David Cummings on Startups

Category: Operations

  • Bonuses Don’t Drive Performance

    I’m of the same opinion of The Globe and Mail article “Bonuses don’t mean better performance” where the author cites several examples in the real world as well as academic research of bonuses not improving output in non-manual labor roles. In my company, we don’t do bonuses, but rather we focus on above-average pay, a great work environment, and positive corporate culture. My line of thinking is that people automatically incorporate the bonus into their standard compensation, and don’t separate fixed from variable pay.

    This strategy won’t work for everyone, but I encourage entrepreneurs to proactively decide on their desired type of corporate culture and compensation strategy, and not just blindly follow the plan from their previous employer.

  • Moving from Consulting to Products

    I had lunch with a friend today that is working on shifting his company from being a consulting business to being a products business. No, it isn’t the same entrepreneur that I mentioned before, so there must a theme here: when the economy goes south, consultants think the grass is greener for recurring revenue software-as-a-service companies.

    Here’s the advice I gave him:

    • Cost of customer acquisition is going to be your number one challenge
    • Plan for the software process to take twice as long and cost four times as much as you think
    • Several employees that like the consulting business will be alienated by the software business — it is hard to shift the corporate culture to support the new way of thinking
    • Build metrics about everything that goes on from day one — Salesforce.com, or something similar, makes it easy to track many of these

    It’s going to be a challenging transition but well worth the effort.

  • Employee Hiring Tips

    Hiring is one of the hardest things an entrepreneur does on a regular basis. The actual act of hiring isn’t hard, rather, it is the difficulty of hiring the right people for your team. Building a great team is the number one priority of an entrepreneur. Here are a few tips that we’ve found to be successful for us during the hiring process:

    • Have an essay portion of the hiring process whereby the candidate has to answer five short answer questions that are specific to your industry
    • If you’re a software company, have an exercise for the candidate to complete certain tasks in the application and demonstrate technical proficiency
    • If it is a very senior position, go out to dinner with the candidate and his/her spouse so that you can see how they interact with their significant other
    • If anyone on your team objects to the candidate, immediately discontinue the process and move on — everyone needs to be on board 100%

    Hiring the right people is incredibly difficult. I hope these tips help.

  • End of the Year Planning

    It’s that time of the year to start planning for 2010. Our process is pretty loose right now and is continually evolving. Here are some of the steps we take:

    • Update our One Page Strategic Plan
    • Change our financial models using Google Spreadsheets
    • Revisit our KPIs and decide what to keep, what to remove, and what to add
    • Plan any major initiatives or projects

    Personally, I like doing tasks more than I like planning, but I realize the importance.

  • Financial Models – How much detail?

    We’ve been reworking our financial models in preparation for 2010 and beyond (three year planning). One of the questions that has come up is related to how much detail should we put into them. Detail, both in the number of assumptions and amount of variables, as well as projecting out out a certain time period. In terms of time periods, here are some common options:

    • The first six months on a month by month basis, followed by quarters for the remainder of the year, and then just a yearly columns
    • The 12 months on a month by month basis, followed by quarters for year two, and then just a yearly columns
    • The first 24 months a month by month basis, followed by yearly columns

    I’m leaning toward keeping them fairly simple and using the first option for the time period details.

  • Budget vs Actual

    We don’t use budgets in my company. There, I said it. Yes, many executive would view it as blasphemous to not set budgets and measure actual against it. What do we do in lieu of budgets? We do have quarterly sales bookings goals, recognized revenue goals, profit margin goals, etc. Yes, we look at our salary cap, trailing 12 months revenue and expenses, and a variety of other metrics. On a monthly basis we have a chunk of money to use for whatever comes up, and department managers submit requests and we make decisions to allocate money, or not, within a week.

    I’m guessing as we continue to grow, and work through the process of exiting No Man’s Land, we’ll have to do budgets. For now, we’re in no rush.

  • Office Scoreboard

    One of the things we have in our office, which people always comment on when they come in, is a large LCD scoreboard in our reception area. The scoreboard, which is color coded based on percent of goal, and based on Mastering the Rockefeller Habits, shows our quarter-to-date score card for the following metrics by product line:

    • Recognized revenue
    • Percent of goal
    • Percent of goal relative to percent of quarter complete
    • Monthly recurring revenue

    We update the Google Spreadsheet that powers the scoreboard twice a week by hand. I’d recommend a similar scoreboard that is simple and concise for your company to always show the health of your business.

  • SaaS Magic Number

    The term “magic number” in the Software-as-a-Service (SaaS) world has come up several times over the past month in casual conversations. Early last year, the term was popularized on Will Price’s blog via a guest post from Lars Leckie titled Magic Number for SaaS Companies. Generally, the magic number is a reflection of how efficiently a company is growing their recurring revenue relative to sales and marketing expenses.

    To calculate your magic number, take the difference in quarterly recurring revenue between your last quarter and the one before, multiple that by four, and then divide everything by all the sales and marketing costs of the  quarter before last.

    Magic Number = (((Last Quarter Recurring Revenue) – (Quarter-Before-Last Recurring Revenue)) * 4) / (Quarter-Before-Last Sales and Marketing Expense)

    The general idea is that if the magic number is greater than one, more should be invested in sales and marketing. If the magic number is less than .7, additional energy should be invested in making customer acquisition more cost effective.

    I’d recommending reading the original article and evaluating the equivalent magic number for your company.

  • Monthly Financials Review

    We have a monthly financials review on the first Thursday of each month. As part of our rhythm, data, and priorities, using the terminology from Mastering the Rockefeller Habits, we try to have consistent, repeatable processes for everything we do. The monthly financials review involves talking through the following items:

    • Balance sheet, cash flow statement, and income statement for the past month, quarter-to-date, and year-to-date
    • Reviewing the trailing 12 months expenses vs revenues and looking for trends
    • Looking at the cash flow forecast for the next 12 months

    Financials, especially cash flow, are critical for entrepreneurs to monitor, and I recommend doing it on a regular basis.

  • Quarterly Performance Review Time

    It’s that time of the quarter to do our performance reviews. We try to make them very simple and focused using a methodology from Patrick Lencioni. Everyone in my company has to answer the following four questions personally as well as for their direct reports:

    1. What did you accomplish?
    2. What will you accomplish next?
    3. How can you improve?
    4. How are you following the values?

    Employees then provide anonymous feedback about how their manager can improve to our HR manager. I feel that doing reviews quarterly, and not tying them to compensation discussions, makes for better communication that flows in a more timely manner.