The San Diego Software Industry Council (SDSIC) is hosting a Forum on Analytics on Wednesday, November 12 from 7 a.m. to 4 p.m. at the Del Mar Marriott. Leaders in analytics will explore trends and innovations that influence consumer decision-making and increase business performance across various industries. As usual, they’ve lined up some impressive people at companies which are local to San Diego but are also on the front lines of these issues as keynote speakers:

• Daniel Yankelovich, commonly referred to as the founding father of public opinion research and a leading interpreter of trends shaping American society and the global economy. Yankelovich has been named by PR Week as one of the 10 most influential people in the past century in public affairs, communications and public relations. He has spent more than 40 years monitoring social change and public opinion in America and is author of 11 books. Yankelovich will address the November 4 general election in his keynote entitled “After the Election: Analyzing the Disconnects.
• Robert Hecht-Nielsen, a leading authority in the field of analytics, is co-founder of HNC Software (acquired by Fair-Isaac), and recently founded Hecht-Nielsen Confabulation. He is a member of the Board of Governors for the International Neural Network Society and the UCSD Institute for Neural Computation, an adjunct professor in the UCSD Department of Electrical and Computer Engineering, and an IEEE fellow, having been awarded the IEEE Neural Networks Pioneer medal.
• Hamid Ahmadi, corporate vice president, senior fellow and chief architect of Motorola Technology Organization. Hamid has over 25 years of research, development and management experience in the area of telecommunication, IP networking, wireless communications and network security. He was named as Motorola’s first chief architect in 2006 and served as vice president of technology and CTO in the Global Communications Sector at IBM Corporation. Hamid is an IEEE fellow and received his B.S., M.S., and Ph.D. degrees in electrical engineering from Columbia University.

You may remember the discussion about whether data or algorithms are more valuable back in early January.  This is still an open issue for me and I’ll be curious to hear if anyone at the conference can shed any light on it!See you there… 

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It’s a tough call.

Don Reisinger wrote a very interesting piece, Google’s search secret: It gets rid of you, that struck a real chord with me.  In discussing a recent report on how Google is stealing market even more share in the search market from Yahoo and Microsoft they note that Google is the only site which really encourages you to leave!  By doing so, they seem to indirectly be encouraging you to come back.

“But Google, unlike Yahoo and Microsoft, has made it a key point in its business model to ensure that you get off the Google search result pages as soon as possible. Its competitors, on the other hand, fail to fully understand that premise.”

There is so much discussion, on the web especially, about subscription business models its refreshing to hear that Google’s capitalizing on the ultimate subscription lock-in: doing a good job for their users!

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Things are so bad the Fed and Treasury are in full emergency mode to stop the bleeding.  The steps they’ve taken so far are clearly necessary, but they haven’t yet addressed the issue head on about how to fix the problem in the future.

The banks are looking at their books and wondering how they can possibly avoid this fiasco in the future.  Take a look at the following charts from J.P. Morgan Chase which shows the difference in loans that brokers vs. J.P. Morgan’s employees originated (the boxed area).  The 2007 YTD column shows clearly that 31% of all loans the brokers’ originated had a loan to value (LTV) of over 90%!  That’s quite a departure from the 4% or even 10% historically normal levels that were originated internally by the bank.

This is just one more piece of evidence that the brokers’ interests are not properly aligned with the bank’s.  Default rates on mortgages paint just as damning a picture for banks not being on the same team as their investors.  Given all the turmoil - is there a way to get everyone on the same side & restore order to our mortgage finance system?  In a perfect world this wouldn’t require too much new expensive regulation or new departments to watch over the industry - because that’ll cost us all more later.

The mortgage industry pays brokers to originate loans - which makes perfect sense and provides a valuable service to both the mortgage industry & borrowers when done well.  I think most of the problem is in how they’re paid.

These payments are large up-front dollar amounts paid upon the closing of the loan.  They don’t get paid any residuals on the loan at all - so once they get this check they’ve made their money and that’s it.  This is where the trouble starts.  Once the guy who’s responsibility to close the deal doesn’t care whether the borrower can afford the loan, it’s only a matter of time before there’s going to be a problem.  The truth is, that we already have a model for this.  It’s how health insurance brokers are paid. 

Pay them every month

My proposal is to change the definition of a conforming loan to include a condition that the originator is paid a percentage of the loan’s monthly payment.  Perhaps a modestly larger up front payment in order to help jumpstart a person’s career in the business - but the vast majority of a broker’s income should be paid each time the borrower’s check clears every month.  That way, the broker is incentivized to only originate high quality loans.  If the broker thinks you can’t afford the loan, it’s not in his best interest to push you into it, it’s not worth the trouble for only a couple months of tiny fractional payments.  The broker would be much better off readjusting your expectations and getting you in something you can afford.  Perfect.

No new costs 

The really good news is that the operational infrastructure already exists: this is how the investors are paid, it’s how some of the bond insurers are paid, and it’s how taxes are paid.  One more check to cut to the broker should be a pretty easy adjustment in the system - which means it won’t introduce significant additional cost.

Someone’s always vested on both sides

Additionally, it creates an adversarial environment between existing brokers & new brokers during a refinance.  If you want to refinance your mortgage and speak to a new broker about it, they may try to trick you into a new loan that’s not in your best interest.  When this happens today, that’s the end of it, it’s you versus the broker.  In a world where your previous broker’s paycheck depends on you staying in your current loan things are a bit different.  Now you have to industry professionals fighting over your business.  This is good news because they should both be better informed & equipped to slog it out on your behalf, increasing the likelihood that you’re going to get a truer picture of the situation.  Now you can choose which one really is the better option.  In fact, in order to change other kinds of insurance (e.g. life, disability, or long term care) you have to send in a Replacement Notice to your existing insurance provider - which they then send along to the broker to go fight for your business.

Require it for “conforming” loans

Why make it part of the definition of being conforming?  Because conforming loans are the ones that Freddie Mac & Fannie Mae buy.  They’re the ones that our government and our tax dollars help subsidize.  These institutions drive what’s “normal” in the mortgage industry because they’re the ultimate clearinghouse for the massive amounts of capital required to keep the mortgage securities market liquid.  By altering the definition of a conforming loan we can “recommend” that the market coordinate in a way that helps everyone out, without requiring too much more supervision or regulatory burden to the system.  Other banks can pay brokers in alternative ways - but they just won’t have access to the large pools of money subsidized by our tax dollars.  It’s up to the bank if they want to make that tradeoff on each mortgage product they underwrite.  In the long run, I would hope that this model would become the norm because it really is in everyone’s best interest, but in the short run the banks & brokers could gradually move over to the new system.

Hopefully I haven’t overlooked anything critical and when the emergencies slow down we’ll see some policy changes in this direction.

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This post is particularly timely for me because a few friends of mine have come to me within the last couple months asking me if the culture of Google is really something they are interested in joining.  Once Google stops losing the ability to snap up the smartest and most motivated people, they’re clearly headed in the wrong direction.  It will be interesting to watch the next year or two at Google.

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The economy is shaping up to take quite a beating - however the way in which it affects each industry and market is quite skewed. Automotive manufacturers are taking a serious hit, but the healthcare industry is doing quite well actually. If this rough economy is doing your business a favor - then you may be in a unique position to do nothing and capitalize fully from this. However, the more interesting question is what the rest of us should do.

All business “successes” deal a direct and severe blow to someone else's industry. Two cases in point: Due to Apple's iPod, Sony doesn’t sell a lot of Walkmans anymore, and Henry Ford was public enemy #1 for the horse & carriage industries. This is the entrepreneur's “creative destruction” at its harshest, albeit most poignant, contribution to our economy. The entrepreneur is finding a latent need in people’s lives and innovating a better solution than the world knew before.

Given the wide scope of personal and business economic hardships in sight, I believe the case can be made that the glass is half full. The key insight here is to ask yourself the most basic economic question, “… and then what?” I’ll leave you with two concrete examples to spur some thinking.

Take gas as a classic case in point – so people are driving less - that’s fine… what are they doing more of instead? Talking on the phone? Work around the house?

Next up is credit. The credit markets are tightening for everyone, yet ironically interest rates are low right now. Perhaps you can determine that some segment of your customers are super creditworthy yet don’t have access to other credit sources for a few (bad) reasons. Can you offer them “financing” by removing your upfront fee & increasing the monthly fee at above market interest rates to increase your profitability and improve their cash flow? If you have cash on hand – your competition may have trouble keeping up with you!

What are three new possible opportunities that today’s economy is offering you?

I’m going to do some thinking about this myself and report back…

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Technology innovators will present on how they have used innovation to grow ideas, companies and profits. Seats range from $75 - $95 and can be reserved at www.sdsic.org or by calling (858) 793-6655.

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Speakers include:

• Mitch Oliver, Vice President of Solutions and Marketing, Qualcomm Internet Services
• Matt Porta, Partner, Technology Strategy, IBM Global Business Services
• Pete Kronowitt, Open Source Strategist, Intel Corp
• Chuck Davis, Regional Director, Open Innovation Solutions , InnoCentive
• Michael Robertson, Founder, Linspire, MP3tunes, SIPphone, and REEF
• Dmitry Shapiro, Founder/Chief Innovation Officer, Veoh Networks, Founder Akonix
• Dennis Clerke, Co Founder and CEO, Cardiff Software, Managing Director, Daggerboard
• David Merkoski, Creative Director, Frog Design
• Cary Gibaldi, Creative Director, Frog Design
• Chelsea Holden Baker, Marketing Communications Specialist, Frog Design
• Larry Kettler, CEO, Linspire
• Frode Odegard, CEO, Lean Software Institute
• Carl Eibl, Partner, Enterprise Partners

I’m going to be joining my good friends at Clearpoint Agency - it looks like it’s going to be an interesting mix of speakers this year - there seems to be more of a focus on startups.

See you there!

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The value proposition is simple:

• Build and deliver a better ad with greater returns
• Measure the ad performance in real time
• Measure the mix of media spend to improve overall advertising returns

How it works

1. The advertiser creates a call-to-action in their ad to text a short-code or call a toll-free number.  For example: “Text COFFEE to 123456 and receive a free cup!”
2. Consumers who hear or see the ad (depending on whether it’s radio, TV, newspaper, magazine, etc.) respond by calling the toll free number or sending the SMS message.
3. Analog Analytics tracks, sorts, and presents the information to the advertiser in real time through an analytics dashboard (think something like Google Analytics).

Do people respond to SMS ads?

According to a September 2007 m:metrics report, the response rates to SMS ads in Europe are between 6%-9% depending on the country.  The response rates in the US are higher, 12%, but our penetration is only 17% vs. 35%-75% in Europe.  This shows that while the US market is still developing, even with significantly higher penetration rates, the response rates are still probably going to be at least 6%.

The people

One of the great things about working with startups is the people you get to interact with.  In addition to Ken, we’ve been working very closely with Tom Buscher and Scott Willson.  Tom worked with Ken at a previous company doing telephone stuff, so he knew just how to get the backend infrastructure up & running in no time flat.  Scott is a “Coder, bike racer, husband, father” who has a great command of both user interfaces and Rails.  Both guys are really smart and it’s been great working with them; we’ve learned a lot from them both.

The future

The product looks great and it’s continuing to get better and better every day.  We’re very excited about being able to help the Analog Analytics team implement the first version of the software behind this fantastic new company.  If you do a lot of advertising, you should definitely check out what they’re up to, look at their report samples, & let them know you’re interested in increasing your return on ad spend!

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The really fascinating aspect of Weintraub’s opinion piece to me though, was his acknowledgement of contrary economic indicators and how they can be resolved:

• The share of middle-income jobs in Silicon Valley is shrinking
• Share of households earning less than $35,000 has been declining since 2004
• The number of low-paying jobs is growing as a percentage of the work force 
• More households are reporting higher incomes
• Share of households earning more than $100,000 has been increasing since 2004
• The share of households earning between $35,000 and $100,000 has stayed roughly the same
• Nearly 4 in 10 households earn more than $100,000 / year!

How does Weintraub reconcile these?  He points to the increasing “free agency” of the workforce.  The Silicon Valley culture is now one of work for hire, specialists as consultants, which of course means companies are doing more outsourcing than ever before.

It’s interesting that the fraction of outsourcing has increased so dramatically in Silicon Valley and that it’s been so good to their economy.  As Silicon Valley’s bread and butter are high technology new ventures, the advantages of outsourcing for startups is apparently clear to them.  Hopefully other startups around the world will continue to follow suit!

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Click fraud is a problem under certain circumstances, but for the major search engines who use an auction system for PPC and a performance based CTR to show their ads, this really is not a big problem.

Check out the comments section on this great Freakonomics post and weigh in!

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Perhaps surprisingly, most of the 50 countries in the index rated comparably well on financial attractiveness.  What really set India and China apart from the rest of the pack was primarily their people and skills availability scores.  The two mainstay outsourcing destinations were the second and third rated countries for people and skills availability trailing only the US, with Germany and France filling out the top 5.

This is the fourth year the top 50 countries providing IT services and support, contact centers, and back-office support were ranked on 43 measurements that determine financial attractiveness, people and skills availability, and business environment.

This year saw the addition of two additional measurements critical to determining global competitiveness: compensation costs and relative experience of BPO analysts.  The experience of IT professionals and contact center agents were already part of the index.

I decided to dig into the numbers a bit more, why is it that people and skill availability are determining the winners?  It sure seems like having favorable financial & business terms should be super valuable as well.  The answer is that these two other factors tend to cancel each other out.  If you look at the chart below, you can see that countries who have relatively strong cost advantages tend to have less favorable business environments.  In fact, the correlation between financial attractiveness and business environment was -0.81!

This tendency for the business environment & financial environment to cancel each other out, seems to be what tips the balance in favor of abundant supply of skilled people & processes.  The risk of unfavorable business environment obviously impacts the overall financial opportunity for a company looking abroad.  This study seems to support the idea that as policy leaders decrease the barriers for business to be conducted in their country (free trade restrictions, reliable contract enforcement, etc.) the financial incentives to go offshore tend to catch up and offset that gain. 

Given the tradeoff between these two dimensions, the smart money seems to be on the countries with abundant talent supply.

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