Generals Say Troops Understand Need for Pay Cuts

As ex-military, I have mixed feelings about this…   Yes, the Armed Forces are all about the mission and defending the constitution of the United States of America.  But you still have to pay the bills and feed the family.  You decide…

Facebook & WhatsApp, The M&A Bubble, and Valuing B2B Companies With New Metrics

By Jason Busch, guest contributor.  Jason Busch and Richard Lee, the founders of Spend Matters Group, a Spend Matters affiliate, frequently lecture and advise on M&A strategy and valuation in the B2B sector.

Looking at Facebook’s $19 billion acquisition of WhatsApp, I’m getting a sneaking feeling like it’s 1999 all over again. As with the last Internet bubble, consumer-centric tech companies with stratospheric valuations are leading the charge in buying smaller firms with, well, stratospheric valuations. And the metrics being used to gauge acquisition value – the number of users and user growth rates – seem eerily similar to non-financial valuation metrics from last time around (eyeballs, anyone?). That is, when Mary Meeker and Henry Blodget ushered in an era where discounted cash flow analysis was taught only to business school students and had no place in the bubble M&A world.

But how does this relate to WhatsApp? In a story from earlier this week, Reuters reported that “Facebook is paying $42 per user with the deal, dwarfing its own $33 per user cost of acquiring Instagram. By comparison, Japanese e-commerce giant Rakuten just bought messaging service Viber for $3 per user, in a $900 million deal.” As an aside, for those who are curious, the multiple on employees (55 in total for WhatsApp) was $344 million per FTE.

So number of users is now the new “eyeballs” in B2C. But what will the metrics for valuation become in B2B if indeed this bubble migrates to such future IPO candidates as Fieldglass, Coupa, and IQNavigator, not to mention public companies in the sector including SciQuest – and the already atmosphere topping Tungsten/OB10?

Arguably, the metrics by which one will measure B2B procurement, supplier network and marketplace companies this time will be more grounded in financial upside than the somewhat nebulous number of “free users” favored by the B2C social and app companies on the deal side today. Outside of the usual financially centric metrics including but not limited to discounted cash flow (DCF) as well as earning and revenue multiples (and growth multiples of the same), I’d vote for the following if I were trying to understand the potential value of these organizations in a bubble scenario:

  • Dollar volume of “non-card” commerce flowing through the application or network (owing to the potential value of new means of trade financing inclusive of both receivables financing and payables financing). The potential upside from a trade financing perspective (a market that in our analysis is well less than 1 percent tapped today) on the B2B application and network side is as much as 200+ basis points per transaction (but even a more conservative 25-75 basis points could show huge revenue potential)
  • Volume growth rates in terms of both dollars and number of transactions – a more valuable proxy than “number of customers” or “number of suppliers” because it shows actual application or marketplace usage.
  • Rate of large buying organizations added and successfully transacting. Taulia, for example, is absolutely the reigning champion in terms of adding new customer names in the e-invoicing and dynamic discounting area in the past 18 months. And after all, you need large buyers to enable value-added services for suppliers (which can generate new sources of revenue longer-term)
  • Number of “active suppliers” or those vendors doing commerce with organizations through an application or network in the past month or quarter. Separating out active from passive suppliers is key. Some networks and application providers claim to have hundreds of thousands of suppliers, but in many cases, the number of truly active vendors is less than 10 percent of the number claimed.
  • The privacy and security restrictions that an application, network or marketplace has (or does not have). For example, OB10/Tungsten and Ariba are able to do more with either user specific or aggregate data in the marketplace / network based on a relatively loose user agreement compared with more restrictive covenants in other agreements that do not enable the same sharing of information with either network participants or third parties (all of which could potentially provide value-added services) around the core offerings available today.
  • The ongoing sustainability of business models. For example, Fieldglass and IQNavigator, along with their vendor management system (VMS) competitors, have proven out the sustainability of a relatively high supplier-paid volume-based fee model until now. There is industry validation for this model. There is not the same commonality of validation for the value-based fees in the Ariba/SAP network model for indirect spend by comparison; in contrast, Ariba’s competitors based their pricing on alternative models.

There’s no question that B2C valuations are once again silly. And my guess is B2B is next. But the question remains: how we will value organizations when all the tried-and-true methods taught for decades in finance 101 courses goes the way of bad eighties music being played – this time through Pandora, iTunes and Spotify – on the 101 between San Francisco and San Jose.

Wait a minute … the 80s music is back and more alive than ever. In fact, the drivers for last two UberX rides that I took both had XM radio blasting Tears for Fears and INXS from the “80s” station.

Which of course can only mean one thing – the bubble is back.

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Allegiance for Hire

10ahn-master675Hyun-soo Ahn was one of South Korea’s most decorated short-track speed skaters (5 World Championships and 3 golds at 2006 Olympics), so why did he change his name to Viktor Ahn and is now skating for Russia?

What NY Times failed to understand…  Sports federations in South Korea are like mini-mobs (maybe even worse).  There have been allegations of abuse of power, misappropriation of funds, physical mistreatment of athletes, etc.  I heard rumors that Ahn wasn’t supposed to win his 3rd gold at ’06 Olympics, rather it was supposed to go to one of his teammates so that he too could be exempt from mandatory military service (with mandatory military conscription, you are exempt if you win an Olympic gold).  Instead, Ahn competed like any athlete should, whether Pop Warner or world-class…  For that South Korean Skating Federation full of bureaucrats and fat cats, made Ahn’s life hell and disowned him when he was seriously injured ’08 and missed 2010 winter games.  Now Viktor Ahn is winning medals for Russia at Sochi and could become one of the most decorated short-track speed skaters of all time.  Talk about karma…  Good for Viktor (and 61% of South Koreans surveyed agree)…

2013 in review for

The stats helpers prepared a 2013 annual report for this blog.  While our traffic may be minute compared to our sister sites (,, etc.), we are truly encouraged by the site’s global reach, leveraging technology.  We started SMBmatters as a forum for eclectic content for small and medium size business owners – hopefully some articles are relevant, many often not, but all entertaining.   In 2014, we promise to publish more original content, re-blog useful thought leadership and welcome more guest writers.  Thanks – and again, happy 2014!

Click here to see the complete report.

Death of Fox & Obel

photo (63)I’ve written many “Death of” articles – death of Blackberry, death of the penny, death of the Encyclopedia Britannica. But this one really hurts…

Before Mariano’s Fresh Market, Whole Foods, Wild Oats, and Trader Joe’s (I’m still mad at them for not giving me an opportunity to interview after I submitted an application at a different point in my life out West, but that’s a story for another time), there was Fox & Obel, the Chicago-based, River East mainstay for over a decade. With rumored celebrity investors like Scottie Pippen, 5 dollar per ounce olive oil, truffle tasting stations, in-house wet and dry aged meats (initially the only grocer that carried Tall Grass Beef from Red Buffalo Ranch, owned by Bill Curtis), top-notch wine and apéritif lists, hard-to-find regional and international accoutrements, and a Zagat-rated cafe attached, people had flocked to what is arguably the first high-end grocery store in Chicagoland. And this was despite its sky-high prices (trust me, much worse than Whole Paycheck, I meant Whole Foods).

Manning the bakery was Phyllis, a lovely woman and native of South Africa who never hesitated to scold rude customers, who took it. There was Martha, the ever-smiling assistant manager greeting patrons as they walked in and out. And Juanita, café manager and a single mother (her son’s a star athlete at a local Catholic school). Juanita knew exactly how you liked your coffee. Fox & Obel managed the unlikely balance of Chicago Gold Coast uppity-up-ness with a neighborhood feel. My business partner (of Spend Matters fame) Jason Busch Ioved the bakery so much that its muffins, pastries and bread made it into our formal LLC operating agreement for our Spend Matters advisory business (i.e., written into the agreement was that one partner had to “stop at the Fox and Obel” bakery before business meetings – I kid you not, and yes we did honor the agreement!) Unfortunately, it’s now time to amend it.

For a while we’d heard rumors of additional investors, new stores in the downtown area, North American expansion. Then bam: the bottom fell out.

My wife Jenna and I walked around the closing sales event with heavy hearts. To Jenna and me, this was not just a grocery store – Tsige cooked for us, Sue babysat our kids, and on Friday afternoons I used to bring my RJSL and Spend Matters colleagues treats from the Fox & Obel bakery. So what happened? I can certainly make a few hypotheses.

  • Decreasing passion and sense of mission – After initial success, the original founders cashed out to private equity investors. And I could sense a gradual decline in quality over the past few years. Does that mean every buyout spells doom for those acquired? No, but it does mean that if cash flow buyers (as opposed to strategic acquirers) focus too much on the short-term bottom line, it will erode the X-factor that made the establishment special.
  • Hiccups in execution – It could be as minor as less crust on what used to be their signature almond croissant (Jenna noticed it after a new pastry chef came on board; the long-time head quit when his paycheck bounced), as major as multiple health code violations (fruit flies in food preparation stations is what I’ve heard), and everything in between, such as failure to pay electricity bills on time.
  • Poor inventory – Along with declining quality, I noticed that shelves were becoming emptier. No longer was Fox & Obel the go-to place for hard-to-find items, and even its staple trappings were sometimes missing, a cardinal sin for a grocery store. I am not a grocery industry expert by any stretch of the imagination, but even I could see tension between Fox & Obel and its suppliers.
  • Erosion of the foundation – No disrespect to technology and process (many economists claim these are the only two factors that could push the famed EFPC – efficient frontier production curve – outward), but people make up every business’s foundation, regardless of the segment. Again, towards the end, I heard grumblings from Fox & Obel’s employees. Perhaps they trusted me since I was a regular, but nonetheless, I never heard any complaints over the first few years.

I could go on and on, but it won’t bring Fox & Obel back. Furthermore, I think these causes of their failure are a good lesson for just about any business. And in case you were wondering what Jenna and I bought at the final closing sale, we stocked up on Fox & Obel water glasses and Mexican Coca Cola, made with real sugar. Coincidently, the sourcing of Mexican coke is a great personal procurement lesson – which involves having to pay significantly more for a far superior product (which also requires seeking out) albeit with the same corporate brand.

I promise to tackle more cheerful topics for the rest of 2014. Happy New Year, everyone.

We’ll also let you know what new Chicago bakery (La Fournette is highest on our current list) that Jason and I decided to amend and include in our operating agreement so that the entire Spend Matters and MetalMiner office continue to remain well-fed and sugared-up.

Emotional Intelligence and Project Manager

PMAs you may know, PARR has a sister company in RJSL Group, an IT and business PMO consulting shop.  I’ve been a project manager (PM) since my Diamond Technology Partners days, and I believe good PM skill-set is a must for any manager, regardless of his or her corporate function.  Over the years, I’ve also learned that especially when it comes to PM, emotional intelligence (EI) is more important than either intellectual abilities or any specialized, functional trainings combined.  EI separates great PM from good ones and can be defined as the ability to identify, assess, and control the emotions of oneself, of others, and of groups so that they are expressed appropriately and effectively, enabling people to work together smoothly toward their common goals.  According to many experts, major skills that make up EI are – self-awareness, self-management, social awareness and relationship management.

So, how does a PM use EI?  First, project management by nature entails a highly collaborative undertaking, often extending the scope beyond prescribed boundaries.  One of the key skill-set for a great PM is the ability to influence stakeholders globally.  More specifically, project’s success depends on the PM’s ability to influence and persuade team members and stakeholders, who often do not report directly to the project owner and have very different agenda, on numerous behavioral and emotional levels.  No matter how you slice it, this requires a large degree of EI on the part of the PM.  Second, every project introduces some degree of organizational changes in order to achieve a desired outcome. The impact of change on those who are affected can be championed or rejected based on the project manager’s leadership, prompting the PM to serve as an emotional guide throughout the process.  PMs often make on-the-fly adjustments to build and maintain positive relationships while motivating and focusing others to achieve success.

As all PMs know, the ability to develop and sustain relationships leads to successful project results. Understanding EI and honing our own EI provides an invaluable edge in building the relationships necessary to excel within the project management profession.

The Problem Underneath Conflict Mineral Compliance

Originally published in Compliance Week by Matt Kelly (

I had the pleasure last week of talking to a top legal officer at a large manufacturer, someone who will be speaking at the Compliance Week 2014 conference next spring about conflict minerals compliance. The program his company has developed so far is excellent, and I won’t spoil it by naming him and disclosing all the details here—but our conversation also underlined a headache compliance executives are facing that runs far deeper than conflict minerals, one worth discussing now.

Let’s start with our man Smith and his company’s first efforts at conflict minerals compliance. The duty fell to Smith because he, in the legal department, oversees all regulatory filings with the Securities and Exchange Commission—which will include conflict minerals disclosure on the agency’s new Form SD, starting early next year. So Smith assembled a task force from various company departments: compliance, accounting, IT, and supply chain.

He then described to me how the task force mapped out its goals and the work required to get those goals done, and it all sounded very much like the conversations I had nearly 10 years ago with companies confronting Section 404 compliance with the Sarbanes-Oxley Act. Understand what the SEC wants; find your weak spots; remediate any weaknesses as best you can; disclose what you know and what you don’t know, but hope to fix in the following year. Any compliance officer of a certain age will see the parallels.

Smith quickly understood that the company’s biggest challenge would be staffing: both manpower to get the work done, and expertise to know how to do the work wisely. Little surprise, then, he turned to his company’s external auditor (a Big 4 firm) for help. The company’s exposure to conflict-minerals is small, Smith told me, so he knew that its conflict-minerals program could be audited by a small firm. The more important trick would be building the right structure for compliance in the first place, so all those disclosures will be correct—and when you need specialty teams of very bright people, the Big 4 firms genuinely do have that manpower in spades.

“Thankfully this didn’t take up too much of my personal time, since I handle a bunch of regulatory issues,” Smith told me. “The ones who really did the work were our supply-chain team; for every four- or five-hour meeting I sat through, I know they were sitting through three or four more. They were just indispensable to this whole process.”

Smith also realized that the company’s other difficult problem was IT: namely, how much money to spend on IT dedicated to managing conflict-minerals compliance. “Right now it’s going to be something cheap and easy, to get compliance running,” he said. “We know we’ll need to do something more long-term within two years. We can’t keep imposing on our suppliers like this.”

And with that bit of casual wisdom from Smith, we come to the deeper, much more intractable headache for compliance officers. pressures that hit your third parties are proliferating so rapidly—anti-corruption, conflict minerals, data security, human trafficking, offshore tax havens—that they now exceed your ability to manage them all well, or in any systematic fashion. The result: you keep pestering your third parties one regulation at a time, to the point where they get compliance fatigue and don’t want to cooperate with you. As Smith put it when we spoke, “It’s a big ask we’re imposing on them, and we need to find a way to ease that up.”

Good luck with that. In theory, getting ahead of the problem should not be too hard. These regulations (and more) all ask different questions of your third parties, but the fundamental process of asking for information and verifying its accuracy is the same. You should be able to deploy software that allows you to do those things. Indeed, I have no doubt that any number of vendors reading these words will breathlessly tell me that their very product is perfect for the job.

In practice, the world operates quite differently. Regulations aren’t always clear (see: Volcker Rule), and many immediately get mired in court challenges anyway. Software products aren’t easy to scope and implement, despite what vendors might say. And above all, the sheer time commitment to install a strong, flexible IT system that works well with your third parties is a multi-year commitment. Persuading CIOs and boards to make that sort of commitment is a tall order, one that borders on hopeless. Companies never want to make strategic shifts without a clear upside on revenue—and right now, effective compliance still doesn’t have one.

So at the Compliance Week 2014 conference, our man Smith is going to give an excellent presentation (one among many) about his approach to conflict-minerals compliance. It really does sound like a logical, systematic way to address one of the big compliance challenges facing companies today. At the end, however, if you ask him how his company might leverage its success here with other compliance burdens to come, you’ll get an answer something like this.

“We need to simplify what we ask of our suppliers,” Smith told me. “This is all getting to be too much for them or anyone else, and we need something that works.”

We’ll look at that problem at Compliance Week 2014 too, but somehow I suspect it will remain on the agenda for years to come.

My First Job: Minimum Wage, Maximum Value

By Michelle Rhee (CEO, StudentsFirst)

It was the summer before my senior year of high school. I got a job waitressing at Grumpy’s, a deli near downtown Toledo.

The restaurant — owned and managed by Jeff Horn and his wife, Connie — was aptly named. Jeff was a little bit like the iconic Soup Nazi from Seinfeld: great at making to-die-for food, not so great at dealing gently with people.

When he wasn’t overseeing the creation of crisp salads or oozing grilled cheese sandwiches, he was often doing one of two things: yelling at customers, or firing workers.

Jeff demanded perfection, and anything less was met with swift and final justice.

15 minutes late to work? You’re fired.

Write down the wrong order? See ya later.

Cook a burger well-done that the customer wanted rare? That was the last burger you’d be flipping.

Jeff started that summer with about 20 employees; by the end, I was one of only two left. My big secret: I kept my head down and my mouth shut, and did my job. In those three months, I learned the most fundamental ingredient to success and survival in the workplace, and in life: working your butt off.

That was just one of many lessons I learned at my first job.

A few years later, when I was in college, Jeff and Connie opened another Grumpy’s and asked me to manage it during the summer. It was my first real experience in a supervisory role, and what made it especially challenging was that I was in charge of people around my own age.

Under different circumstances, I likely would have been good friends with many of the other employees. But in order to be effective, I had to assert authority and not be overly concerned with being liked.

My managerial skills were put to the test one scorching summer day. The garbage cans were full, and because of the heat were producing a particularly horrifying smell. I asked four of the girls to empty and clean them. One of the girls, who appeared to be the group’s leader, adamantly refused.

Connie, who was there that day, asked me what I was going to do.

“I don’t know,” I responded. “What should I do?”

“Fire her,” Connie told me. “You have to send a message.”

It was nerve-wracking, but I knew I could not project weakness. So I sent the girl packing. Then I looked at the others. “Anyone else have a problem?” I asked. They got the message, and an hour later those trashcans were sparkling clean—well, as close to sparkling as trashcans can be.

Grumpy’s had taught me something else: it never feels good, but sometimes you need to make tough decisions, including letting people go.

I remembered that lesson years later when I became head of the Washington, D.C. public school system, one of the most bloated, dysfunctional and low-performing districts in the nation.

I had to make a number of difficult calls, including closing and consolidating under-enrolled schools, and laying off ineffective and excessive central office workers. It wasn’t easy, but those decisions helped create enough efficiencies and savings to allow us to put an art and music teacher, a librarian, a nurse and a counselor in every single school — which hadn’t happened in years. And you better believe I’m proud that those actions, along with other reforms, have helped lead to a steady rise in achievement for D.C. students, including historic gains on the 2013 National Report Card (NAEP) released last week.

That first summer at Grumpy’s, I earned the minimum wage — $3.35 in 1988. But the value of my first job went far beyond dollars and cents. And for that I am grateful to Jeff and Connie Horn.

Professional Services Council on Government Shutdown: “Truthfully, it’s discouraging.”

Originally published in Public Spend Forum (

As we mentioned in our piece earlier today, the government shutdown could have lasting effects on federal procurement and the federal supply chain. While the legislative branch duked it out on Monday, we got Alan Chvotkin, Executive Vice President and Counsel for the Professional Services Council—the trade association representing government professional and technical services—on the phone to talk about how its members were reacting what advice he could give them, and what the long-term ramifications may be.

Have you been hearing from contractors concerned about the shutdown?
Absolutely. They’re very concerned about it, both from an ongoing-work perspective, and from what it’s going to do to future opportunities. And they’re wondering if they’re even going to be getting paid for work that’s going to continue. There are a lot of risks.

What’s some advice you’re giving them?
It falls into a couple of areas. The first is to know whether any work you’re doing—all of the work that’s already been awarded—it’s important to know how that work is funded, whether it’s fully funded or incrementally funded. That will determine if the work can continue after October first. If it’s fully funded it can go ahead, except in those rare circumstances when ongoing work requires direct and continuing government supervision, but that’s a small part of the universe.

Are they worried about no new work being awarded?
Well, very few of contracts are made in the first few days of the fiscal year. If there is a shutdown, and I hope there’s not, the impact should be minimal if it’s for a short duration. The longer it goes, the greater the impact on the smaller firms. There’s also a greater impact on companies providing professional services rather than manufacturing. Most of those services contracts, they’re for smaller dollars and last for a shorter duration. They may be more often incrementally funded, say every month, or every quarter. Manufacturing tends to be fully funded more often.

I would imagine that smaller companies are going to be most hurt by this.
Depending on the length of the shutdown. But it will certainly have a cash-flow impact on them, if that shutdown happens for longer period of time, say three to four days, or even five, seven, ten days, then you begin to see it significantly affect cash flow. The government tries to pay small businesses more rapidly, so the cash flow impact to smaller firms is even more magnified. We’ve been telling our members to study, make sure they know when their contract was awarded and how it’s funded.

But this is not the first time we’ve come up to a deadline for a potential lack of funds. It seems like Groundhog Day, we’ve been to this movie before. Most companies spent some time making sure they’re well-positioned with lines of credit so they have the funding they might need, can meet payroll, while they’re waiting for the government to reimburse them for expenses. The only problem is, there’s a cost to that. There’s an interest cost to using somebody else’ money, and the government isn’t reimbursing that, so the company does incur direct costs.

What does this uncertainty do, as far as businesses pursuing federal contract opportunities?
Truthfully, it’s discouraging. Companies will decide what market opportunity there is for them, but these types of fiscal issues make it much more uncertain. The procurement lead times, the time between development of a requirement in the agency to the time it takes to make the award, keep getting longer, so companies need alternate sources. The dynamics in the federal marketplace are changing, a lot more companies competing for fewer dollars.

The CEO of PSC spoke to Congress about this, about crisis budgeting, and some of the effects this has on agencies and companies. They can adjust to spending patterns if they know what they are, but if you give them little to no time, or a very short window of time, only the most critical types of work get done, the rest gets sacrificed.

So what happens if the shutdown persists?

The longer it goes, the short-term impacts are more and more magnified. You know federal employees who were furloughed will have to be called back to work. And 100% of the time when fed employees have been furloughed by a gap in funding, Congress have reimbursed them for the time lost. On the other hand, 100% of the time, federal contractors have never been reimbursed because of gaps in funding that have occurred. And because of a stop-work order, or a reduction in programming, a company’s employees may have to go find other work, and may not be available for recall. That puts a challenge on the company to be able to restart and find the necessary personnel. Incrementally, as the period of time gets longer, challenges for companies get larger.

Trust Truisms….

Re-blogged from The Brighton Leadership Group (

Are you intentional about building trust?  Do you know what breaks trust? How do you repair broken trust? We are going to explore these questions over the next few tips.  These topics come from our research and preparation for an upcoming presentation on “Building a Culture of Trust.

When there is a culture of trust, leaders are more effective in achieving their strategic goals. Leaders can create change faster and get better results. Organizations have greater profitability and higher productivity.

Amy Lyman’s work on the 100 Best Companies to work for concludes, “Companies whose employees praise the high levels of trust in their workplace are, in fact, among the highest performers, beating the average annualized returns of the S&P 500 by a factor of three.”

A culture of trust is extremely beneficial to leaders, employees and overall organizational performance.

Here are three unique qualities about trust; it’s a process, a choice and something that is uniquely human.

  1. Process - trust is a learned skill. It involves an ongoing process of relationship building, communication and action. Doing what you say you will do builds trust. Building trust is a process that layers on level after level of deeper trust. When actions do not match words and trust is breeched, this is also a process that works in the reverse.
  1. Choice – people decide whether or not to extend trust. Trust evolves incrementally over time, is based on sound judgment, and is not without limits and conditions. Those who choose to trust understand that there is the possibility of a breach of trust, and weigh risks and benefits before proceeding.
  1. Uniquely Human – while you may consider your car to be reliable transportation, you don’t “trust your car.” Trust is about keeping your word, honoring your commitments and involves a decision, action, and a response. Trust is something that is unique to human beings.




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