Takt Time and Value Added Time in Surgery and Healthcare Processes

By:  David M. Kashmer, MD MBA MBB

 

These Tools Are Valuable

Two of the most undervalued tool sets in healthcare are the Lean and Six Sigma tool set.  We hear the common refrain from physicians, nurses, and healthcare workers that Lean and Six Sigma tools, along with other statistical process control tools, are not useful in service industries–particularly not in healthcare.  In our experience, this isn’t correct.

 

It’s A Matter Of Training

Often, healthcare workers are not trained in these tools and therefore find little value in them.  However, in our experience, with training and understanding healthcare workers find these tools just as useful as the broader audience that uses them frequently.  In fact, many of the tools for which healthcare workers are looking to articulate certain words or ideas are already worked out in the well-know tools of statistical process control.  These can be quite valuable in healthcare and other service lines.

 

Sometimes We Use “Stealth Sigma”

Our team has experience with turnarounds and realignments in more than five trauma centers where we have found the Lean and Six sigma toolset to be invaluable.  We often have to change the moniker associated with this set of tools so as to avoid being too off-putting towards our healthcare colleagues.  Sometimes we call them “statistical process control” so that there’s less pushback caused by use of the term “Lean” or “Six Sigma”.  In fact, some colleagues have a term for the type of deployment where we avoid “Lean” and “Six Sigma”–those deployments get called “stealth sigma”.

 

Many of us on the team were trained in healthcare and currently practice clinically.  We understand the skepticism of our colleagues as we initially had it ourselves before we were trained in the tools.  Healthcare colleagues, here’s an important headline:  many of the tools you are currently re-inventing in your various fields have been worked out.  There’s even processes to use them.  They’re called Lean and Six Sigma.  Ok, stepping down off soapbox…

 

It’s only natural for us to be biased and a little evangelical.  After all, several of us are Master Black Belts (degrees of Six Sigma education have names that sound like karate belts) in Lean and Six Sigma.  We are accredited by various bodies throughout the United States.  Until we learned these things, we didn’t understand that they yield an ability to improve healthcare.  Here, allow me to stop testifying and to start telling you some of our experience as we focus on two useful Lean tools.

Let’s Talk About A Case

 

A healthcare system was having issues with stressed workers and backlog.  The concept of takt time was easily applied to demonstrate issues with the system.  Takt time represents the drum beat of a service line.  Another way to describe it, and one we often use with healthcare workers, is as the heartbeat of their patient.  The takt time is the time required to produce one unit of whatever the service line is producing.  This can be a patient admission, a surgical procedure, or something similar.  Takt time is an average and of course there is variability of the rates of production in practice.  However, takt time gives us an idea of what the drumbeat of the situation should be based on customer demand.

 

Definition of Takt Time

Takt time can be determined as the total available time to work divided by the demand for a situation.  That is, if, after breaks and other issues there is one hour available available in a day to actually do work and there are three patients that usually show up to the hospital (the demand on that system) in that hour to be admitted, the takt time for admissions is one third of an hour per every admission.  Said differently, it’s 1 hour available to do admissions / 3 admissions to be done.  This is one third of 60 minutes or approximately 20 minutes per admission.  Concepts like these give us an idea of what the drumbeat of the system needs to be.

 

We can use takt time in many ways.  One of the most useful ways is to pair it with a visual diagram of the process.  This type of diagram is called a value stream map.  Value stream mapping is very useful to better understand processes and services.  We can get a sense of what the drumbeat is in our organization and, based on mapping out the times associated with different portions of our value stream map, we can figure out how long it actually takes us to produce one unit of whatever we are trying to accomplish.  We can compare the two.  A value stream map gives us an idea of how the speed at which the process usually performs compares to takt time.  If takt time is 20 minutes per 1 admission, yet it usually takes us 40 minutes per 1 admission, we probably need to look for where we can cut wasted time and improve the process speed to be closer to takt time.

 

We can then see if there are discrepancies between our takt time, which is the drumbeat required, and our actual time to produce what we are trying to produce.

Focus On Value Added Time (VAT)

 

Another useful consequence of the value stream map is something called value-added time.  A troubling statistic often taught in Lean and Six sigma courses is that, in most systems, only approximately 1% of time used in the system is spent adding value to a product, service or patient. The “what adds value” is defined as that benefit or item for which the customer will pay.

 

In healthcare there are some special issues in application of this definition.  For example, who is the payer in the situation?  When we say value-added time as anything for which the customer will pay, who is the customer? We usually use a third party payer’s perspective as the answer for “who is the customer” because they are usually the ones actually paying for the services and systems.  Rather than talk about who should be paying for services in American healthcare we, instead, focus on who does.  In this respect we treat the third party payer, the source of funds, as the actual entity paying for use of services.

 

This also has some interesting consequences.  The third party payer, in fact, bases their payment on physician, surgeon or healthcare provider notation.  In fact what they actually are paying for is the tangible product they see which is the note.  Again, the note the physician, advanced practitioner, or healthcare provider supplies is what the third party payer reimburses.  In fact, they also use that as a rational to decline payment.  Consider how, if we gave a service but didn’t write it down, we would not be reimbursed.  This is part of how third party payers control costs whether they mean to or not.  We may have done several procedures, yet it is unlikely we would be reimbursed if we didn’t write down exactly what we did with clear and often exact documentation.  The note is the product for which the provider is paid.  Of course, without rendering the service there can be no note.

 

We feel strongly that it is improper (to say the least) to write a note based on the services or procedures that were not performed.  This is likely fraud in most cases and we are concerned about this.  We do not suggest writing notes on patients for procedures or care that was not delivered.  However, we acknowledge, in fact, a strong focus on the value chain for healthcare needs to be on the production of a medicolegally compliant, provider-protective, and exact note that satisfies the ever-increasing regulatory requirements of third party payers. That said, at the end of the day, what third party payers pay for is the services given as represented by the note.

 Apply VAT Concept To Everyday Processes

 

Let’s return to this concept that only 1% of time in most systems is spent adding value to a patient, process or other entity.  Experientially, this seems to be true.  When we have mapped out value streams in healthcare we have determined that again, that only approximately 1% of the time is used to actually add something that the third party payer will eventually reimburse.  A 4 day hospital stay related to cholecystitis is reimbursed with one global payment based on service as represented by the note.  Are there any opportunities to streamline note-writing, patient care, and cholecystectomy performance to decrease the amount of time spent in non-value added activities?  (You may be laughing, because the answer is clear to anyone who has worked in healthcare:  yes of course–there is a great deal of waste and re-work.)

 

The fact that only about 1% of time in a system is value-added time is often interesting and counterintuitive to the project group until they see the numbers. Once the amount of non-value added time is established and made tangible it becomes much more straightforward to reduce this time.  It is useful to reduce non value added time because much of non value added time is waste.  There are exceptions as you can imagine.  (Sometimes one process has to be completed in preparation to allow a value added step later.)  However, making the amount of non value added time crystal clear, tangible, and visible on a value stream map greatly improves processes and consensus building among healthcare providers, nurses and other allied health practitioners.

 

Use These Two Tools Together

We suggest, in our practice, to focus on these two tools as important adjuncts to process development. Again, takt time gives us a sense of our patient’s heart rhythm and we can often see how our processes are functioning relative to this concept of takt time.  For more information regarding takt time, value stream mapping, and value added time we invite you to visit Wikipedia or a Lean Six Sigma site after a google search.

 

Remember, to all our friends in healthcare:  we’ve been there and feel your pain.  We are surgeons, advanced practitioners, and nurses too.  Let us tell you:  the tools for which you are looking, or the ones you are re-inventing, have already been worked out and are called Lean and Six Sigma.  Feel free to borrow our wheel anytime rather than working out how to build your own.

A Military Take On Competitive Stategy

 

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from OODA loop Wikipedia Article

There have been multiple military thinkers through the ages who have greatly influenced modern thought on strategy in warfare. In this entry we do not discuss the competitive nature of the firm in industry as if it is war; however, we, instead, turn towards some of the greatest thinkers of military strategy to try to learn some useful lessons for how we compete and form strategy as a business or new startup business in the modern day.  Our investment team has found these ideas particularly useful as we evaluate the ability with which a firm can compete amidst the uncertainty of changing markets.

 

One of the most classic military thinkers is von Clausewitz, who eventually became a Prussian General.  Prior to becoming a general he wrote a classic treatise named On War. Von Clausewitz clearly described several things that deviate significantly from thinkers prior his time.  Many thinkers prior to von Clausewitz had espoused more of a technical, almost proscribed approach to war-fighting.  Von Clausewitz, among other things, introduced many important tenants of war-fighting that have made it to the modern day.  One thing that was very different is what von Clausewitz did not do:  he did not seek to make a cook book for how to fight successfully.  Rather, he described over-arching philosophic and process-type issues that allowed for effective war-fighting.  Perhaps von Clausewitz’s most often-cited ideas include war as a continuation of politics, and the idea that it is (in general) easier to defend a position than to attack one.

 

From von Clausewitz, we take several important lessons:  first, it is challenging to adopt a new position.  Once a team has a position in a market, however, it is easier to defend than to “attack” a new one.  This does NOT mean a firm should never change its position, yet indicates it should evolve carefully when it feels it is time.  (We feel first should be looking for innovative changes that give long-term returns.) Please realize, however, that easy does not always equate with successful or desirable.

 

Also, von Clausewitz helps remind us that healthcare startups, and others, must have a good reason to be bothered starting up.  Going for a new position in a market will be challenging, and the effort to do so must always be subservient to some plan just as the horrors of war serve the end of politics.  In any event, von Clausewitz helps us remember that the “getting there” is challenging and must serve some higher purpose.  Once a team gets there, it will be easier to defend territory, although again we caution against complacency.

 

Now, let’s transition toward more modern war-fighting theory such as that described by John Boyd.  John Boyd was a United States Air Force pilot who helped contribute to a manner of approach in dog fighting and other conflicts that lead to a great amount of success with the F series of fighters.  In short, per my rudimentary understanding, the F series of fighters was, in many ways, felt to be technically inferior to the Russian MiG owing to certain characteristics of the F series itself.  However, with Boyd’s direction this concept of being able to ‘turn under power’ had been designed into the F series and became key in the United States Air Force designs and implementation.  Although the F series may have lagged in classic measurements of fighters, its ability to maintain thrust and TURN to adopt the best attack angle made it highly effective in combat.

 

This idea of turning under power directly affects our thoughts on firms and industry.  A firm must continue going forward and yet be nimble enough to take the best angle of attack.  A team must be able to pivot.  This is key in startups:  turning while remaining moving forward, or turning under power, is a key characteristic.

 

John Boyd, however, went one step further and described what has been called the OODA loop. The OODA loop describes a light, flexible pattern of war-fighting in which first a participant must Observe a situation obtaining observations accurately.  Then, these must be passed through filters including education, cultural background, and the different elements that compose that person’s background as the person or entity Orients to the situation.  That means they must understand where and how they fit into a given the situation as individuals.  Next, they must appropriately and quickly come to an effective Decision.  It is not enough to come to a decision quickly; the decision must also be as accurate as possible given the background of the situation.  Last, the person must be able to implement this decision in a rapid tempo fashion so as to effect the other participant in the struggle, conflict or market.  In short that person must Act.  Results of the action and the updated situation then feedback to the beginning of the loop.

 

In our angel investment practice, we found that using the OODA loop as a shared mental model for certain aspects of competition to be very key.  We talked in an early blog entry about Blue Ocean strategy.  Here, however, we describe the importance that is to be allotted to this concept of a decision cycle.  The Boyd loop tells us several important things.

 

First, the Boyd loop is a useful mental model to describe the importance of the decision cycle as a means of competitive advantage.  When another firm, an enemy, or another participant makes decisions more slowly than our team this can be a source of advantage for our team.  That is, when we ‘operate inside the decision loop’ of the other side we find this is very effective in competitive strategy.

 

Making decisions more quickly is not the only source of competitive advantage. However,  it can be done to great effect as the opposite side or sides feel like we are the tempo setter for an industry and that they are rushing to catch up.  Eventually they may feel like they are following in our wake no matter which direction they turn as we operate inside their loop.

 

Besides simply decision time we also focus on accuracy in decisions.  It is not enough to make a poor decision quickly.  Instead, we focus on making the best decision we can amidst uncertainty.  This uncertainty is a key feature of the process and has been described by military thinkers such as Marine General AM Gray in Warfighting as the ‘fog of war’.  The fog of war is a useful term that describes uncertainty in fluid, unique situations that arise as part of competitive strategy.

 

Beyond the fog of war we focus on the concept of friction.  Friction, here, refers to those small impediments that, when summed, make it more challenging for us to impose our will on a situation.  The minimization of friction, coupled with effective decision making in uncertainty, is a hallmark of high-performing teams in our estimation.  In fact, we found that teams that actually need to communicate verbally or in a written manner to be less than the most effective.  Communication based on the team’s intent, or so-called implicate communication is a hallmark, in our opinion, of high functioning teams.  Each team member knows what plans can be executed in different situations because they know the team’s intent.  Rather than over-communicate about each small item, only large items are communicated and even those are minimized.  Everyone knows which way to row and doesn’t have to make decision cycle time longer by stopping to ask questions about each ripple in the water.  Given that, team members need to say very little to be very effective because they share the same mental model and are on the same team.

 

In short, we have much to learn from some of the classic military thinkers regarding competitive strategy in our market.  We have chosen several distinct elements from some of the great military thinkers that describe modern war-fighting, decision cycle, and friction amidst uncertainty.  One of the most important things on which we focused in our practice is this concept of decision making amidst uncertainty.  The ability to make high quality decisions in a rapid, effective manner, despite red herrings and other fog of war is key for success with your new business model whether that be in surgery, healthcare, or another field.

Don’t Start A Business With Your Family

Many times, startup entrepreneurs consider drawing the startup team from their friends and family.  This is only natural because these are close contacts in their social circle.  However, we recommend, based on our experience: don’t start a business with your family.


There are many reasons for this that we have seen in our practice as investors and as members of startup teams ourselves.  One of the most common is that it is very difficult for family members to keep their relationships separate and distinct. What we mean by this is that it is very challenging to compartmentalize family issues and keep these completely separate from the business.  When the business goes well it may positively affect families, and when the business goes poorly this may also affect families.  Further team dysfunctions related to long held family grudges, issues that are bygone / don’t relate to the business, and other social considerations may make the business go poorly. 

 

 

If you remember, we claimed previously that approximately 65% of businesses that do poorly do so because of team dynamics.  In our experience this percentage is higher in businesses started by families.  Team dysfunctions seem to be magnified and can be challenging.  This end of the spectrum includes the fact that sometimes teams composed of relatives have too much baggage to discuss and so may be mired in both old family politics and history.

 

On the opposite of the spectrum, it can be difficult for teams of relatives to discuss those unmentionable issues that affect the business.  If one family member has an alcohol issue or another family member has childcare issues, or if someone just isn’t putting the time in that is required, these things can become hard to discuss and may go unmentioned.  The same difficulties with discussing things beyond the scope of the business can arise from not discussing certain topics that do relate to the business because of family dynamic issues.

 

Starting a business with family seems to decrease the probability that the business will take off. Importantly, most startups do, in fact, not succeed.  Approximately two thirds of startups don’t go on to be successful going considerations.  Given the fact that two thirds of startups don’t make it, and two thirds of the ones that fail do so for team considerations, I would say it is setting up both family and business for failure when we attempt to start a business with family as doing so seems to only increase the risk of failure overall.  Of course, as with all things, there are exceptions to these broad rules. However, I would say those should be recognized as exceptions.  It is worthwhile to think carefully, at the very least, before moving ahead with family.

 

How did we learn this lesson?  Well I will share with you that we made the mistake of starting business with family members early on.  Worst of all, we knew the data about starting a business with family members and we did it anyway thinking that our family was somehow the exception.  We were wrong.  We did this on two occasions and, as usual, we invite you to learn from our experience with this blog rather that having to repeat our experience yourself.  This saves you time, energy and capital.

 

Have you ever started a business with family?  How did it turn out?  We are always interested to have lively discussions about your experiences with startups and innovative business models particularly as they related to startup teams.   Let us know more in the comments field.

The Nature of Competitive Advantage In Your Business

 

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Our last post talked mostly about premium positioning and its influence on the probability of success for your business model.  One of the sidelights included the fact that you need to justify your premium positioning.  Specifically, you need to be able to demonstrate value to your consumer.  Part of the way you can bring this increased value to your consumer and maintain a substantial lead on competition is finding a source of competitive advantage.  There are lots of different types of competitive advantage, and some of these have been alluded to earlier.  Competitive advantage is what you do that gives your business a unique, sustainable, non-obvious, and slightly opaque perspective.

 

Let me describe exactly what I mean.  First, we talked in an early blog post about the fact that, as investors, our team looks for a non-consensus opinion on whatever market you are in. This is similar to when we focus on competitive advantage.  You need a unique business take on the value stream you are describing.  We described Porter’s Value Stream in an early blog entry, and for now, it suffices to say that you must have some unique spin on the value stream for your firm in your industry.

 

This can be competitive advantage coming from how discreet elements in the value stream interlock.  That means you may focus on how your inbound logistics and operations go together. There may be opportunities as you bring a new substrate into your system to position it for eventual easy outflow from your system.  You may be able to eliminate inventory etc., altogether.  These are ways to look for competitive advantage in how the pieces of your business fit together.  That said, and I can’t suggest this strongly enough, you should focus on a unique take on your business model.  Meaning it is not simply how the discreet activities fit together but rather what discreet activities you are performing in what proportion, and in what way, to what final effect.  This represents the portion of competitive advantage that focuses on having a unique position in your industry or field.

 

Once you have a unique position carved out, this position needs to be non-obvious. That means the more simple and straightforward this seems the more likely everyone is to do it.  Also, the more obvious the advantage is, the more easy it is to discern and copy.  So, one of the categories on which we recommend you evaluate your competitive advantage is just how obvious an idea this would be to everyone else in your field with a similar amount of knowledge.

 

After the non-obvious criteria we recommend that your competitive advantage be slightly opaque.  That means there is no need to share with your competitors exactly how you do what you do.  Further it should be not easy to discover with merely casual contact with the company.  This means that whether you are able to process data and information more quickly, you are able to compete with data analytics to a greater degree than other companies, or you are able to speed up your decision cycle to make accurate, clear decisions based on the data you obtain from customers and other sources,  people contacting your business should be unable to tell how you do it.

 

Competing on data, for example, is one focus for current, modern businesses.  Sometimes, owing to the sheer volume of data and the processing power required to interpret the data, this methodology is called Big Data.  Big data can be a powerful source of insight but it is not typically used in small businesses or brand new startups owing to the significant time, intellectual capital investment, or possible need for massive data warehouses etc.  Also there may be challenges in implementing insights from Big Data into the frontlines of your company.  So, again, we recommend that whatever the competitive advantage you create, you make it a semi-opaque one that other competitors in your field are not easily able to discern from a casual interaction with your company.

 

Next, we recommend several other important characteristics of your competitive advantage.  For example, we recommend that it be sustainable.  That is, those things on which you choose to compete must be expected to persist, must be able to be replenished, and must be able to make for an effective going concern. You need to be able to have the elements that contributed to your competitive advantage persist and have reasonable expectation that you can sustain those things on which you have chosen to compete.  This is no easy task, yet sustainability is one of the hallmarks of a good competitive advantage.

 

However, you should note that competitive advantage is very different than a strategy in the market.  As Michael Porter has described in his previous work, and as we have referenced earlier in the blog, competitive strategy and competitive advantage are truly distinct.  The manner and market architecture in which we compete relates to our competitive strategy and the characteristics of our business model including its specific resources, modes of delivery, etc, are some of the sources of that competitive advantage which may influence our strategy.  How you run the race is strategy, and the body you bring to run represents your unique advantage.

 

Competitive advantage can even come, in part, from the market you have chosen to enter.  Some startup texts recommend that you start a business in a field in which is feels like you are running downhill.  Meaning that you should open your business in a field in which it seems that you have an unfair advantage owing to either certain expertise, an extensive contact network, information about where the market is going, or some similar impressive advantage.  Starting off with a good selection upfront about which market to enter can translate into a higher likelihood of success in your chosen field.  (Notice, however, that by choosing wisely which market to enter, you may have made it more likely that your business will succeed but as we have described earlier it is by no means a sure fire prospect simply because you have chosen so wisely.)

 

So we have discussed briefly some of the key elements of competitive advantage.  We recommend that you focus on building a sustainable competitive advantage that is non-obvious, slightly opaque, and can be translated into a unique strategy and a unique position for your business.  Rather than compete in everyone else’s game which has often been ironed out early on and years prior to your starting your business, we often recommend that you evolve a game changing take on the market.  This is in line with blue ocean strategy as we described earlier on in the blog.

 

Whatever you choose to do, we recommend a premium positioning paired with a sustainable, non-obvious, unique source of competitive advantage.  This will prevent you from difficult errands we have seen created by startup owners including:  strategies that are focused on competing based upon price, strategies that are focused on competing in a manner in which the business is not built to compete, or focusing on a source of competitive advantage which is easily extinguished with the next technological leap or slight fluctuation in the market.

 

My colleagues and I hope that you found this brief description of the nature of competitive advantage useful.  These are some lessons that are textbook level from such books as Understanding Michael Porter.  However, as is usual, once we have read the lesson in the text book we must go live it several times before it sinks into us and becomes part of our practice. Here, we continue to hope that you are able to use this blog entry and others to avoid issues we have seen and experienced with new startup companies.  Please, use this to learn from our mistakes rather than having to make them yourself.

Premium Positioning Is A Good Option For Your New Business Model

Did you know that there is evidence that positioning your brand as “premium” is significantly associated with improving your startup’s outcome?  It turns out that positioning your brand as premium or a value-added proposition for customers is associated improving your outcomes.  This is because, in part, early on in a startup a premium positioning allows a substantially increased margin on what would be relatively low sales at the onset.  This makes it more important than ever to focus on how your brand adds value to your customers above and beyond what other brands may perform.  You need to focus on reasons why your comparatively new product or service is worth the premium price.  Our experience resonates with this teaching.  Premium positioning works and makes startups, all else constant, more likely to be successful.

 

Take a moment to think about an important point:  it is incredibly challenging to compete on price versus existing players in the market.  That is, choosing to compete on price is usually a recipe for disaster for startups owing to the fact that they will lack the volume to obtain substantial profit and they lack the economies of scale of larger competitors.  They also lack negotiating power to bring down the costs from suppliers.  Thus, competing on cost versus large competitors is a recipe for failure.

 

Consider how it would it would look versus a company such as Walmart, Target, or similar large distributor based on price alone.  They are able to negotiate substantially lower prices from their suppliers owing to their expected volume of sales and positioning. These, and other economies of scale present in larger retailers, make competing with retailers in that vein almost impossible.  Thus, we frequently recommend to new startups that they not focus on competing on price and instead compete on value.  Again, competing on price decreases the probability that your startup will take off.

 

We usually support an innovative, sustainable, UNIQUE viewpoint as represented by the business model.  If you can’t answer what your unique take on the business is, how this translates to a value-added situation for clients, and therefore why your product is a premium product, well, in our experience you are less likely to achieve the type of break-out success for which teams often look.

 

This and other interesting facts about startups and positioning will be discussed in future blog entries.  I invite you to review Understanding Michael Porter, or a similar text, for thoughts on premium positioning and competition.  It can be counter-intuitive for a startup to create, and work to maintain, a premium product.  That said, it remains:  premium positioning in startups seems to be associated with success.

 

For a nice example of a premium-positioned startup that has enjoyed considerable success, visit www.emergencysurgicalstaffing.com.  This team focused on premium positioning compared to traditional locum tenens staffing models in Surgery.  The positioning and value they add has allowed considerable success in their field.

 

Do you think premium positioning is worthwhile for your startup?  Let us know in the comments field beneath.  We’re always interested in a lively discussion about positioning in new startups.

Dynamic Ownership Equity & Other Alignment Techniques

 

 

 

Racing Toward Change - Speedometer

 

We discussed, in an early post, some of the importance of alignment to the startup team.  As the business progresses, peoples’ interests can become misaligned owing to various factors. For example, liquidation preferences may make investors be very content to sell a company at a much lower price than the initial startup team would. This can be because, as mentioned before, the liquidation preferences at the time of their initial investment set the stage for this situation.  This is one of the many emergent properties of the business as it grows.  Individuals from the initial startup team may become misaligned.  Changes in their personal lives, and other business issues, may make misalignment into an increasingly important factor.  In this post I will discuss some of the techniques our team uses to try to help the team continue to grow in the same direction.

Dynamic Ownership Equity

 

One of these techniques is dynamic ownership equity.  As discussed previously, the concept of dynamic ownership equity is very clearly discussed in Noam Wasserman’s The Founder’s Dilemmas.  This concept has been very useful for us in our angel investment practice. Dynamic ownership equity means that equity ownership changes as the business reaches different milestones.  For example, when the investors have their initial investment returned to them plus a certain margin, the portion of the business they own may change.

Take, for example, a business that has three entities owning it.  We will call them entity A, B and C.  We will say that entity A had the initial idea for the business and has a 35% ownership equity owing to the “idea premium”.  The idea premium is the concept that the person who has the idea may have more ownership equity especially at the beginning of the company.  Let’s say entity B has 15% ownership equity and entity C has 50% ownership equity at time 0 or when the business starts. Let’s say entity C is the investor who brings capital to the business, entity A brings the idea and certain technical expertise, and that entity B brings both a managerial style and personal connection network to the business.

The team can and should negotiate out ahead of time different milestones at which ownership equity changes.  Over time the idea premium may erode and entity A’s ownership equity, for example, could decrease.  The entity C could decrease their ownership equity with time once they have been returned their initial investment.  Over time, perhaps, entity B’s managerial skills may be come more important.  Multiple milestones can occur, and the milestones we often use are revenue-based.  That is, at the final stage of equity balance maturation the final ownership equities for each entity usually come about when the business reaches some certain gross revenue milestone.  This is because, we would rather, as investors, have a passive source of income which is 10% of $2 million rather than 80% of a $20 thousand dollar company.  We feel dynamic ownership equity gets us there and keeps the team alive as we get there.  This concept of a smaller % and yet higher return is easily understood once we run the numbers. There are many different techniques and ideas on how to balance ownership equity.  However, the idea that it changes over time as different stages of the business are achieved and that different talents are more important at each stage is clearly useful.

Regular Meetings

 

In addition to dynamic ownership equity there are other techniques we utilize to help keep the team growing in the same direction.  One of these is regular meetings.  Regular meetings with a focused agenda on key metrics to which the team has agreed ahead of time helps keep us growing in the same direction.  If we can understand our business in numbers, as mentioned in an earlier blog post, we can really get a feel for our business in different lenses which are objective.  People are less likely to get their feelings hurt in this manner.  A focus on metrics in which we believe is key.

 

Making A Business Canvas (And Updating It!)

 

One of the other things we perform in meetings is recreating our business model canvas and updating it.  This gives us a snapshot of our business over time. We then place the metrics on what we feel the key portions of our business are and follow these.  Having these updated business model canvas allows us to have a snapshot of our business over time and get a sense for what our revenue streams etc. should look like.  As we mentioned in an earlier blog post a formal business plan often does not persist beyond first contact with the real world.  That’s why, in many cases, being able to create business model canvas is much more useful.

Direct Conversations…& Avoid Founding With Family(!)

 

An additional technique we utilize to keep everyone moving in the same direction is having direct conversations.  What I mean by this is we really try to focus from the beginning of the company on the idea that there are some things we must discuss for the good of the company even when the issues, or we, are uncomfortable.  This is one of the barriers to founding a business with family.  Often founding businesses with a family member can put certain constraints on what can and cant be talked about in the business.  It is harder to discuss the elephant in the room when family is in the room also.  This makes us feel that, in line with Noam Wasserman’s description in The Founder’s Dilemmas, founding a business with family is akin to playing with fire. (For more on that, click here.) If the business does not go well, and keep in mind more than 60% of new business ‘fail’, this may leave family members with a bad taste in their mouths, blame, and much finger pointing at each other.

In conclusion, the team alignment in the new business model is an important key to success.  We need to take care to use special techniques to promote team alignment through every stage of the business.  Some of these techniques include dynamic ownership equity, updating the business model canvas, focusing on metrics with which everyone has agreed, and the avoidance of founding a company with family.  We hope that you may find these techniques useful in your practice and again I recommend, as always, that you read more about the concepts of dynamic ownership equity and some the importance of metrics via online search.

The Importance Of The Team

Some famous venture capitalists have estimated that 65% of new startup businesses fail because of team dynamics and team-related issues.  This really highlights how important it is that the team be functional and that the team members be able to perform on an individual basis as well. In our experience this is one of the most challenging portions of the startups:  how do we decide if the team is right and if the team is adequate to make the business go?

 

We use several techniques to try to determine if the team is ok before investing, or before starting up the new venture as an initial member of the startup team.  First, simply, there needs to be a team.  Sometimes we have excellent, star performers come to us with fantastic business ideas which seem a sure-fire win.  However, there needs to be a team presented as part of the business idea.  As we have said before a great business idea is only a portion of the battle when it comes to making a great business model. We often ask, at the first meeting, about who the team members are and their backgrounds.  Let me share with you that there is evidence that a team size of approximately 3-4 is statistically significantly associated with improved outcomes for the business model.  And this is per an online Stanford business course that was given on coursera.org. (That same course, Technology Entrepreneurship by Chuck Eesley, is also on novoed.com.) This course is available to everyone and is given on an intermittent basis.

 

Whether you agree that the ideal team size is 3-4, there are some important considerations beyond simply team size.  The team members need to have some background in the idea they are describing.  Industry experience and an extensive set of network contacts adds to and enhances the legitimacy of the business idea.

 

 

Venture capitalists have estimated that it takes approximately 6-7 million dollars in capital expenditure to train a VC capitalist. That has been an interesting statistic to me, whether you feel it is overly broad or not.  It is interesting to me that one way to measure venture capitalist learning and growth is in the total amount of the deals they have performed as evidenced by the amount of capital they’ve run through in getting there.

 

In our experience as Angel investors, we have learned a great deal from trial and error despite trying to do all the book learning, background work, and other issues.  I can’t say strongly enough that we have learned a lot, as expected, by actually doing the work.  One of the lessons learned has been just how easy it is to miscalibrate the team.  We have had several incidences now of startups in which we have participated where we were very confident that the team performance, background, and structure was adequate and we found out later that we were quite incorrect.  We take these experiences as paying-for-education-type experiences.  We take the lessons learned from these and try to not make the same mistakes in the future. However, that said, there are other important topics such as alignment.

 

We will discuss alignment in a separate blog entry.  Here, let me tell you that alignment issues occur when the startup teams interests are no longer completely aligned.  These may emerge as the business grows and different people expect different things from the business.  These may arise from a non-recognition of one startup team member by another startup team member.  Alignment issues are very common and there are multiple techniques to keep the team in alignment as it moves forward together. In our experience, despite adequate ideas and margins, the most common reason for failure of a business model is in fact team dynamics.

 

Please, recognize that I don’t mean that a business is doing poorly or failing and then team alignment becomes an issue. Rather team alignment issues and team performance issues come first and then the businesses do poorly afterwards.  The team dynamic issues I am describing here are usually seen before issues with the business and are seen in that first 4-5 months necessary to get a sense for whether the business model works.  I cant say strongly enough that our experience substantiates that at least 65% of business ideas and innovative business model canvass do not work because of team dynamics.  In our experience it is probably more like 75% that the causal reason is probably the team rather than the idea, regulatory issues, or other significant issues.  Check in on later blog entries where we will discuss different issues such as team alignment and ways to keep the startup team aligned in healthcare and beyond.

Dogs Walking On Their Hind Legs: Tales Of What Happens When You Don’t Know Your Business Model’s Numbers

 

 

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from:  http://tinyurl.com/przwj3o

I have seen several businesses now that don’t know themselves via numbers.  They may be founded by highly relationship-focused entrepreneurs, which can be a great thing, or they may be focused by people who are not numbers savvy.  However, I can’t tell you strongly enough about how important it is to know key metrics for your business and to follow them.  

 

Sometimes, my colleagues and I have seen businesses that, when we finally look at the numbers, appear as dogs walking on their hind legs.  That is, these are businesses that currently shouldn’t be doing what they are doing and probably cannot do it for very long.  One of the key techniques we focus start up teams on to achieve a sustainable position was discussed in an earlier entry.  The business model canvas is one of the techniques we recommend to set up a condition where you can know your business by the numbers and follow it over time to get a sense of where you really are.

 

The business model canvas can be used to create a pictorial history of the business.  The business model canvas can then be considered at different meetings and revised.  Then, over time, we obtain a history of the business and can look back on this to gain certain insights.  It will focus us on those areas on which our business rests.  Next, we need to establish and focus on key metrics for the business.  Many new businesses are highly dependent on new customer acquisition.  In those cases, we recommend getting metrics together about that key sector.  Whatever parts of the canvas are key we recommend putting some metrics in which you can believe attached to that.  

 

However, often there are several areas of the business on which we should focus. One of these is cash-flow.  Cash is, in fact, king as the the saying goes.  This is because it is highly liquid and very transportable.  Cash-flow is incredibly important to businesses and, although I was told that in business school, I didn’t fully appreciate it until situations arose in one of the first businesses I helped co-found.  

 

In short, I learned important lessons like:  it is possible to grow the business so much so quickly that the business actually grows its way into bankruptcy. That can be because, although the business is very worthwhile and profitable, it is unable to meet its current obligations owing to cash-flow restrictions. So, for that reason, I can’t stress enough the importance of knowing your businesses’ key metrics and establishing these upfront. 

 

There are multiple sources you can go to in order to discover what key business metrics there are for startups.  Some of the key metrics we look at to prevent the dog-on-hind-legs-syndrome (or DOHLS, because, being in healthcare, it seems I have to attach an acronym to everything) are business financial ratios.  These can tell you about the current financial health of the business. 

 

Some of the most important ones include the acid test ratio, which focuses on your businesses’ ability to meet its current obligations. The acid test ratio is called that for the very important reason that it is one of the most central, key metrics for how your business is doing. However, these are not the only lenses through which you should view your business.

 

One of the other important things is the days in accounts receivable. If it is taking you too long to collect on outstanding bills you may need to incentivize customers to pay those bills faster.  Taking too long to collect on invoices can directly inhibit your cash flow and ability to meet those current obligations. For a more in depth discussion on financial ratios and associated metrics, including the classic three levers of financial control, I invite you to read a brief primer on financial ratios, either available from Amazon for Kindle or many online sources.  

 

Some of the key ones we use include the acid test ratio and the ROIC (return on invested capital).  However, you should recognize that startups need different ratios than established companies.  For startups there are other metrics which are no less central to understanding the quality and life of the business.  Sometimes when we give talks to surgeons and other physicians about their startups we even use the analogy of the business as the patient and focus on some of the metrics we use as if they are vital signs. This is a useful exercise and my colleagues and I do this routinely at our yearly seminar.

 

The yearly seminar really helps both physicians, non-physician caregivers and other providers in healthcare get their minds wrapped around how to know how well their business, patient, or business model canvas is performing.  There are some other useful metrics that are indigenous to startups.  For example it is very key to highlight a customer-specific metric.  Some startup books advise that the core team actually focus mostly on customer development at the onset of the business.  That means the entrepreneurial team spends a great deal of its time developing the market and focusing on techniques such as evergreening.  

 

Evergreening is a classic technique that focuses on obtaining more or repeat business from a client pool.  This evergreening technique references trees and tree growth where the tree is green all year long. This is the focus for techniques collectively called evergreening.  Beyond evergreening there are also other useful areas of focus for business metrics of the startup.  Some of these include the number of new potential customer contacts and the attrition rate of customers.  How much time, effort, and ability does it take to convert a set number of calls to a new customer.  Related to this there can be costs associated with customer acquisition. If you ever watched the show ‘Shark Tank’ this is one that you have seen repeatedly question by some of the sharks.  If a startup knows its cost of customer acquisition this tells us a great deal about the startup.  First, it tells you that the startup is focused on bringing in new business and really has focused on it to the point where they can name a price associated with the cost of acquiring new customer.  It shows that they have spent time working on it. And it shows they have thought about the inflow to their company to an appropriate degree.  

 

Regardless of what the specific number is, Mark Cuban’s typical question on Shark Tank indicates that the startup has a good sense of how it brings in new customers and there is a ready-made stream of inflow developed. For startups, again, it is very key to have an understanding of metrics associated with customer acquisition and business acquisition so as to prevent dog walking on hind legs syndrome.

 

Have you ever seen any business that has this dog walking on hind legs syndrome (DOHLS)?  It happens all the time that, when a business finally looks at its numbers, it becomes clear that it can’t continue onward doing what it’s doing for very long just like that wobbly dog. 


To share a personal story, I have been very fortunate with at least one of the startups in which I have participated.  My cofounder and I were not as focused on our business model’s metrics at the beginning of the startup, and instead took the route of the very personal, very relationship-oriented startup.  This had many upsides.  However there were a few downsides including the fact that we began to encounter cash-flow problems etc. and quite nearly did grow ourselves into a bankruptcy-type situation where we could not cover our costs.  This was because of cash-flow as the company grew.  Each time the company grew into a new venue we had to be able to have approximately 20k cash on hand to be able to pay our first independent contractors who worked at that site before that site was required to pay us.  This 20k of float, or floating money, was not something we appreciated as well as we could have initially.  Fortunately, owing to excellent work on the part of my cofounder and the business team associated with the project the company has gone on to do well.  However, we were almost too late when it came to appreciating our financial metrics.  We had to pay more attention to our days and accounts receivable etc, and this was something that it took sometime to get a feel for in our business.  So there are multiple business metrics on which we can focus for our startup. 


Learn from my mistake:  regardless of the specific ones you choose to believe in and rely upon it is essential that there be some on which you rely.  I recommend some of these include customer-focused metrics so you have a sense of how to develop a continuous, effective, cost-conscious pipeline for new customers into your business model.  For more information regarding financial ratios, including those focused on profitability, cash-flow and inventory I direct you towards any of the classic primers on management by financial ratios which you can find on Amazon.com or the Google.  Also, remember to look at one that is startup-focused.

 

Thought Leadership Has An Upside And A Downside

A thought leader is similar to a bellwether:  it is a person who is sort of a leader of the pack.  They are people who are often at the forefront of a movement or a set of ideas.  It is important to realize, though, that being a thought leader has upside but also has downside risks.  For example, the cutting edge idea that you may espouse may not make it to prime time.  Being at the forefront of your field has a lot of benefits and it’s important to recognize the downside risks of you possibly getting behind an idea that fails spectacularly.

 

How does one become a thought leader?  A thought leader is often someone who represents a non -consensus viewpoint.  Note the key elements of this include that they represent this idea or cutting-edge thought.  They need, in short, an audience.  Finding and growing an audience is one of the biggest challenges of becoming a thought leader.

 

In healthcare, particularly Surgery, there are many mechanisms in which to do this.  In Trauma and Emergency Surgery, for example, giving talks at professional meetings, participating in committees within professional organizations such as the Eastern Association of the Surgery for Trauma (similar national trauma surgical society), or networking via online communities can help you establish yourself as a thought leader.  Other routes include social media visibility, and yet another includes publishing papers in journals or even becoming an editor for a journal.  These are just some of the ways to be at the forefront of research in trauma and emergency surgery, and in healthcare being at the forefront of research is often equated with being a thought leader.  However, these are not the only ways in which you can become a thought leader.  You can even provide consultant work to hospital service lines, be the messenger or proponent of an idea that is already in existence or basically establish your name and reputation as someone at the forefront of the field.

 

As mentioned, one of the other important elements of becoming a thought leader is representing a non-consensus viewpoint.  That is, if every speaker represents the same view point it is unlikely that anyone will be perceived as a leader.  Looking at a problem or issue in a new way, focusing on an issue that is common to people in the field, and clearly representing this non-consensus viewpoint in a non-confrontational way can help establish you as a thought leader.  Representing a unique viewpoint makes being a thought leader very different than just being an expert on some topic.

 

In our angel investment practice, one criterion on which we evaluate new potential business models is the presence of a non-consensus viewpoint.  We are interested in a team that thinks the market, or a solution to some issue a consumer has, is going in a different direction than what many others think.  They need solid data (experiential or otherwise) to substantiate their claim.  If a business team demonstrates a non -onsensus viewpoint that has sustainable competitive advantage, that is it, the position can be protected, established, and grown, the idea is much more attractive.  Clint Korver, from Ulu Ventures, also described the search for non-consensus viewpoint in a recent online course on NovoEd.com entitled Venture Capital 101.

 

In short, being a thought leader requires multiple facets including finding and reaching an audience with your unique, non-consensus viewpoint in a non-confrontational way that demonstrates the utility of this non-consensus viewpoint. Having a novel or interesting viewpoint on a topic that doesn’t matter about which you can tell no one is exactly the opposite of becoming a thought leader.  In business model innovation, becoming a thought leader can have significant utility as you look to influence stakeholders to get on board with your business model.  Representing a non-consensus viewpoint in an effective way can help propel you into a position where you are much more likely to get funding for your business model or be looked up in your field as an important thought leader. Such a visible position has a strong upside yet also has downside risk.

Scalability Is A Key Concept For Your Business

One of the most challenging elements in business model innovation is the concept of scalability.  When the team and I evaluate new business model ideas, one of the parameters on which we evaluate them is scalability.  Scalability is the term attached to how easily the business grows up as its inflow grows.

 

As a general rule, service-intensive companies are tougher to scale up.  An example of a service-intensive company may be one, for example, that is contingent on the individual talent / professional knowledge of some core team member such that replicating that position in the business model is difficult.  Specific examples include a law firm, physician’s office, or an architectural drafting company.  When the initial team member, let’s say a physician in this case, becomes busier with administrative tasks as the company grows, it is difficult to replicate that physician’s participation in providing the actual service that the company is meant to do.  So, issues with scalability arise.

 

Said differently, it is much harder to scale businesses that are services in part owing to the reason that an individual team member’s talent provides the core for the business.  Usually when we find a business model where scalability is a challenge or when we design a new business model that is a service, we focus, intentionally, on ways to make the business more scalable.  Some of these include planning for the volume of business at which we will add employees or independent contractors to be able to provide the service as the initial team member becomes progressively busier with administrative work.  It can become very difficult if we wait for a team member to be overloaded before offloading tasks from them, and so a clear discussion about how to scale up, at the onset of the business, is useful.

 

We usually say that an issue with scaling up is one of the “good problems to have” because it indicates the business is growing and the model is likely reaching a customer need / market.  So when we perceive issues with scaling we try to remind ourselves that this set of issues is better than the set of issues where no one is buying the product or service.

 

Non-service business opportunities maybe much more easily scalable.  A model that sells an online info product, for example, may be much easier to scale.  A recent online search for examples of highly scalable models revealed www.providerlifestyleexperts.com as a nice example.  Startups that focus on a website for sales are often contingent on band width, server speed and other issues such as those.  Where scalability is more dependent on technology things maybe scaled easier.  This is not to say that it is straightforward to scale business models that have inventory associated with them.

 

Business models where an object is built or an object has value added to it and is then sold can also be very challenging.  CEO’s such as Tim Cook from Apple and Jeff Bezos from Amazon are masters at logistics and this highlights the importance of those functions in a modern business model that wants to scale up.

 

When you have an idea for a new business it should be fairly clear by now that much more goes into a successful idea than having a good idea.  A good idea is key to success but there is much more around it that makes the idea move forward in a sustainable fashion.  In later posts we will discuss more on typical factors that are associated with the business success or failure.  (FYI The “we” seems to be creeping into the blog a lot.  That is because sometimes, here, I’m speaking for our team of investors and “startup mechanics”.) Interestingly there is a great deal of research, much of which is statistically rigorous, about what makes successful startups across multiple different industries.  These have always been a personal interest of mine and I look forward to sharing those with you in future blog post.