EQ Journal Archive 33

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Why I enrolled for ADM 3396

Posted on
Tuesday 13 January 2009

Guest Column by David Huffman, Mature Student, Telfer School of Management, University of Ottawa, January 2009.

I have been self employed for 19 years. In reality, it’s only been a
glorified JOB. I have attempted many things to bring my business to the
next level but to no avail. I’m not stupid but obviously I need to learn
more about getting to the next level. I remember a friend of mine,
Angela Sutcliffe, a business coach, telling me that I was more afraid of
success that I was of failure.

In 1989, after being laid off from Combustion Engineering, a friend
of mine asked me to help him expand his janitorial business. He wanted
to get some government contracts but didn’t know how. By the end of the
year, we had a ton of work. It seemed like with every contract, we were
also being asked to do some renovations. So we really ended up with two
businesses. That’s why we split it into two.

Things coasted along. I was in a comfort zone. We all tend to gravitate to our comfort zone, I guess. Typically Canadian, eh?

And then 2004 happened. It was a low point in my life for a number of
reasons. I lost everything. My family, my truck, my house, my pension.
When I say everything, I mean everything. I was depressed and didn’t
have any work. I was in a rut. I found out later that a rut is just a
grave with both ends knocked out.

Then a friend of mine, Joy Statham, offered me her family cottage in
Muskoka for a month. I could get away. It was a breath of fresh air. It
was there that I started my journal.

During that month, I went to a theatre production of “Wake Me Up When
It’s Over.” The play was about a man who was in the throws of a
divorce. His teenage daughter didn’t want anything to do with him. He
had lost his job and was depressed. He felt that his whole life was a
failure. To him, signing the divorce papers was akin to committing
suicide. Throughout the play, the man played himself in the various
parts of his life. The only other actor in the play, a woman, played the
Catholic nun who was his teacher, his wife, his daughter, all of the
other parts. In the final scene, he met the nun again but in her new
profession as a dancer in a strip club. They recognized each other but
he was in shock. They talked and talked. His focus was on the woes of
his life. She got frustrated and finally said, “S__t happens. If you
don’t get rid of it, it just keeps piling up. And you can’t move on.”

It was the most refreshing statement I had ever heard. I realized
that the only person who could help me was me. ‘It’s what people know
about themselves inside that makes them afraid.’ I decided to get up
everyday with a new attitude. I would force myself to get out of my
comfort zone. I had learned a number of years ago that where you are
going to be in five years is dependent on two things, the books you read
and the people you meet.

I started to read, joined a networking club, went to my alumni lunch,
wnet to museums, went to presentations and seminars. What I learned
about myself was that every time I went out to an event, whatever it
was, something happened that made my effort worthwhile. I would meet
someone new or connect with someone I already knew. I would learn
something I didn’t know before. I would get pointed in a new direction.
Something happened and, in every case, it was something positive. Yes,
at first it was difficult but got much easier with time.

I started doing some guerrilla marketing and got my business going
again. But it seemed that no matter what I did, I couldn’t get my
business to the next level. It was paying my bills all right but the
funds for my retirement kept eluding me.

So I had to shake it up. Little did I realize how that would happen.
On March 20, 2008 on a clear, bright, sunny day, I rolled my car five
times on Highway 401 near Kingston. Needless to say, the car was a write
off. It’s a long story so I won’t get into it all now but I will say
that after the firefighters got the front windshield out, they still
couldn’t get me out. I had to get myself out. Then I had to walk the 300
feet to the edge of the highway where the ambulance was. Mind you I had
two burly guys supporting me. You might say that I walked away from it!
The accident happened at 2:00 pm in the afternoon and by 4:00 pm they
had released me from the hospital. They couldn’t find anything wrong.
All I had was a bad headache and a bruise on my right leg just below the
knee. The doctor at the Kingston General Hospital and the terrific OPP
officer both agreed that it was an accident that I shouldn’t have walked
away from (alive).

The seat belt damage to my shoulder required physiotherapy and, not
surprisingly, I couldn’t do the physical part of my work. Using a hammer
just wasn’t in the cards. Yet 2008 was the best year I have ever had.
Go figure? ‘If you don’t change the direction you’re going, you’ll end
up where you’re headed.’ Something happened. It was not being able to do
the physical work. I had to change.

I had wanted to get into real estate thereby changing the focus of my
business. In November of 2007, I was invited to visit OREIO (Ottawa
Real Estate Investors Organization). On June 9, 2008, I gave a
presentation about ‘Structural Problems: How to Identify them and When
to Run from them.’ Some time later an old business associate of mine who
was also a member of OREIO and heard the presentation approached me
about a business idea he had. That lead to a consultation with Dr. Bruce
Firestone to find out how we could structure the business.

I had already met Dr. Bruce after the presentation he gave at OREIO. I
was intrigued about the history behind the Ottawa Senators and
attentively listened to his stories about his experiences in business
and in real estate. We also have a common thread; his family’s
appreciation of the Group of Seven.

Our consultation lasted about 2-½ hours. Dr. Bruce knew how to
structure the financial side of the business, how to get the financing,
how to structure shareholdings and how to structure the partnership. He
knew about partnership agreements and shareholder agreements. He knew
about voting trusts and shotgun clauses. He knew bankers, realtors,
accountants, insurance people, mortgage brokers and contractors. And,
almost more importantly, he knew what to avoid. Dr. Bruce was doing for
us what we had asked him to do. It was no effort for him. It just
flowed. He also talked about his not-for-profit
organization—Exploriem.org and his teaching at the University of
Ottawa’s Telfer School of Management which I referred to as “Bootstrap
Entrepreneurship.”

When I attend meetings, I tend to listen a lot and make notes. I
already knew many of the things we discussed but not in the detail or
the depth that Dr. Bruce did. What impressed me was how it all flowed.
Remember, the older we get the more we realize how much we don’t know.

In hindsight, most of those topics of that meeting had been discussed
between my proposed partner and myself. In subsequent meetings we tried
to deal with them but things fell apart. Was it a failure? No!
‘Experiments never fail. They always produce results.’ It took Thomas
Edison over 2,000 experiments to finally produce the incandescent light
bulb. He didn’t fail 2000 times, he just learned 2,000 ways of how not
to make a filament.

That meeting with Dr. Bruce changed the direction I was going with my
company. It may be more appropriate to say accelerated it. Yes, I’m
still going to pursue construction and real estate but not with the same
mindset I had before. If a two and a half hour meeting with Dr. Bruce
could have such an impact on me, how could I get more? ‘Wise is the
person who learns from experience; but wiser is a person who learns from
the experience of others.’ I did think about the course but dismissed
it. I swore that I would never go back to school again! I found out in
university that it wasn’t what you knew, it was who you knew.

Some months went by when, out of the blue, a business associate,
Zydra Gestautaite (who is also taking the course) asked me if I was
going to take Dr. Bruce’s course. The thought of going back to school
was exciting and terrifying at the same time. Bah humbug! I really
didn’t want to do it, but how successful we will be, is based on one
thing, the space between our ears.

When Robert Kiyosaki of “Rich Dad, Poor Dad” fame wanted to learn
about real estate, he found someone to learn from, a mentor. The man he
found lived in Texas so he flew to Texas for their first meeting. After
the meeting, he knew that he wanted this guy to be his mentor. He
offered to work for him free-of-charge. Matter of fact, Kiyosaki said
that he would not only work for him at no cost but he would also pay all
of his own expenses. His first assignment was in Hawaii. The rest is
history.

I read the ADM3396 course description off the website and one thing
stayed with me. It was Craig Schoen’s comment “It changes the way you
think about business.” Blink! I didn’t see or rather I didn’t want to
see that I was going to have to do a video interview with a CEO and that
I was going to have to create my own blog with three of my own
articles. I have wanted to be a writer for some time but never had the
impetus to do so. This article will be the first one I post.

When I was sitting in the class for the first time I knew something
was happening to me. Here I was sitting in a class of twenty-two year
olds. What do you mean business plans are dead the moment they are
finished? WOW! As the class progressed the realization started to hit me
like a 2 x 4. At one point, about 95% of the class responded in the
affirmative to a question about whether they had their profile (or
whatever it is you call it) on Facebook. I shrunk down in my seat a
little bit.

I knew that I was behind the times. In April of 2008, I had to get
another cell phone as the one I had was destroyed in the accident. I
stood there in the store and told the salesman exactly what I wanted in
my new phone, or rather, what I didn’t want. I didn’t want texting. I
didn’t want a camera nor did I want Internet capabilities. He just stood
there as a smile formed on his face. My choice for a new cell phone
was…zero.

I am not only behind the times; I feel that I am cast in concrete.
And I believe that ADM3396 will be the jack hammer (or better still,
dynamite) to get me out of it. Progress is based on creativity plus
getting us out of our comfort zone. Right brain stuff. I wonder who I’ll
meet and what I’ll learn and where I’ll be directed. I know it will
happen. Everything happens for a reason.

Walt Disney said: “All our dreams can come true, if we have the courage to pursue them.”

“If one advances confidently in the direction of his dreams, and
endeavours to live the life which he has imagined, he will meet with a
success unexpected in common hours.”
– Henry David Thoreau

What’s your dream?

David Huffman, January 2009

Prof Bruce @ 2:26 pm

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Posted on
Sunday 11 January 2009

For people who follow this blog, you know that I think it is
vital to tell the truth but it sure helps to know the difference
between truth and smart truth.

I love that cartoon which shows a dog owner speaking to his dog—what
he is saying (I paraphrase here): “Fido, bad dog. Fido, never do that
again! I will be really mad, Fido, if you ever do that again, Fido!”
Then in the next panel, the cartoonist shows what Fido actually hears:
“Fido, blah blah. Fido, blah blah blah blah! Blah blah blah blah blah,
Fido, blah blah blah blah blah blah blah, Fido!”

I feel like that pretty much every work day of my life.

A couple of weeks ago, a client of mine called me up from a US city
where she lives and told me: “You tell the Seller to heck with them.
They can’t push me around! You tell them no way am I going to pay them
one more nickel for a measly three week extension to our Agreement. If I
pull the rezoning application, do they have any clue what will happen
to their site! The City will downzone them and their value will fall by
half or more. I want a that three week extension! I am really upset. I
have already spent $45,000 on the rezoning and I gave them a $30,000
non-refundable deposit… I will take a loss, I don’t care what happens. I
will pull my application and then they’ll see what happens. They’ll be
sorry.”

Now as a Broker, it is my responsibility to follow the instructions of my clients. So I did but here is how I put it instead:

“Hi Sam. I just heard from Michele and she is really upset that the
City is taking so long to approve her rezoning application. It should
have been done at least a month ago but with Christmas and all, it just
didn’t get done. She needs another three weeks. But remember she has
already spent $45,000 on the application and all the studies that the
City required plus she has given you a non-refundable deposit of 30
grand so she is pretty tapped out. I don’t think she is likely to agree
to another 10 grand non-refundable at this time; I did ask her about
that, but she seemed pretty reluctant to do anything more than wait for
the rezoning to go through. Now I realize you have already waited ten
months, but maybe you ought to agree to another three week extension. If
the City refuses the rezoning application, your density could go down
by half or maybe even two thirds and that could negatively affect your
ability to sell the property for what you already have plus the economy,
as you know, isn’t better now than it was ten months ago, it’s worse.”

You can see I shifted the focus to the City for causing the delays in
the first place (true) plus I got across the fact that the property
could be downzoned (true) and that the economy has taken a turn for the
worse (also true). So I got the information across to the Seller but in a
way that is non-threatening.

What I said is all true but it’s the smart truth.

The deal got extended, no problem.

Dr. Bruce

Prof Bruce @ 5:54 pm

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Pricing is an Art

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Decoy Pricing

Posted on
Monday 5 January 2009

Pricing is an Art
Terms Matter

Anyone who tells you that pricing (of products or services) is somehow ‘scientific’ has no idea what they are talking about.

Reading Blink by Malcolm Gladwell or Predictably Irrational by Dan Ariely or The Black Swan by Nassim Nicjholas Taleb will quickly disabuse you of this notion.

When I was a second year engineer at McGill University many years
ago, I thought that prices were set rationally—why wouldn’t they be
subject to some type of formula based on, say, what the thing cost to
produce plus some preset profit margin.

It didn’t occur to me that a price could be much higher than its
cost, about equal to its cost or lower than its cost. In fact, costs
have almost nothing to do with pricing in most markets.

You might price a thing based on:

a) what the competition charges,
b) what the market will bear,
c) how much you want to leave on the table for a buyer, hoping they will come back and buy more from you later on,
d) a loss leader—for example, selling milk at a loss hoping that the
buyer will pick up other things while in your store with a better
margin,
e) value in possession (for example, an old steel mill might have a
negative value to you and me (i.e., the cost to clean up the site might
be more than the value of the lands for redevelopment) but to another
steel maker, the land and buildings could have substantial positive
value);
f) price for investment purposes (let’s say you run a large
investment fund and you are required to have at least 15% of your assets
in, for example, real estate; you might pay more for a class of assets
than anyone else thought they were worth);
g) what a willing buyer and seller agree to.

If you are selling something that is not in demand (like, say,
housing in Florida today), the price might be much less than its cost to
complete. On the other hand, if you are selling a ticket to tonight’s
World Junior Gold Medal Hockey Game in which Canada is playing Sweden in
front of a madly pro-Canadian home audience in Ottawa, the price might
be much higher than its cost (this may involve scalping the ticket which
is illegal and I am not recommending that. But it does happen…)

So pricing is an art not a science.

Let me give you an example. In the last recession, one of my clients
owned a lovely downtown apartment hotel. For $135 per night, you got a
full suite with a small eat-in kitchen and a separate living room/den.
The location was great, the accommodation and furniture wonderful. Plus
the price was very competitive with other hotels that gave you a single
room for the same price or even a bit more. But in that recession, their
occupancy was dropping. So in response, they lowered their prices and
guess what? Their volume dropped further. They again lowered their
price. Same thing. When they came to me, they were offering their suites
at $55 per night (!) and their occupancy had dropped to less than 40%.
(You can’t make money in the hotel biz at occupancy levels of less than
around 70 to 75% and don’t really make serious money until you are north
of 80%.)

What they didn’t realize is that for US-based facilities managers,
price and quality are closely tied together and so US-based booking
agents thought that a $55 a night kind of place would be decrepit and in
a dangerous part of town. It would be a security risk for their
traveling executives and many traveling executives are females.

So while demand/supply curves suggest that when the price of a thing
is lowered, more of it will be purchased, doesn’t work in this paradigm.

By simply raising prices (first, to $115 and later to $135 and higher), demand went up not down.

Let me give you another example. When we ran mini office complexes,
we used to charge for the office space (say, $550 per month per office
in those days). We also charged a ‘facilities charge’ of about $125 per
month for stuff like telephone answering, utilities, mail handling,
furniture, etc. Both prices were in the Lease but they were on separate
pages and never added together. To me it was a remarkably successful
strategy because the competition would be charging $675 for a very
similar set of services but our clients felt they were getting a better
deal paying $550 plus $125. Go figure.

Pricing is an art. Of course, you must always be truthful but use the smart truth.

Decoy pricing is also very effective. Dan Ariely describes it well in
his book. Let’s say you want people to buy your magazine; then you
might offer:

a) Internet only Subscription: $59;
b) Magazine only Subscription: $129;
c) Magazine and Internet Subscription: $129.

Now obviously, b) is the decoy. It turns out that if you only offer
a) and c), a majority will select the cheaper option, option a). By
including the decoy, you can get the opposite result—a majority will
order option c) because they are getting the Internet edition for
‘free’.

The psychology underpinning this is that people are not very good at
assessing things in a vacuum. They need to be able to compare—to do some
comparison shopping.

How much is a magazine subscription worth? I don’t know. But if I can
get the subscription for $129 with something that is worth $59 thrown
in for free, well, that is the option for me!

Let’s think of a real estate equivalent. If you want to sell someone
Home X, which is a colonial style home that you think is best suited to
your clients’ needs and tastes, then you can’t just show them Home Y,
which is, say, an example of Tudor architecture. What you must do is
introduce a third option, Home Z, which is a colonial style home but not
quite as nice as Home X. Ariely calls this Home X-. When faced with a
decision between X, Y and X-, Buyers will almost always choose X.

Ariely explains that this also works in the dating game so the next
time you want to date that handsome guy or pretty girl, bring along a
friend who looks like you but isn’t quite as good looking.

@ProfBruce

Postscript: A whole other dimension to any pricing discussion has to
take into account– terms. If I offered to sell you a car for $65,000,
you might think, ‘Wow, that’s a lot.’ But if I told you: you could pay
it off at the rate of $2,600 per year for 25 years with no interest, you
might take a few moments and calculate out its NPV (Net Present Value
or worth) to you.

If we assume that your personal discount rate is 18% p.a. (these tend
to be higher when people are younger and a dollar today is much more
important to them than a dollar at a later time*) then your NPV of this
stream of annual car payments is just $14,213.96 so maybe it’s a pretty
good deal after all.

(* Personal discount rates tend to start around 22 to 24% for university age people before falling to 8% or less for elders.)

Car $65,000
No. Yrs 25
Annual Payment $2,600
Interest Rate 0%
Personal Discount Rate 18%

NPV $14,213.96

Terms can be subtle. When we ran Blue Heron Storage Corp (one of
those public storage places with roll-up garage doors) our only
differentiation was: a) location (we had a decent location in Kanata, a
western suburb of Ottawa) and b) we had no minimum lease term.

So when a potential client called up (mostly women saying that their
husbands had way too much stuff in their garage/basement/closets), one
of the first questions we got was, “How long do we have to sign up for?”

Our Manager was trained to answer that with, “We have no minimum term. You just need it for a month, fine, that’s $99 plus HST.”

Almost all our competitors had three month minimum stays/leases or more.

But the fact is that most people are a bit lazy and once in, they
stay. They get used to having a place to put summer stuff during winter
time and vice versa. So folks who said they ‘only need it for a month’
are often there two years later.

Terms matter.

Prof Bruce @ 5:20 pm

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Political Cover

Posted on
Wednesday 31 December 2008

One of the things we know about Guerrilla Marketing, GM is
that it often involves entrepreneurs and intrapreneurs in gray
areas—things that are either ethically questionable or legally
questionable. Obviously, you should never do anything illegal or
unethical but if you are a small business, a startup, a new skunk works
(often part of a large company but separate from it—either spatially or
managerially or both), how do you get noticed, how do you earn media
attention instead of buying it and how do you get a place at the table
with the big boys?

You use GM. GM involves replacing money with brains so that means
getting attention without hurting anyone, damaging any property or going
to jail.

Promoting your new video game with packages with flashing lights
lashed to bridges in the US post 911 is probably not a good way to
promote yourself unless getting arrested is on your list of to dos for
2009.

One of my former colleagues had a cute idea for the brokerage we were
both working at. He wanted to mount commercial real estate signs (FOR
SALE signs or FOR LEASE signs) with most of the information upside down
except for the phone number and a slogan—“We turn the market upside down
for you!” Like I said, it was a cute idea but too radical for that
brokerage.

But clearly it meets the tests of what is acceptable.

Years ago, we got annoyed with the major newspaper in our city—their
only competitor had gone OOB (look it up, it’s in
urbandictionary.com)—and they decided to jack up their advertising
rates. So, what the heck, I had seen the Boston Business Journal on one
of my trips to that city, let’s start one of our own—Ottawa Business
News (now Ottawa Business Journal) was born.

Let’s ask the three questions again:

• how do you get noticed,
• how do you earn media attention instead of buying it, and
• how do you get a place at the table with the big boys?

We decided to bring 150 paper boxes to Ottawa. At that time there
were no paper boxes here. The Ottawa Citizen and the Globe and Mail
dominated the newspaper scene. Now what would you do: ask for permission
or just do it?

If you decide to ask the City of Ottawa for permission, they are likely to do the following:

1. Say ‘No’. That is the bureaucrats’ answer to everything.
2. If they don’t say ‘No’, they will use their second best answer:
‘We’ll study it.’ Cities and bureaucracies know that they can make you
do studies, attend meetings, consult with the community, fill in forms
and do endless, mind numbing things until either you go away or die,
whichever comes first.

Now you also know that entrepreneurs would rather ask for forgiveness
than beg for permission so we planned to drop 150 boxes on streets all
over Ottawa without asking for permission. We had tractor trailer loads
of those paper boxes waiting at the Canada/US border.

But before we dropped them, we needed what is called political cover.

So for about a week we had one of our employees (in a cape and mask
no less, looking like Hanna-Barbera’s Quick Draw McGraw) go around
Ottawa and drop 25 cents into parking meters that were about to expire.
That got us some decent media attention and positive attention—we were
good guys saving drivers from the Green Hornets and their parking
tickets.

Paper boxes are a powerful way to promote your brand—they are
inexpensive and sit at crowded intersections and tirelessly work for you
24/7. If you bought billboards, you would pay (in Ottawa) around $1,500
per side per location per month. So buying a paper box for $150 ( a
one-time cost) and dropping it on a sidewalk and chaining it to a post
is pretty good signage at a very, very low CPM (cost per thousand pairs
of eyeballs per month).

What entrepreneurs and intrapreneurs must do is be like the North
Vietnamese—cause your enemy to expend a lot more resources than you to
put a soldier in the field with bullets and this gives you leverage. If
you have 50 million North Vietnamese and Viet Cong facing 250 million
Americans, you might think that the Americans will win given a simple
power ratio of 5:1 (250 million divided by 50 million). But if the Viet
Minh have a supply line of 300 miles and the Americans have one that is
10,000 miles long, this means the correct power ratio is (250 x 300)/(50
x 10,000) or 1:6.667, practically the inverse!

If entrepreneurs and intrapreneurs can’t get leverage on their elephant competitors, their businesses will soon be dead.

Paper boxes were that kind of leverage for OBN.

Now if we had asked the City of Ottawa for permission, they probably
would have convened a committee of stakeholders. Who do you think would
be on that committee? Well, the Mop and Pail (G+M) and the Ottawa
Citizen for starters. Do you think they would be inclined to give a new
competitor that kind of leverage? How about Joe and Jane Q. Busybody?
People from the community who volunteer for these types of committees
tend to have too little to do in their lives. They undoubtedly would
have cried foul—paper boxes would have been compared to billboards and
‘visual pollution’.

Plus how long would the Committee have taken to make a decision? A year? Two years? And then it would have been ‘no’ anyway.

Entrepreneurs don’t have time for this.

So we dropped them overnight and chained them.

The entrenched competitors howled.

But we were ready. Under the then new Canadian Charter of Rights and
Freedoms, we wrote to the Mayor and made it an issue of freedom of the
press. If the City touched one of our paper boxes, they were going to
get sued for breaching our rights.

Now politicians like two things—money and power and they are of
course related to one another. We had another strategy ready as well.

After the first commotion dies down a bit, we suggested to the City:
“Why, wait here a sec. Instead of forcing OBN to remove its paper boxes
and face a lawsuit, why don’t you charge a fee for paper boxes? We
suggest $50 per box per year!”

The G+M and the Ottawa Citizen did, of course, put out their own
paper boxes. But they put out thousands. OBN was just fine with 150 in
strategic locations. So we made them spend a ton of money on paper
boxes, filling them each day (we only came out weekly) plus pay a fee
for each box to the City (the City accepted our idea but they upped the
license fee to $75.)

So there it is—GM leverage, political cover and learn from the success of others.

Dr. Bruce

Prof Bruce @ 3:46 pm

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Business Models Work

Posted on
Wednesday 31 December 2008

Sam Palmisano, Chair of IBM, in an interview with
BusinessWeek (April 3rd, 2006), put a great deal of emphasis on the
importance of Business Model innovation. Mr. Palmisano is quoted in the
article as saying:
“…with product innovation, it’s a certainty that your competition is
shortly going to copy what you have done. With business-model
innovation, though, if you can come up with a unique way of doing
things, it’s much tougher to react to.”

The reason Business Models are much tougher to copy is that the
Business Model implies that there is a whole eco system that you have to
copy before you can compete.

Recently, we had a client who came to us in some distress—they were
being discriminated against and having a tough time finding a place to
lease.

[Please Note: This Blog is written for a general audience and
can be read by all. However, this entry contains mature subject matter
and should not be read by anyone under 21 years of age.]

These folks run a dating service of which there are many that have
become or are main stream like eHarmony.com or lavalife.com. These are
reputable businesses that fill an important niche. Did you know that
married men tend to outlive unmarried men by about seven or eight years?

So at least for men, it appears that having a life partner contributes to their overall well being.

(You have to be careful about assigning causality. It could be that
men who tend to marry tend to take better care of themselves. So
marriage, per se, does not cause them to live longer. On the other hand,
one could plausibly argue that a wife will see to it that her husband
eats properly, gets enough rest, does at least some exercise, gets out
and socializes, does not sit in front of the TV all of his spare time,
gets a job, holds a job, cleans up regularly and so forth.

In his excellent book, Outliers, Malcolm Gladwell, relates
the story of how Italian immigrants to a small town in Pennsylvania
(Roseto) in the 1950s and 1960s suffered fewer health problems before
age 65 than the general population despite having a diet that was made
of 41% fat as well as having an obesity problem amongst the males. After
exhaustive medical studies, it turned out that vibrant social
interaction in the town kept people alive and well. So being tied to a
community and being a part of something greater than yourself can, not
surprisingly, help keep you going.

Women whether married or unmarried tend to live about the same length
of time. Unmarried women tend to do all of the above plus keep their
social networks in tact without help from a spouse.)

So, at least for men, having dating services around is pretty
important to life expectancy. I am happily married with five children
but, as a middle aged person, it has occurred to me: How would I go
about getting a date if I suddenly found myself alone? I imagine that
there are Internet services that would help middle aged people too.

Dawn and Bruce in Jamaica
(Still in Love
After Five Kids)

My Cutie Pie and Me at My 40th Birthday Party

But the folks who came to see us run a different type of dating
service—it is a private club where couples date other couples. There is a
term for this type of service which I won’t use here.

But I believe in Live and Let Live and I felt we should help these
people because: a) they seemed like nice people, b) let He or She who is
without sin cast the first stone, c) let’s not judge other people, d) I
like a challenge, e) maybe they are saving lots of marriages by spicing
them up, who knows?

Now I am not a prude. I lived in Italy in the 1960s for awhile and I
saw swinging London then as well. I loved the fact that Italian girls
wore the skimpiest bikinis and that London girls wore micro dresses. In
Italy, it was nothing to see lovemaking on TV—they kept the Rambo films
off the air until after midnight. I mean who wants to see Sylvester
Stallone killing 120 ‘gooks’ in less than 90 minutes when you can see
the human form doing what comes naturally?

When I came back to North America, I was amazed that kids could see
extreme violence on TV at 7 pm but, Heaven forbid, a shot of Janet
Jackson’s partly naked breast for less than 1.5 seconds resulted in a
huge fine for the network that showed that particular Super Bowl half
time show. I am sorry but we have our priorities wrong.

The Human Form is Celebrated by Canadian Artist Edwin Holgate

When President Clinton was subject to impeachment proceedings for
having sex with a 22 year old intern, Euros were perplexed and
dumbfounded that the entire US government could be paralyzed for two
years because a good looking guy was having sex with a cute girl who was
not his wife. If having sex with someone not your wife or husband (even
the half hearted type of sex that Bill was having with Monica) was
reason enough to kick a person out of government, half the cabinets in
France, Lebanon and Italy would have to stand down.

I am not advocating having affairs. I am advocating tolerance for
people who do. I believe in tolerance not only for this but for all the
things that matter to people—religion, politics, sports teams, cultural
background, race, gender, sexual orientation, what have you.

These days, tolerance, peace and diversity underpin the well being of
city-state economies and of nations too. Can you think of any place
that lacks these qualities that is prospering and you would want to live
there too?

So anyway, the City of Ottawa was giving these folks a hard time. So we changed their business model.
What if we did this?

1. Called it a place of assembly.
2. Looked for a building in an industrial park far from any residential areas, schools or Churches.
3. Met the zoning requirements for a place of assembly—a defined use in the Bylaws of the City of Ottawa.
4. Explained to potential Landlords that it was a dating club.
5. Relied on the Canadian Charter of Rights and Freedoms brought in by
Prime Minister Pierre Trudeau to protect persons from discrimination.
(Mr. Trudeau, boldly stated that “The Government of Canada has no place
in the bedrooms of the Nation.”)
6. Opened up the club for use by others when it is not in use for its
original purposes (mainly a Thursday, Friday and Saturday use).

The Club’s business model (we will call it the Shy and Adventurous
Club (SAC), not its real name) has now gone through a subtle but
powerful change. It is a place of assembly which makes it much easier to
pass the Bylaw examination. It is a ‘dating club’ which sounds much
more mainstream. And lastly and most importantly, by making the SAC
available to others—it could be a business meeting, a Kiwanis meeting, a
conference, a wedding—the revenue potential for the club has probably
tripled or quadrupled.

Now the SAC, which could never have signage before or advertise, will become the ‘50 XYZ Road Meeting Centre’.

Who cares if the meetings are between people who enjoy the company of
the same sex or between couples who want to meet other couples or to
hold a Kiwanis auction?

What matters is that the SAC is a trustworthy organization and not
controlled by organized crime like so much of the industry that thrives
in the wilder side of life.

And that thought led us to the biggest change for their Business
Model—why not become the lavalife.com or eHarmony.com online community
for couples wishing to date other couples? The SAC interviews all its
couples to minimize problems and if you look on the Internet, trusted
organizations are hard to find in this area…

Now revenue potential is limitless.

See Business Modeling works!

Dr. Bruce

Postscript: What other Real Estate Brokerage can offer business
modeling services and zoning advice! There, that is a shameless plug for
our Brokerage.

Prof Bruce @ 12:09 pm

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Posted on
Wednesday 31 December 2008

I am surprised at how often co-opetition can prove to be a
survival strategy in entrepreneurship and business generally. Of course,
we all know that you can learn from your competitors. When I see a
competitor doing something better than I do, I change immediately. My
ego is not involved and there is no shame in recognizing that someone
else thought of something before you did or does something at a higher
level than you do. I don’t suffer from the not-invented-here syndrome.

I remember as a young adult watching my youngest sister removing her
coat and scarf. While she was removing her arm from the first sleeve,
she would grab hold of the end of her scarf and while pulling her arm
out, presto, her scarf would be drawn into the sleeve of her coat
leaving it perfectly stored in the sleeve of her coat—half of it in the
sleeve and half of it hanging nicely inside the coat itself. All in one
smooth, effortless motion.

Have you ever watched anyone trying to do this with their scarf after
removing their coat? It takes time, it takes effort and usually the
scarf just ends up jammed in a lump down one sleeve or hung separately
around a hangar.

I have used my sister’s technique in the threes decades since I first
saw her do it. The only time I didn’t do it was once last winter—and
guess what? I lost my expensive, warm Burberry scarf that was a gift
from my dear wife.

What is co-opetition? We compete with our competitors, we learn from
our competitors, we buy our competitors (or they buy us), we sometimes
buy them (when we can’t make a deal) one client at a time (i.e., we take
their clients and customers away from them based on better service,
better pricing, better terms, more innovative products, higher quality,
faster speed of delivery and for a whole host of other reasons including
that they like and trust us more…), we sometimes co-operate with them
and sometimes we co-opt them.

So the word ‘co-opetition’ might be a combination of three
things—competing, co-operating and co-opting. The last one is (probably)
my addition to the meaning of co-opetition.

Co-opetition is everywhere. Every trade association is a form of
co-opetition. There is a trade association for practically every
industry: Better Hearing, Boat Owners, Security Dealers, Credit
Counseling, Funeral Directors, Soap and Detergent, Tour Operators,
Realtors, Home Builders, Direct Selling, etc.

There is even a US National Turkey Federation and a Monument Builders of North America.

These associations lobby for favourable treatment by governments for
their members, they market the whole industry to consumers and clients,
they serve as clearing houses for new techniques that might be of
interest to their members in terms of improving their operations, they
set standards, they self police their industries to weed out the poor
performers, they provide education for their members, they hold
conferences in which invited speakers talk about best practices.

If you want to learn from your competitors, a few drinks at an
industry get together with a prominent and successful member of your
industry can quickly unlock a whole host of confidential and proprietary
trade secrets from people who like to talk about themselves proving, of
course, how smart they are. If you are a good listener, you can and
will learn a lot.

However, some industries are practically immune to change. I work as a
Commercial REALTOR and our industry is pretty conservative. I could
post some of the things that we do to improve our value proposition on
this blog. In fact, I could write them up on a big Bristol board and
staple them up on a wall next to every one of our competitor’s
executive’s desks, and they still wouldn’t change. You can hide your
trade secrets in plain view in a world that refuses to change.

Here is one example. We offer our competitors access to all our
listings, no exceptions. We offer them at least half of our
commissions—we guarantee it. Why do we do it? Why do we co-operate with
our competitors?

I called up one of our competitors this Fall and asked about one of
their listings—we were looking for 20,000 sq. ft. of office space in the
west end of Ottawa. Right now there is about 1.25 million sq. ft. of
empty space in the west end so clients are pretty hard to come by. The
listing agent sent over their info package—but it didn’t have any
pricing data (how much the basic rent would be). I thought it was an
oversight and called the listing agent back. He told me: a) they would
not give me the lease rate and b) in any event, they would not
co-operate with us even if we brought them a client.

I know the owner of the building. Our industry ethics prevent me from
calling him but I asked the listing agent: “Do you think you are giving
your client the right type of service by not providing other agencies
(Outside Brokers) with the info? Does he know that you won’t co-operate
with OBs?”

His response was: “Bring me an Offer… but you will have to be paid by your client.”

Now I have spoken to many Brokerages in the Commercial market in
Ottawa about this. I tell them that the residential guys have it all
over us. If I were a residential agent, I would probably be a listing
powerhouse—I know a lot of people and I am extroverted and I work hard.
Now every time I would get a listing, I couldn’t wait to run back to my
office and put it up on MLS.ca (now called REALTOR.ca). Why? Because
then I would have 2,200 other agents in Ottawa working for me!

They would show the house, prepare the Offer, give it to me, I would
talk with my clients, counter the Offer, get another counter back, get
it signed, give it to their lawyers and then sit back and wait for my
commission. Meanwhile, the other agents were burning their gas showing
multiple dwellings to buyers, preparing the Offers including an
exhaustive list of chattels and fixtures, once accepted, they were
arranging a home inspection, a re-inspection, a mortgage, briefing a
lawyer, preparing waiver of conditions and sometimes amendments as
required and, basically, babysitting the buyer client who usually has at
least one episode of buyer’s remorse. Now that’s a lot of work.

Of course, it’s true I didn’t double end this transaction—that is I
had to share half the commission with the Buyer’s agent. But so what? I
would rather have half of 50 deals a year than all of 15. More pay, less
work. Duh.

Now almost all residential REALTORS have figured this out. The one
true statement I learned at the first brokerage I worked in was: “In
this business, you have to list to last.”

But almost no Commercial Brokerages in Ottawa get this. They want to
double end every deal if they can… much to the detriment of their
clients, in my view.

Now back to the west end office search. Do you think I can sell my
tenant client on seeing a building where: a) I don’t know what the
asking price is and b) he will have to pay our commission when with
every other building on our tour, the Landlord was paying the commission
to our brokerage? Absolutely not.

The guy who owns that particular building is not an immensely wealthy
person and he can not afford to have his building empty for long. He
could easily lose it if it remains that way. I like him—he is a hard
working person. Only our industry ethics prevents me from calling him
and telling him what kind of service he is getting. It is a little like
the law profession—once you have legal representation, the lawyer for
the other side can not contact you directly—he or she must go through
your lawyer. You can talk to the other client but not to the other
client’s lawyer.

Now the reason the other brokerage does this is so that they can
double end the deal—get both the listing and selling (in this case
leasing) half of the commission. But getting all of nothing is obviously
worse than half of something and much, much worse for their client.

There is a reason why, when we go in to do a listing presentation, we
tend to walk out with 7 or 8 out of 10 signed Authorities to Lease (or
Authorities to Sell). If you owned a building and you had more than half
of it empty, wouldn’t you want to hire someone who guaranteed maximum
exposure for your building, who always shared the commission with OBs
and was tied into a national network that is a source of more than 50%
of all searches done in real estate? We are one of the few commercial
brokerages in Ottawa (maybe the only one) that belongs to organized real
estate (OREB, the Ottawa Real Estate Board; OREA, the Ontario Real
Estate Association; and CREA, the Canadian Real estate Association).

This gives us access to REALTOR.ca, MLS.ca, ICX and a host of other
resources and, by rule, we must advertise the commission split we offer
OBs.

Look, to me, it’s a no-brainer. But I have talked to senior people at
other commercial brokerages and disclosed all of this—let’s learn from
the res guys! We will sell (or lease) more property, at higher prices
(rates) and do it faster. If we share, we will all make more money not
less and provide better client service too.

This is co-opetition at its best and makes for more effective and efficient markets.

So far, I have convinced no one. The good news out of all this is
that we are sucking up a large amount of inventory because clients know
they can trust us to do our best to get their properties sold or leased.

I can put this on my blog and it won’t damage our business for three
reasons: a) no one in this industry is paying attention (they nod ‘yes’
when I talk to them but afterwards they say: “But if we did that, we
wouldn’t double end as many deals and we would make less money!”; b)
their thinking goes something like this: we do things that way we do
them because we have always done them that way and we will always do
things this way because that is the way we have always done them and c)
if they did change, it would actually help us as the whole industry
would improve its level of service, its level of trust with clients
would increase, more inventory would be given over to the industry as a
whole and we would all end up making more money. The increase would come
from not only selling or leasing faster and selling or leasing at
higher prices or rates (because in an efficient market—broader exposure
will attract higher prices) but also from greater volume—more developers
would entrust our industry with their products.

There are some developers who will not list with brokers because they
know they try to double end deals and cut out other OBs. So why not,
not list and let every broker have a shot at the property? The answer to
that is simple—brokerages do actually know how to move product—they
each have their own network of buyers, sellers, tenants, investors and
they have their own way of moving and marketing product. But they will
naturally pay more attention to properties they have listed.

OK, so we have seen co-opetition in the form of trade associations
and also in the form of co-opting your competition. Think about OPEC
(the Organization of Petroleum Exporting Countries). They compete for
customers and oil field development dollars but obviously co-operate in
setting prices. Think about residential agents competing for listings
but then co-operating by putting almost all their listings on the
Internet and co-opting the agent community in a wide-scale effort to
sell a home.

Another example from the real estate industry is when two or more
builders get together to develop a sub-division. In Ottawa, it isn’t
unusual to find homebuilders like Richcraft, Urbandale, Claridge,
Phoenix, Cardel, Monarch and others co-operating in this way.

It makes sense—if a home buyer comes along and doesn’t like a
Richraft home for some reason, they can mosey along to Cardel and see if
they like that one better, or vice versa.

When Richcraft, Cardel and others spend their marketing dollars on a
particular sub-division, they attract more clients than they would do
alone. Just the presence of more than one builder gives the would-be
buyer comfort that the sub-division will be completed in a reasonable
period of time, people like to have choices and people like to buy where
other people are also buying—it is the power of a crowd to draw an even
larger crowd.

The same type of co-opetition takes place when you see:

• four fast food restaurants at an intersection;
• four petrol stations grouped together;
• multiple car dealers within ear shot of each other (in Ottawa, for
example there are (or will be) 11 dealerships at the Palladium Auto Park
(if the auto industry recovers);
• four outdoor equipment stores along one street;
• dozens of bars and restaurant in a small are (like the Byward Market in Ottawa);
• office towers congregating downtown or in a suburban business park;
• three or more (!) women’s shoe stores in the same mall.

You get the picture.

How about Yahoo recently wanting to use Google’s ad server (Ad Sense)
for some of its sites. They estimated that Google’s superior algorithm
could generate $350 million more revenue per annum than Yahoo’s own ad
service.

It turns out that Yahoo is pretty good at generating content but
Google is way better at matching ads that pay (!) to that content.

One of the things that we all need to do in business is focus on our
core competencies. It makes sense for Yahoo to outsource some of its ad
revenue production to Google because that is all the Google (really)
does. So Yahoo could focus more on content and that is good for the
Internet (by making the Internet an even more interesting place than it
already is). And by making even more money, Yahoo could do even more of
that, hence, it become a virtuous circle.

Unfortunately for Yahoo (and to a lesser extent, Google), the US
Department of Justice (which enforces anti-trust legislation in the US)
did not agree—they felt it would lessen competition in search engines
and Internet advertising channels and they may be right. But it would
have been a heck of an example of co-opetition.

Dr. Bruce

Prof Bruce @ 10:16 am

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If I Gave You a Million Dollars

1 Comment

Posted on
Friday 26 December 2008

You would be … poor. With apologies to the Barenaked Ladies
for a poor parody of their tune, the fact is, it’s true. Most mega buck
lottery winners are worse off less than five years after winning—they
have drug and alcohol problems, they have lost their jobs and families,
they have a bunch of new best friends, all of whom have can’t-miss
business ideas that tanked. In entrepreneurship, we say it
differently—“Give a person a fishing rod, not a fish.”

Recently, a friend of mine sent me an article on Zappos, a web-based
retailer that grew to around $1 billion per year in sales in less than
ten years, in part, because of an emphasis on customer service, CS. I
can’t believe the number of companies that believe that CS is a cost
centre—it is not. It’s obviously a profit centre. If you get most of
your business as Zappos does from repeat customers (75% of their volume
is from repeat customers!), just imagine how much money they save by not
having to spend precious marketing dollars on replacing unhappy
clients?

They do things like provide free shipping… both ways. One of the
biggest drawbacks of using web retailers is returning goods. They take
the hassle out of returns. It’s expensive but the results are in…
excellent customer service, works.

To drive home the point, Zappos will pay any new hire $1,000 to quit
after the first month. No questions asked. You can have $1,000 to go
away. Zappos has realized something that almost no one gets these
days—your HR is the number one thing you have going for you. If you have
good people, you will be much more likely to succeed.

Now $1,000 to get rid of someone who provides lousy CS, who doesn’t
buy in to the idea that the customer is number one and who doesn’t buy
in to your corporate culture is a really cheap way of de-hiring someone.
Trust me, it costs a lot more to fire someone—you have to give them a
reasonable period of time to improve, meanwhile the lousy customer
service may continue. You lose orders, you get bad word of mouth and
your brand suffers. One unhappy client tells two others. You need to
give them a warning letter then you must monitor their performance and
meet with them a second and maybe a third time. This takes up a lot of
management time. You need to get your legal staff to prepare a letter of
dismissal. You have to provide them with notice or payment in lieu of
notice. (The latter being infinitely preferable because you don’t want
them around for five more minutes damaging not only your customer
relations but poisoning your staff.)

You may get sued for wrongful dismissal. Then you need to prepare a
defence, present yourself for cross examination for discovery, attend a
settlement conference, go to trial if you can’t settle and, if you win
or lose, face a possible appeal. It’s endless. One thousand bucks to pay
someone to go away who doesn’t want to be there and who doesn’t buy in
to your corporate culture is a bargoon.

Now what if your Rich Uncle Fred gave you the World Financial Center
in NYC consisting of four towers of eight million square feet in the
centre of Battery Park for free? A heck of a deal, right? Wrong. I would
predict that you would be broke and lose this wonderful portfolio in no
time at all.

It isn’t your buildings that produce revenue for you, it’s your
people. If you don’t have great leasing people, maintenance folks,
property managers, financial controllers, contractors, cleaners,
security personnel, managers and so forth, you won’t manage your
portfolio well at all. Pretty soon, tenants will be giving you notice
and you won’t be replacing them and, if you did, you might get the wrong
ones—tenants who don’t pay their rent are worse than no tenants at all.

Do you know who pays the operating costs and utilities when your
buildings are empty—you do. Do you have any idea what it costs to
pay—realty taxes, cleaning, garbage removal, security, snow removal,
maintenance, heat, gas and electricity—for a Class A Tower in New York
City? It is at least $45 per sq. ft. per annum; that works out to
$360,000,000 per year for the WFC!

Before Uncle Fred gave you those buildings for free, you were happily
working as an advertising executive somewhere earning $100,000 per
year. Your annual salary (if you still have a job) can support an empty
WFC portfolio for .101 of a day or around two and a half hours. You
would lose your real estate portfolio before lunch.

Stick to what you know. Every business has ‘secret’ levers you pull
to make them work. No business is easy. Even one you get for free.

It’s great to have a good business model, a few launch clients and
customers and some cashflow, but after you get the business off the
ground, your first hire and every one after that are the most important
things you will do. Be like Google, get the very best people you can.

There is a great book, Blink by Malcolm Gladwell (Little Brown and
Company, 2005), that talks about using the power of your unconscious
mind (the part of your brain that forms impressions in the first two
seconds of any situation) to make certain decisions. He also points out
how it can work against you.

Gladwell talks about how hiring for the wind section of a Symphonic
Orchestra can be overwhelmingly influenced by the eyes instead of the
ears. He calls this the ‘Warren Harding’ effect.

Warren Harding is considered the worst President of the US ever
(although I suspect that President George W. Bush will, in the distant
future, vie for this role). But he looked the part—tall, good looking
and imposing. And he got elected despite being patently unsuited,
unprepared and unready for the job.

So in auditions for the wind section, a good looking, tall imposing
male has every advantage over a petite woman. Women were ‘known’ to be
unable to play with the strength, vitality and range of a man. But it
turns out that when Maestros were encouraged to do blind auditions
(placing musicians behind screens), women could, in fact, play as well
or better. In less than a generation, women make up nearly half of
US-based orchestras (up from less than 5%).

Walt Disney knew this. He realized that an attractive female could
unduly influence his judgment of the calibre of her voice. He placed all
would-be Snow Whites behind a screen. The result is a magical film that
saved Walt’s company from bankruptcy in 1937.

The number one thing we look for in our employees is good
heartedness. Pretty much everyone will have the required credentials or
they would not be in the interview in the first place. What we want is
people who care about people—their colleagues, their clients, their
suppliers, their families, their company, their city, their country.
These people don’t quit when the going gets tough. They share
information. They are generous with their time.

This you can probably deduce from the first two seconds after you meet someone, if you pay attention.

Dr. Bruce

Prof Bruce @ 8:30 am

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33 Comments

Good Corporate Citizen

Posted on
Wednesday 17 December 2008

The City of Ottawa is yet again embarking on a planning
exercise for rapid transit in Canada’s Capital City. Based on LRT (Light
Rail Technology), the last initiative foundered badly, not because of
the technology, not because the financing wasn’t available, not because
the public interest wasn’t there in Light Rail but because of political
discord within Council.

The matter is now before the courts—the selected providers (mainly
PCL and Siemens) are suing the City of Ottawa for a few hundred million
for breach of contract.

The City has now decided to go a different way—starting with a rail
tunnel under the City core. The consultants who are engaged in the
analysis of different routes are now suggesting that instead of running
the tunnel under City-owned streets or other City-owned ROW (Rights of
Way), they say their preference would be to run the line on an
as-the-crow-flies basis. The shortest path between two points is a
straight line. This obviously reduces costs for the City: not only
capital costs but operating costs as well—running trains on a shorter
route with fewer turns leads to reduced power consumption and less wear
and tear on brakes and suspension. Faster average speeds also result,
reducing transit times, increasing capacity with a preset level of
rolling stock and saving valuable time for riders.

All to the good, no doubt. But the consultants also state that
getting the ROWs from private landowners should be no problem (read, NO
COST) because none of the landowners use their properties at the depth
that the LRT tunnel would be constructed so why wouldn’t they be good
corporate citizens and make those ROWs available for free?

Not so fast. Let me tell you a story about another good corporate citizen (moi) who helped the City out a few years ago.

The City was constructing a major sewer line in Bells Corners. To go
around the site I owned at that time (which was 4.5 acres) would have
cost the City an extra $500,000 or so. They would have had to go south
along Moodie Drive, east along Stafford Road and then head north and
then east again. The pipeline would have extra length (i.e, extra cost)
plus five significant bends of 90 degrees, which reduce flow and
capacity and also the City would end up with a pipe that would have a
greater chance of leaking in those extra joints.

So like a good corporate citizen, when the City asked for an easement
over our property (for free, of course), I rather naively agreed.

The City surveyed the easement, created it at the Land Division
Committee and put the pipe through our parking lot. They kindly repaved
and patched our parking lot.

The weather in Ottawa is pretty tough—temperatures range from –20
degrees Celsius to +30 degrees Celsius. The average temperature year
round is just 4 degrees!

Snow and ice, freezing and thawing, these cycles are a major cause of
damage to all human made objects—roads, buildings, vehicles, …
pipelines too.

So the next Spring, we notice there is huge sump hole in our parking
lot—this is a lot that had been stable since we built those buildings 15
(!) years before. But now there was a hole in the parking lot big
enough to eat two cars.

We call up the City and tell them to get out and fix the darn thing. They send a survey crew instead. What’s with that?

It turns out that the sump hole has formed just outside their
easement—they then claim that it is not their responsibility to fix
anything outside their easement.

Any civil engineer (like me, for example) would just look at that
report and laugh. To understand the process, think about a pipeline
buried in the ground—it makes a perfect conduit for movement in the
water table along its outer length. Any water infiltration from the
surface will carve a channel along the pipe and take with it sand and
gravel (engineered fill) that underpins all asphalt surfaces.

For anyone who has ever installed a membrane roof, trying to find
where a leak is, is a non-trivial task. Water has a nasty habit of
following the path of least resistance which can be quite random.

Anyway, trust me, a sump hole could form quite a piece from that pipe and still be caused by it.

The City refused to fix it—“Sue us!” they said.

Nice chaps.

The City said the same thing to PCL and Siemens—“Sure, we had a
binding contract but so sad, too bad, we just feel like repudiating it
so sue us.” And they did.

Now I don’t like suing people—it consumes a huge amount of time, resources and creates a negative energy.

Here is the ‘balance sheet’ on a lawsuit:

Dec. 17, 2008 City of Ottawa Sewer Pipe Lawsuit

Cost to Repair Parking Lot -$50,000

Cost to Sue City $30,000
Cost to Obtain Engineering Report $15,000
Management Time $10,000
Misc. Costs $8,000

Total $63,000

Award for Cost of Repair $50,000
Punitive Damages $0
Total Award $113,000

Probability of Success 66.67%

Expected Value of Award $75,333.71

IRR

0 -$50,000
1 -$30,000.0
2 -$25,000.0
3 -$8,000 -$63,000.0 Check
4 $75,333.71

IRR -13% pa.

What this tells you is that you spend $50k fixing your parking lot
(you can’t very well leave it with a hole that can swallow cars whole).

Then you spend the next three years of your life suing the City
during which time you spend $30k on legal fees, $15k on an independent
engineering consulting report to prove that the City’s pipe caused the
problem in the first place (which any reasonable person could see by
standing on the edge of the sump hole for five minutes), $10k of
management time stupidvising the whole process and another $8k of
various expenses that come up.

In my experience, even if you feel you have an open and shut case (of
which there is no such thing), you ALWAYS have a chance of losing
litigation. The judge might not like the way you part your hair. She or
he may be a bad mood (I lost one OMB Hearing when the Panel Member got
caught in Ottawa’s great ice storm and wrote his negative decision in a
fury. That decision was later reversed, BTW.) Who knows?

So I have put in a probability of success of 2/3. That means the
expected value of your award is just 2/3 of your costs. This leads to a
NEGATIVE Internal Rate of Return (IRR) of 13% p.a. You would be better
off to do nothing!

Dr. Bruce M. Firestone

Postscript: Even if you change your probability of success to 90%
(way too high in my opinion), you still have an IRR = -3% p.a.

And what happens if the City decides to appeal the award? They can,
you know. The City’s staff know they can win by delay—just exhaust the
other side both financially and emotionally. This is a set strategy
that the staff use on planning applications, for example.

I think the economics of litigation are terrible and would only get
worse. It could change for the better from your POV if the courts would
award you punitive damages but Canadian Courts, in particular, are
hesitant to do that. So, sorry, no big lottery win for you. You are just
better off to fix it and the next time the City asks you for a
favour—just say ‘no’.

I include the SPREADSHEET I used to estimate the IRR of litigation.
You can download it in .xls format and change the assumptions yourself.
Click HERE
to download the spreadsheet. Note that even if you increase punitive
damages from zero to $50,000, your IRR is still negative (-1% p.a.).
Even a $100,000 punitive damages award only yields a return of 8%. This
is far below the rates of return you need to achieve to be a successful
entrepreneur or intrapreneur. It might be fine for your retirement nest
egg to have rates of return around 8% p.a. but large publicly traded
companies aim for around 22% p.a. rates of return on their equity. It is
not unusual for entrepreneurs to look for rates that are double this or
more. They need these types of returns since, almost by definition,
most entrepreneurs start with (almost) nothing and, if they ever expect
to get anywhere, need exponential growth rates.

(BTW, this type of analysis is also applicable to many collection
actions. If you are suing a company with deep pockets, using a law firm
that works on a contingency fee basis (a typical US practice) and
litigation is your life, maybe this is what makes sense. But in most
situations where you are having trouble collecting a debt, negotiating a
settlement is, in my experience, the best, most efficient and humane
way to do things.)

For clients of mine with property downtown, you can be sure I will be
bringing the above difficulty with the City of Ottawa to their
attention. What happens if vibration, undercutting the foundation,
what-have-you, destabilizes an office tower downtown? If the City was
too cheap to fix our piddly problem just imagine how they will react to a
real crisis. They will run for the protection of their lawyers.

Prof Bruce @ 11:58 am

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Yoga Moment

Posted on
Saturday 13 December 2008

I didn’t know what a Yoga moment is until this year. It is a moment of personal achievement in the practice of Yoga.

Now even though I didn’t know what a Yoga moment is before my wife
clued me in, I certainly intuitively understood the concept from all of
the sports I did when I was younger. After all the sports injuries I
have had (separated shoulder from windsurfing, tennis elbow from all the
racket sports I have played, left knee damage from soccer, and a bunch
more), frankly, I never thought I would have that type of experience
again.

Earlier ‘Yoga moments’ for me included:

• Playing (out of position) goal and stoning the opposing hockey team when I was 12.
• Making the senior boys gym team and finally being able to do a flip off the high horse.
• Catching 13 passes in a row as a halfback in one (football) game and only missing the 14th due a pass interference call.
• Scoring the tying goal in a broom ball game championship game that we won.
• Assisting on the winning goal in overtime in the champions game when I was playing soccer for an ANU team in Canberra.
• Playing (hockey) on a line with Ron Davidson, a former Canadian
Olympic team member, and scoring goals by going to the net and keeping
my stick on the ice so Ronnie could bank goals in off of me.
• Learning how to proficiently jibe a windsurfer.
• Running the 10 km. in less than 40 minutes before I was 40 (actually,
not quite—my PB was 40:14 at age 39 and I knew after that race that I
couldn’t run any faster and never would).

Now these are good moments to remember in a more or less
undistinguished athletic career. The reason I bring it up here in my
blog is because you are never too old to learn new things.

One of my heroes, my mother-in-law, learned how to use a PC at age 65
when she left her job as chief nurse in the Cancer Clinic to become a
manager at a health staffing agency. She had earlier gone back to
University to get her Bachelor of Nursing in her 40s after completing a
rigorous training as a RN in her late teens and early 20s. She continues
to amaze me as she studies for and writes her drivers license exam
today as well as taking and acing the required road tests.

What keeps people young and sharp is always to be learning and trying
new things. Just because you are middle aged like me or an elder
doesn’t mean you are useless and should be thrown out, unless, of
course, you make yourself useless and worthless by not trying.

I started Yoga two years ago at the suggestion of my wife. I must say
I always thought of Yoga as something for women to do. And sure enough,
when I walked into my first class—it was all women and me. When the
Yoga instructor told us to get into position, all the girls flopped into
the position perfectly and I was pathetic, totally inflexible and
embarrassed.

My first Yoga moment was learning not to care. For a competitive guy
like me that took a few months. But then I started to get a bit better
at it, I liked the feeling that it gave me (it is a natural high for
sure) and I suddenly found I didn’t give a hoot what other people
thought or how bad (or good) I was at it.

I recently had a month where I had six Yoga moments (in one month, no less!)

a) I could do a headstand, unsupported.
b) I could do a ‘bicycle’, unsupported.
c) I could bow to the floor without using my hands.
d) I could balance on one leg in various Yoga positions without falling over.
e) I created my own Yoga routine.
f) I taught my first class and didn’t make a hash of it.

I told my three teenage daughters about these moments and they
laughed at me. They can, of course, do all of these things (the first
four anyway) without any apparent effort and can’t understand why middle
aged people would have any trouble at all with any of it.

But I must say I have enjoyed immensely these little personal
victories, as much as I did, for example, being able to make the senior
boys gym team at age 12 (I was in High School at 12). On that occasion, I
could do everything the older guys could do except the flip off the
high horse. The gym teacher gave me until the following Monday to do the
flip successfully or I was off the team. I worried about it all
weekend. On Sunday night, I had a dream—in my dream I saw myself
hammering the springboard and flawlessly doing the flip. The next day,
as I lined up to wait my turn, I heard the snickering of a couple of the
lads as I got ready to go. But I did it perfectly and made the team.

The reason I write this, is to inspire some middle aged people—don’t
give up! But also because there are some lessons here for entrepreneurs
including:

• Visualization is an important tool for humans—if you can visualize something, you can probably do it.
• Practice, practice, practice is a pre-requisite for success not just in athletics but in business too.
• Patience is required.
• A little humility goes a long way.
• Don’t make too many judgments without some evidence (Yoga turned out
to be good for my psyche, core strength, flexibility, healing, sore
back, creativity and sense of tranquility and peace).

Dr. Bruce

Prof Bruce @ 5:11 pm

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Hair, Makeup and Clothes

Posted on
Saturday 13 December 2008

I had a discussion recently with an anonymous person (my
wife) about the value of hair, makeup and clothes. Now this person
spends a lot of her money on these things and she feels that the
investment is sensible and important.

I thought a bit more about it. Just Google [celebrities without
makeup] and see what you think of the images that result—would you pay
as much to see a film star without her or his makeup as you would with?

Now, if I had my way, I would never wear another suit and tie as long
as I live. I have lived in a suit since I was nine years old—I went to a
private, all-boys school and we were required to wear jacket and tie at
all times except for sports. We even fought pitched battles in tie and
jacket.

A friend of mine, a successful developer, never wears anything but
jeans to the office. He told me, when we were both a lot younger, that
he would put an earring in his ear after he made his first million which
he did (for a week or so) when he was about 32. He is a charming,
handsome Irishman and can get away with pretty much anything in terms of
the clothes he wears.

But can the rest of us mere mortals with fewer resources and less charm get away with it? Probably not.

The economic and political case for going to a top quality hair
dresser, wearing Holt’s clothing or Harry’s suits and putting on makeup
is pretty convincing, even if I hate to admit it. Tony Blair, a
consummate politician, had his own makeup professional to make him look
good. Richard Nixon lost the Presidency to John Kennedy, in part,
because he eschewed makeup in their television debates while Kennedy did
not. Kennedy looked poised, assured, youthful while Nixon looked
unshaven, shifty and untrustworthy (not to mention he sweated a ton
under the hot television lights).

Is there any doubt that good looking people in great clothes make
more money? Let’s think about that for a minute—what do, for example,
Brad Pitt, Will Smith, Tom Cruise and Denzil Washington have that most
of the rest of us don’t? $20 million+ per film. Now I am not saying that
you have to look and dress like these guys to be successful.

Looking good is what these guys do for a living. And they work hard
at it—facials, nutrition, unbelievable, peak fitness work out programs,
sleep, sports, massage, yoga and naps as well as relief from stress are a
big part of their formulae. They have personal trainers, nutritionists,
massage therapists, hair dressers, agents, personal managers, yogis,
clothiers, personal assistants, makeup artists, schedulers, money
managers, nannies, housekeepers, pool maintenance people, gardeners,
professional cooks, housekeepers, maintenance personnel, security
people, chauffeurs, private planes, pilots and stewards and
stewardesses, studio execs, psychologists, dieticians, psychiatrists,
doctors, plastic surgeons, publicists and various hangers-on whose job
it is to make these people look good and their lives easier. And, by and
large, they do.

Now I am not recommending that you try to do what these famous folks
do on a budget that is likely to be 1/10th of one percent of theirs. But
doing some lifetime fitness (finding a fitness routine that you can do
at a low level of intensity “forever”), getting a decent hair cut,
wearing some nice clothes, eating properly, not drinking too much,
staying away from drugs and getting enough sleep will almost certainly
help you be more successful. Again, I hate to admit it but in our
society, image is BIG. Marshall McLuhan said it best: “The Medium is the
Message.” And you are the medium of your own image.

Dr. Bruce

Ps. I did a spreadsheet on what might happen if a person invested an
average extra amount ($1,939.81 per year) in hair, makeup and clothes
over a 54 year career from age 18 to 72. Assuming that that person got
better jobs or faster promotion, she or he might make an average of 9%
more over that period. The difference is smaller when that person is
younger or older. The investment in more hair care, makeup and clothes
makes the most difference in terms of their income (at least, it does in
my fictitious model) in the middle earning period from age 33 to 63.
The model does not take into account the possibility that their spouse,
attracted to a well presented person, might also be a higher earning
individual. Get the SPREADSHEET.

Pps. Here is a good comment from Aron Chaney, a Real Estate
Salesperson with Partners Advantage GMAC, a former clothier and
Taekwon-do instructor. I especially like his comment on body
language—you can dress up any outfit with a confident demeanour.

Bruce:

That’s great! I agree wholeheartedly. As a person under 33, I can
attest to the fact that for the past ten years my success and failure in
business relationships has been highly influenced (often contingent) on
the way I looked.

When I was 17 years old, teaching Taekwon-do to people older and
younger than I (ages 4-65), it was important that I portray an image
that did not threaten (by having pants that were too baggy) and would
make people comfortable (by having a collared shirt plus clean shoes). I
was the youngest instructor to ever be given charge of a branch (albeit
a tiny branch: Ashbury College) and I believe much of the
responsibility I was granted was as a result of the way I presented
myself.

Again when I started the clothing company (at age 24 along with
partner and friend, Neil Williams, now co-owner of a blossoming
limousine service called Dublin’s Gate), I had a distinct advantage when
I did my best to “look the part” of a sales executive when dealing with
hotels and airlines. (Please note that, in my view, Social Respect due
is determined this way: a 25 year old in a suit = a 45 year old in a
golf shirt!)

There were (very rare) times when I would not dress the part, and
although it was never disastrous, I did notice a significant difference
in the business dynamic (less deference, less magnetic, less presence,
less confidence).

On a side note, I believe body language is also important, if not
more important than clothing and grooming… You can dress up a pair of
jeans by standing up straight and smiling!

Thanks again,

Aron

Prof Bruce @ 4:08 pm

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Discovery

Posted on
Sunday 7 December 2008

Some Things Can Only Be Discovered in the Process of Doing/Why Goal Setting is More Important than Planning

I have come to believe over the years that there are some things,
maybe many things that can only be discovered and cannot be planned for
or thought out in advance. I realize I am coming at this from the POV of
an entrepreneur, who does most things this way anyway. But still it is
true, I believe.

It also frustrates many people (my wife included) who want to plan
things out well in advance. I have already written elsewhere about the
futility of long range (and quite often short range) planning—too many
pieces are moving around and too many changes are happening day to day
in our political-economy for planning to be of much use.

How many economists thought petrol would soar to $145 a barrel two
years ago? How many thought it would drop from there to less than $60 a
barrel in less than four months? How many thought that Lehman Brothers
would go OOB before it actually did?

I personally believe economists can only tell you what has already
happened and sometimes they can’t even manage that—it took the Business
Cycle Dating Committee of the National Bureau of Economic Research
(NBER) a year to make a determination that the US is in a recession. A
year! Sheesh, any corner store owner could have made that determination
earlier than that. PhD not required.

So while planning may not be of much use, goal setting is. Humans are
much better at setting and achieving goals than they are at making
plans. I have always liked the US Marine Corps unofficial motto: “Show
some adaptability!” Trust me, it will save your life (if you are a
marine, blindly following a pre-ordained battle plan will surely get you
killed) and your business (if you are a business owner or CEO and, say,
in six months car sales drop from an annual run rate of 20 million
vehicles in the US market to a demand for just 10 million, your precious
plans are useless.)

Just to make things more complex (sorry about that), there are many
things in life and business that can only be discovered by experiencing
business processes or by living your life. Do you think you can plan out
who you are going to fall in love with? I believe that most of us
DISCOVER that. (According to Malcolm Gladwell’s thesis in Blink, you
might actually discover you love her in the first two seconds after you
meet her. Your unconscious mind is at work here. It is terrifically fast
and, in complex matters, often a better guide than the best you could
do after months of collecting additional data and ‘thinking things
through’.)

The first time the woman who was going to be wife kissed me, I got
lost on my way home—in my home town no less. I had to stop the car and
collect my wits for more than 15 minutes. I had NO idea where I was.
Then I realized, that’s the girl for me!

Recently I moved real estate Brokerages. I wanted to be in a place
that acted and performed like a team. In this industry, everyone says
they want to work in teams but, frankly, that is just so much hooey. In
place after place, your biggest competitors sit around the table with
you and will take your clients, ideas, inventory if they can.

Did you know that if you ask someone else in our industry to do an
open house for you for one of your listings and a Buyer comes in, likes
the place, is represented by a Buyer agent and makes an Offer through
that agent, you get paid as the listing agent, the Buyer’s agent gets
paid but the poor sap who did the open house for you gets nada?

So some young guy or gal, probably new in the biz, gets suckered into
doing open houses for you because you are too busy doing your Xmas
shopping and he or she gives up say five or six weekends before Xmas to
help you out but at the end of the day he or she may get nothing for
doing that. The rationale* is simple—this is the way we do it because
this is the way we have always done it and this is the way we will
always do it because this is the way we have always done it. Got that?

(* Senior agents do have some political cover for this—they say that
the new agent, by doing open houses for you, may get some people who
come in who are not already represented by an agent and thus may get
some Buyer clients for that home he or she is showing or if the Buyer
doesn’t like that home then for another one. Pretty tenuous cover, I
think.)

Commercial real estate isn’t any better and maybe it’s worse. Many
broker-owners compete with their own agents for clients and deals. I
can’t think of another industry where this happens on such a widespread
basis.

So I came to the new brokerage with the idea that we would try real
team selling. When asked to explain it, I could only say what it is not
by quoting the above examples and a bunch more.

But over the last five months, from the DOING OF THE WORK, I think we
are coming to understand what it might mean. It sure is different and
again I believe there was no way we could have planned out what we were
going to do in advance—we had to discover it.

I am amazed that so many of the people I work with are willing to
live through this experiment with me. The theory is that you are better
off with 25% of 30 deals say than 100% of five. Not only are you better
off financially (at least in theory), you feel you are part of something
bigger than yourself (which most of us crave and need) and you can rely
on others to have your back, not stab you in the back.

Now this is not for everyone—REALTORS are notoriously independent and
I understand that. There is nothing at our firm that says you have to
join the team—be an individual or form your own team, no problem. Just
don’t engage in unethical practices.

Some things we have learned is to put three agents on every listing
or deal. We are also doing Trade Record Sheets, TRS (which divvy up
commission income) that are really new in the industry. Instead of the
usual 50/50 or 72/25 TRS, ours look weird: they could be 12.5/12.5/25/50
or 6.25/6.25/43.75/43.75 (yes, we just did one like that!) or
33.33/33.33/33.33 or ….

I won’t go into too much more detail about what we are doing because
some of it is proprietary, but we are definitely discovering things as
we go.

If you are open to new ideas, opportunity is everywhere in the
‘ether’. The other day I happened to put one file down next to another
one and it suddenly occurred to me that I had a match between Buyer and
Seller. Despite having my own data base software, it just had not been
apparent before. Making connections is often a quasi-random event. You
just need to SEE it.

SEEING is a big part of the discovery process but to get better at it
you have to resist two things: one, the tendency to reject ideas
suggested by other people and, two, the culture of compliance. We are
all guilty at times of rejecting not-invented-here ideas but you can get
better at this: just return to the subject again and again and,
eventually, you might see that what someone has suggested makes good
sense.

The culture of compliance* is more difficult to deal with. It’s more
complex. It’s as if you are driving towards a cliff but, because you are
driving the speed limit, you think you are OK. This happens more often
than you might think in business and the next thing you know as CEO,
your company is in bankruptcy protection.

(* It’s also why companies sometimes compromise the safety of their
employees. The thinking goes like this: ‘If we’re up to date on all our
record keeping, reports and tests, we must be OK.’ They just stop
looking at what those records, tests and reports are saying.)

I believe you should never waste a crisis; it’s from crisis that the
mind is concentrated and many opportunities are borne or discovered but
if you don’t know you are in crisis, you are not open to SEEING the
opportunities to avert it or take advantage of it. I believe that, for
example, early on in his Presidency, Mr. Obama missed some nearly
unprecedented opportunities to: remake the US space program (https://www.eqjournalblog.com/?p=829), the US financial system and the US tax system.

Sean Murray in our office had a big insight the other day. Don’t many
middle aged, potential condo buyers have homes to sell? What if condo
developers allowed us to help them sell more condos by moving the
existing homes of their potential clients? Now how did Sean discover
that?

I can tell you. I asked him to call a condo builder for some info on
their project and a light went on when he was talking to them about
their problems—it just popped out of the conversation. It was completely
fortuitous but Sean was OPEN to the process of discovery.

Another REALTOR friend of mine, Dan Oakes, had another big insight
last year. There is a shortage of commercial condos in Ottawa—if you
want to own your own place of business, it isn’t easy to do here. So Dan
was driving around one day on one of our main streets and he noticed
how many private residences there were on major arteries like Carling
Avenue, Maitland Avenue, St. Joseph Blvd., Churchill, Woodroffe, etc.

He thought: “Hmm, if the City of Ottawa got their act together, they
could rezone all these homes for commercial/residential purposes and, in
one fell swoop, create a huge increase in inventory for would-be
owners.”

This initiative would have some terrific results:

1. More business owners could own their own place. They would no
longer be subject to rental increases set by Landlords, they would have
security of tenure, they would have some diversification of risk by
owning some real estate in addition to their operating business, they
could renovate their premises to their requirements, they could benefit
from property value increases.
2. Residents on these main arteries, many of them elderly, would have
more Buyers to sell to and at higher prices. I mean who really wants to
live on Maitland with 20,000 cars a day buzzing by your living room at
more than 60 kph less than 20 feet away?
3. The City of Ottawa which is suffering its own financial problems
would get a large increase in their municipal assessment base and a huge
increase in realty taxes (commercial rates are around four times the
residential rate) while costs for commercial assessment are much lower
(very few city services are extended to commercial establishments, who
must, for example, pay for their own garbage removal and don’t need
schools, play grounds or libraries built for them).
4. Many of these properties are in need of significant repair—their
foundations are failing, their roofs need replacing, their facades need
refacing, their building envelopes are not weather-proof, their
interiors are shabby and so forth. It probably isn’t worth doing if they
are used for residential purposes but almost certainly would get done
if they were used by a dentist, a CA, a law office, etc.
5. Many of these buildings will be multi-use with second floor
apartments or maybe basement apartments with the ground floor being used
for commercial uses. So some affordable housing may also come out of
this initiative.
6. REALTORS would make more money too. And that surely is a good thing!

Now this makes a lot of sense but don’t hold your breath for the City
of Ottawa to act. This is one of the worst run cities in Canada with a
staff that is more bureaucratic than the guys running the UN.

Anyway, do you think Archimedes could plan out how he was going to
figure out how to measure the density of King Heiro’s
irregularly-shaped, gold crown before the King of Syracuse lost patience
and executed him? He needed to be open to new possibilities. He
subsequently noticed that large, irregular objects (like the male of our
species) cause water levels in public baths to rise. And so, he
discovered the principle that the buoyancy force exactly equals the
weight of an immersed object and with that, he immediately recognized he
could measure the density of the crown to ensure its purity was as
advertised.

I would bet that things like Amazon’s use of its relational data base
(asking the question: “Would you like to see what other people who
ordered this book (CD/DVD/etc) also ordered?”) was discovered from
contact with their client base. This is why pre-selling is so important
for start-ups or even for large companies that are starting a new
division or selling a new product or service. Contact with customers
(and potential suppliers too, BTW) will lead to many, many changes and
improvements that can not be found any other way than by the actual
doing of a thing.

Dr. Bruce

Postscript: I think most artists also find that their art is a
process of discovery. For example, a sculptor may discover or uncover
the image in a block of stone. A novelist may discover or unearth things
about their characters as the book is being written. I think that the
scriptwriters for the hit television show LOST probably are discovering
the story as they go along. I would like to talk to one of them. There
is probably no way that for a story with: a) such a large ensemble cast,
b) back stories that are woven into the fabric of the show, c)
timelines that are extremely hard to track, d) characters that behave in
a manner that is consistent with their back story development and e)
plot lines that constantly delve into the past to resolve present
conundrums, could ever be written in a conventional manner—they are open
to the process of discovering the story as they go. And so should you
be in whatever field of endeavour you toil in—science, business,
politics, arts, social enterprises, etc…

Postscript: You can become more creative and more open to discovery
by: a. getting lots of rest, b. getting some exercise, c. not drinking
and thinking, d. don’t take drugs, e. focus on a problem then stop if a
solution does not present itself, f. sleep on it– let the subconscious
work on it for awhile, g. focus on it again, h. get some more exercise,
i. sleep on it again, j. don’t suffer from the not-invented-here
syndrome: if someone has a better idea or way of doing things, adopt it
immediately, k. read a lot, l. draw, m. write notes, especially at 3 am
when you wake up with a good idea, n. talk about it to someone you can
trust– verbalize, o. listen to your subconscious and your ‘gut’
feelings, p. be open to learning new things and new experiences (this
keeps you young at every age), p. do the hard stuff, q. exercise your
mind!

Here is a trivial example: What is the non-obvious next number in this series?

1,3,5,7,…

Answer

Prof Bruce @ 11:08 am

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