Lecture 9 Feb 4, 2010

Determining ValueOutsourcingTypes of Organizations

Next week

• Continue marketing!• Read Kressel Handout• Lectures (friends welcome)

– Kressel– Baltimore

• Midterm– Questions?

Let’s Look at the BasicsConsider your company one year from now...1. What should you be bringing to the party?

– Why should your customer value who you are?

2. What do you do really well?– What will be your core competencies?

3. What can you outsource?– How do you strip to the essentials

1. To determine ValueWho does the customer care about?

To determine ValueConsider everybody who will “touch” your product

– Marketing– Sales– After market service– Engineering

• Design• Testing• R&D

– Production• Logistics• Assembly

– Legal– HR– Financial

• Tax• Payrolls• Acct• Benefits• Stock options

– Other?

Let’s Look at the Basics

Consider your company one year from now...

1. What do you do really well?– What will be your core competencies?

Who cares

• It is obvious that your customer does not “need” many of the things you are spending a lot of time on.

Your Core Competencies in one year

Outsourcing

• Why is it desirable?• How important is it?

Outsourcing

• Pros • Cons

OutsourcingThe Virtual Corporation• Why is it desirable?

– Availability of a network of “suppliers” each as better than you at what you do.

– Consider effort to become excellent at more than one or two things.• Compare with people who have specialized in one

area for along time– Consider effects

• Hire. Will you choose the best people? Time for them to learn

• Cash flow• Timing• Office, lab, factory space provision• People problems• Opportunity cost in a resource-constrained

environment

Outsourcing http://entrepreneurs.about.com/cs/beyondstartup/a/uc041003a_2.htm

You can access top-notch expertise any time you need it without the overhead of hiring full-time staff. By staying focused on your core competencies and hiring expert freelancers for your other needs, you can compete with the delivery capabilities of larger organizations while maintaining your independence

Outsourcing

• What is your core competence?– What do your customers care about?

Where do you provide value to them?•Consider value chain and how it

addresses customer pain•Providing “complete” solution to pain •Ask them•Prioritize• Is what they say consonant with what

you think?

Outsourcingadopted from

http://entrepreneurs.about.com/cs/beyondstartup/a/uc041003a_2.htm  

Do What You Do Best and Hire the Rest

1.Clearly define what you need. Don’t get sold into more than you need.

2.Evaluate a service provider as you’d hire a full-time employeeInterview Check references for quality, reliability cost, etcUse gut for compatibility

3. Look for specific experience fitHave they done similar work before

4. Don’t choose a vendor based solely on price

Outsourcing5.Review portfolios and samples

Examine vendor’s previous work (their “portfolio”) to assure quality.

6.Start smallTry first before long term commitmentConsider competing vendors in a “phase

0” project7. Tie payment to clearly defined milestones

(~3-4, if appropriate)minimize up-front paymentsReview at each milestoneLook for payments “in-kind”Consider stockConsider barter

Outsourcing8. Negotiate ownership of work up front

Be clear who owns the resulting work product

9. Don’t forget about support after the project is complete

Specify a warranty or support clausee.g., Specifying some amount of free support or negotiating discounted prices for future modifications

10. Get it in writingOriginal agreementSchedule, scope or payment changesSave copies of email exchanges but print is better.

11. Consider Barter, Partnerships, Stock, etc.

OutsourcingWhat can be outsourced?

• Candidate Areas– Legal

• Corporate formation• IP• Contract• Employment• Regulatory• Other

– Finance• Acct• CFO• Bill Paying• Acct Receivable• Taxes

Outsourcing

• Manufacturing• Real Estate• Research (?)• Logistics• Product Development (?)

– Product Design– Software– Hardware– Test– Support

Outsourcing

• IT• Sales

– VARs and reps– OEMs– Direct (on contract)

• Marketing– Strategy– Research– Customer identification

• Other

OutsourcingWhere do you get these

people?• Networking

– Entrepreneurial Events– Caltech TTO– Mentors and Advisors– Investors

• Web search• Where do they live

– We are fortunate to be in LA! There is a huge infrastructure of vendors

– However, the best partners for you could live anywhere in the world

OutsourcingConclusion

• In short, every piece of your business is potentially outsourceable

• Challenge of Entrepreneur is – Decide what you must do– Choose the best vendors

• Reliability• Cash Flow• Quality• Value

Alliances or Partnerships

• Give some examples of “symbiotic” relationships.

Alliances or Partnerships

• Supposition: I can build my company more effectively if I establish a strong relationship with another company (or institution).

• Could be a complementorPros and Cons

• Who could you team with in your space?

Exercise

• What are your core competencies?• Whom will you hire to get those

competencies you don’t already have?

Choices for Corporate Organization

•Sole Proprietorship•Partnership•“C” Corporation•“S” Corporation

Sole Proprietorship• Business entity and your other affairs

(personal and business) are merged. As the proprietor, you own and control the business.

• All proprietorship debt is payable by the proprietor (proprietor's family unit)

• lenders customarily require signatures on debt agreements by both the proprietor and spouse

• All profits accrue to, and all losses are borne by, the proprietor (the family).

• Must separate finances and records for your business unit and your household.

Sole ProprietorshipAdvantages

– Simplicity and flexibility. – established, modified, bought, sold, or terminated very

quickly. – No organizational arrangements (bylaws, organizational

charter, etc.) required – Only routine permits and licenses required– legal assistance not required to start, terminate, redirect,

or modify the business. – The proprietor can decide to start a business and almost

immediately can say, "I'm open for business and I'm my own boss.“

Limitations

– mingling of business and household finances often occurs– everything the proprietor and family own can be at risk in

both personal and business activities – the resource base limited including credit availability and

capacity to respond to business opportunities

PartnershipAn association of two or more persons formed to carry

on a business each of whom has a specified ownership interest

General Partnership or Limited Partnership

– Most business partnerships are organized as general partnerships. In many, the partners are related by blood or by marriage

– (Should be) based on a written agreement– Typically not an income tax paying entity– Profits and losses pass through to the partners'

individual tax returns in proportion to their respective ownership interests.

– Unless specified otherwise, partnership is dissolved upon the death or withdrawal of one of the partners.

PartnershipAdvantages • easy• In a general partnership partners can

specialize• In a limited partnership only the general

partner can be manager • Limited partners enjoy a limited liability• Borrowing capacity of a partnership may

be greater than the total borrowing capacity of the partners as individuals.

• Cost of establishing a partnership is relatively low Record keeping and tax filing relatively easy

PartnershipLimitations • General partnership- all assets of each partner are

at risk • Limited partnership- all assets of the general

partner are at risk and capital invested by the limited partners is at risk.

• Any partner in general partnership and the general partner of a limited partnership can enter into contracts binding on all

• General partnership can end upon the death or divorce of any partner

• Any general partner can require dissolution of the partnership at any time.

• It may be very difficult to get out of a partnership without undue financial loss Conflicts can immobilize business decision making

“C” Corporation• Company continues regardless of incapacity or death of one

or more stockholders.

• Can have ownership changes without disturbing ability to conduct business.

• pays taxes and dividends are also taxable to stockholders.

• Corporate shield protects other investments and savings of the stockholders

• The annual meetings of stockholders can provide more comprehensive guidance for management.

• Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.

“C” Corporation Disadvantages

• Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.

• Conflicts or disagreements among the stockholders (usually a small group of persons) may immobilize decision making.

• Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.

• If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

• The corporate shield of limited liability may be lost: – When corporate formalities are not followed — that is, when

director and shareholder meetings are not held and minutes of such meetings are not kept.

– When corporate assets are treated as personal assets — for example, when a corporate vehicle is used for family vacation and the corporation is not reimbursed for the nonbusiness use.

• When limited liability is lost, shareholders become personally liable for any corporate legal or financial obligations. In addition, if corporate income tax returns are audited, failure to observe corporate formalities or treating corporate assets as personal assets can cause penalties and interest years.

“S” Corporation“C” Corporation vs. “S” Corporation - What's the

difference?

“S”=“C” with one exception

• “S” corporation has a single tax imposed at the shareholder level

• "C" corporation has a tax imposed both at the corporate level and then again when the corporation makes a distribution to the shareholders.

To be eligible for “S– Less than seventy-five shareholders, all of whom must

be individuals or certain trusts in estates, – one class of stock outstanding.