As most of you realize, about two weeks ago I made the hard decision to move the email subscription list for this blog from Feedburner over to Aweber. I basically had come to the realization that Feedburner is coming to an end sooner than later, most likely sometime later this year to at most sometime next year. The signs are pretty obvious in my opinion. So as a result, rather than continue to build up the email subscriptions only to lose them later, I decided to take the hit and move to Aweber now.
I knew it was going to painful and I would lose many subscribers over in the transition based on what I read from many other bloggers. It was pretty clear the subscription count would drop significantly. There was no if, the only question was by how much?
Firstly, and this is the hardest to swallow, everyone you import over to Aweber basically has to re-subscribe (re-opt in but it’s really the same thing). To prevent spam, and thus to prevent people from importing random email addresses and email lists and causing harm to their service, Aweber require that every single person you import re-opt in. That is they will send out an email saying that if you wish to continue receiving emails, you have to once again click on the link to confirm your subscription. Not a big deal, but this does require an action from all your subscribers.
The problem here is twofold. Firstly many people are afraid of clicking on links they receive. When it comes to subscribing, they usually get it within a minute or so, so it’s very fresh in their minds. It’s an expected email and they’re ready to respond. However when it comes out of the blue, even if you announce it in a previous communication, it’s still not as expected, so a lot of people will be reluctant and just not click. It’s unfortunate but that’s reality.
Also, and this is again another reality of our world today, asking people to perform any additional steps is enough to lose a certain percentage. Yes they may still be interested in your articles, but any additional work will cause a drop of some people. Just like adding an extra field in your purchase is likely to lower your sales conversions, asking to re-opt in will unfortunately drop some people.
And of course, and this is probably a good thing, over time some email addresses will no longer be valid. For example I still had many hotmail.com email addresses which Microsoft have since converted over to outlook.com. So for some people they may just have re-subscribed with another email address. Others just missed the opportunity. Similarly others may have used their work email address and are no longer employed at the same place so the email address is still in the list but is no longer active. Basically a bunch of little reasons for why some subscribers are no longer valid. So all list naturally need some pruning over time. It’s just psychologically tougher to do at the same time as everything else even if you know why.
With that in mind, the last blog post I wrote here was to let people know what I was doing, so that they weren’t as big a surprise when they received the email to re-opt in. Basically a friendly notice. And since then I decided to wait at least a week to give as many people as possible a chance to re-opt in before posting again so they wouldn’t miss anything. So yes although I was planning on writing more often, I held back to give the transition a little bit of additional time.
So what was the end result? Well firstly I’m happy and relieved it’s done. I’ve been wanting to do this for at least the last 2-3 years. I don’t know why I held off so long, probably it just didn’t seem as important. That and I didn’t want to lose any subscribers along the way. In any case it’s now done and as a result I can breathe more freely. And most importantly I can feel more comfortable that any efforts I spend on growing the list are not going to be lost in the future.
And now for some metrics. Well right off the bat 26.6% of the emails bounced when sending out the re-opt in email. So yes although that stung, that’s actually a good thing. It’s the pruning I just talked about. S4o basically 26.6% of the email subscribers over the years are no longer active. So this is a good purge. No point in sending out emails to people whose email addresses are no longer valid.
After that, in terms of re-opt ins, well let’s just say that quite a good number of subscribers were lost. I expected it, and it was definitely within the norm from what I read online from other bloggers who did the same thing. Everywhere you read about it, people say do it sooner than later because the cost of transitioning is painful. After this experience I completely agree. Do it sooner than later. It’s not fun so if you’re going to do it, do it sooner rather than later. It’s better to keep the number of lost subscribers in absolute numbers lower because the percentage will most likely be about the same. In other say losing 10% of 10 is much better than losing 10% of 1 billion in absolute numbers. That being said, I’m finding a week later previous subscribers are still in the process of re-opting in, so I don’t yet know what the final percentages will be.
On a positive note I’ve absorbed the cost so that’s now done. And although I lost some subscribers, quite a lot did transition over which is great! Above that, all the RSS feed subscribers are still there, they haven’t changed in numbers at all according to Feedburner (I left Feedburner for the RSS feed for now since there’s no reason not to – there’s no penalty if they go away and I transition that later).
What’s also good is that I already have quite a large blog with almost 500 posts written over 8 years so that will definitely help me re-grow it back to the same level of subscribers pretty quickly. My guess is that I’ll be back to this same levels within 3-6 months, so that’s about the cost for moving if you’re curious. Which like I said before, if you research it, that’s actually pretty good.
I believe this is also the very first time ever that FollowSteph has had less email newsletter subscribers than my company LandlordMax Property Management Software email newsletter! By the way the company email newsletter is also managed by Aweber and has been for at least a year now. In any case I don’t expect that to last very long, usually blogs get more subscribers than company newsletters, regardless of how good they are. What’s nice though is to see both of them growing on a daily basis!!
And on that note, I welcome back everyone who has transitioned! I also look forward to posting quite a lot starting now. And later this week, I will start to post one interview a week from my book Blog Blazers which you can find on Amazon here. The list of bloggers I interviewed can be found here (and I will be posting in the order of the book). So it should be quite a lot of fun. There’s lots of great interviews in the book.
Until then, here’s goes to the first post using Aweber!
Today’s post is more for the people who follow this blog by email, those who have subscribed to the email newsletter to receive emails of the posts. Basically the recent closing of Google Reader has made me realize I can’t hold off moving away from Feedburner any longer. It’s pretty clear that Feedburner is on it’s last leg and that Google will drop it shortly. Another example of some of the risks of hosted services.
In any case, as a result I’ve decide to transition over to Aweber (affiliate link). I’m going to import the email list into Aweber, but the downside is that Aweber requires that everyone re-opt in to get the email newsletter. In other words they will not send you any new blog posts by email unless you confirm your subscription. They do this as a policy to prevent spam on their system. Otherwise anyone could just import any list of emails they wanted and Aweber’s email service quality would go down. The downside is that you’re almost guaranteed to lose some subscribers along the way, and as unfortunate as that is, I don’t think I have a choice.
Therefore please accept my apologies for this inconvenience, and please do go ahead and re-opt your email newsletter subscription when you receive the invite. I look forward to continuing to post many articles in the future. Also starting next week I plan to post one chapter of my book Blog Blazers each week (an interview a week). You can find the list of people interviewed for the book here. If you can’t wait, or you want a hard copy, you can order the book on Amazon here.
In any case, I do appreciate your patience, help, and understanding in transitionning to Aweber. And if you have any questions or comments please don’t hesitate to contact me. In the meantime expect to see an invitation email to the new email newsletter service later this week.
And thank you for following FollowSteph.com!!
First let me preface this article by saying that although I believe SaaS, cloud services, and hosted services can be very good and wise decisions in some situations, in others they can also be very terrible options.
Not to rehash the past, but I wrote a previous post called What are the Risks of Cloud Services? I explain when it’s good to use hosted services and when it isn’t. They have a time and place, and running core and critical business functionality and data is generally a bad place to use cloud services. I won’t go into the same arguments again, I’ll just recommend you read the article if you haven’t already.
That being said, many people are about to be cut off from Google Reader at the end of the month. There’s only a few days more before their Google Reader service goes away for good. Luckily they gave us a month’s notice, but you can’t always expect this from every company. Additionally we’re very lucky that for most people this is a convenience rather than a critical service. Unlike say the core data for a property management company were you store your accounting, leases, tenants, late rents, etc., Google Reader is mainly just a place where you manage a large the reading of a large number of websites in a convenient and easy way. I personally use it and loved the service. I used it every day. I will definitely miss it.
The problem with a hosted service is that they decide when you can no longer use the service. NOT YOU!! It could be tomorrow, or in the case of Google they can give you a grace period to do what you need to. And in this case, we’re actually even more lucky in that Google offers the ability to backup the data. The big problem however is what do you do with the backed up data? It’s not an industry standard. Generally there is no way to backup the data, and in most cases you have no warning at all.
So what’s happened in the last while is that a bunch of people are trying to create products and services to fill in the void created by Google Readers dismisal. But before continuing, you should be congnicent that if it wasn’t such a big service from a big company, most likely the users of Google Reader would be out of luck with no alternatives. The norm for online services is that you lose everything when the service closes and you normally have no warning. It’s very very common! Just this month alone I personally read (who knows how many I didn’t see) about at least a dozen web services that have closed down on Hacker News which is a place where you can find a lot of interesting news from the Startup community.
One of the more poignants one that recently caught my attention and pretty much inspired this post was called My Startup Has 30 Days to Live. You can read the discussion from Hacker News here. Specifically one comment from patio11 drew my attention, also known as Patrick Mckenzie, where above suggesting they stop taking money unless it’s absolutely necessary to pay employees, he also said:
“It sucks. It will be better, very soon. You don’t have to be scared: this is routine and, while it doesn’t feel like it, you’re actually in very good position, both absolutely and relative to many other people.”
The key comment being “it’s routine”. That this is common. Many online companies close. The problem is that we haven’t experienced it as users enough yet. Much like most people don’t really realize computers and especially harddrives do fail, and quite often. I know more than a few people who have lost all their pictures and videos because they assumed computers just always worked and didn’t need to do any backups. Until digital cameras really became mainstream, most people didn’t really feel the pain when their computers failed because most of the data wasn’t as critical, or shall we say important to them. It’s different now, so people are going through an education process and are learning that you need to backup your data, that computers do fail and it can be very painful.
And with that in mind, I was quite surprised, well ok I wasn’t surprised by it but rather surprised that we’re still repeating the same mistakes when I read the following comment about one of the latest Google Reader replacement options called Sismics Reader which is a software you own and manage on your computer (I have not tried their software so I cannot say if they are good or not):
“This looks pretty promising. Judging from the demo, they have the UI close enough. They need to offer it as a service, though. I like that I have the freedom to run my own server, but I really don’t want to have to bother in practice.”
Basically you want to use a hosted services to replaced the hosted service that was just closed down and for which you’re now trying to scramble to find an alternative solution, because you were lucky enough to be able to backup your data, even if you have no place to restore it to yet.
Cloud and online services can be good in some situations, but we still have to learn that they have a place and time, and that time and place is NOT always!! We internally for LandlordMax use cloud and hosted services for a number of things including email delivery, email newsletter management, version control, and so on. But each of these systems can either be replaced within minutes to a day, or use a standard data structure where the data can also be pushed to another service right away. For example we use Subversion which is one of several industry standard systems for managing programming code. We do regular backups, and if our host goes away, we can move to another service within minutes. In fact we could host it internally on our own computers but we don’t for reasons that are more beneficial for us specifically. The key is that we’re not locked to the success of another company. Losing our programming code overnight would be catastrophic for us, so it’s critical that this data never be locked out. We need to make sure we have regular backups and alternatives should something happen.
With all that in mind I’m personally more interested in a Google Reader replacement that I can own and manage myself. There are just too many startups right now clamoring for Google’s fallout, and I suspect a LOT of them will be gone within the next year or two. And at that point, it’s right back to the very same situation as today. And the next time we may not be able to transfer the data to another solution. I don’t expect these new solutions will support each other’s data formats, assuming you can even export any data at all. At least with a software solution you own and manage you can continue using the software for as long as you need or want. If the company closes, discontinues the software, etc., you can still continue using the software for as long as you want. A small difference with a very big implication!
Online and cloud based solutions can be good, just be careful not to assume they are always good because this is not always the case. And if you haven’t already read my article about the risks and when it’s good and when it’s not good to use a hosted service, then I suggest you do so sooner than later.
And hopefully a good Google Reader alternative will appear soon. From what I’ve seen there hasn’t yet been a good solution to transition to yet. Every comment and suggestion I’ve seen so far about Google Reader alternatives has been about making due with what they have. There’s been no obvious goto solution yet. Right now it’s still really about just good enough until someone releases something worthwhile.
PS: In all this we never even mentioned issues such as what happens if you get locked out of your service. What if for example Google decided one day to lock you out of your Gmail account? What if your credit card failed and you didn’t notice until after they closed your account and deleted all your data? Just a few other things to look out for…
Printing on the Mac OS with Java 7 has been broken for a long time, months in fact. I don’t understand how this can possibly happen. After all printing isn’t exactly a small issue, and the Mac isn’t exactly a small market. So how can this be? For months? I don’t get it…
Specifically the font attributes are not honored on the Mac OS. Java seems to make the proper OS calls but for whatever reason the Mac OS just ignores those calls. Here’s the official bug report. To quote:
“Call to MacOS native function CTTypesetterCreateWithAttributedStringAndOptions did not produce the expected result. Although the font dictionary was passed in options, for unknown reason, it is ignored. Fix is to add the font dictionary in the attributed string and use CTTypesetterCreateWithAttributedString.”
And this only affects the Mac, it works fine in Windows or with Linux. The following code shows how to replicate the Java 7 printing bug on the Mac OS:
Font font = new Font("Times", Font.BOLD, 24);
Graphics2D g = (Graphics2D)graphics;
g.drawString("Hello World", 10, 10);
// Increase font by 10 - Mac OS ignores this next line of code.
g.drawString("Hello World in a bigger font", 10, 100);
The weirdest part of this whole issue is that it’s really only broken in Java 7!! Of course it’s the only stable release of Java. How does that make any sense? It still works on Java 6 which is no longer supported (past it’s End of Life). For Java 8, which is still in beta and does NOT have a stable release, it seems to be working. However for Java 7, nope. Nothing. Nada. Huh???
In case you want to read further information from the better links I found on the issue, they are here, here, here, here, here, here, here, here, here, here, and here. Just a few links. So it’s not exactly an unknown issue. Many people are struggling with it.
That being said, several people have found workaround solutions, including us here at LandlordMax Property Management Software. A common solution I’ve heard is to create an image of what you want to print and print that image. It makes sense and it will work because you’re bypassing the font attributes. I’m not a big fan of this solution, especially since it doesn’t really scale well to multi-page report printouts that we need in LandlordMax.
So what we’ve been forced to do is create a temporary PDF file of the report, ask the Mac OS to print the file using the system command
lp filename.pdf, and then delete the temporary file. This works pretty well, the only downside is that the Page Setup and printer setting options that comes along with most programs are not available because we’re not really printing from the software itself, nor can we pass them on to the system command. It’s not ideal, but it’s the only way to print within Java 7 on the Mac OS.
We added this workaround in the software with Java 7 Update 17. Unfortunately s far as we can tell the bug has been around at least since Update 9, but probably earlier. I just checked and we’re now at Java 7 Update 25, and guess what. Still no fix! No mention of the issue either.
The big question now is whether this is a Java (Oracle) issue or a Mac (Apple) issue? In either case, I would think both companies should want to fix this issue right away. It’s not exactly a minor issue. I don’t understand what’s holding up a resolution to this issue. It makes absolutely no sense to me. This is core functionality that affects both their users in a big way. It’s not a little bug, it’s huge! Printing is important, even in today’s digital world.
Hopefully Apple and Oracle can put their differences aside for a little bit and resolve this issue. It’s affecting a lot of people and we don’t deserve to be the collateral damage to their war against each other.
Again, just like last time, I completely agree that Lines of Code (LOC) is not an ideal metric to measure the scale of a system because of all the varying factors. However this is all I have so I’m going to do the best I can with what I have.
As many of you already we’re hard at work on a networked and multi-user version of LandlordMax to which you can see the daily status update here. It will be released as a minor update, that is a letter increment rather than a full version number increment. The main reason for this is to assist people in moving up to the networked version with the lease friction and costs possible.
In any case, I thought I would share with you today the scale of this effort. Yes again I do realize LOC is not the best metric, but it’s really the only metric I have which can show the scale of the effort. As you’ll see, the amount of new programming code included between each version is fairly close. This is NOT intentional by any means, and I hadn’t realized it until I generated this chart today, it just happened that way. Anyways as you’ll quickly see, the difference in LOC between the last version, version 6.05d, and the upcoming version 6.05e is about the same as a full version number release!
Of course a lot of that effort is specific to the networked offering and the as such the desktop offering will only get some of the benefits, but regardless it’s still a major effort.
All that to say the upcoming networked version 6.05e is a major undertaking, probably more than most people realize. Offering networking capabilities along with multi-user support is definitely a lot more complex than just letting multiple users connect to the same database, especially when you’re dealing with complex data that many of the users connected to the same system at the same time will be sharing and modify on a regular basis. You have to deal with a lot of synchronization issues, especially when it comes to modifying and saving existing data which I won’t get into today.
And if anyone has any suggestions on other interesting metrics I can fairly easily, please let me know. I’m always interested in learning more about our system.
Before I begin let me share a story that some of you might have already hear, at least in some variation of another. A woman sends her husband to the store to buy a ham, but she specifically asks him to have the butcher cut it in half. Of course the husband forgets to ask the butcher, so when he gets home his wife is not too happy that she has to cut the ham in half. The husband then proceeds to ask his wife why she cuts it in half, to which she responds that her mother has always done it that way and that was reason enough for her.
Luckily for the husband, his mother-in-law is there visiting for Xmas. So he takes the opportunity to ask her why she always cut the ham in half before cooking it, to which she replies because that’s how her mother also always did it.
Still not happy with this answer the husband convinces his wife to call her grandmother to try and figure out this mystery. After all, this is now three generations that have always cut their hams in half before cooking it, and no one knows why. It baffles him that no one has ever asked why. Well thankfully the grandmother finally had the answer, it was because her oven was too small to cook a ham in one piece, so she had to cut it to make it fit. A simple solution to a simple problem that was no longer true.
The moral of the story of course being that everyone just did the same thing because that’s how it had always been done. No one ever questioned WHY it was done that way, they just went ahead and continued to do the same thing.
And this is at the heart of the incredible tip I’m going to offer you today on how to increase your PROFITS, not your income, but your profits, by a pretty significant amount!
As many of you already know, my company LandlordMax Software sells property management software (also sometimes refered to as rental property software, landlord software, and so on). One questions we get asked often enough is if we offer check printing. Which leads right into the tip on how to significantly increase your profits while at the same time reduce your workload!!
Why do people need check printing? Seriously. Think about? Why? Do you really need to have software that prints out tons of checks each month these days? When is the last time you looked at automating their bill payments? Most property managers and landlords just continue to write and send checks for their bills, but why? Because that’s how they’ve always done it. But is it necessary?
Today many many many bills can be completely automated. If you cover the utilities for your tenants as part of the rental agreement, then each payment to the different utility companies can be automated, avoiding the need to write and send a check to each company. We’re not talking just one check here, possibly quite a lot. Today most utility companies have some kind of method or other to have your bills automatically paid.
If you’re a property management company that sends checks out to the individual property owners, there are a number of other options you can exercise. Most banks and financial institutions have all kinds of ways to send money digitally that will save you time and money (and fees). For example most employers these days no longer pay their employees with checks, most just do direct deposit. I’m not suggesting you take their route with your clients, only that there are options out there. When was the last time you looked?
How much of a difference can it make? What is the cost of writing and sending one check? My personal ballpark figure is about $1-$2 per check. This includes the cost to order the checks themselves, then there’s envelopers, stamps, bank fees, etc. I’m also ignoring any penalties for checks lost in the mail, which if you send a lot of checks, you’ll for sure have had some checks lost in the mail.
Above this I’m also not including all the labor costs. Sure the software can automate some of this, but you still need to load your printer with special checks which you probably had to order at a marked up price to match the specific you’re using. Then there’s the time of putting each check into the right envelope, making sure there’s no mistakes along the way. And don’t forget preparing the envelopers and so on. Printing all those mailing labels, sticking them on. It adds up faster than most people realize.
And I haven’t hit the price of the software. If you have a professional property management software solution then you’re easily looking at the thousand dollar or more range. If you’re using a small business accounting software with check printing, then it’s at least some hundreds. If you’re not using any software, then how long does it take you to manually write all those checks? In either situation there is a cost.
With all that in mind, if you have over 100 tenants (an easy round number) at 5 checks a month per tenant on average (plus one property owner payment), you’re looking at spending anywhere from $500-$2000/month of total expenses on just producing checks! Over a year it can easily get into the five figures! I do strongly recommend you look at your own full costs for writing all those checks, don’t just use my numbers. Do your own calculations.
And don’t forget to include the time costs, I can’t imagine an effort like that takes one person less than a full day to accomplish if it was all done at the same time. Over a year that adds up to 2.5 weeks business weeks of full time effort. Yuck. What a waste of time! I don’t know about you, but I have much better things to do. Especially if this can all be automated.
Now imagine that all it took was a day to automate almost all of this effort. No more need to print and/or send checks. Even if you can just automate your regular bills, and for property managers the need to print checks for your clients, how much money and time would you save? And again, this is PURE PROFIT! You’ve just reduced your costs, and not only has it not reduced the quality of your business, you’ve actually increased it!! All this because you’ve finally looked at WHY it’s always been done that way before!
To answer my question about our software, no we currently don’t offer check printing. We would like to, and do plan to eventually offer it (even after all I’ve said). However it’s not normally something you’ll see in competing solutions anywhere our price range. It’s much like a tenant asking for an in-unit hot tub while only paying an affordable rent. You can definitely get an apartment that offers in-unit hot tubs, but you should expect to pay quite a bit in rent. The same is true for check printing. However when people ask us, the answer isn’t really no, it’s more why do you really need check printing? Wouldn’t your time be better invested in researching what you can automate rather than just continuing to do what you’ve always done. Not only will you save on the price of the software, but you’ll save money each and every month from now on! And as an added bonus, the cherry on the whipped cream, you’ll have more time to grow your business rather than spend it on busywork that offers no real and lasting value.
About once a year I try to post how we’re doing here at LandlordMax, and it’s again that time of the year. But before I do, for those of you who are interested, here are the links to my previous yearly posts. And please note that although LandlordMax was originally founded in 2003, I only started sharing the revenues in 2007:
And now for the updated revenue graph which includes the fiscal year of 2011-2012:
As you can quickly see, we definitely grew some more this year, to the tune of about 65%. Another really exciting and good year!
And similar to last year, this all happened during a recession which is continuing to see a lot of weeding out of our competitors! So we’re very excited about these results.
The biggest improvements for the company this year were mostly internal, although there are some improvements which are visible from the outside.
In terms of visible changes, we completely redid the LandlordMax website (long overdue) which resulted in a marked improvements in sales almost immediately. Above that we released an update to the software which was pretty significant in terms of scale and effort. The update not only fixed some issues, but it also included a number of big improvements and features. We completely re-wrote the user manual from the ground up which resulted in a significant decrease of 80% in technical support levels! That’s a huge win!! We started a newsletter for the company which is growing by about 20% a month! In less than a year (closer to half a year) the subscriber count is already in the solid 4 figures and we haven’t marketed it one bit. The only way to find it is on the footer of the company website (there isn’t even a dedicated newsletter page yet!). So having that level of subscription growth is quite impressive in so little time considering there’s also been absolutely no marketing effort. We completely revamped RealEstatePigeon.com and brought it to it’s own home rather than being hosted by a third party service. There’s quite a bit of work left there, but it’s a good start for now.
Internally, and much less visible, an incredible amount of effort has been put into releasing the networked version of LandlordMax. And I do mean an INCREDIBLE amount of effort. This release has almost doubled the size of our code base! In other words, it’s almost doubled the size of the programming code behind the software! That’s huge! I only wish I could properly express the amount of effort that’s gone into this release.
Above the effort to release the networked version, we’ve spent a lot of effort improving our internal systems and processes. I won’t go into the details here because it’s probably not very exciting for most people outside of the company, but I can tell you a lot of things have been improved and streamlined quite a bit. A lot of things that could be automated have been automated, much more than before. This has helped improve and increase our overall productivity significantly.
Our marketing efforts have also expanded quite a bit. I won’t go into the details here either, but I can tell you that we spend more a month now on our marketing efforts than we did in our whole first year.
All that to say we’ve been very busy. This year has probably been the more busy for me personally than I’ve ever been in my whole life! And I can’t wait to see how things will change for us as a company once the networked version is available.
We’re definitely in a tech bubble again. Tech IPO’s are over priced once again. Just last year I wrote the post Groupon – Back to Crazy Company Valuations, in which I explained how and why Groupon was insanely overpriced. What’s happened since that post? They went public, quickly climbed to the $25 mark and then not even a year later they’re barely trading at $12! That’s a 50% price decrease!
Not only that but their numbers still make no sense. Ignoring their accounting oddities and controversies, the P/E alone would be staggering (assuming they had a profit). For the same market cap you could buy quite a few amazing companies with a lot less risk and the same revenue growth.
But today’s article is about Facebook and not Groupon, so let’s look at their story. Why do I believe they are incredibly overpriced? Firstly, the IPO price was insane. $38? Seriously? That gives them a market cap of about $100 billion dollars! In of itself that’s not a big deal, but when you take into account their revenues and then it’s insane!
The P/E for Facebook is over 100! The last time we saw P/E’s like that was in the dot com boom from about a decade ago.
But ignoring that fact, let’s do a comparative analysis of Amazon to Facebook, since they have about the same market cap, are both in IT, and so on. Facebook has $3.7 billion in revenues. Amazon has $51 billion in revenues. Yes that’s more than 10x the revenues. Both are experiencing similar growth rates. Amazon has about 5x the total profits of Facebook. Both are selling for the same price!
So why would I buy a company that’s at least 10x smaller and making 5x less profits for the same price? Or put another way, if you could by a local little store for $100,000 or one for $1,000,000 that had the same revenues, same growth, etc., which would you buy?
Ignoring that, which means ignoring yet another red flag (which in of itself should be yet another red flag – talk about meta), how stable are Facebook’s revenues? We know that Amazon owns ecommerce. But above that, Amazon is also a leader in cloud services. Many many many many companies (some very large companies) rely on them for managing their IT infrastructures. This isn’t small, it’s a huge deal in the IT world. Personally I believe this is the future of Amazon and where they will grow extremely large and powerful.
Ok but that’s just one competitor, and maybe Amazon is wrongly priced, maybe it’s even under priced itself (or maybe overpriced too, it could be that Facebook is that overpriced – I’m not debating if Amazon is a good deal today, just that compared to Facebook, Amazon is a much better deal). But what about some other companies. Did you know that McDonald’s is cheaper than Facebook! Yes, it’s market cap is $90B. That’s 10% cheaper. It’s not growing anywhere the same rate, but still. Anyone heard of Visa? Yeah, that’s cheaper than Facebook! And it’s a company that continues to grow. And no one has any doubts that it’s profitable with their interest rates and all kinds of fees, etc. For the tech oriented there’s also Intel. Yes it’s a bit more expensive than Facebook, but it’s generating 15x the revenues and almost 10x the profits. And it’s revenues are growing (not at the same rate, but still quite nicely nonetheless).
So basically when you buy Facebook, you’re buying the stock with all of the growth of these companies already built into the stock price. In other words, you’re buying it assuming it will grow to the same size as these companies. It has to grow BIGGER than these companies for you to make any profit because the price already includes these gains! That’s a huge claim!
Of course we all know the stock prices are irrational and the price could go higher based on that irrationality, but trying predict irrationality is a fool’s errand and if you don’t jump out at just the right time, you’ll get severely burned. Not something I want to try my luck at!
I believe that the biggest reason Facebook is getting such a high valuation is because of it’s brand awareness. Almost everyone is familiar with Facebook. There’s even been a movie about it. Many many people use it. The problem is that most people don’t stop to think where and how Facebook makes it’s revenues. In case you don’t know, most of it’s revenues come from ads.
Yes it’s similar to Google and their ads (Adwords), except that Google has a major advantage over Facebook. People on Google are actively searching for something when they go to Google. They aren’t just perusing and maybe they’ll click on an ad, they’re actively searching for something, including the ads! With Facebook, the ads are a distraction. When you use Facebook, it’s to socialize. It’s not to actively look for products. You’re in a completely different mindset. You don’t go to Facebook to find something, you go to socialize. With Google you go to find things.
And since Google and Facebook share such a similar business model, it’s only fair to compare them. Google is priced at twice the price of Facebook ($200 billion market cap). Google’s revenues are growing quite well, similar to Facebook’s. But Google is generating more than 10x the revenues and about 20x the profits!! Not bad for twice the price. And you don’t have to hope it will make it, it’s already there!
So let’s do a comparable analogy of Google and Facebook. If I was to give you two options:
– Buy stock A for $1 that’s generating $0.61 revenues and $0.20 profit
– Buy stock B for $1 that’s generating $0.04 revenues and $0.01 profit
Which would you want to buy? It’s pretty clear and obvious isn’t it? Now let’s say I added another:
– Buy stock A for $1 that’s generating $0.61 revenues and $0.20 profit
– Buy stock B for $1 that’s generating $0.04 revenues and $0.01 profit
– Buy stock C for $1 that’s generating $0.52 revenues and $0.05 profit
In case you’re wondering, stock C is Amazon. In either case, as you can quickly see, Facebook is incredibly overpriced. At this time, Google would appear to be the best deal (best profits – and a higher profit margins!). Of course this quick analysis is missing a lot of factors such as growth, marketspace, etc. But it’s good enough to see the scale of the valuations of the different companies. Kinda makes you think doesn’t it?
So how is Facebook fairing since the IPO? Well firstly did you know that Morgan Stanley spent billions to support the initial IPO price point?. Yes the market wouldn’t bare the initial price so it had to be propped up.
And since then, the price has continued to decline. Right now as I write this the price is hovering around $31/share. That’s approximately a 18% price decline in just a few days! And the biggest tell of the stocks success will be when it releases it’s first real financial report as a public company. If it doesn’t meet the incredibly high expectations, well let’s just say the market has a history of not being too kind to such stocks. It will be interesting to see how Facebook does on its first filing after the IPO.
But do remember that for Google, as important as the big accounts are, Google Adwords has a lot of small accounts too. My company LandlordMax spends quite a bit on Google Adwords advertising each month. And we will continue to do as long as the ROI is positive. However many small businesses aren’t experiencing the same positive results on Facebook. Here’s just a few examples:
As you will quickly notice, the results weren’t just not positive, they were atrociously negative. As in extremely bad! To the point that it’s in not even worth trying to adjust and fix.We’re not just talking small companies with naive marketers, but we’re also talking large companies with large budgets. That’s why I can’t see the same expenditure levels on marketing for Facebook ad campaigns as are happening today with Google Adwords. Yet this growth is already assumed and calculated into the current stock price.
Again some people have shown success, but I have read too many similar articles like those above to dismiss them as just bad luck. Sure Google has similar unsuccessful stories, but they are rare in comparison.
Being an entrepreneur, I constantly talk to a lot of other fellow entrepreneurs, and I have yet to personally meet someone who has had a successful Facebook ad campaign. Again, some people obviously have had success, and you can find articles about it. I just don’t personally know any. Whereas with Google Adwords I know of many people actively using it with positive ROI, including myself. So as anecdotal as this observation is, it’s still an important observation for me. Firsthand experience down in the trenches is always very valuable and should never be dismissed.
But if you buy Facebook stock, then the price includes this growth in today’s price. It has to acquire all these customers and more to justify it’s current price! Any increase in market cap (stock price) is then based on further expected growth and not actual real growth. Sure signs of a boom with a very high potential for a large price drop.
And in my personal predication Facebook will NOT meet it’s expectations. Facebook is a cool system, and it’s great for social networking, but in terms of a advertising value for a company I believe it has limited value. Unlike Google where people are actively searching, with Facebook the ads are more like banner ads. And we all know that banner ads have atrocious click through rates, just like Facebook ads are appearing to have. Yes you can significantly improve your targeting, but does that really matter that much? It doesn’t appear to be making that much of a difference in terms of ROI for Facebook ad campaigns from the results we’re seeing. And I can’t see it improving. I also can’t see Facebook trying to compete in search. So I personally don’t understand how they will ever get the same ROI on ads as Google.
Now I’m not saying Facebook isn’t a good business, it definitely is a good business. And it can definitely earn revenues and is profitable. All I’m saying is that the current price of Facebook is not inline with the value of its business. It’s too overpriced. If the price dropped significantly I would probably start to get tempted. But right now, it’s just insanely priced for what you get. Which means the price of the stock only has one direction to go, DOWN! Maybe not today, but give it a 1-3 years and it should better line up with it’s real value.
In either case, we’ll know soon enough. I’ll definitely have to post a follow-up in a year or two to see what happened between my initial predication today and then.
Update: Looks like the Facebook IPO is about to get quite messy!! It appears that the earnings estimates for Facebook were downgraded for the IPO but not everyone was notified. Firstly it’s very odd to do it at the very last minute of an IPO, but what’s even more worrisome is that some bigger investors were notified which is considered insider information. This could get really ugly real quick!!
Update 2: It’s quickly escalating. It now looks like Morgan Stanley, Goldman Sachs, and JP Morgan, along with Facebook itself, are being sued by investors claiming to be misled in the purchase of the Facebook IPO. If you thought Martha being sued for insider information and trading was a big story, this is going to explode in comparison. One of the largest IPO in history, an over-hyped IPO, investors losing 20% in two days, large dollar values of insider trades, a high profile company, it all has the making of one of the biggest stories of the year. I’ll even predict that a movie, even if it’s just made a made for tv movie, along with at least 2-3 books, will be released within a year.
Through my company LandlordMax I hear lots of people asking if we have a cloud offering (in case you’re wondering, we don’t yet). The thing is that most people ONLY look at the benefits, very few look at the potential and catastrophic issues that you’re at risk of. For LandlordMax we use several online (cloud’ish) solutions, and it’s great for many things. The problem is that you also have to be careful because for some things the downside can be catastrophic! Even possibly terminal to your business! It can be much bigger than you realize and I’ll explain why in just a bit.
First, let’s make sure we’re on the same page about what cloud offerings really are. So what exactly is a cloud offering? Most people today have come to define a cloud service as a service that’s hosted online. Although not exactly right, it’s pretty close. And for the purpose of this post we’re going to define cloud services as all online services. In most cases these are just going to be websites that offer services. Again, although not technically correct, it’s close enough for today. And anyways this is what most people understand cloud services to be.
If you’re interested in the exact details, Wikipedia has a nice article about cloud computing. As well you’ll probably want to check out their article about SaaS (Software as a Service), which is actually closer to what people really mean when they say cloud services.
In any case, let’s start with the benefits, so we can understand why people are so interested in these solutions (including myself):
- Affordable: You don’t have to invest in any infrastructure, computers, etc., it’s all taken care of for you and amortized over time.
- Automation and Maintenance: You don’t have to manage any computers, servers, upgrades, etc. It’s all taken care of for you.
- Mobility: You can generally access the service anywhere there is an internet connection.
- Focus on core competencies: Instead of spending time setting up your infrastructure, computers, etc. you now have the time to spend on where your real value is.
- Scalability: Most online solutions will offer a significant amount of growth. You just move up plans. Amazon’s EC2 service recently had an amazing example where a system scaled up to 50,000 CPU cores within 3 hours.
- Easier: If you don’t have to set up anything. You don’t have to figure out how it works. It’s all done for you.
- Vendors are more experienced: In most cases, the service you’re using is the vendors bread and butter, they work in these systems all day, so they know their stuff in and out whereas for you it’s just to get the job done.
- Quicker: You can generally sign up and start using the solution within minutes. If you have to set it up, it can take days, weeks, or more.
- Less commitment: Maybe you only need the service for a month, half a year, etc., which means you can save from having to invest in a ton of infrastructure for a short lifespan.
As you can see, all of these are great benefits. Who wouldn’t want them? Especially for a smaller company, the benefits are incredible.
Of course, like everything else in life, you can’t have everything. Cloud services do come with costs. Not so much in terms of dollar costs, but in terms of very huge potential UNSEEN RISKS. This is especially true if you have to store data!
There are a few other cons, such as you can’t access your data without an internet connection, and so on. But really there’s really just one very big con, and unfortunately it’s generally unseen until it happens. That’s the worse kind of con! What’s worse is that most people don’t really talk about them, mostly because cloud services are still fairly new enough that most people haven’t really had a chance to experience this very big and potentially catastrophic con.
But before I explain it, let me give you an analogy that’s probably closer to home, and that you’re likely to have already encountered.
Most people store their pictures on their personal computer hardrives. Hardrives do fail. Google published a groundbreaking research report and the results were quite troubling. Basically you can expect drives to fail at a pretty predictable rate. And unfortunately it’s not just hardware failures that you have to deal with, all kinds of things can happen such as a virus corrupting your system, power surges, and so on.
In any case, before there were digital cameras, most people really didn’t have that much data, so all their really important data could usually be backed up on a CD or DVD (or if you’re old enough to remember this, floppy disks or tapes). It sucked to lose your saved video game files, or to have to install your applications again, but you usually could. Sure you’d lose some data, but usually it wasn’t that critical. Most important was generally backed up on floppies, CD’s, etc. because it was quick and simple.
Nowadays with everyone having a digital camera, there’s lots and lots and lots and lots and lots of pictures saved on people’s computers. Pictures they really don’t want to lose. The data is now much larger and generally more valuable. There’s so much data these days that in many cases you can no longer just back it up on a CD or DVD. But even at that, because of the quantity of data, most people just simply don’t do any backups at all, they expect their computers will just continue working. And computers usually just work until one fine day where it eventually fails and everything is lost. It’s terrible and catastrophic. Years of pictures lost in an instance!! It’s devastating. Yes there’s other data, but for a lot of people, their pictures are their most important data.
And so as cameras have become more common, we’ve started to experience more the pain of computer failures. And as such, it’s now much more common for the average person to have an external hardrive to backup their data. 5 years ago almost no one did this. Although not everyone still does this, it’s much more common. And its definitely going to be that much more common with time. We’re learning from our experiences. Once you experience it you vow never to let it happen again. It always takes that first time to wake people up, myself included.
I’ve been backing up prolifically since as long as I can remember because I’m one of the lucky ones to have experienced my first computer failures eons ago. And in 2006 I even wrote a post called 4 Simple Steps to Protect Your Data From 99.9999% of all Computer Failures which is still as true today as it was back then. I still mostly adhere to these steps, with the exception that I do even more today than I did back then
So why did I go on such a tangent with digital cameras and data backups, because when you use a cloud service to manage your data you’re basically exposing yourself to exact same risks!! You might not realize it, but with most online services you’re basically running without a net. There’s no backups. If anything happens, it’s the same as a computer failure with your digital pictures. And if the data is critical to your business, it could be catastrophic. What’s worse of all, there’s often no warning at all before it happens.
So let’s get into this con in much detail.
For the cloud services you use right now, do you have a backup that you can use if they close down or you decide you want to move elsewhere? In most cases you have no way to extract your data at all, nevermind moving to another service. In those situations that you do, can you actually take that data file and use it anywhere else? Maybe in theory yes, but can you really in practice? If you can’t, then you might as well not have any backups at all. Why fool yourself into feeling more secure when you really aren’t. And this question leads us to some very interesting and provocative questions.
What happens if the company closes or decides to no longer offer their cloud service? All I can really say is good luck with that! Imagine for a moment that you have a contact management system and you have tens of thousands of contacts stored, with all their interactions, etc. The company that hosts the cloud services suddenly closes. What happens the day after the company closes? If it’s a service, the service is shutdown immediately. You’ve just lost all access to the system and your data overnight. Ouch!!
Online services that manage and store data have a lot of additional and very high risks. The scenario I just described is the same as if your hardrive just crashed and you just lost all your pictures and documents without any backups. However in this case, maybe your business relies on the data and system. It sucks to lose your pictures, but you can and will survive. Can your business survive? What is the impact on your business?
If it’s just a backup service of your data files, then it’s not a big deal, you can just re-create the backups with another service. Sure in the meantime you have no backups, but it’s quickly resolved. However if it’s all your customer and vendor contact information, communication histories, contract negotiations, etc., then the impact is going to be huge. What if you were using an online property management software system to manage hundreds or thousands of units and tenants and suddenly you have no access to anything. The impact could be severe enough to cause you to go bankrupt (you may not be able to properly collect your rents on time to pay all your bills, or even know what all your bills are)! That’s a huge risk. A risk that’s so large that it overshadows all the possible benefits!!
Which leads me to my next question, how much warning do you think you’ll get if the company hosting the cloud service closes? I can’t imagine a company that’s managing contacts, emails, projects, etc. publicizing that they’re on the brink of closing. Most likely you’ll have absolutely no warning. One day everything will be fine and the next day the system is down never to come back up. And to be quite honest, I don’t know that there’s much you can do to prepare for this anyways, even if they gave you a warning. How are you going to extract your data? What are you going to do with that data?
Following this, what happens if the service you’re using significantly changes it’s pricing model? It’s not uncommon for an online service to adjust their prices, there are many stories of significant increases in prices. Especially for newer companies, which most cloud based services are. Or better yet, what happens if the company gets acquired? Will the pricing models change? Other than paying what they want to charge you, what option do you have? Sure you can move, but can you really? What is the cost of transitioning?
And what will happen to the could service when it gets brought into the new company as part of an acquisition? Will it stagnate? For example Mint was acquired by Intuit in 2009 and a year later the comments weren’t that great. What if the new company is a competitor? Will they force you to transition to their service or you lose all your data? One of our big competitors has been doing this with the competitors they acquire. They’re basically closing the solutions they acquired and are forcing everyone to move to their cloud based solution. Not everyone is happy about this. It’s yet another very big risk of using a cloud service?
Which leads me to my next big question. Do you trust this company over the lifetime of your own company’s needs? In other words, will they offer the same quality of service in 2-5 years? What about in 10 years? If transitioning is next to impossible, which it is for most online cloud services, then you’re at their mercy. They could never upgrade or improve the service, or worse it could become slow, buggy, etc. with time. What recourse do you have other than completely starting over?
With a solution you install and manage, you don’t ever have to upgrade if you don’t want to. In fact, the company has a very strong motivation to improve their software because they generally only get paid when a new version that has enough value to upgrade is released. If it’s not good enough, people just don’t upgrade. And with time, the value of upgrades becomes more and more significant. In other words, the company’s motivations are probably much more inline with yours when they aren’t cloud based. They need to convince you spend more money on them, that the value is worth it.
Unlike pictures where it would really suck to lose Johnny or Susie’s 1st birthday pictures, the impact to your losing your data could be so significant as to destroy your business. I’ve already given a couple of examples, and it’s pretty easy to come up with additional ones. Basically anywhere you store data that’s critical to your business is at high risk.
Therefore I would now recommend you look at what services you use and determine what the costs would be if they suddenly went down tomorrow. Is that cost worth the benefits? In some cases yes, absolutely, but in other cases no way would you ever even consider it if you had thought about it first.
The thing is that today most online services are still fairly new, and most really haven’t had the chance to close. Although cloud computing isn’t new, it’s really only been in the public’s attention for a short time. And as such very few people have experienced the downside. If I was to guess, I would suspect that most like you haven’t either.
I’ve personally only experienced it once, and it wasn’t with one of our core products, but even then it was pretty painful. I learned my lesson. Never again. And thankfully it wasn’t a service that’s core to my business. And because of that I’ve since been very careful with what online services my company uses.
Anything that can severely cripple us has to be done internally. It has to be installed and managed internally. This doesn’t protect us 100%, but what it does offer us is a buffer. If something happens we have some time if the company closes, collapses, changes, etc. We can at least still continue to use their software until we find an alternative solution, even they don’t exist anymore. We can’t use them indefinitely, but we do have some time to transition to another system. We might not be able to transition the data, but at least we can continue to access the old system if need be. And because we have some time, we can always hire someone to help us in moving data from one system to the other, even if it’s manual data entry. The key is that we at least have options. And most importantly that we’re not without our system overnight.
And with that, I will say that my company probably uses close to a dozen online cloud services. Am I a hypocrite? Am I willing to take those risks? Absolutely not. Each service we use would not cripple us if they closed tomorrow. It wouldn’t be fun if they went down, but it definitely wouldn’t be catastrophic either. There’s only one online service we use which I’m planning to push to an internally manage solution sometime this summer. It also wouldn’t be a catastrophic loss, but it would definitely be more painful than the others. It’s the only solution left with data that we’d need to extract that we wouldn’t be able to. However if we lost the data, it wouldn’t be catastrophic. It wouldn’t be pleasant either, but we could manage without too big a hiccup.
To give you an example of solutions we manage outside, internally we communicate using HipChat. Well at least until last month, before that we were using Campfire. Obviously we were able to transition because we’ve already done it. Losing either of these services overnight wouldn’t be fun, but neither would really slow us down much. They’re very useful and do increase our productivity internally, and losing the chat histories would have some costs because some info would have to be re-communicated, but as I’m sure you can appreciate, the exposure is pretty minimal compared to the costs and risks.
Another example is that we use Aweber to manage our company newsletter. Before I begin, let me just start by saying I chose them because of their reputation and my belief that they aren’t going anywhere anytime soon. In any case, if something happens, yes we’ll lose the latest email subscribers since our last local backup. That’s a cost, but really it’s not that big a deal. Yes we’ll lose our stats over time. They were nice, but we can live without them. The biggest pain would be importing the mailing list with a new service. Most likely all our subscribers would be emailed to confirm and verify they want to be subscribed to the new service managing the newsletter. So as part of this effort, we’ll probably lose a percentage of our subscribers. It’s not pleasant, but by no means is this catastrophic. We can definitely recover.
If however I was a real estate investor, or a property management company managing properties for others, losing all my data could be extremely catastrophic. All of sudden I no longer know which tenants owe me what amount of money (rents, back rents, damages, late fees, etc.). I now have to find all the signed lease agreements and go through that manually just to calculate this month’s rent roll. If I have 300-500 tenants, I might not be able to process all that information in time (I might have 5000 tenants on file but only 500 are currently active). What about all the workorders I have on file, all that information goes away. In some cases a request to fix a leaky sink can just be re-requested by the tenant, but what if a workorder is critical and it gets lost (for example a vacant unit needs a roof repair otherwise it will collapse, a leak that goes unchecked escalates, etc.). If I’m a property management company, I might have obligations on when I need to pay the property owners their rental revenues so they can meet their mortgage obligations, but if all my information is gone, I might not have the time to manually process everything. And when I do find a new system, in this example I now have to enter 500 units worth of data, 500 tenants contact info, 500 leases, etc. How long will that take? I might not be able to survive the 1-3 months it takes me to recover from my online cloud service disappearing on me overnight.
Using an online solution in the above example could be very catastrophic. In this case the risks just aren’t worth the benefits. In this case you’d most likely want to acquire a system which you can manage internally, so that if the software company closes, decides to stop selling the software, gets acquired, changes prices, etc., you can still continue using their software until you find a proper replacement. Otherwise you could come in to the office one day to find yourself in a world of hurt.
Online and cloud services can be very beneficial. They definitely have their merits. We use many such cloud services here within LandlordMax. However you always have to be vigilant in terms of what and how you use them. They really only have one con, bit it’s a whopper of a con! Which is that your data is at their mercy. You generally don’t have backups or anyway of transferring it. So always, and I mean always, make sure that a permanent disruption of the cloud service you’re looking to use isn’t going to destroy you. And if you’re already using it, then you should already start to make preparation plans just in case the worse does happen. Don’t wait until it’s too late because by then it will be too late!
We’ve all heard the joke, that the government will pay $5000 for a $5 hammer that you can buy at your local Home Depot. Is it true? Not really, but everyone does know that the government generally pays a lot more for almost everything than if they just went to their local stores and bought what they needed. Why is that? Why would anyone want to pay so much for everything? Especially in these economic times? And even more especially for higher priced products and services where the savings are larger.
The real truth, which most people don’t really want to hear, is that we’re all partially to blame. It’s as much our fault as the governments. And once you start to understand it from their perspective, you start to understand why they do pay too much for things. It doesn’t make it better or right, it just gives you an appreciation for why things are the way they are. And more importantly, why they probably won’t ever change.
So let’s look at the purchasing process, starting from the top, for anything above the $1000-$5000 threshold. The threshold where you need to start getting approvals before you can make any purchases. Where you can’t just buy it on your personal credit card and just it get reimbursed. And before I get going, please remember that this process is the same for purchases of $10,000, $100,000, $1,000,000 or more. The only difference is that they involve more people and layers, hence more bureaucracy and costs. So if you’re going to sell something to the government for more than $1000-$5000, the process quickly becomes complex and expensive and you almost have to increase it by an order of magnitude to cover your costs.
Now I hate this next statement, but it was only after going through it while working for a few government entities in my consulting days that I was fully able to appreciate why the government (and many large companies)have their hands tied. I was always on the side of “this is crazy and bureaucracy is insanely expensive for nothing” but eventually it was explained to me in a way that I got it. So here’s my attempt to help you have pity on the poor people you’re trying to help. Oh, and realize that most of these same people don’t get this, it’s never really explained to them, so please be kind. Many just end up working for the government their whole lives so they assume this is how the world works. You can usually quickly and easily tell those that have worked for the government and very large companies their whole lives. It’s not a bad thing, it’s just a different way of working.
The first thing to remember is that the government is public facing, so they can get in trouble for anything that goes wrong (whether it was a right decision OR a stupid decision). So the general philosophy is CYOA (Cover Your Own A**). To give you an example, if you say need a computer system for your team of 10 people, and you try to do it yourself, if you make any mistake whatsoever you’re personally in trouble. In my case when I worked for a specific government entity and I tried to do this, I was told if even just one computer was infected with a virus, one wasn’t fully patched (or even if it was fully patched), if anything at all happened, I would be personally responsible. Anything at all, data being lost, a power surge, anything, regardless if it’s my fault, someone else’s, or even an act of nature!
Also if I use a vendor and someone somewhere else is cheaper, or has a better deal (regardless of the quality), I could be in trouble if anyone outside finds out. If another vendor gets hold of this info, if a member of the general public sees a better deal anywhere else, etc., they can target me because I didn’t follow the correct process and procedures. And even if I have the best deal in the world, there are still potential issues. Basically I can quickly and easily be in for a world of hurt. I would lose all government protection and could be personally liable.
So what can the government do to alleviate this mess because no one wants to personally take on that kind of risk for the little reward you get. The project is a wild success, you get some taps on your back, you might move up in your career with a small promotion (and that’s a big maybe, many departments have strong tendency towards seniority), and so on. You might get some rewards, but they won’t be anywhere near the same as the risk. What exactly are the risks? You can be fired on the spot. So immediate loss of job. You might not be able to work for any government entity again, depending on your level. You lose all your benefits. If you had a pension, that’s going to be limited from now, or gone in the worse case. You could have legal issues, even criminally charged in some cases. The risks are large, compared to at best a promotion.
Which means that most people aren’t willing to do anything bold or stick out their necks because the risks to reward ratio just doesn’t make sense. So to resolve that, the government force everyone to go through approved vendors. If the vendor is approved, you can’t get in trouble, you can’t be fired, and so on. You’re no longer personally at risk. Ok, that’s easy. And if a vendor is approved it should be because their prices are reasonable and the quality is good. But here’s where it fails and gets all wonky. As soon as you do that, all kinds of people and vendors come out of the woodwork complaining about why it isn’t them and why it’s not fair, regardless of whether or not theey’re right. So now the government has to create further processes by which you can be approved otherwise the public cries foulplay.
You don’t see this in a private or public companies, but with the government it’s different because of who they are. It’s insane how many people complain about everything! And if anything isn’t “fair” (which most things aren’t, that why there’s competition and a free market), it will generally make the papers. So this creates a lot of process and work for everyone. It’s a mess. With companies you can just ignore the public because you’re a company, but with a government entity you don’t have that luxury. You are accountable to the people.
So now a process gets put in place for selecting vendors. Of course some people still complain some more. So tighter measures get added to the process. Suddenly the only vendors willing to do all the paperwork charge crazy expensive prices for everything because it costs them an arm and a leg just to get in. And this is with no promises of any sales, that must be done after you’re approved (and costs further money). You want a $800 computer, that’s $5000. $800 for the computer, and $4200 for all the costs to get in the system and the risks of not getting a sale in the first place.
And so here we are. The poor government worker is screwed into going through all these crazy and expensive processes because they have to for their own personal safety. The very people who scream loudly that this is insane and stupidly expensive are often the same people who created this mess in the first place. If at every corner every single one of my purchases are being scrutinized and I can be fired for anything (nevermind the potential legal issues), I won’t do anything. It doesn’t make sense for me to buy anything, even if the consequences are potentially terrible. Which then forces all the crazy processes and brings us to where we are today.
I’m personally not fond of how that world works but unfortunately I do understand it and was able to navigate through it when I was a consultant (it helps to understand it). That’s also why I will never sell software to that world. The risks for a vendor are just too high. As a company you have to invest a lot of money for the chance to sell to the government at inflated prices. Sure you will make a profit, but it’s not nearly as big as most people think because of all the costs associated in selling to the government in the first place. That $5000 hammer might only result in a profit of $500, but that’s only a 10% margin with a lot of risk.
The main draw for companies is that once you’re in, it’s relatively easy to stay in. Most companies aren’t willing to go through all the effort and cost. That and the government doesn’t like to change, even if there are better and more affordable solutions, because there is a lot of internal costs and efforts in changing anything. Change is not fluid, it’s hard and has a lot of inertia. And it can be vetoed at almost any step. So if you are fortunate to get in, you can be locked in for quite some time, which is where the real benefits and profits to vendors come in. That’s the gravy boat. Not the prices you charge, but the consistent and long term almost guaranteed revenues and profits for those lucky few.
So even if you do get into the system, good luck trying to find any real decision maker willing to make an actual decision on your product or service within a reasonable timeframe! That’s the hardest thing possible, at least from my personal experience for anything more than $1000. From the government employee side, it’s much much easier to ride on a big decision for months, even years, before ever considering making the actual decision because you can’t get in trouble for finding more information and doing more research. That and being undecided generally won’t get you in trouble compared to what making a wrong decision can cost you. So what happens is that it takes a while for anyone and everyone to get into some kind of consensus and make a final decision. Eventually someone or some department has a strong enough need to push a decision, enough to champion and push it through. But until then, the sales cycle will generally be months to years. At least once a decision has been made things usually move relatively fast. That’s relatively fast, and not private world fast.
To give you a further example to contemplate about, if I’m the person in charge of a project and I decide to take a risk and do something, even if it’s only a 10% chance it can fail, an 80% we collapse if I do nothing, and a 90% chance of success (so massive chances of winning and almost no downside, and if I do nothing we fail), if it does end up failing, my career is most likely over. Not only can I get fired, I could be in the news and so on. If I do nothing and it fails because of inaction, I’m not personally to blame and still get my pension and everything else. The motivation for me to do move forward and do the correct thing is badly aligned with my personal motivations and success. In the private world, if you don’t move ahead and get some successes, you’re not gonna be around long, so the motivations are better aligned. They’re not perfect, we obviously have some issues as the Occupy Wall Street Protests have shown, but at least it’s closer.
In other words there is little incentive to take any kind of risk, even when the odds are incredibly stacked in your favor and the downside is minimal. As long as there’s any potential downsides, which there always are, then it’s against my motivation to act. Unless I’m a go-getter willing to take the risks, don’t know any better, I’m naive, or I just don’t care, the only time I’ll make any decision is when I can no longer push it off. The culture is amazingly strong to avoid making any real decisions. And you can’t blame them. What would you do if you were in that situation? And remember that most decision makers are at higher levels, so they generally have quite a number of years invested in their careers, not to mention their pension plans, and everything else that comes with being a government worker.
And that is why a hammer will cost a government entity many times more than it costs in real life. It’s a vicious cycle where you can’t blame the person who has to make the decision. Pay a realistic amount and PERSONALLY take on any and all of the risks and liabilities yourself OR follow a process which significantly increases the cost of everything and protects you in the process. A process that was created to protect the government from overpaying is the very one that causes them to pay so much! It’s a real bad lose-lose situation. And as far as I can tell, there’s no real way, and definitely no easy way, to resolve this problem. Which is why I predict the government will continue to overpay for just about everything for the coming future. Hopefully some day we can find a solution.