Episode #85 - Free-rider Friday - March 2016

Ron’s Topics

Netflix Reinvented HR

Article from HBR Jan-Feb 2014, “How Netflix Reinvented HR.”

Reed Hastings, CEO, 5 tenets to approaching talent:

Hire, Reward, and Tolerate Only Fully Formed Adults—don’t hire the problem 3% in the first place

Tell the Truth about performance—Building a bureaucracy and elaborate rituals around measuring performance usually doesn’t improve it. 360 feedback went from anonymous to signed, then to face-to-face

Managers own the job of creating great teams—no performance bonuses. Market-based pay. Let employee select % of equity, no vesting (no golden handcuffs)

Leaders own the job of creating the company culture

Good talent managers think like businesspeople and innovators first, and like HR people last: I’ve never seen an HR initiative that improves morale!

“There’s no reason the HR team can’t be innovative too.” Ron’s question: is this asking for a barking cat?

And from the Feb 20, 2016 The Economist, Schumpeter columnist in “The measure of a man,” argues that the death of performance appraisals is greatly exaggerated.

Kevin Murphy at Colorado State Univ: “Performance reviews are “an expensive and complex way of making people unhappy.”

IBM, Accenture, Adobe, Deloitte, GE, Microsoft and Netflix have all scrapped annual performance appraisals.

Uber for Trucking

From The Economist, March 5, 2016, “The appy trucker.”

The top 5 airlines in the USA account for 90% of the industry’s revenues. In contrast, the top 5 logistic firms account for 20%. Trucking is much more fragmented (much lower barriers to entry).

Trucking is a $700B per year industry in the USA, projected to grow at 3% per year for the next decade. Yet trucks drive empty 50B miles per year, 28% of the total (25% in Europe). This is incredibly inefficient.

Brokers charge 45% to arrange a haul, but the process is really inefficient. Startup Apps like Cargomatic, in Los Angeles, lists jobs, pings nearby drivers, and arranges payment. So does Transfix out of New York, which charges a 10% commission.

Amazon is working “On My Way,” whereby anyone can get paid for delivering packages.

Economist Russ Robersts, on his EconTalk podcast, recently interviewed Marina Krakovsky, author of The Middleman Economy, where she lays 6 value-added roles that middleman play:

• Concierge

• Insulator

• Enforcer

• Risk-bearer

• The Bridge

• The Certifier

Marina claims that the middleman, far from being disintermediated by the internet, have grown, and that we are all, in a sense, a middleman. Examples of web-based middlemen:

• OpenTable

• Powersellers on eBay are 4% of sellers and 50% of sales

• Craig’s List sellers

• CarLotz, flat fee, takes car on consignment, connects buyers and sellers

The End of Moore’s Law?

From The Economist, March 12, 2016, Technology Quarterly, “After Moore’s Law.”

Moore’s Law has had a glorious 50 Years: “Computer power doubles every two years at the same cost.”

Peter Lee, VP, Microsoft Research: “The number of people predicting the death of Moore’s law doubles every two years.”

In 1971, the Intel 4004 had 2,300 tiny transistors, each the size of a red blood cell, which could be counted by a kid with a decent microscope.

Today’s Intel’s Skylake has 1.75B transistors (size: 100 atoms across), at 400,000 times the power. If cars and skyscrapers improved at same rate, cars would be capable of traveling at 1/10th the speed of light, and the tallest building would reach ½ way to Moon.

Three ways computers will continue to become more powerful, but in different and varied ways:

• More clever software (AlphaGo, Watson, Deep learning, AI, etc.)

• The cloud—30% growth last yr, projected to remain until 2018

• Specialized chips for particular jobs

The industry is at an “inflection point”: It needs a replacement for silicon, such as:

• Silicon-germanium alloy

• Graphene

• Electronic blood: provide energy and regulate the temperature

HP, Google, IBM, Microsoft are all entering chip-design business. There will be new tradeoffs on the three key metrics of power, performance, and cost.

Remember: computer firms are not, fundamentally, in it to make ever-smaller transistors. They’re in it to produce useful products, and to make money.” Amd consumers don’t care about Moore’s Law.

Google’s AlphaGo Beats World’s Best Go Player

From The Economist, March 12, 2016, “Showdown.”

Google’s AlphaGo AI beats Lee Sedol 4-1 in Go Series, from The Verge.
(Ed)itors note: Go and Othello are NOT the same game. 

Ed’s Topics

Lobby for Driverless Cars

From The Huffington Post, Google testifies before Congress to allow driverless cars.

Can Ethereum Restore Online Freedom?

From ReasonTV:

Uber Saves Lives

Ed’s friend had a heart situation, and rather than calling for an ambulance, he called Uber. Hospital said it probably saved his life.

Episode #84 - Interview with Paul Kennedy: The OBK Story

Paul Kennedy’s Biography

Paul Kennedy and Paul O’Byrne experienced just about every practice management course put on in the UK and are graduates of the Accountants Boot Camp, and many Ron Baker seminars. They implemented many in their firm, O’Byrne and Kennedy, Chartered Accountants.

They are candid about the traumas faced in abandoning timesheets and introducing fixed price agreements for all clients – and why they are so glad they did!

Since meeting Ron Baker in March 2000, Paul and Paul have challenged and argued with Ron’s views until they found it easier to go along with (most of) it. Since then they have preached – and practiced what they preached – the lessons in The Professional’s Guide to Value Pricing and The Firm of the Future. They come with first-hand experience and examples of how the message can be explained in a practice setting and the effects it has within the firm, to clients and prospects, and to fellow professionals. They have a core competency in sacking clients, having disposed of 80% of their clients between 1997 and 1999. Their story of this and trashing timesheets are included in three of Ron’s books, two for the ACCA and Implementing Value Pricing, and in the www.verasage.com website in the Trailblazers case studies.

Their firm now has less than one-third of its growing income from compliance work, and negative lock-up (work in progress and debtors).

Taking the lesson of intellectual capital, in 2003 they created the “GOBS MBA” course. This is a year-long, ten three-hour session course of modules that O’Byrne and Kennedy clients (owner-managers of businesses) should have been taught if only they’d been taught it.

A proud father of two and still a keen soccer player, Paul is married to a fitness instructor and won’t have that slice of cake, thank you. He has enjoyed traveling to New York and New Zealand as well as old Australia speaking on VeraSage matters and has initiated course on accountant to consultant as well as designing the VeraTrak software for a professional firm to operate in a timesheet-free zone.

The OBK Story

Paul explains his history of meeting Paul O’Byrne, and how they worked in the same firm, before going out on their own on October 1, 1987. Sadly, Paul O'Byrne passed away in November 2008.

He then explains the firm’s pivot to Business Advisory services and away from compliance services. Mostly this happened because Paul O’Byrne was “bored” with traditional accounting services.

In 1997, they attended the Results Accountants’ Boot Camp, conducted by Paul Dunn and Ric Payne. They realized they had too many customers—around 500. They first fired their largest (audit) customer.

They ended up firing over 450 customers over 2-3 years, freeing up capacity to move into more business advisory services. They developed a “core competency in firing customers. They did it professionally, keeping their reputation in the community intact.

Firing a customer is similar to breaking up: “It’s not you, it’s me, I’ve changed.” They also found them a replacement firm to make the landing softer. They also ended up selling some customers to another firm.

They also lost some team members due to this pivot. Today, the firm has 8 team members.

They developed many consulting protocols and products, and developed a rigorous customer selection criteria. Paul O’Byrne was no longer bored!

Then they met Ron, in March 2000. They thought he was crazy at first, especially Paul O’Byrne who continuously debated with Ron for three years about the concept of eliminating timesheets.

The firm did immediately implement Value Pricing, OBK says the firm became the “Ron Baker laboratory.” The firm didn’t eliminate timesheets until July 1, 2003, that’s how long it took Ron to convince them.

In fact, Paul Kennedy wrote what Ron considers is one of the most powerful arguments for eliminating timesheets, in his essay on timesheets. You can read the entire essay here. 

Paul discusses the effect no timesheets has had on his team, and how the firm works. You become obsessed with value. Also, their website says OBK is a “teaching and learning organization.” Ed observes that most firms would not put this on their website, as it makes them vulnerable. Paul answers, “But it’s true, isn’t it, Ed? Why would we be afraid of the truth?”

What makes OBK one of the most innovative accounting firms on the planet?

The OBK MBA. The firm’s internal University offers an MBA to customers and potential customers. This is an intense program, teaching strategy, finance, positioning, pricing, and other facets of executive education, including each student preparing and presenting a case study. Check out the video on the MBA at their website.

VivaTrak. This is the firm’s internal project management program, which they developed internally. It translates the fixed price agreement into milestones, tracking deadlines to the customer, and value earned based on those milestones.

After Action Reviews. The firm diligently does AARs on all work, and Paul says AARs are one of the most transformative processes they have ever implemented. They have also introduced AARs to customers. AARs drive out fear, and develops a culture where people aren’t afraid to admit errors.

Paul points out that AARs can’t just be negative. You have to focus on what went well so you can replicate it.

Renewing Your Vows. “We don’t own these people.” OBK puts every single customer at risk at the end of each contract period. They have a conversation where the first item on the agenda is if they should continue the relationship. Sometimes, the firm wants out; other times, customers want out.

OBK doesn’t want people to stay from apathy. They only want to work with people who they can add tremendous value to. The firm’s success is a direct by-product of how it creates value for other people. Here are some of the questions they ask:

•             How are we doing?

•             How is this working for you?

•             Are you getting value from our work?

•             What can we do to create more value?

•             Do you still think we are the right firm for you?

Paul wants his entire team to think they are on the last chance with every customer. This enables them to perform at the highest level, to exceed customer expectations and constantly deliver more value (it’s like a value guarantee on steroids).

This scares most firms to death!

Last Questions for Paul

What’s the number one issue facing the profession?

Lack of focus. We try to be all things to all people, and we need to narrow our focus. We can’t be all things to all people. Paul quotes Zig Ziglar: “You need to move from being a wondering generality to becoming a meaningful specific.” Figure out what you’re good at and stick with it.

What’s your advice to any firm out there that’s thinking about making some of the transitions you have?

Take a holistic view of your business. Become focused. Saying no, turning work away. Be comfortable with other accounting firms doing work for your customers. And get rid of your timesheets, as it detracts focus from what your customers care about.

Other Resources

Episode #83 - Interview with John Jantsch

Ed and Ron interviewed John Jantsch, a marketing consultant, speaker and best-selling author of Duct Tape Marketing, Duct Tape Selling, The Commitment Engine and The Referral Engine. He is the creator of the Duct Tape Marketing System and Duct Tape Marketing Consulting Network that trains and licenses small business marketing consultants around the world. He frequently consults with small and mid-sized businesses helping them create marketing plans and organized marketing systems that smooth the way for steady growth.

Questions Ed Asked John

You are the author of near 3500 blog posts in total. When did you start blogging?

Is the Blog still the “absolute starting point?”

What is marketing? Get someone who has a need to know, like and trust you?

How do you define marketing strategy? How does it differ from tactics? Objectives? Goals? Mission?

Your TedxKC talk is about purpose, how does that tie into marketing strategy?

How do you feel about the idea that strategy is more about what will you say “No” to?

Talk about the marketing hourglass and how it replaces the marketing funnel?

Why do so many businesses, especially professionals, believe the are in a commodity business?

Please expand upon you belief that, "Price is a function of value!”

Why is pricing so often take out of the hands of marketing?

What is “the perfect referral?”

Who are some of your major business heroes?

Who is a non-business hero of yours?

Questions Ron Asked John

John's reaction to Peter Drucker's statements:

“Because its purpose is to create a customer, the business enterprise has two––and only these two––basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”

“If marketing were done perfectly, selling would be unnecessary. Marketing and selling are not complementary and might even be adversarial.”

Reaction to Tim William's statement: "The default purpose of marketing is not to increase sales but rather to increase profit."

Is there a correlation between market share and profitability?

What’s your advice with respect to business models?

How do you market risk?

How do you de-commodotize a product or service with marketing?

Why do you think most companies don’t offer a guarantee?

Which companies do you admire from a marketing perspective? John answered REI and Patagonia.

What’s your advice on RFPs? Don't do them!

Who are your business mentors/thinkers/authors? Peter Drucker, Michael Gerber, Seth Godin.

John also recommended the books Dealstorming and Love is the Killer App, both by Tim Sanders.

Episode #82 - Profiling Milton Friedman

Milton Friedman was born July 31, 1912 (Brooklyn, NY), and died November 16, 2006. He was married to Rose Friedman and economist in her own right. In 1976, Friedman won the  Nobel Prize and 1988 he won the Presidential Medal of Freedom. 

Books

Price Theory, 1962, 1976 - He didn’t think Frank Knights distinction between risk and uncertainty was valid. He believed in personal probability.

Monetary vs Fiscal Policy: A Dialogue, Milton Friedman, Walter W. Heller, 1969 - Money matters for nominal magnitudes, but not real output over the long-term. Money is not the only thing that matters! Technology, institutions, rule of law, etc. Interest rates are not the price of money, but the price of credit.

Why Government Is the Problem, 1993, Essays in Public Policy, Hoover Institution - If a private enterprise is a failure, it closes down—unless it can get a government subsidy to keep it going; if a government enterprise fails, it is expanded. I challenge you to find exceptions.

Reverse invisible hand: People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention.

TANSTAAFL (There ain’t no such thing as a free lunch), Robert Heinlein, The Moon Is a Harsh Mistress. Also, traced back to 19th century saloons: if you bought a beer, they gave you a free lunch. Dedication speech, Cato Building in DC: In the real economic world, there is a free lunch, an extraordinary free lunch, and that free lunch is free markets and private property.

On Liberty And Drugs: Essays on the Free Market and Prohibition, Milton Friedman and Thomas S. Szasz, 1992 - It is extraordinary that leaders of medicine should proclaim publicly that they and their colleagues must be paid to be ethical. And if it were so, I doubt that the price would have any limit. There seems little correlation between poverty and honesty.

As I once said to a Republican Club of students at Stanford, I am a libertarian with a small l and a Republican with a capital R. And I am a Republican with a capital R on grounds of expediency, not on principle.

Prohibition (1920-1933) passed during World War I because men were in France and the majority of women voted for it.

From the Founding until 1914, trade in drugs was free. George Washington grew “hemp.”

We don’t say legalize, implies that the government gives us a permission to do these things. Are rights are inalienable.

Milton Friedman on Economics: Selected Papers, 1976 - Contains his Nobel lecture. Rejected that economics was a branch of philosophy. Thought of it as a social science, with tentative hypotheses that can never be proved but can only fail to be rejected. Falsified the Phillips curve—tradeoff between inflation and unemployment.

Friedman didn’t draw distinction between micro and macro economics. He    started with individual choice. First major publication, Income from Independent Professional Practice (NBER, 1945), with Simon Kuznets, his Columbia dissertation:

• Introduced concept of permanent income

• An early human capital analysis of returns to education

• First quantitative study of union restrictions on entry into occupations and of the effect of unions on earnings

• Publication was held up five years, so was Friedman’s PhD, because a board member of the bureau (a Pharma Exec, C. Reinhold Noyes) objected to this conclusion and analysis of the American Medical Association’s behavior. Friedman didn’t budge, finally published with irrelevant comment by the objecting board member.

• Explained 1/3 by which average income of doctors exceeded dentists. Only ½ due to natural supply/demand, the rest was ease of entry to dentistry back then

Friedman in China, 1990 - Visited in 1980 and 1988. China invented paper money.

The Essence of Friedman, edited by Kurt R. Leube, 1987 - More lives lost because of Das Kapital, so why no warning label on it such as with cigarettes?

“The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 13, 1970 - Road to hell paved with good intentions. He often quoted Pierre S. du Pont, to the French National Assembly:

Gentlemen, it’s a disagreeable custom to which one is too easily led by the harshness of the discussions, to assume evil intentions. It’s necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally.

He did favor a “real gold standard” but not a “pseudo gold standard,” whereby government fixes the price of gold. He did think the gold standard was consistent with liberty.

Bright Promises, Dismal Performance: An Economist’s Protest, 1983 - 70 Essays from Newsweek, 1972-1982. He wrote 300+ columns over 18 years. Contains Playboy interview from 1973. “The preservation of liberty, not the promotion of efficiency, is the primary justification for private property.”

Milton Friedman: A Biography, Lanny Ebenstein, 2007 - Fanatically religious phase until 12yrs old, by time of his bar mitzvah at 13, complete agnosticism. Received his introduction to libertarian thought at Rutgers from John Stuart Mill’s On Liberty, which he read as freshman or sophomore.

Teacher Henry Simons (U. Chicago) taught that an objective, critical examination of a man’s ideas is a truer tribute than slavish repetition of his formulas. Thinks he voted for FDR in 1936, went to Chicago as a Norman Thomas-type socialist. Rose dated others, Milton didn’t. “He couldn’t afford it,” says Rose.

From Fall 1941 – March 1943, was one of the top 10 aides to Secretary of the Treasury, Henry Morgenthau; he helped devise income tax withholding. Indirectly involved with the Manhattan project, designed a statistical procedure to ensure that the detonator for the atom bomb worked, though he didn’t know it. Helped designed the trigger for the atom bomb!

He believed that “almost all important contributions of a scientist are made in the first ten years after he enters the discipline.” Only one valid criterion for acceptance or rejection of a theory: its capacity to predict. He joked: “so happily blessed with critics that I have been forced to adopt the general rule of not replying to them.”

A Monetary History of the US and A Theory of the Consumption Function constitutes his critiques of Keynes. The Great Depression caused by inappropriate monetary policy, 1/3 contraction of money supply between 1929-1933. Thought the New Deal with a the wrong cure for the wrong disease

He thought Capitalism and Freedom was his best work for a popular audience, and better than Free to Choose, more philosophical and abstract, and hence more fundamental. Great arguer, and people said they loved to argue with Milton—when he wasn’t there! His two most terrifying questions: How do you know? So What?

I would rather government spend one trillion dollars with a deficit of half a trillion that have government spend two trillion dollars with no deficit. Government spending is the price of government, not deficits! Advantage of flat tax get rid of all the unpaid bookkeeping we are forced to engage in, and free up human talent of accountants and lawyers for more productive work.

Congressional testimony, All-Volunteer Commission, Nixon, General William Westmoreland, commander of American troops in Vietnam said, “he did not want to command an army of mercenaries.”

Friedman: General, would you rather command an army of slaves?

Westmoreland: I don’t like to hear our patriotic draftees referred to as slaves.

Friedman: I don’t like to hear our patriotic volunteers referred to as mercenaries.

Was protested for visiting Chile in March 1975, but not for visiting China, certainly an evil government?  “There is nothing so permanent as a temporary government program."

As so often is the case, what everyone knows is not so. Anyone who is converted in an evening isn’t worth converting. The next person of opposite views… will unconvert him.

He saw past two and quarter centuries by three intellectual tides:

• The rise of Laissez-Faire (the Adam Smith Tide)

• The Rise of the Welfare State (the Fabian Tide)

• The Resurgence of the Free Market (the Hayek Tide)

“Ideas are important, but they take a long time and are not important in and of themselves. Something else has to come along that provides fertile ground for those ideas.”

He was pro-abortion, but thought government shouldn’t pay for it. He Opposed Gulf War 1991 and Iraq in 2003. Epitaph: Inflation is always and everywhere a monetary phenomenon (too much money chasing too few goods).

Arnold Schwarzenegger: “I have often said that the two people who have most profoundly impacted my thinking on economics are Milton Friedman and Adam Smith.” [As a resident of California who lived through the Schwarzenegger administration, this is nonsense!].

Lawrence Summers: As for Milton Friedman, he was the devil figure in my youth. Only with time have I come to have large amounts of grudging respect. And with time, increasingly ungrudging respect.”

Money Mischief, 1992

Famous story of the island of stone money.

Hugh Rockoff (1990) paper argues Frank Baum’s The Wonderful Wizard of Oz was actually a sophisticated commentary on the political and economic debates of the Populist Era. The Land of OZ is the East, where the gold standard reigns supreme. Wicked Witch of the East, Grover Cleveland, the gold Democrat who, as president, led the successful repeal of the Sherman Silver Purchase Act of 1893

Capitalism & Freedom, 1962 - Abolish corporate tax, but undistributed earnings should be assigned to individual shareholder returns, so corporation only keeps when it can earn higher ROI than shareholder

Free to Choose: A Personal Statement, 1980 - Dedicated to Ricki and Patri. See videos below. 

Tyranny of the Status Quo, 1984 - Points out that harder to make good changes in our system than in parliamentary system, also harder to make bad changes. UK moved much quicker to welfare state because of this structure. IRS was chief obstacle to implementation of withholding tax. Government since 1897 has Board of Tea-Tasters, $125,000/year, still existed in 1984! It was finally shut down on March 25, 1996.

Two Lucky People: Milton and Rose Friedman Memoirs, 1998 - 2 children, 4 grandchildren, 59 years married. Second child, David Director Friedman, born Feb 12, 1945, degree in physics. Milton’s natural father died when Milton was 15. Intended major in mathematics, only work was as an actuary; took some exams, passed some, failed others—most difficult exams ever taken! Milton met Rose in Economics 301, Price and Distribution Theory, Univ. Chicago, taught by Jacob Viner.

First law of bureaucracy: the only feasible way of doing anything is the way it is being done. Established the Milton and Rose D. Friedman Foundation, vouchers, etc. Says calling for a state conventional would be most effective way to get Congress to act on balanced-budget, tax-limitation amendments. “Barking Cats” (2/19/73) one of his best columns ever written: page 362-3.

Decided testifying before congressional committees was a waste of time. Thought Nobel prize may do more harm than good, gives people importance utterly unjustified. Wanted his work judged 25-50 years after his death. “Judged by practice, we have been, despite some successes, mostly on the losing side. Judged by ideas, we have been on the winning side. We are in the mainstream of thought, not, as we were fifty years ago, members of a derided minority.”

The Making of Modern Economics, Mark Skousen

To keep the fish that they carried on long journeys lively and fresh, sea captains used to introduce an eel into the barrel. In the economics profession, Milton Friedman is that eel. —Paul Samuelson

Karl Marx, the phrenologist; then came Stanley Jevons, the astrologer, who was followed by Maynard Keynes, the palm reader. Now we have Milton Friedman, the handwriting analyst!

In the late 1960s, Friedman was invited to debate strident Keynesian Leon Keyserling at the University of Wisconsin. Keyserling read the list of fourteen items Friedman highlighted as “unjustified” government activities in Capitalism and Freedom. Protesters made fun of the points as he read them, hoping to win the debate. Point 11 called for the elimination of military conscription during peacetime. Friedman’s opposition to the draft brought ardent applause and won him the debate.

Thomas Sowell said Friedman was a tough grader—he got one of only two B’s in his price-theory class. He gave no A’s.

Friedman’s Big Ideas

• Education vouchers

• Negative Income Tax

• Flexible exchange rates (1940, adopted in 1970s)

• Repealing the Draft

• Natural rate of unemployment, 1967 AEA address, so goal of 0% unemployment is not realizable

Friedman Videos