter, or half, of its net cash receipts to GroupOn, when there is no promise of true revenue growth or positive ROI? Let’s remember that GroupOn’s valuation of $30billion requires that almost all small businesses sign up for a deal with the Company…therefore, no net redistribution of revenue will be possible. Month 1, one merchant will pocket more revenue as a result of its GroupOn deal; however, in months 2-12 it will forgo its revenues to fund the redistribution of industry receipts to its rivals featuring a GroupOn deal.
And of course, let us not forget the copy cats proliferating the market. One might ask if international expansion is their basis for growth…that sounds too optimistic - China alone has already launched over a 100 GroupOn competitors. It’s an industry with zero barriers to entry, and therefore, competition is rampant.
If GroupOn’s valuation appears so optimistic, the entire industry taken together appears highly speculative. I would highly caution any venture capitalist, and investor pouring funds into the industry.
But, where did this all start? The deals industry… The power or bargaining power… The concept of offering a deal to seduce customers… Read “The myth of the deals industry” for more.
Wednesday, March 30, 2011
Minimizing taxes with offshore transactions? Watch out for your IP!
It is reported that Google pays only 2.4% taxes on its offshore profits – made possible through a web of transfer pricing transactions. Transfer pricing allows a corporation to transfer profits to lower tax countries by cleverly choosing where to house its intellectual property “IP”.
It’s that simple to save millions in taxes! If your revenues are in the US, by transferring your IP to a subsidiary in a country with low tax rates, you will pay royalty to the offshore subsidiary, thus effectively transferring out profits and minimizing taxes. Google, has its IP in Mountain View, CA and therefore, has the incentive to pay as little in royalties to the US parent.
Although tax law requires royalty rates to be set as in an arm’s length transaction, it is extremely difficult to challenge the rates that companies set, since no market exists to determine fair market value of highly company specific IP assets, such as algorithms and customer lists. If the IP is housed in a high tax country, such as in the case of Google, companies intentionally understate the royalty rate. On the other hand, if paying royalty to a subsidiary in a low tax country, the incentive is to overstate the royalty rate.
It works perfect, when tax minimization is your main concern. However, it is important to understand the implication on your IP rights when those rights are contested. Here’s why.
Assume you understate the intercompany royalty rate to minimize taxes; in the event your IP is infringed upon and you sue for damages, the intercompany royalty rate will be used to determine the damages you are owed. In effect, reducing your tax liability significantly reduces recovery of damages, and hence your valuation.
Another issue relates to your ability to sue an infringer. Only patent owners and exclusive licensees have the standing to sue infringing parties, but non-exclusive licensees do not. Transfer Pricing structures almost always rely on non-exclusive licenses. Exclusivity will prevent other subsidiaries of your company from using the IP, and therefore is never used.
Furthermore, where non-exclusive licensees lack standing, the patent owner's recovery may be limited to reasonable royalties — even though the entity seeking injunctive relief or lost profits damages is part of the same wholly owned corporate family as the patent owner.
Therefore, it is crucial to assess the impact of intercompany transfer pricing agreements on a company’s ability to defend its intellectual property. Unfortunately, transfer pricing is done by tax professionals with the sole purpose of minimizing taxation.
Transfer pricing policies that create non-exclusive relationships can compromise IP protection. Thoughtful coordination among tax professionals, business leaders and law departments can prevent these problems, but care must be taken up front - once an issue is revealed in litigation, it is usually too late.
It’s that simple to save millions in taxes! If your revenues are in the US, by transferring your IP to a subsidiary in a country with low tax rates, you will pay royalty to the offshore subsidiary, thus effectively transferring out profits and minimizing taxes. Google, has its IP in Mountain View, CA and therefore, has the incentive to pay as little in royalties to the US parent.
Although tax law requires royalty rates to be set as in an arm’s length transaction, it is extremely difficult to challenge the rates that companies set, since no market exists to determine fair market value of highly company specific IP assets, such as algorithms and customer lists. If the IP is housed in a high tax country, such as in the case of Google, companies intentionally understate the royalty rate. On the other hand, if paying royalty to a subsidiary in a low tax country, the incentive is to overstate the royalty rate.
It works perfect, when tax minimization is your main concern. However, it is important to understand the implication on your IP rights when those rights are contested. Here’s why.
Assume you understate the intercompany royalty rate to minimize taxes; in the event your IP is infringed upon and you sue for damages, the intercompany royalty rate will be used to determine the damages you are owed. In effect, reducing your tax liability significantly reduces recovery of damages, and hence your valuation.
Another issue relates to your ability to sue an infringer. Only patent owners and exclusive licensees have the standing to sue infringing parties, but non-exclusive licensees do not. Transfer Pricing structures almost always rely on non-exclusive licenses. Exclusivity will prevent other subsidiaries of your company from using the IP, and therefore is never used.
Furthermore, where non-exclusive licensees lack standing, the patent owner's recovery may be limited to reasonable royalties — even though the entity seeking injunctive relief or lost profits damages is part of the same wholly owned corporate family as the patent owner.
Therefore, it is crucial to assess the impact of intercompany transfer pricing agreements on a company’s ability to defend its intellectual property. Unfortunately, transfer pricing is done by tax professionals with the sole purpose of minimizing taxation.
Transfer pricing policies that create non-exclusive relationships can compromise IP protection. Thoughtful coordination among tax professionals, business leaders and law departments can prevent these problems, but care must be taken up front - once an issue is revealed in litigation, it is usually too late.
Sunday, March 27, 2011
How much your data safety is worth?
A few months ago LinkedIn users were slammed with “update your account” messages. If they responded, their computer got infected with data swiping malware, stealing credit card information from their hard drives.
Not so bad if only your personal data was stolen. What if you have stored client data and it got breached?
Unfortunately, credit card fraud protection only applies to an individual being a fraud victim. However, as a business owner, you are responsible for all losses your customers suffer, if you are held to have breached reasonable standards of protection. And, most small businesses fail to meet the standards that courts hold them responsible for.
With the proliferation of computer malware, small businesses have much to worry.
If you are playing the “odds” game, there is room for much concern. Gone are the days when fraudsters invested much time and brain power to create specialized software to commit their deeds. Nowadays, a burgeoning market for malware allows fraudsters to buy turn-and-click software that are operational within minutes, allowing them steal credit card information, keylog sensitive passwords and spoof wire transfers. And, all this for a few thousand dollars in investment only!
Bugat, the malware behind LinkedIn attack, costs only $500. SpyEye and Zeus Builder are a few other examples that cost only a few thousand and provide the fraudster with a huge upside.
As malware is constantly updated, even the most sophisticated security software may not safeguard you against novel malware. Therefore, the best protection is to have a dedicated computer for financial transactions with limited internet and no email access.
However, in the unfortunate event that a breach occurs, detailed documentation of your safety processes are your only savior out of liability in the courtroom. Invest the time to ensure your safety procedures will meet the “reasonableness” standard set by the law. This investment will save your business from coughing up millions of dollars to make your victims whole.
For additional information safety tips, you can consult the Federal Trade Commission website.
Not so bad if only your personal data was stolen. What if you have stored client data and it got breached?
Unfortunately, credit card fraud protection only applies to an individual being a fraud victim. However, as a business owner, you are responsible for all losses your customers suffer, if you are held to have breached reasonable standards of protection. And, most small businesses fail to meet the standards that courts hold them responsible for.
With the proliferation of computer malware, small businesses have much to worry.
If you are playing the “odds” game, there is room for much concern. Gone are the days when fraudsters invested much time and brain power to create specialized software to commit their deeds. Nowadays, a burgeoning market for malware allows fraudsters to buy turn-and-click software that are operational within minutes, allowing them steal credit card information, keylog sensitive passwords and spoof wire transfers. And, all this for a few thousand dollars in investment only!
Bugat, the malware behind LinkedIn attack, costs only $500. SpyEye and Zeus Builder are a few other examples that cost only a few thousand and provide the fraudster with a huge upside.
As malware is constantly updated, even the most sophisticated security software may not safeguard you against novel malware. Therefore, the best protection is to have a dedicated computer for financial transactions with limited internet and no email access.
However, in the unfortunate event that a breach occurs, detailed documentation of your safety processes are your only savior out of liability in the courtroom. Invest the time to ensure your safety procedures will meet the “reasonableness” standard set by the law. This investment will save your business from coughing up millions of dollars to make your victims whole.
For additional information safety tips, you can consult the Federal Trade Commission website.
Monday, February 21, 2011
Is customer loyalty really worth the hype?
As a company progresses through the various stages of growth, marketing strategy often evolves from customer acquisition to retaining the customer base. At that critical transition, many companies fall prey to following strategy with bad economics. The challenge becomes how to decide how much your customer loyalty is worth to you.
Bad economics arises from a few common pitfalls that can be avoided:
Misjudging the value of loyalty can bleed your company to extinction – The purpose of developing loyalty program is to increase your company valuation. That is, every dollar spent on loyalty should result in more than a dollar in revenue creation for the company. If not, your company is heading towards extinction. The cost benefit analysis should be performed holistically, including all fixed costs of resources used. Measuring the impact on revenue is one of the most complex valuation exercises, since it is difficult to isolate the impact of the loyalty program. This exercise should be performed on a granular level, analyzing changes in customer survival rates, average ticket size of purchases, and purchase frequencies.
Loyalty programs targeting your entire customer base breeds disaster –It is important to understand your customer base and how they contribute to your company earnings. Chart out in a histogram to determine the distribution of “dollars earned per customer” - the distribution will tell you if your company has a natural segment worthy of loyalty marketing. If you determine your customers follow an 80/20 (i.e. 20% of your customers make you 80% of your earnings), 90/10, or 70/30 distribution then you have a natural segment worthy to target. By focusing on that 10-30% of your customer base, you significantly reduce marketing costs and focus on the most profitable segment to retain. If not natural segment is found, perhaps loyalty marketing is not suitable for your industry.
Following competitor’s strategy will increase your costs – Companies going through the exploding phase of growth often forget that their success was due to the unique product/idea they created. During this critical phase, companies fall prey to copying competitor’s strategies. This is bad, because it commoditizes the strategy. Once a commodity, you need to keep on fighting on the ‘price’ of the loyalty program to keep your customer’s happy. We don’t need to look any further than the credit card industry with its cash-back rewards. To maintain competitive rewards, card companies continue to increase the cash-back bonus, which in turn erodes their bottom line and profitability. One wonders if they are following ‘survival of the fittest’ strategy or their rewards offering is based on careful study of loyalty economics. Think outside the box, evaluate your core competencies and create a loyalty program that adds to your unique value proposition, further differentiating your company from the masses. And, most importantly know the minds and hearts of your consumers to excite them with what they perceive as ‘value’ when creating your loyalty program.
One size fits all loyalty will create bad economics. Know which segment of your customers to target and carefully monitor how your loyalty program contributes to your business value. The innovative spirit that made your company succeed should be brought to your loyalty strategy to help you create unique value proposition to your consumer.
Bad economics arises from a few common pitfalls that can be avoided:
Misjudging the value of loyalty can bleed your company to extinction – The purpose of developing loyalty program is to increase your company valuation. That is, every dollar spent on loyalty should result in more than a dollar in revenue creation for the company. If not, your company is heading towards extinction. The cost benefit analysis should be performed holistically, including all fixed costs of resources used. Measuring the impact on revenue is one of the most complex valuation exercises, since it is difficult to isolate the impact of the loyalty program. This exercise should be performed on a granular level, analyzing changes in customer survival rates, average ticket size of purchases, and purchase frequencies.
Loyalty programs targeting your entire customer base breeds disaster –It is important to understand your customer base and how they contribute to your company earnings. Chart out in a histogram to determine the distribution of “dollars earned per customer” - the distribution will tell you if your company has a natural segment worthy of loyalty marketing. If you determine your customers follow an 80/20 (i.e. 20% of your customers make you 80% of your earnings), 90/10, or 70/30 distribution then you have a natural segment worthy to target. By focusing on that 10-30% of your customer base, you significantly reduce marketing costs and focus on the most profitable segment to retain. If not natural segment is found, perhaps loyalty marketing is not suitable for your industry.
Following competitor’s strategy will increase your costs – Companies going through the exploding phase of growth often forget that their success was due to the unique product/idea they created. During this critical phase, companies fall prey to copying competitor’s strategies. This is bad, because it commoditizes the strategy. Once a commodity, you need to keep on fighting on the ‘price’ of the loyalty program to keep your customer’s happy. We don’t need to look any further than the credit card industry with its cash-back rewards. To maintain competitive rewards, card companies continue to increase the cash-back bonus, which in turn erodes their bottom line and profitability. One wonders if they are following ‘survival of the fittest’ strategy or their rewards offering is based on careful study of loyalty economics. Think outside the box, evaluate your core competencies and create a loyalty program that adds to your unique value proposition, further differentiating your company from the masses. And, most importantly know the minds and hearts of your consumers to excite them with what they perceive as ‘value’ when creating your loyalty program.
One size fits all loyalty will create bad economics. Know which segment of your customers to target and carefully monitor how your loyalty program contributes to your business value. The innovative spirit that made your company succeed should be brought to your loyalty strategy to help you create unique value proposition to your consumer.
Monday, January 17, 2011
You caught an employee stealing from you…Now what?
Employee fraud is estimated to cost U.S. businesses $1 trillion a year, equating to 7% of company revenues. Small businesses are particularly vulnerable to employee fraud because they employ limited controls over accounting & treasury functions. The median loss suffered by organizations with fewer than 100 employees is $200,000.
Creating a zero tolerance environment, performing regular bank reconciliations, running surprise function audits can help mitigate the risk of employee fraud, but what to do in the event you uncover one of your employees has been stealing from you. Here are a few things to consider:
1) Terminate the employee to set an example of zero tolerance. It is estimated that 80% of employees who steal, do so because they feel they can get away. Expelling an employee, even for a small infraction, can set the tone that there will be repercussions thus curtailing employee appetite for fraud.
2) Estimate the amount of the loss. This is crucial step to determine whether it’s worth filing charges and pursuing recovery. When large dollars are at stake, it is best to consult with an attorney to file criminal, and or civil charges. Fraud is a criminal offense punishable by incarceration.
3) How about filing a civil lawsuit to recover the funds? In most cases, the fraudster would have already exhausted the embezzled funds, and will have negative equity. You may force liquidation of his personal assets by filing expensive lawsuits, which you may or may not win. Proving fraud in the court room requires confession by the fraudster, or non-assailable evidence.
Even a victorious lawsuit does not guarantee recovery. At the end of the day, if the fraudster has little equity, then your net recovery may be negative due to the legal & accounting fees you incur, in addition to the time and energy diverted to the lawsuit.
4) However, there’s a sweet and legal way to render some justice. Send the fraudster a 1099 Form for the amount of the embezzled funds and for an extra kick, label the source as “FRAUD EARNINGS.” After all, these are funds earned by the employee, although illegally and criminally, and the fraudster is liable to pay taxes on them.
The beauty of the 1099 is that it will put the criminal in the hands of the IRS. Let’s not forget that Al Capone was convicted for tax evasion and not for his criminal acts.
The best way to fight employee fraud begins with good controls. In the event you become the victim, consider the likelihood of funds recovery before expending more funds in fighting a lawsuit. The best way for revenge is to simply send the criminal a 1099 and put him in the hands of the IRS.
Creating a zero tolerance environment, performing regular bank reconciliations, running surprise function audits can help mitigate the risk of employee fraud, but what to do in the event you uncover one of your employees has been stealing from you. Here are a few things to consider:
1) Terminate the employee to set an example of zero tolerance. It is estimated that 80% of employees who steal, do so because they feel they can get away. Expelling an employee, even for a small infraction, can set the tone that there will be repercussions thus curtailing employee appetite for fraud.
2) Estimate the amount of the loss. This is crucial step to determine whether it’s worth filing charges and pursuing recovery. When large dollars are at stake, it is best to consult with an attorney to file criminal, and or civil charges. Fraud is a criminal offense punishable by incarceration.
3) How about filing a civil lawsuit to recover the funds? In most cases, the fraudster would have already exhausted the embezzled funds, and will have negative equity. You may force liquidation of his personal assets by filing expensive lawsuits, which you may or may not win. Proving fraud in the court room requires confession by the fraudster, or non-assailable evidence.
Even a victorious lawsuit does not guarantee recovery. At the end of the day, if the fraudster has little equity, then your net recovery may be negative due to the legal & accounting fees you incur, in addition to the time and energy diverted to the lawsuit.
4) However, there’s a sweet and legal way to render some justice. Send the fraudster a 1099 Form for the amount of the embezzled funds and for an extra kick, label the source as “FRAUD EARNINGS.” After all, these are funds earned by the employee, although illegally and criminally, and the fraudster is liable to pay taxes on them.
The beauty of the 1099 is that it will put the criminal in the hands of the IRS. Let’s not forget that Al Capone was convicted for tax evasion and not for his criminal acts.
The best way to fight employee fraud begins with good controls. In the event you become the victim, consider the likelihood of funds recovery before expending more funds in fighting a lawsuit. The best way for revenge is to simply send the criminal a 1099 and put him in the hands of the IRS.
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