I often receive emails from directories who are asking me to pay a fee to list my company.  Highly ranked directories can not only drive traffic to your site, but can help your rankings on search engines.  However, pick the wrong Directory and it can actually lower you rankings with Google and other search sites.  Below are a few tools you can use to determine the quality of a website before you place links or advertise with them.

I recently found a fantastic social networking site (www.bigTreetop.com) focused on small businesses located south of Boston.   I’m considering enrolling as a company, but wanted to do some research first.  I’ve outlined some of the steps I’ve taken to learn more about this website.

Google PageRank

Google ranks all web pages on a 1 – 10 scale.  An average website has a 2 or 3 ranking, a good website has a 4 to 6 ranking, and larger, well-developed sites have rankings over 6 (few websites get rankings over 6).  www.eBay.com, for example, has a google PageRank of 8, and a well-known local website like www.wikedlocal.com has a Google PageRank of 5. 

BigTreetop.com has a ranking of 3, which is a good ranking for a fairly new website that focuses on a niche local market.  Our website, www.sinatraco.com has a PageRank of 4 probably because we’ve been around a little longer (I would suspect that BigTreetop will have a higher PageRank in the next year or so).  Our higher PageRank has moved us to the #3 spot on Google for “South of Boston Web Design” and #4 for “South of Boston Marketing.” 

What plays into this ranking is the number of quality sites (PageRank of 3 or higher) that link to your site as well as the age of a URL.  Also, the number of outbound links to high quality sites (PageRank of 6 or better) will also play into this ranking (I often link to www.wikipeida.com to provide more information on specific terms and ideas).  There are many other criteria that play into this rank, but these are key factors. 

If you want to see Google PageRanks go to www.Google.com and download their toolbar.  Once loaded, you’ll see a little green bar that shows the rank of each page in which you visit.  You will also be able to see all the linked sites that figure into the PageRank by putting “link:” before any URL in the Google Search Box. 

For example, you can see the inbound links for www.bigtreetop.com by putting “link:http://www.bigtreetop.com” in the Google search box.  While there may be dozens of inbound links to a site, Google will only track the highly rated sites.

Keep this in mind when a company solicits your business to advertise on their site.  If it’s not a highly ranked site it will not even show up on the Google links page.  Importantly, if it ranks 0 – 1 it may even hurt your ranking on Google and other search engines.  Be very leery of anyone who asks you to put links to your site all over the Internet on free directories.  Being linked to a handful of good quality, relevant sites is far better than being linked to thousands of sites with low rankings. 

Another way to learn more about a web site is via a DNS lookup.  This will tell you if a site has been around for a while, which has a strong weighting on Google Search results and PageRank.  It will also tell you if it’s only been around a short time and you can often see the owner of the URL. 

If you look at www.BigTreetop.com, for example, in a DNS lookup (via www.dnsstuff.com), we found that the site is owned by the CEO of BigTreetop and that it has been around for many years.  These are both positive indications that this is a solid website. 

The last tool I’ll share is fun to use.  It’s called the “wayback machine” and allows you to see what a web address looked like in years’ past.  Simply go to http://www.archive.org/web/web.php and type in a web address.  I typed in www.bigtreetop.com and found out that they’ve been working with a social media concept since as early as 2007.  I also learned that this is was the only usage of this web address.   

This tool is also helpful if you’re picking a URL so you can make sure a previous owner of the URL did not use it in negative ways.

Overall, I learned that www.bigtreetop.com is a reputable website, has some positive momentum in terms of increasing their PageRank, and they’ve been working in the social media space for several years (which is a fairly “new” industry). 

In the atmosphere of full disclosure, we also have a fairly new website, www.AnAffordableWebsite.com that provides free websites for small businesses, which has a PageRank of 1.  This is likely due to the age of the site (it’s fairly new), there are few outbound links (we don’t have a blog on this site), and few inbound links (we do mostly Google Ads rather than linking to promote the site).  While we have not done any “search engine optimization” on this site yet, our intent is to move this page rank up in the months to come. 
    

Simplicity is the Key

Think of your website like a retail location with dozens of visitors walking by the front window.  Your home page is similar in nature to the display window.  If someone visits your home page and leaves without clicking a link this is like someone walking by your window and not coming in. 

An effective window display is simple and specific.  It captures the attention of prospective clients quickly and easily.  As you walk through a mall notice the displays that capture your attention, and notice the ones you walk past.  Most likely the ones you walk past either don’t communicate well or they’re not relevant to you personally. 

As you begin to develop your home page put a list of key word phrases together – a list of words and statements someone would type into Google/Yahoo/MSN to find your site.  These ideas will form the foundation on which you’ll build your entire web site, especially the home page.

You’ll want to incorporate these ideas into the design as well as the copy over an over again.  Put these statements right up front on the web page along with some strong visuals.  Don’t put too many words on your home page (remember, it’s just like a window display).  The goal is to engage a visitor, not tell them everything you do right up front. 

Think about how you’d like people to “walk” through your site – create specific “sections” so people can find what they need right up front so they don’t have to “hunt around.”  Think about what action your visitors should take and help guide them from the home page, to some interesting content, to some deeper ideas, and then to an action step.  

Take a look at how our website is set up (www.sinatraco.com).  You’ll notice three specific services across the top (Website Design & Development, Marketing Services & Branding, and Ecommerce), and very few words.  We’ve also added some links down the left side for easy access to key information. 

Also notice that we have many services, and few of them are listed on the home page.  The key is to keep your home page simple and uncluttered, while providing some specific entry points.  Visitors can see right up front some samples of our work and some testimonials and not much more.  As people dive deeper into the site they’ll gain access to more and more information that will help to meet their needs. 

Our goal is to have visitors fill out the “Free Consultation” form so we have a button on every page that leads to this form.  We provide many links to interesting content found in this blog.  Our hope is people will read this blog and gain a sense of what we’re about, how we approach web design, and acquire some helpful ideas that may impact their business in a positive way. 

Conclusion

I think the most important element of any home page is simplicity and focus.  Let people know who you are and what you’re about right up front (with as few words as possible) and then provide a few specific entry points into the site.  Too many choices on the home page will often lead to confusion, which will lead to visitors bouncing to a different site.  Check your web logs to see what percentage of people are only viewing your home page.  If more than 50% of your visitors ”bounce” off your home page you may want to consider redesigning your site and making it more specific and simple. 

If you have any questions feel free to fill out our form: http://sinatraco.com/consult.html 

If you don’t know Cloud Computing (or even if you do) this post is a “must read.”

It’s an unprecedented time in history when it comes to IT infrastructure; yet, few companies are utilizing these advancements.  I’ve managed a large IT infrastructure and know the downside of upgrades, patches, security issues, desktop management, etc.  In fact, 80% of our time was spent maintaining a clunky physical infrastructure, rather than providing real business value.  Millions of dollars were spent keeping this behemoth running. 

As time moved on, more pressure came from the business units to deliver value, rather than maintaining (let’s face it, it’s only when the network goes down that anyone cares about technology).  Small businesses deal with this same issue – a modest in-house network, email, and databases all absorb vital cash.  In this economy, reducing expenditures is essential, but only if a company owner can deliver better technology and maintain a competitive advantage.

It has been my experience, that Cloud Computing can deliver superior results and lower IT costs by as much as 60% or more.  A few years ago I experienced first-hand the power of Cloud Computing when working with a financial services firm with about 20 employees.  I was able to reduce their IT budget by 70% and deliver a multi-million dollar CRM / Business Management system.  This system changed the way they did business.  It gave unparalleled visibility into their business. It introduced new insights and efficiencies.
   
The new system included a defined sales process, automated workflows, commission tracking, management dashboards, a 360-degree view of clients, and the result was a 400+% increase in assets under management. The transformation was quite miraculous.  
 
I’ve worked with small companies for years (both as an owner and consultant), and I have never seen technology have such an impact on process improvement.  In fact, at one startup we received multiple offers for $500K in funding as a direct result of the automated workflows and CRM system. A few years ago I experienced first-hand the power of Cloud Computing when working with a financial services firm with about 20 employees.    This system changed the way they did business.  It gave unparalleled visibility into their business. It introduced new insights and efficiencies.   The new system included a defined sales process, automated workflows, commission tracking, management dashboards, a 360-degree view of clients, and The transformation was quite miraculous.   I’ve worked with small companies for years (both as an owner and consultant), and I have never seen technology have such an impact on process improvement.  In fact, at one startup we received multiple offers for $500K in funding as a direct result of the automated workflows and CRM system. We were able to track:

• when clients came into the system
• how often they were contacted
• flag customers who were not contacted
• store all financial information in one central location
• provide a customer portal so clients could log into their account
• this was all done on a shoestring, startup budget of $500 per month 

Today, as I sit down with business people and map out their Business Processes, clarity gives way to efficiency (spreadsheets are replaced with a cutting edge technology platform).  It also provides employees with 24/7 access and a flexibility that allows them to work from home, at night, and on weekends. 

Often, the simple act of being able to check email before they go to bed provides for a peaceful nights sleep.  The benefits are almost unlimited and the infrastructure does not need to be maintained, upgraded, or cared for.  4 to 5 upgrades take place effortlessly every year, and substantial functionality is added consistently (Google does 18 to 24 upgrades per year!). 

For example, Salesforce.com recently developed a fully integrated platform on which to develop web sites.  Now, a company can manage their website content through the same application they’re managing customer relationships, tracking web visitors, and keeping track of Google Adwords campaigns. 

Integrations with Facebook, Amazon S3, Google, and other cloud applications are accelerating.  Thousands of applications are being developed and the Cloud Computing industry is growing at record speeds.

As Developing Nations have skipped over the copper telephonic infrastructure in place of wireless, the startup of today is by-passing a physical infrastructure in place of the cloud.  Many companies are building their entire infrastructure in the cloud and gaining significant competitive advantage.  Lower costs, more flexibility (applications can now be deployed in hours rather than months and years), and seamless integration is replacing older, stand-alone technology. 
In short, Cloud computing is a new paradigm and the company who does not take advantage of this technology will have difficulty competing with those who do.   
  
If you’re interested in learning more please call me immediately.  We provide a “quick start” program to review your business processes, goals, and objectives, which results in an unbiased recommendation of next steps. 

The total process takes about 10 hours (7 to 8 hours in-person and 2 to 3 hours documenting the recommendation). 

Total Investment:  $1,200.       

A paradigm shift is when a new form of technology emerges that replaces the old, while a next generation technology builds on previous computing architectures (not replacing it, but rather growing out from it).  The difference between these two concepts may seem subtle, but it is this very distinction that may put an end to Microsoft.   

These “paradigm shifts” in IT rarely occur – a true paradigm shift happens when one form of computing completely replaces another.  In fact, there really has been only one true paradigm shift in recent history, when Supercomputer centers where replaced by on-site servers and desktops.  The advent of the desktop computer was a paradigm shift, whereas, the advent of servers that tie desktops together was a “next generation” iteration. 

There is a significant difference between a paradigm shift and iterative/evolutionary growth – the first is a complete replacement (flat world vs. round world), while the latter simply builds on what already exists (the introduction of laptops, which did not replace desktops). 

Today, it appears that we’re in the midst of a true paradigm shift, in which one form of computing may completely replace another form.  Cloud Computing, or “Software-as-a-Service,” is the new paradigm, and it will replace the current Server/desktop model due to efficiency and simplicity.

Microsoft’s miscalculation is the belief that Cloud Computing is evolutionary, or a next generation of computing, while there is growing evidence that this is a true paradigm shift.  Only time will tell, but it would seem a strong case could be made that we’re living in a historic moment (from a technology perspective).

I would seem that Microsoft is still trying to put old wine into new bottles, and their failure to understand the difference between an actual paradigm shift and an evolutionary/iterative shift will likely be their downfall (if, in fact, this is a paradigm shift):

Don’t Be Fooled…

It’s important to understand what this paradigm shift is.  The real paradigm shift is NOT about putting applications that were once on servers into the “cloud” (or Internet), which is what Microsoft’s Azure seems to be doing.  The real paradigm shift is in a multi-tenant architecture.  This kind of architecture utilizes limited instances of an application that is shared between many companies.  While the data for each company is stored separately, the application itself is shared.

Why Is Multi-Tenancy the Key?

Multi-Tenancy resolves the fatal flaws inherent in the current server/desktop paradigm – software upgrades, software patches, broken integrations, lost data due to upgrades, conflicting applications, hardware upgrades, managing thousands of desktop computers, etc.  IT departments are spending millions of dollars trying to maintain these infrastructures that continue to become more and more complex. 

The success of the current server/desktop model depends on complexity.  Revenue is derived from upgrades, patches, on-site installations, etc.  The more complex and difficult to manage this infrastructure becomes the more Microsoft and it’s developers earn. 

It would appear Microsoft’s Azure is simply taking this complex IT nightmare and moving onto a new platform.  All the issues described above are not resolved, but rather moved to a new place.  Software + Service (Microsoft’s approach to “SaaS”) is simply the same Emperor in new clothes, nothing more.  

Multi-tenancy, on the other hand, represents an entirely new form of computing.  Instead of computing power residing locally it is accessed via the Internet.  Instead of millions of different versions of a single application on hundreds of different servers and desktops, millions of companies can now use a single version on one Application – a single set of source code for all users.  The difference between these two approaches is night and day – one will ultimately replace the other.  

During the early stages of the Industrial Age factories created their own electricity.  This provided them with a competitive advantage and an entire industry grew up around creating on-site generators.  Each company spent a portion of their revenue developing their own infrastructure specifically to create electricity. 

Then, a new technology emerged.  This new “grid” technology allowed electricity to be created centrally and delivered via wires (sound familiar?).  Delivering electricity became far less expensive than a company could do on their own.  The entire industry who provided on-site electricity infrastructure practically vanished. 

It was a paradigm shift that is very similar to what we’re seeing today.  We’re in the early stages of this shift so there will be some hiccups and growing pains, but this does not mean it’s not a paradigm shift. 

I suspect the advent of “Cloud Computing,” or more specifically multi-tenant Cloud Computing, will ultimately replace our existing approach to computing.  Just like electricity was ultimately “outsourced and commoditized,” it would appear on-site computing will also go the way of on-site electricity creation. 

This shift is already taking place.  It’s only a matter of time before enough pressure builds and the dam breaks.  Cloud Computing is reaching a critical mass.  When it does, Microsoft will disappear (if it does not wholeheartedly adopt SaaS and walk away from their most profitable products and services).   

Helpful Links:

http://news.cnet.com/8301-13846_3-10079576-62.html

http://blogs.zdnet.com/microsoft/?p=1671&tag=mncol;txt

http://cloudenterprise.info/2008/10/29/microsoft-azure-vs-amazon-google-and-vmware/

There are some very specific reasons the SaaS industry (also called “cloud computing“) is growing exponentially:

• Low up-front development costs
• No ongoing maintenance – no on-site applications and software
• No homegrown applications that need constant tweaking
• No servers to maintain, patch, and secure
• No in-house network to protect and maintain
• Seamless upgrades – often 2 to 3 times per year
• No broken integrations from upgrades
• Fast implementation – companies can have full-blown applications in weeks rather than months and years
• Flexible application that can change and grow as the business changes and grows

IT departments have been severely burdened by upgrades, server patches, and security issues, as well as developing and maintaining homegrown applications.  Often, 60% to 70% of IT resources are directed at maintaining this infrastructure, while the business units within their organization are demanding more tools to make them more productive.  This tension between the need to maintain an in-house infrastructure and the need to quickly provide innovative IT solutions while keeping costs in check is straining IT organizations, regardless of company size.

The future is now and the evidence of the emergence of a significant shift in IT is mounting. 

The SaaS deployment method will ultimately eliminate the need for an in-house network and will continue to free resources to provide innovative tools to business units.  While the longer-term vision of companies maintaining their entire IT infrastructure in the “cloud,” or Internet, is not there now, the time is not far off.  There are some companies who have already saved millions of dollars by eliminating their in-house network and have found the new “cloud” environment incredibly fluid, flexible, and reliable. 

This trend is unstoppable, and Microsoft thinks it can stem the tide.  It cannot.  There are far too many benefits that come from cloud computing.  Microsoft is a massive company with huge influence, but it’s not large enough to stop the new paradigm of SaaS. 

Microsoft is trying to redefine SaaS as “Software + Service (pdf),” a mixture of in-house networks and cloud computing.  The only problem is while this model may help Microsoft, it will not help a company struggling with upgrading servers and old applications, patching software, and having to fix integrations at each upgrade.  These problems are a significant burden and CIO’s are looking for solutions, which is why they’re turning to SaaS in droves. 

The SaaS tide is rising and Microsoft’s attempt to slow down this trend will ultimately end in their demise, if they do not fully adopt SaaS.  Unfortunately for Micorsoft, fully adopting SaaS presents significant risk because it will cannibalize their main revenue source, which includes server-based applications like Exchange, security patches to applications, hardware, and upgrading and maintaining physical infrastructures.  Ultimately, it’s a lose-lose proposition for Microsoft because they do well with greater complexity which runs counter to what a CIO desires. 

Smaller companies and startups are beginning with the SaaS model and skipping over the installation of complicated and costly IT infrastructures.  The more progressive small companies don’t even try to develop in-house networks – they use services like salesforce.com, Google Apps, and Amazon S3.  Why would they, when they can have a far superiour IT infrastructure in the cloud?   

This phenomena is similar to how developing nations have skipped over expensive “hard lines” and have gone directly to wireless networks.  Why would any developing nation, given a choice, install copper wires throughout their country when they could install wireless towers at a fraction of the cost?  The same could be asked of any new and developing company considering how to develop their own IT infrastructure. 

The Software + Service model proposed by Microsoft does not resolve the issues with which CIO’s are struggling.  In fact, it adds more complexity, which is why Microsoft will ultimately not survive this new paradigm shift to Cloud Computing.  A true paradigm shift seldom occurs, but when they do large and seemingly unstoppable companies often disappear if they do not radically change.  The only problem is it’s very difficult for a large company to innovate because their survival depends on an old paradigm, which will be swallowed up by the new.

One of the reasons I like SaaS (also known as Cloud Computing), is it levels the playing field for small and large companies alike. 

When I was involved in a startup company, for example, we were able to create some incredibly sophisticated automated workflows and customer management applications on the salesforce.com platform.  In the past, these kinds of workflows and automation was only available to larger companies at a cost of hundreds of thousands of dollars.  In fact, one small company for which I worked was paying $170+K per year in technology development and the end-product was substandard and barely worked.

When I stepped in I was able to cut that budget by 50+% using salesforce.com and the end result was a multi-million dollar, highly sophisticated application at a fraction of the traditional cost.  They lowered their IT investment by 50% and had a far superior product.  This is the reality of the new world of technology.  Some companies are beginning to see this, and others are sticking with their older home-grown applications.

I recently talked to a VP of a 140-person company and they do not own a single server – anyone in IT should fear this fact.  They run their company on a platform that exists 100% on the Internet - salesforce.com and google apps.  The cost of their technology is a small percentage of other companies of similar sizes.

I’m convinced that we’re entering a new paradigm in the technology industry, and Microsoft has never been more vulnerable.  The reason is most of their revenue comes from the server/desktop model, and for them to switch to a SaaS model will destroy their revenue stream.  Later this month Microsoft will be launching their own version of a “SaaS” application to compete with companies like Google, Salesforce, Amazon, and WorkDay, which will include a blending of desktop/server model and SaaS.  This will be a huge mistake, and it could mark the first crack in the Microsoft armor. 

To me, this is like telling some people to ride on the right side of the street and others to drive on the Left.  There is no question that Microsoft (and the entire IT industry) is on the cusp of tremendous change.  While most industries like telecommunications, publishing, banking, etc, have capitalized on the efficiencies of the Internet, the IT industry has remained surprisingly in the 90’s. 

I believe this industry has remained so far behind because most people in this industry have a vested interest in the older technology model, which is anchored by Microsoft.  Here’s the deal.  If Microsoft moves into the SaaS marketplace, they essentially become less influential because they’re cutting off their main revenue stream and admits to a better deployment method (SaaS).  In order to survive, Microsoft needs companies to continue to use servers, desktops, software, software patches, homegrown applications, local networks, etc.  If these elements go away so do they. 

Let me repeat this, if all these hardware and software elements go away, so does Microsoft.  Think about that!  SaaS gives companies the tools to shed these expensive elements, and CIO’s are flocking to the SaaS deployment method.    

Microsoft is at a crossroads.  If they choose a pure SaaS deployment method, then it’s a huge leap of faith and has tremendous risk because their competitors are already well down the road to the cloud.  If they stay with the old technology, then companies like Google, Salesforce, WorkDay, and Amazon will continue to chip away at their market share until the industry hits the tipping point and the Microsoft way will be swallowed up in the new paradigm. 

I know this sounds a bit dramatic, but it’s absolutely true.  There is no middle ground here.  If Microsoft chooses the middle ground (which it appears that’s the direction as they coined the phrase Software and Service), then they choose the old technology, and will lose huge market share.  The two deployment models (server/desktop/software vs. Software-as-a-Service) do not mix, it’s a zero sum game.  Trying to bridge this divide is like MS asking CIO’s, “I know servers are expensive and keeping up with patches and upgrades are costly and risky, but we think you should stick with us even though the SaaS model is cheaper, better, and faster.”  

IT Departments are looking for ways to save in this economy and SaaS is what they’re looking at.   Fast deployment, lower cost of ownership, lower implementation costs, and a superior end-product.  The small company I described above is an example of what’s beginning to happen on a larger scale.  CIO’s are far more risk averse than small companies and are careful about making changes, but believe me it’s happening.   

Drip, drip, drip, drip…  it may take decades for small drops of water to break a giant stone, but when that final drop hits the stone and the first crack appears, it’s the beginning of the end – then each drop has more and more impact.  This is where we are.  The cracks are beginning to form.  The signs of these times are all around.  Microsoft’s SaaS strategy, which will be announced shortly, will tell us if MS will be in the game 10 years from now.  During times of transition the companies who have the big vision and are willing to take huge risks are the ones who prosper.  

I’m looking forward to Microsoft’s SaaS plan, and I hope you are too!!  They could go bold and change the IT world forever, or they could try to bridge the gap with incremental change and get eaten alive.  This should be an interesting few weeks. 

Every company that needs assets removed from their books would give up a 20% equity stake in Preferred stock to the US Government.  These companies would immediately suspend dividends for 3 years to stabilize their companies and protect the taxpayer investment. 

The real estate backing the loans would then be put into a protected Social Security Trust Fund (with the stipulation that it cannot be used by politicians at any time under any circumstances).  These assets would be sold later to pay for the shortage in our Social Security / Medicare System.

All preferred stock would be distributed to all US Citizens 18+ at the end of each year.

These preferred shares could be sold in the stock market or held – regardless, it would put wealth back into the economy without too much inflationary pressures of sending cash to US citizens, as has been proposed.

While the common shares of these companies would be diluted to some degree, it’s far better than having these companies/banks go under.

American citizens would actually have an equity stake in the “bailout” and as these companies turned around these shares would gain value and gradually push more wealth to all citizens. 

Also, as Real Estate values turn around in the years ahead, a new protected Social Security Trust Fund may actually survive (currently, the existing trust fund is empty and the only way someone in their 30’s will get any benefit is if the income tax rate increases to about 60%)

Under the Sinatra Plan, US Citizens would own a stake in this bailout and we would fix one of the most important problems facing our younger generation, the Social Security System.  Under the Sinatra Plan we can turn this crisis into an opportunity.  

If the assets backing the mortgage paper is allowed to go to the government, it is highly likely these assets will be liquidated by politicians to increase spending in the future. The chances these assets will be sold to repay the bailout is unlikely.  It will be turned into a giant piggy bank that politicians will use for years as they spend this country into oblivion.   By placing these assets in a protected Social Security Trust Fund they will not be able to touch them.  Unfortunately, politicians in this day and age cannot be trusted.

This plan is more realistic than writing massive checks to the citizenry, and better than sending huge amounts of cash to Wall Street banks. It’s a reasonable plan that would actually work, but we need to spread the word quickly before our politicians create for themselves a Trillion dollar slush fund.     

Send this plan to everyone you know before it’s too late… 

By the way, there seems to be a push to make sure the politicians have “oversight” and “control” over these assets.  Why would we want the folks who put us in this position to control anything?  Those real estate assets need to be put on a high shelf where no politician can reach and a protected Social Security Trust Fund may be that safe harbor.

Jeff Sinatra, a Concerned Citizen

There are elements of the $700B bailout that no one is talking about and I’m not sure why.  First, this bailout is not a classic bailout because the “bad debt” is actually backed by assets with real value, namely, real estate.  The government is not pouring money into a black hole, like they’ve done in the past.  They’re taking this debt (and asset) off the books of banks who cannot properly value these assets. 

When the real estate market recovers the government could sell the assets and put the revenue back into Treasury.  In a best case scenario the government could actually EARN revenue because they are essentially buying these assets low and could potentially sell them for a higher price later on.

This historic bailout will do two things:

• It will take bad dept off the books of banks which will free up money for new mortgages
• It will stop the flow of bank owned properties into the marketplace, which is eroding home prices

In other words, this bailout will bring new buyers into the marketplace and potentially put a bottom on the home price erosion, which I believe is one of the most significant threats to the US. 

It’s hard to understand why this bailout is being characterized so negatively.  The government is acting more like a Venture Capitalist, coming in at the last minute to purchase assets at a low price who then holds them until the market turns around.  The fact is, these assets could actually increase in value over the next 7 to 10 years and be sold off at a higher price to help solve issues like Social Security, Medicare, or an overtaxed military. 

Let’s say a bank took over a $200,000 mortgage in foreclosure and the property is valued at $150,000.  If the bank had several hundred of these “bad” loans the write offs would be significant and would cripple it’s ability to generate more mortgages for new people.  These properties would be pushed into the marketplace at a low price in order to get them off the books, but at the same time banks cannot create new mortgages so the prices drop even more.

The bailout plan would allow the government to take these bad loans (and the asset) off the banks’ books.  In the example above, the bailout would be applied to the $200K mortgage, but the government would also own the asset.  Instead of dumping the property into a competitive marketplace, the government could hold the asset for a few years until home prices recover to some degree.  In 5 years from now, they could sell this same asset for $220K and actually earn revenue.   

The unfortunate part of this is the government rarely manages anything properly.  So, there could potentially be millions of government owned properties floating around in the next 7 to 10 years not being kept up.  This could also undermine home prices and erode a potential Return on Investment.   

If this bailout is done right, it could have a significant long term positive impact on the economy and even help remove part of our deficit.  If, on the other hand, it is not managed correctly, the consequences could be negative.  However, not acting at this stage would mean significant erosion of home values which could have a cataclysmic effect on our economy and the world economy.  Banks will continue to fail, home values will continue to fall, more people will owe more than what their house is worth, which will result in even more foreclosures, which will lead to more bank failures, etc.  The downward spiral must be stopped and there are not many institutions that have the ability to invest such large amounts of capital.

My concern at this point is this process will become politicized, the bailout will stall, more banks will fail, and the window of opportunity will close.  If more large banks fail, which they will as home prices drop, a bailout will not be possible.  It will be too late. 

I wonder if it’s possible for our government to put political views aside and act on behalf of it’s citizens?  It will be interesting to see how all of this unfolds this week.  My guess is the next two weeks will be one of the most historic times in US history from a financial perspective.  We’re at a crossroads and it could go either way.  Here’s to holding my breath and hoping for the best!!      

One last point that has not been discussed.  Let’s say the government takes over these assets and banks write off the debt.  If this happens, I believe those who went into foreclosure could have a significant tax burden, which could also pull a great deal of money out of the economy due to the sheer magnitude of the problem and it all happening at the same time. 

In the example above the the individual would owe $200K, but the asset would only be valued at $150K.  The amount ”forgiven” would be $50K ($200K – $150K), which would show up as “income” on this years taxes.  This would amount to a tax bill of $10K to $15K, which could push many into bankruptcy (or at least seriously curb spending), which would also put a burden on our banking system. 

There are many facets to this bailout and due diligence is needed, but if honest dialog turns into “analysis paralysis” then the country is doomed and so is the world economy.  I’m not a big fan of how the Republicans are pushing this through, and I’m also not comfortable with the Democrats adding pieces to the bill that are politically charged. 

But then again, who the heck am I??! 

Last week the SEC banned short selling for financial services stocks.  It was an unprecedented move.  Some have come out to denounce it, but I think this action was positive and should be made permanent, rather than having the ban lifted in early October. 

Short selling is used when an investor believes a security (stock) will go down.  Here’s a description of a short sale from wikipedia:

“Short selling or “shorting” is the practice of selling things the seller does not own, (often financial instruments), in the hope of repurchasing them later at a lower price. Often the sold item is ‘borrowed’ or ‘rented’ for the period of sale and re-purchase.  Short-sellers attempt to profit from an expected decline in price (in contrast to the ordinary investment practice, where an investor “goes long,” purchasing a security in the hope the price will rise).”

The reason short selling is fundamentally flawed is it turns the stock market into the largest casino on the planet.  Look closely at how this quote from Wikipedia is worded.  It’s implies “betting” on which way someone thinks a stock will behave – it says nothing about owning something of substance.  This implies gambling, and it’s one of the reasons our financial system is struggling – it represents a fundamental flaw.  In fact, much of our financial infrastructure is becoming more casino-like and looks less like what it was originally intended to do.

The original intent of the stock market was to invest (not gamble).  It was designed to provide capital to entrepreneurs who had a good idea and a strong business model.  If the company performed well the stock would pay a dividend to those who owned it.  It was a way for a wide variety of people to participate in our free market economy who may not otherwise be able to do so.  It was a way to develop this country from the ground up, in a grass roots way.  It’s a brilliant model in which citizens can take ownership and have a vested interest in success. 

Like any successful model, the negative parts of human nature will try to undermine it.   

In recent years, the stock market has evolved into a casino.  It’s become a way for those addicted to gambling to ”justify” their vice.  The stock market has become a way for people to “make money” first, and invest in good ideas second.  That was not the original intent.  Originally, people ”made money” in the stock market via dividends, and increases in the value of the stock was secondary.  Now, this concept has been flipped: 

• People who participate in “shorting” care little about dividend payments and good ideas and more about “making money”
• People “bet” on which way the stock market will move, rather than investing in good ideas and business models
• People buy “options” which have no intrinsic value, and it’s sole purpose is to “bet” on the value of a stock – this is pure gambling

Short selling has nothing to do with investing in good ideas and good people.  It has nothing to do with finding unique business models or healthy entrepreneurial endeavor.  It has little in common with finding CEO’s that can make valuable ideas a reality.  Short selling is wrong on every level and should be banned forever.  This is also true with “options” and other financial instrument that have no actual value like ETF’s. 

Options and short selling are supposedly used as a form of ”insurance” to protect an investor from downturns in the market.  This “insurance” argument is used to justify high-stakes, wall street gambling and nothing else.  A stock should go up or down based on dividends, or potential of dividends, as well as the business model and management team.  Short selling and Options put false pressure on stock prices because people are not selling stocks based on a desire not to own them, but rather because they believe the price will go down.  While this distinction may seem insignificant, it’s absolutely essential to understand the subtle difference – on one side is healthy ownership on the other side is gambling and chance.

The added pressure these misguided financial instruments put on the real price of stocks is a fundamental flaw which will continue to plague our financial system.  Of course, those who create the tools that allow gamblers to feel better about their vice and undermine a great institution make billions of dollars.  It will be unlikely these practices will stop until we experience the downside that comes from swimming against the current of morality. 

Gambling is wrong and will undermine the original rightness of the financial system as long as it is allowed to persist.  I understand the seeming value of “insurance,” but in the case of short selling and Options this “duck” walks and talks like ”gambling and chance” rather than investing in good ideas.  Let’s call a spade a spade and ditch short selling and options forever.  

Who’s with me??!!    

It doesn’t take long to figure out why Disney is such a success.  It’s clean, organized, and the experience is unforgettable.  I heard comments like, “They [Disney] just know how to do it.”  There’s a reason Disney is successful.  It’s not luck, or circumstance, or a “good business model.”  Importantly, the same underlying principles that make Disney successful can make any small business successful.

Seeing the multitudes of people happily move through their day as Disney reminded me of Ray Kroc, the founder of McDonald’s.  Next time you go to McDonald’s step back and watch the order.  The number of people, the location of each “station,” how the drive through orders meld with the orders coming in from the counter.  Ray Krock spend years perfecting the operations underlying the overall McDonald’s experience, and it was this eye-to-detail related to the customer experience that propelled McDonald’s to one of the most successful franchises in history.

It’s not enough to have a good product or service.  Small business owners need to focus on two key elements:

• The overall experience
• Delivery of that experience

How do your customers interact with your company?  Put yourself in the place of a customer, step away from your business, and walk through what a customer would experience when dealing with your company.  Take notes about things you’d change, add, stop doing.  Develop an overall experience that a customer would have.  Did they receive a thank you note?  Did they have a positive initial contact?  How did they find out about your company?

Now that you’ve developed what that experience may look like, begin to systematize the inner-workings of your company.  Make sure each customer has a consistent experience.  One way to do this is through technology and thanks to “cloud computing” (a.k.a. Software-as-a-Service) any small business can have access to a state-of-the-art customer relationship management system. 

A few years ago I worked for a financial service company.  We developed a system that made sure each client was contacted at least each quarter.  We used the leading Software-as-a-Service application, salesforce.com, to create reminders of these interactions and used HTML emails with merge fields to send customized communications.  We were able to create a number of automated workflows which resulted in a consistent customer experience.  Not surprisingly, the assets under management grew over 300% in 18 months. 

Step back and look at your company through the eyes of you customers.  Determine the optimum experience and try to replicate it over and over again using the latest technology.  It’s not rocket science, but it does take dedicated time and energy, and it will require you to get out of the day-to-day operations on a consistent basis.