Rapid Innovation Group blog

Putting a value on the elimination of risk

Imagine that you hire someone to come around once a day in the afternoon and clean all the toilets in your building. The cleaner works for £10 an hour and it takes five hours per day so the cost to you is £50 per day.

A technology firm approaches you with a robot cleaner that can do exactly the same job. The robot's value to you is then £50 per day, because you no longer have to pay the cleaner. If the technology firm offers you the robot for anything less than £50 per day then the price should be acceptable.

This is the basis of value-based pricing that looks at tangible or certain or past costs: assume that the existing solution is 100% satisfactory; calculate the costs that are removed when using technology instead of the manual process; and set the price accordingly.

The other way to think about value-based pricing is to look at intangible or uncertain or future costs. Imagine that there is a very small risk of some highly-damaging infection with the current practice of cleaning five hours per day, and that the risk would be negligible if you cleaned every hour.

If you wanted to eliminate the risk completely then one solution would be to hire a cleaner every hour, say £240 per day. But practically speaking the risk is tiny, and you've never been affected before, so £240 per day is probably too much. However, if the same technology company said that its robots could not only clean but also eliminate this risk of infection then its value rises to £240 per day.

In other words, the technology company assumes that the existing solution is well below 100% satisfactory and considers the cost of scaling up the current processes to hit 100%. This is a much clearer way of putting a value on the elimination of risk than try to argue that there is a 0.01% chance per day of a £1m disaster.

Assigning a value to the reduction of a very small risk is notoriously difficult and unreliable. Try arguing that the maximum speed limit on motorways should be 5 mph less because of the marginal difference in the risk of motor accidents. However, that does not mean that it has no value at all, so think about the costs of eliminating the risk using existing practices.

Where do you choose to compete?

As an entrepreneurial company you may find yourself in the awkward position of not having a direct competitor. Explaining the value of your services is far easier if you can say we're exactly like company X, except that we're cheaper, we're easier to do business with, and we have real domain expertise.

Recruitment is also more difficult because you can't simply steal your competitors' top performers and insert them in the same role within your company.

However this situation allows you the opportunity to pick a competitor that makes you look good. If you compete by focusing on just one industry then you'll tell everyone that your competition is the company that works across every industry and has no real domain expertise. If you want to compete on customer service then pick someone with a high staff turnover in their customer services team. If you want to compete on price then select the company with a premium offer.

RIG competes by hiring the brightest people we can find and being smarter at doing major deals for our clients. We also compete by working exclusively for fast-growth technology companies and by being selective about client projects we take on.

If we had to compete by working longer hours than everyone else then we would not have a sustainable business: there will always be people out there willing to work even longer hours and for less pay. But our business model rewards output - not input - so we stay ahead by being smarter not by doing more.

How Venture Capitalists lose motivation

An interesting article here by Venture Capitalist, Fred Destin discusses the causes of VCs in Europe suffering from a lack of motivation.

The not-so-secret fact about venture capital is that it has not made serious money for 10 years now...[and] because it takes a very long time to know whether you are a good VC, partners can keep taking comfortable salaries for a decade or more before any form of verdict is placed on their money-making abilities.

The problem then is that the average time it takes to make a return is increasing. If the average time were only a year it would be obvious which partners are the high-flyers; when it reaches six or seven years nobody knows for a couple of investment cycles (12-14 years) whether the VC is any good or not.

I think Destin's argument is that this lack of quick feedback makes it more difficult for an average or ineffective VC to grow and become a successful one, because the link between action and results is opaque and stretched over many years. So their motivation suffers.

Perhaps this is why so many people find it impossible to pick the most appropriate pension scheme: the result is so far away and difficult to predict that it barely seems connected to your original choice at all.

I can see how motivation might suffer if it is not clear for many years whether your investment will result in a decent payout or not. But I also think this is a consequence of many VCs focusing too much on the financial side and not enough on the multitude of other business objectives in which they could involve themselves.

From the entrepreneur's point of view, a good VC will not only put money into the company but also be an invaluable source of ideas, diligence, and connections. They will add extra credibility to the entrepreneur, which can set the company apart from its competition.

How to be more innovative than Cisco

An article in September 2009's Harvard Business Review describes an admirable campaign run by Cisco called I-Prize. The project, headed up by the CTO of Cisco's Emerging Technology Group, Guidot Jouret, was designed to find and build "a new billion-dollar Cisco business."

Around 1,200 distinct ideas were welcomed from over 2,500 innovators around the world. These ideas were whittled down to 40 'semi-finalists' then 10 'finalists' and ultimately one winner, who took home $250,000.

The interesting point in all this is how the ideas were judged. Jouret explains that each idea was judged according to five basic criteria:

• Does it address a real pain point?
• Will it appeal to a big enough market?
• Is the timing right?
• If we pursue the idea, will Cisco be good at it?
• Can Cisco exploit the opportunity in the long term?

Cisco's judges' answers to the first three will necessarily be modulated by their own position in a large corporation: they are unlikely to have the same ground-level feel for what is going on as a technology entrepreneur might. The final two ask to what extent will Cisco be well-positioned to make the most of the opportunity.

So to be more innovative than Cisco all you have to do is identify a market trend and develop an idea that will be valuable if the market follows that trend, such that you - not Cisco - will be in the better position to take advantage if you're right.

Low-cost airlines gambled that travellers would be willing to forgo certain comforts if they could fly cheaply. They set up their entire operation from marketing to the supply-chain to customer services on that very assumption. Once the assumption had been validated it was impossible for the established, premium airlines to compete for that level of business.

Knowing that even the very best ideas that Cisco will invest in must pass these relatively strict tests should be seen as a huge opportunity for entrepreneurs.

How to think about types of partnership

Our clients will often look to sell through partners rather than directly to customers once they have proven their technologies in some way. Partnerships can become a good idea when you want to scale up or access a new market quickly.

One of many prerequisites for a successful commercial partnership is deciding whether you want a pure Reseller, a Value-Added Reseller (VAR), or an Original Equipment Manufacturer (OEM).

There are a variety of overlapping definitions available for these terms. The easiest way I find to think about them is in terms of how particular responsibilities are divided.

Consider the standard business model of selling directly to your end customer (as opposed to selling indirectly to your end customer through a partner). You have responsibility for developing, marketing, selling, implementing, and supporting the product. Now the three types of partners above can be thought of as follows:

• A Reseller takes responsibility for selling
• A Value-Added Reseller takes responsibility for selling and implementing
• An OEM takes responsibility for marketing, selling, implementing, and supporting

Imagine you are selling your own brand of coffee from a stall at the side of the road.

A Reseller would buy your coffee in bulk for a low price and run around selling it at a slightly higher price; a Value-Added Reseller would buy your coffee, add some of their own sugar and milk, then sell it on at a higher price; an OEM would buy your coffee, add it to their Tiramisu cakes and sell the cakes on without telling anyone that your coffee was involved.

There are advantages and disadvantages to each. One factor to consider is how close you want or need to be to your customers. If you are at an early stage you may depend on the extra customer interaction that comes through implementing and supporting your product in order to inform your development plans. If, on the other hand, you have a clear technology roadmap and a market-leading product then delegating all other responsibilities lowers your cost of sale and removes a number of constraints on your growth.

A perspective on RIG's internships from a former banker

Rave reviews of the ‘bright lights’ of the City draws economics graduates to it much like moths to flame. However, I realised the mysterious world of consulting, filled with its SWOT analyses and mind-boggling diagrams, looked equally appealing due to the potential challenges it could offer.

Hence, in addition to taking the well-trodden path to secure a banking internship, I also applied to RIG, intrigued by its approach to partnership and motivation to succeed by sharing the risk of its clients' success. Through some miracle I landed both jobs and prepared myself for a whirlwind of a summer.

Starting the summer at the Bank, I ended up doing all those things that Interns are supposed to do: long hours as an Excel monkey devouring vats of coffee whilst watching the entirety of my summer being vacuumed into a black hole. Although I had seen plenty of interesting stuff as a banker, the lack of involvement I had in making things happen and the limited opportunity to use my initiative was deeply unsatisfying.

RIG was different. Within three hours of switching on my computer for the first time, I had been set tasks that I was in charge of, rather than just being staffed on. Within a week, I was writing research reports and by the end of it, I was writing a presentation for a client meeting the following week. I soon realised I wasn’t expected to just ‘slot in’: I was there as a consultant, not bonded labour, and therefore I was expected to think. I could define new directions for the business through my actions, from making the firm more productive to getting new clients for the consultancy to work with. What’s more, there was a good chance of getting these ideas heard and implemented rather than stuck on the desk of an overbearing bureaucracy.

Drawing on what my colleagues have said in other posts, an internship at RIG doesn’t fit the mould. Though I was here for only 4 weeks, I realised that the company is keen on promoting ideas, working as a team and encouraging initiative to get things done. They are keen to challenge you to succeed, whilst providing you with the right level of support with a guiding hand.

- Zainul, studying Economics at Cambridge University

More views from an intern

As my first post-university business experience, the two months that I have spent at Rapid Innovation Group have been an invaluable introduction to the potential excitement and energy of the business world. My time spent here has opened my eyes to the range of issues facing entrepreneurial companies; the generalist approach of a RIG consultant means that you have exposure to many different industries, geographies, company profiles and people.  

Whilst I have certainly improved my knowledge of specific industry and company issues, I think that perhaps the biggest thing that I have learnt in my time at RIG is the fundamental importance of people and relationships in business. In order to produce exceptional results it is necessary to understand what motivates people and how best to position yourself in order to have a productive conversation. During the two months, I interacted with a vast range of different people - from senior directors in multi-million pound companies to a bar tender at O’Neills and a cleaner at Starbucks. Indeed the interactions ranged from having cocktails to rigorously combing through detailed spreadsheets to conducting interviews and delivering presentations. I have come to realise that arguably the greatest drawback of working for a small firm - the lack of a brand name to draw upon when approaching strangers - can also be a great benefit as it forces you to adapt and learn how to appeal to and connect with people.

The RIG philosophy is built on dynamism and success - new ideas and new perspectives are expected and welcomed such that, as an intern, there is a very real chance of effecting significant change and contributing to the development of the company. For instance, in my first week I was told that one of my assignments for the 2 months was to present a vision for a spinoff business at the end of my internship. This project was typical of a RIG task - it had a broad scope, entailed significant responsibility, had genuine potential value to the company and involved pursuing something new with no set blueprint.

The team at RIG works together in a closely knit group sharing ideas and knowledge, which leads to an atmosphere of collaborative success rather than individualism. A similar culture in larger consultancies seems to be very rare to find, at least in practice if not on corporate websites.

An internship at RIG is in equal parts rigorous analysis, abstract thinking and relationship building. There have been many challenges during my two months, but I have enjoyed facing them thanks to the supportive, meritocratic environment where results and good ideas are rewarded.

- Sandy, graduate in Economics and Management from Oxford University

How RIG takes risks just like our clients

In order to make ourselves affordable for early-stage firms RIG developed a business model that is 'part-risk, part-reward.' What that means is that we cover our costs by charging a monthly fee and we only make a profit by taking a percentage of revenue we generate for our clients.

A 'full risk' model would forgo fees and rely entirely on payment on results, in the style of a technology reseller. A 'no risk' model would follow the professional services norm of day-rates with no success-related element.

Entrepreneurs take a certain risk when they hire us - particularly those at a very early stage - because we make no guarantees that we will generate any revenue for them. We can certainly point to our track record with similar clients and our growing reputation but we never hide from the fact that we don't succeed every time.

Specifically, the entrepreneur's risk is that if you have a certain amount of funding designed to take you to the next round, hiring us increases your burn rate, and if the company's not successful despite our collaboration then you'll run out sooner than you otherwise would.

So we've been asked, when compared to the risk of running out of funds, what risk is RIG really taking? We work for more than one client at any one time and we are paid our monthly fees whether we generate sales or not. So if we do not make money for one client we're not likely to go out of business for that reason alone.

Here's the most important response I have to this question: the risk we take is the difference between us building a successful firm and just drifting along.

For our firm to succeed and grow into the genuinely-valuable resource for entrepreneurs we strive to be, we need to hire the best people we can find. Having the best people is the most compelling response we can proffer to the argument, 'why wouldn't I just do this myself?'

Having the best people means hiring top performers from the best universities and experienced professionals with the most remarkable backgrounds. But hiring them is one issue; and keeping them will depend on the success and the vision of the firm.

If we take on the brightest people we can find and they see us taking on client after client without success, then they'll either leave, or if they stay and grow into client leadership positions themselves they'll think it's fine not to generate revenue for their clients. It will become ingrained in our culture.

New recruits will think that there's no real pressure if they don't bring in sales for their clients, because we're not going to go out of business either way, even if we don't end up make much of a return.

This culture would prevent us hiring the best people. Those that are happy with unremarkable results would tend to hire others with the same mentality and the firm will just drift along.

Our model is designed to give us a superior return when compared to any other model - but it only works if we are successful in generating profits.

It's true to say that we're not taking risk in the same way as our clients are. But if I was offered the choice as an entrepreneur between (1) using the best people I could find and trying everything I could to make a company succeed, and ultimately failing but failing quickly, before moving on to the next challenge; or (2) being part of a firm that wastes ten years going nowhere, I'd choose the former every time.

We're in the game of building a successful firm, just like our clients are. Our risk is turning into a white dwarf rather than a supernova but that's a risk nonetheless.

Why you shouldn't have a flash website

Psychologists have done studies like this about the amount of time we take to draw a conclusion about a company when looking at its website for the first time. Estimates range from 50 milliseconds up to around a minute but there is a consensus that, whatever the 'correct' number is, it is not a very long time.

So if you have at most a minute to make a positive impression on potential customers, why would you waste their time by spending the first 30 seconds loading a high-graphics, fully flash-enabled website? By the time it has loaded, at best you'll have created no impression at all; at worst, the customer will have left out of impatience. Those buyers that do stay will be frustrated by having to type out notes on your company rather than copying and pasting from the site (which does not seem to be possible on flash websites).

I came across a company's website recently that used those 30 seconds to display proudly its three website innovation awards at the bottom, as the content loaded. I can see the rational side to the idea that it wanted to associate its brand with high technology, creativity, art, and award-winning innovation; but it does so to the heavy detriment of its users' experience. If I had been a potential customer I would have just as quickly associated the brand with tardiness and egotism.

For me, having websites that impress website awards panels more than customers is like exhibiting at events which only your competitors attend. It is a fundamentally misguided way to approach what should be a valuable marketing method. The best websites don't win innovation awards or prizes but they allow potential customers to find out what they want quickly and comfortably.

I have nothing against the use of flash as such. I see no problem in embedding flash videos, such as product demos, in your (non-flash) site so that users can click on them when they want to, in full knowledge that they will take a little while to load. But at that stage you will have already led them through their first minute and made your impression. You will have gained users' permission to take more of their time.

Forcing users to make the choice of whether they want to wait for your content before they know the first thing about you - let alone forcing them to wait every time they need to come back for further information - is presumptuous and ineffective.

A summer in the life of a RIG intern

Though it’s a cliché, a two-month stint at RIG has really brought home to me how fast you learn by being thrown in at the deep end. I began with barely a weekend to transform from an artsy English student into a wily corporate consultant, the two-day turnaround between graduation and internship giving me limited opportunity to brush up on my knowledge of current markets and business economics. Yet even if I’d had time to do so, I very much doubt that books could have taught me what I learnt on the job.

I think it is a combination of RIG’s size together with the company’s vision for its employees that enabled me to draw so much from the internship. By the end of day one, I was on close terms with all my colleagues, something that would never happen at a larger organisation not least because if you got stuck in a lift, chances are it wouldn’t have fitted the entire team in it at once. [Note from the editor: the whole team really did get stuck in a lift on day one.] To cite another commonplace, I have found that good things do come in small packages; as part of a tight-knit group, even as an intern I was able to input a lot to the running of RIG’s largest accounts, and feel that my efforts comprised a real, valuable contribution.

In terms of what RIG envisaged for me, January’s blog post gives a fair idea of the company’s approach. To quote, “we expect nothing less from our interns than to challenge us and to take the company in new directions”. I ended my first day with a presentation to a Swedish CEO looming four weeks away. No pressure. The breezy feeling of being a ‘just an intern’ faded pretty quickly, as I realised that tea-making would not be top of my agenda. Far from it, since I was tasked with engaging new targets and new markets, and researching new approaches and new strategies; new not just for me, but for the company and clients as well.

Daunting though such responsibility might have been at first, it was this unusual way of treating an intern – trusting me with important work and asking me to think for myself – that gave me a real opportunity. Starting from scratch, but with the incentive of a trip to Sweden, I ended up with an alliance management programme that is now the blueprint for all of the client’s partnerships, both on a local and international scale. Certainly I was challenged along the way, perhaps unexpectedly – I should have read the blog post in advance! – but I’d like to think that what I’ve achieved has been in direct proportion to the immensity of the tasks I’ve been given. Though I have found things difficult, I have also found them fun, even extraordinary, the experience opening my mind to the real possibilities that the business world has to offer when a small company has big ideas.

- Heidi, studying English at Cambridge University