When is a cheap flights not a cheap flight? When extras increase it by 337%

We have a mid-year meeting for our leadership team in June. We had a great year last year and so far we have done well this year – so as a thank you to the team we have decided to hold our mid-year get together in the South of Spain. To get the ball rolling I asked our office manager Ping to do some research into flights.

“Great news” she reported back, “Ryanair are showing flights from Stanstead for £36.98 pounds return”.

By anyone’s standards that is a bargain and I momentarily felt genuinely grateful to Ryanair for fighting the corner of the little guy against the big airlines by keeping their fares so competitive. Their price was a no-brainer and they had done a good job of promoting them.

“Fantastic” was my reply to Ping “Book them before they sell out.”

Just as I was basking in the warm glow of satisfaction that our Spanish trip was meant to be, my desk phone rang. It was Ping

“If you want to check in any luggage it costs £30.....” came the bad news. Just as I was about to complain of the lack of transparency in the advert Ping continued here sentence: “.....per person and each way.” £60 a head to take a suitcase!

In an instant Ryanair went from heroes to villains. They had hooked us in with a very cheap headline price and now we are interested they tell us that it will cost more to take a suitcase than they charge for the flight.

But I quickly get over my irritation – after all the flight was still under £100 a head. Still a bargain even if it is not the bargain that we thought it was.   

“Not so fantastic” was my reply to Ping “But go ahead and book them before they sell out.”

I returned to my work with a slightly less warm glow of satisfaction. It was only a few minutes later that my phone rang again. It was Ping – my heart sank anticipating more bad news and she didn’t disappoint me.

“There is an administration charge of £12 person for booking......” she announced. Just as I was about to complain that the only way of getting a ticket was by booking Ping continued here sentence: “......and a £12 person charge for checking in online.”

“Let’s not worry about checking in online” I suggested in an effort to stop costs mounting.

“I can’t find any way for you not to check in online – I think you have to pay it” replied Ping dolefully.

I felt the anger rising and stopped to count to ten. As I got to about seven the final insult was delivered: “There is £4 per person “passenger fee”” said Ping. She didn’t add that she couldn’t see any explanation of what this was for – but I could tell she was thinking it.

 This beggared belief. A fare that had been advertised at £36.98 return was actually nothing of the sort. It was loaded with extras, some of which aren’t even optional, that ended up increasing the fare to £124.98 a head – 337% higher than the advertised fare.

I am sure that Ryanair have an army of lawyers who have checked that they are not in breach of the strict letter of any advertising standards. But that approach misses the point by a country mile. Here’s why.

If Ryanair had advertised an all inclusive £124.98 fare to the South of Spain, we would probably have booked it and felt we hadn’t got a bad deal. Ryanair would be good guys. As it is I feel that Ryanair’s sales tactics are misleading to say the least. I feel as though I have been sucked in on a false promise of a very cheap flight and the actual price is much more than I was led to believe I was going to pay. So although I will end up paying the same amount of money, rather than thinking Ryanair are good guys I will go out of my way never to fly with them again. Does Ryanair think that is a good outcome? Does Ryanair think that is a good return on their marketing spend?

So when you next advertise a cut price deal stop for a moment to look at it from the customer’s point of view. Sometimes the eventual price isn’t the issue, it’s the customer’s perception of how they get there that counts.

Would I call the Winkelvoss Twins Dumb and Dumber?

Sometimes in this life you need someone to take you to one side and tell you some truths that you are probably not able to see or admit for yourself. That time has come in the case of twin brothers Tyler and Cameron Winkelvoss.

You may recall that the Winkelvoss twins have claimed for some years that Mark Zukerberg, Facebooks’s young Chief Executive, stole their idea in 2005 when they were classmates at Harvard. Their idea, they claimed in court, was used by Zuckerberg to start thefacebook.com – a social networking phenomenon that became Facebook. A business now valued at $60 billion.

An out-of-court settlement was reached in 2008 which saw the Winkelvi, as Zukerberg cruelly dubbed them, awarded $20 million in cash and $45 million in Facebook shares; a settlement that is now worth $160 million based on Facebook’s current valuation.

This week a Federal Appeals Court judge in the USA ruled that the Winkelvosses could not have the 2008 ruling re-opened allowing them to go back for a larger settlement. Their case was based on a claim that at the time of the settlement they were duped by Facebook regarding its valuation – meaning they got fewer shares than they believe they should have.

So here’s one way to look at this. Here are two Harvard Graduates, majors in Economics and attendees of business school at Oxford whose father is a very successful and wealthy businessman and who surrounded themselves with an army of lawyers. Now they want us to believe that this collective of extraordinary business acumen and mental horsepower weren’t able to come to the right valuation for Facebook. Come on guys!

Could it be that the motivation here is two guys who have ceased to be able to see the woods from the trees? Two guys who are eaten up with bitterness that a geeky computer science major made himself the world’s youngest billionaire with an idea they allege was theirs. I can’t think of any other logic – because I think everyone predicted the outcome of this appeal. Everyone saw that it was fatally flawed....except that is the Winkelvoss twins. It is time someone took them to one side and gave them a simple piece of advice.

Guys you have many extraordinary qualities. You are Harvard and Oxford graduates, you are Olympic oarsmen and you are worth $160 million – more than most people will accumulate in ten lifetimes. It is time to stop defining your lives by how much you hate Mark Zuckerberg for monetising what you claim is your idea. Harness all of the positive things you have going for you and move on and create your own Magnum Opus before you destroy yourselves wondering what could have been.

And would I call the Winkelvoss twins Dumb and Dumber – no! Not with their track record for litigation! Besides which these guys have rowed in an Olympics - they are much much bigger than me!

The golden rule of recurring revenue businesses – “The Rule of 78”

All successful owners or managers of small businesses that I know have one thing in common. They all have a good grasp of “the numbers”. They all understand the important moving parts of their P&L. They all also have a couple of key metrics in their heads that they watch like hawks. I need to sign x number of customers to break even or I need to sign y customers a month to be profitable this year.

Understanding your numbers is important – but if you run a recurring revenue business, there is one set of numbers that is more important than anything – I call it “The Rule of 78”.

A quick definition – a recurring revenue business is one where you win a customer – usually in a services business - and they spend money every month. For example if you are on a mobile phone contract you are a recurring revenue customer. You spend £20 a month for your phone package every month. For obvious reasons business owners crave it and investors love it. But here is something that a lot of people don’t always appreciate – how you can fall foul of the “Rule of 78”. So what is it?

A simple example – imagine you run a services business and you win one new customer each month and your customers spend exactly £1,000 a month each, every month for the foreseeable future. Let’s look at how your sales in the year build. You win your first customer in January and they bill £1,000 every month in the year – in other words you bill them 12 times - £12,000.

You win your second customer in February and you bill them for the rest of the year – i.e. 11 times. You win the next one in March and bill them 10 times in the year and so on.

If you roll that model on throughout the year you will end up with 12 customers and you will send out 78 bills – hence the name “Rule of 78”. You will bill £78,000. But here’s the really important bit. Of your 78 “billing opportunities” 33 of them – or 42% - come as a result of business you won in January, February and March. In other words almost half of your year’s revenue comes as result of performance in the first quarter. By the half year it’s all over bar the shouting unless you do something really special in the second half. Why? Because in the final two quarters you only have 17 billing opportunities – or 21% of the total.

So what do you do with this information? Well I’ll tell you what I do as the Manager of a recurring revenue business. First and foremost we build some real incentives around performance in the first three months. The last thing a salesman can afford is a blank month between January and March. The second thing we do is we spend a lot of time around September of each year doing some marketing and focused sales activity in order to build a pipeline to set up the upcoming first quarter of the following year.

I am glad to say that with this Q1 just behind us, we hit or exceeded our sales numbers in January, February and March and in doing so have set ourselves up for a very good year. We still need to deliver the remainder but having done the hard bit, we have a good shot.

Those who haven’t appreciated the immutable laws of the Rule of 78 and who have exited Q1 with little sales success are now facing a long uphill climb during which they will be constantly behind the numbers. And with each passing month the chances of closing the gap gets smaller and smaller - literally.

If you run a recurring revenue business, your mantra must be: Recurring revenue businesses are all about first quarter performance.

Solve the Wrong Problem – Oxygen Wasters

In the past, I have written that there are two types of people – employees and business owners. My incredibly well-supported theory is based on the idea that a business owner will never be happy for long as an employee, and an employee will never succeed as a business owner. I have explained this in detail before. So I won't repeat the entire discussion here. The most important thing to note is that, sadly, my theory is wrong. There is a third type of human being – oxygen waster. Although I may be stretching the definition of human being.

Harry called our CPA firm office the third week in March. We were the fifth CPA firm he had called, and I was the only fool to return his call. At the time, I was proud of my commitment to client service. I was a fool. I am a fool.

Harry explained to me that he owned a small federal government contracting firm providing IT services. He then told me that he was having trouble getting paid by Uncle Sam. In fact, he hadn't been paid in over two years. Obviously that's a bit of a problem. He went on to explain that Uncle Sam's employees were regularly rejecting all of his billings. They would not accept his billing rate and any of the invoices he presented.

Let's step back a minute and give you a REALLY brief primer on billing the federal government. Yes you can bill Uncle Sam $10,000 for a hammer, but you have to know how to do it. When you submit a proposal to the government in response to a request from an agency such as the Department of Defense, you have to understand the type of contract upon which you are bidding. Some contracts are fixed price. That means you submit a bid, and if you are a qualified bidder, and you have the lowest price, you win the contract. However, if you mistakenly bid less than your cost, you are on the hook for performing even if you are going to lose money.

Another type of government contract is called a cost plus contract. With this type of contract, you prepare a proposal based on all of the direct costs you will incur in performing your service. You prepare a budget for direct labor, travel, and any materials you will need. Then you calculate two additional factors to add into your proposal. You calculate an overhead rate and a general and administrative (G&A) rate. I'm not going to go into how you determine those rates. The point to understand is that a cost plus contract is based on how much you spend with a fixed percentage markup on those costs. In exchange for getting a guaranteed profit, you must accurately submit your costs to Uncle Sam to get paid.

Harry's contract was a cost plus contract. He wasn't able to get paid, because his cost submissions to the government weren't accurate. He was unable to correctly calculate and support his overhead and G&A rates. When it comes to cost plus contracts, either your bills are correct, or you don't get paid. Harry was in the “don't get paid” mode.

In our telephone conversation and the ensuing onslaught of long winded e-mail messages, he told me how he had hired accountants and billing consultants before. They had all failed him. After a quick review of the e-mail messages, I was ready to schedule a meeting with Harry to determine how to proceed. Then he sent me a final message. In that message, he stressed two criteria I had to meet. First, he didn't want to pay for the meeting. He wanted to keep the meeting time short enough so that I wouldn't bill him for it. Second, he wanted the result of the meeting to be a proposal from me to fix all of his problems for a “firm fixed price.”

In that message, Harry gave me two very important pieces of information. First, he let me know he is a cheap bastard not willing to pay a fair price for my time – especially in the middle of tax season. Second, he really didn't understand how he got into his sad situation. I replied to his message and told him I would be unable to meet his expectations and didn't think a meeting would be worthwhile for either of us. Of course, I was way more polite and civil than the thoughts percolating in my twisted mind. I think you know me by now.

If you asked Harry why he was having a problem getting paid on his contract, he would tell you that he had been failed by the CPA's and consultants he had hired. If only he had hired better people, his results would have been better. There is a VERY small amount of truth in his reasoning. He certainly could have used better advice, but he got the advice he was willing to pay for. Nobody with any real government contracting expertise would take on his mess for a fixed price. I certainly wasn't going to. In my experience, anyone who uses the term “firm fixed price contract” when it comes to complex professional services is an idiot. Harry didn't change my mind any.

Harry's real problem isn't his consultants. They are just a symptom. Harry's real problem is Harry. Harry just isn't a business owner. Business owners understand value. Real value for Harry would be getting paid by Uncle Sam for two years of work. He was only concerned with cost and impressing me with the term “firm fixed price contract.” I suspect that Harry was driven to being a business owner, because he couldn't function as an employee. I know that is a lot for me to derive from a telephone conversation and some e-mails, but I am pretty certain I am correct.

Unfortunately I see this all the time. People believe that owning a business means you don't have to answer to a boss anymore. In my case, I gave up having one boss in favor of having six hundred when Paul and I opened our CPA firm. Not functioning well in an employment setting isn't a qualification for business ownership.

Harry forced me to revise my theory of business owners and employees. I thought my theory was absolute genius. I was sadly mistaken. Harry is an oxygen waster – not well suited for either employment or business ownership. He is using oxygen that would be better used by someone with a functioning brain. I'm not certain just exactly what Harry is well suited for – maybe he would make a great bathroom attendant.

Speaking of bathroom matters, since you asked, here is an update on the S&K bathroom motivation challenge. Special thanks to Art Gose for providing a nearly nude autographed picture of my beloved Jen Aniston. We now have three pictures of the sainted Jen gracing our bathroom walls. My motivation is surely increased as I sit on the pot with my beloved Jen observing my bathroom etiquette from three different angles. She doesn't even seem to mind the smell.

As always, if you would like real business and income tax tips, please visit the real S&K web site at www.skcpas.com. Thanks for reading.

Why invoice scanning and OCR is no more than an interim solution

Invoice scanning together with Optical Character Recognition (OCR) – digitising paper documents to you and me - is presented by many as the answer to everyone’s electronic invoicing prayers. In fact one company which I won’t name, which claims to be a leader in e-invoicing, is actively promoting it as their strategy. There are several reasons why invoice scanning is not the answer and represents only an interim solution.

The holy grail in the world of e-invoicing is that an invoice should go from creation, to delivery, to approval, to payment without a piece of paper being created. In other words machine to machine with software doing the work along the way. Not a pipe dream at all. Today we deliver hundreds of thousands of true electronic invoices a year that follow exactly this path. And with some ground-breaking new interfaces and tools currently in testing, we expect that number to increase sharply in the months ahead.

Invoice scanning and OCR (in the context of invoice processing) became popular because companies couldn’t persuade enough of their suppliers to adopt a truly electronic method of submitting invoices. This meant they found themselves in no man’s land – paying for an e-invoice solution but still having to retain a small army of employees to handle paper invoices. Scanning and OCR takes the paper, scans it and uses OCR technology to lift the data off the page so that it is useful and uses it to create an electronic invoice. But here is why it is no more than an interim solution:

1.       It is at best an inaccurate process. OCR software vendors will tell you they can read characters from paper with 99% accuracy. That may be so with a simple text document in a medium sized typeface. But when it comes to small print on invoices, the reality is that it is a lot less accurate. It only needs to read one character incorrectly in the wrong place for the invoice to fail in an electronic approval process. Someone has to manage these failures and exceptions. People involved in the process? Not what was promised from “electronic invoicing”

2.       Second – OCR on its own is not enough. The next thing a well run AP department will want to do is validate an invoice before it goes into an approval process so that it doesn’t get lost within the approval process. Validation, which is an automated process, includes all those pre-flight checks before starting an electronic approval process – is there a Purchasde Order (PO) number? Does it relate to an existing PO? Is there a supplier reference? Is there a VAT number? Does the invoice add up correctly? And so on. Even the most sophisticated solutions with people checking every invoice struggle with this. Suddenly the failure rate has risen. More inaccuracies and exceptions to manage. More people involved.

Of course the net result of this is that you or your outsourced provider has to incur some real costs to bring this error rate down. Guess who ends up getting stuck with those costs? So suddenly your business plan doesn’t look so good. Where you were expecting to drive the cost of processing each invoice down below £1, human intervention has resulted in costs being much higher.

Scanning and OCR has its place. Even allowing for the absurdity of taking an electronic file, printing it out on paper as an invoice, sending the paper to your customer for them to use an expensive process to turn it back into an electronic file – it has its place. But only if you build your business case based on there being a concerted effort to migrate from scanning and OCR to real electronic invoicing. You should aim over a three year period to turn a ratio of 80% scanned and 20% electronic on its head and have 80% submitted electronically. This is all about being good at persuading your suppliers to send you electronic invoices or online invoices. That is a whole subject on its own!

To see how a good e-invoicing deployment works download a case study here which shows how Essex County Council released 20 AP staff and will save £2.5 million next year by understanding the important distinction between scanning as a means to an end versus scanning as the answer. They now process tens of thousands of real electronic invoices – those that go from creation to delivery, to approval to payment without a piece of paper being created. Invoice scanning was merely a stepping stone which helped them to get there.