Found+READ: Stories by Jay Parkhill

Timing Ain't Everything

Jay Parkhill — Tue, 26 Jun 2007 14:18:28 GMT

Jay originally published his piece on “Start-Up Review”:http://www.startup-review.com/blog/about, “here”:http://www.startup-review.com/blog/how-to-work-with-imperfect-timing-%e2%80%93-an-elance-example.php. We welcome this adaptation of his popular case study for Found|READ.

YouTube’s success is an example of what happens when entrepreneurs stumble on the right idea at just the right time, but I suspect that most companies miss the time window slightly and have to adjust. Elance is a case study in how to adapt when the market isn’t ready for you—and, therefore, might have more to offer founders by way of instruction.

“Elance”:http://www.elance.com/ is an online agency that matches technical, design and other professionals with businesses needing such services. Project “owners” post their requirements and service providers bid on them. The company was founded in 1999, currently receives 130,000 unique visitors per week, and matches 2,500 projects with service providers every week.

A “long detour” through a secondary product.
Elance launched in 1999 as an “eBay for outsourcing”, a marketplace where project sellers could shop for professionals to get the work done, and vice versa. The company raised $80M, $60M at the height of the bubble, only to see the market collapse. Worse, at the time “outsourcing” was viewed by many as distasteful and distributed workforces were not well understood. Due to all of these factors the online marketplace struggled.

One bright spot, however, was in large corporations. Although Elance was founded to bring outsourced, decentralized workforces to a range of businesses, it found that big companies were the segment of the market that had most embraced the concept. Many of these companies had engaged the services of numerous contractors, yet had no reliable systems to manage their distributed workforces.

In 2001, Elance scaled down to conserve cash and refocus on the opportunity to serve large corporations. It kept the online marketplace, but put its principal energy behind the development of an enterprise software package to permit big companies to manage and track contract workers. By 2005 the enterprise software product was used by 200,000 employees of companies such as “American Express”:http://home3.americanexpress.com/corp/default.asp?us_nu=footer, “BP”:http://www.bp.com/home.do?categoryId=1, “FedEx”:http://www.federalexpress.com/us/about/ and “GE”:http://www.ge.com/index.htm, to procure manage over $10B of contract work.

In 2005 Elance perceived that the enterprise software industry had started to consolidate while the general public had come to understand and accept distributed workforces. Elance then re-evaluated its product line and decided to return to the original business idea by selling the enterprise suite to “ClickCommerce”:http://www.clickcommerce.com/CKCM/Rooms/DisplayPages/LayoutInitial_webrQS%20_Q29udGFpbmVyPWNvbS53ZWJyaWRnZS5lbnRpdHkuRW50aXR5JTVCT0lEJTVCRkUxQ0Q1N0Y0MUJCRDY0OEE3QTdCMjQ5RTVCMzRCQTYlNUQlNUQ “for $8M in stock in May 2006”:http://www.clickcommerce.com/CKCM/Rooms/DisplayPages/layoutInitial_webrQS%20_Q29udGFpbmVyPWNvbS53ZWJyaWRnZS5lbnRpdHkuRW50aXR5W09JRFtBM0M4RUJFMTI1Q0JFNTQ1OEY3RUEwQTVCMDFFRTA1RF1d. Elance’s CEO “Fabio Rosati”:http://www.elance.com/p/corporate/about/management.html#fabio described this product arc as a “long detour” on the road to deployment of the founders’ original vision.

Flexible business model, but adherence to the original ideals

Elance could have simply abandoned the marketplace concept and pursued the enterprise software path exclusively, but didn’t. I asked Rosati why the company chose to maintain two product lines, and why they ultimately decided to refocus on the original concept.

He told me that “the Board”:http://www.elance.com/p/corporate/about/management.html considered a variety of strategic alternatives and ultimately came to the conclusion that the online market route offered the best mid- and long-term prospects. At the same time, near term needs in 2001 required that the company secure revenue from another source, namely the enterprise market. During the detour the company continued to believe that the marketplace product held promise and decided not to abandon it, but instead to maintain and manage it for the future.

I find the concept of the “long detour” fascinating. It says that the company believed strongly in the original vision, but recognized that the time was not ripe to realize the plan. In addition, Rosati told me that the company saw the enterprise product as having limited room for growth except as part of a larger supply management software suite, whereas the distributed workforce market was still virgin territory. This combination of factors led the company to end its detour and come back to the path originally envisioned.

Reasons to sell or not to sell a product line

Elance could have sold off or simply abandoned the marketplace product to simplify its operational workload. I asked Rosati why the company didn’t do this, and he told me that the company analyzed the situation and concluded that the marketplace, if properly managed, would not damage the enterprise product or divert undue resources from it (in cash or personnel). That being the case, there was no reason to abandon the possible long-term opportunity it represented.

Getting another shot

The founders and investors originally envisioned the idea of a broad market to match many thousands of service sellers with buyers. The enterprise software “detour” secured the company’s survival during the dot com meltdown and culminated in the sale of the enterprise suite for $15M, a return of less than 20% of investors’ capital but more than adequate to fund future growth. If Elance’s only product line were enterprise software it would be deemed a less-than-successful exit for the company. Maintaining and returning to the original idea, however, gives the company another chance to fulfill the original vision.

Elance’s early vision caused it to launch before the market was ready. As noted earlier, I suspect that many companies have the same problem and need to adapt. Elance adapted by reviewing the market landscape and developing a product to satisfy the immediate revenue-generating opportunity. Many businesses may be able to develop a service offering that can bring steady cash flow sooner, and fund development of the original product.

At the same time, keeping the original product rather than changing the business model entirely gave the company a chance to evolve with the market. Elance’s strategy illustrates one way a company can be flexible and capitalize on available opportunities while preserving a range of options for the future.

Contractor's Conundrum

Jay Parkhill — Mon, 16 Jul 2007 07:00:53 GMT

This post is about how to protecting your own IP as a contractor. I have three clients who spend their time developing toolsets for three very different business disciplines. One develops websites. Another works in grid computing. A third does cleantech business analysis. They are consultants, or contractors. What this really means that each spends a lot of time building “expertise”—a way of doing things—that can actually be applied to any number of business situations. As such, all three share a problem: Each has received some form of a Consulting Agreement from a customer that says everything my client does on customer time belongs to the customer. In time, each of my clients has turned to me to ask: How can I protect my methods while giving my customers the deliverables I am being hired to provide?

The answer is that there are no magic words that will perfectly distinguish your tools from the work product you are developing. However, paying attention to a few important details can tip the balance into your favor.

I. Mind your language
Many “customer-friendly” consulting agreements have very standard language saying that anything you develop on behalf of the customer is a Work for Hire. This is a term under copyright law that gives the customer rights to what you develop. It’s perfectly fine as far as it goes, but you want to distinguish the tools you develop from the actual work product developed for the customer. Make sure you agreement is specific about this – * your engagement agreement should say you are being hired to deliver certain “Work Product” instead of generalized services.* There’s no guarantee that this will avoid conflicts, but it shifts the burden a bit so that the customer will have to show that XYZ was Work Product and not something else.

II. Define the deliverables carefully
Going a step further, Work Product should refer to the Statement of Work at the back of a consulting contract. Too often the Statement of Work gets filled with high-level notes from an early email. Your attorney probably won’t know enough about your business to comment on specifics here, so it’s up to you to be careful. Take the time to write down exactly what you are providing with specificity – preferably that someone not in your field (e.g. a judge) can understand.

III. Retain your Residuals
Residuals are the ideas that stick in your head after you talk to people and work on things. They aren’t part of the Work Product directly – that definitely belongs to the customer. Residuals are the knowledge you pick up along the way that aren’t part of the project, but that you learned as a result of the project. It’s a really squishy concept and I wouldn’t stake a business on it, but if your ideas and toolsets are part of the value you provide your clients it may be worth providing that you own the residuals as well. Again, it doesn’t guarantee you won’t have a dispute, but it gives you a little more leverage to negotiate if the customer tries to claim rights to your toolset.

IV. Scope of License
Consulting agreements frequently include a “fallback” so that even if some piece of work isn’t considered Work Product or Work for Hire outright, you’ve give the customer a license to it. This is also well and good, but be sure you are getting paid adequately for what you give up. Is the Work Product license exclusive? Is it worldwide in any type of application or is it limited by geography, business use, target market, etc.? The more exclusivity a customer gets, limiting your ability to license to someone else, the more they should pay you for it.

IV. Consult an Attorney
General thoughts are no substitute for legal advice grounded in your company’s circumstances.

This is not an exhaustive list of things to consider, of course, but I hope it gives readers some ideas on what to watch out for in a consulting agreement. Disclaimer: Although I am an attorney, this is not legal advice.

How to work your lawyer

Jay Parkhill — Tue, 21 Aug 2007 13:51:59 GMT

“Bill Burnham”:http://billburnham.blogs.com/about.html wrote a great piece called “Understanding Why Your VC is Acting Crazy”:http://billburnham.blogs.com/burnhamsbeat/2007/07/understanding-w.html where he leads off saying “Over the years I have heard many stories from entrepreneurs expressing various degrees of frustration and mystification over a position taken by their VCs . . .”

To say that I have heard stories of frustration with lawyers would be a significant understatement. In fact, when I sat down to write this I came up with so many areas of complaint that I decided to limit the column to addressing three of them:

I. my lawyer overcharges me for tiny projects

II. my lawyer wants to take over everything
III. my lawyer misses the big picture.

I. My lawyer bills me huge amounts of money for nothing!
This is probably the most common complaint I hear. Clients ask for something simple, and it turns into a huge project, or else the lawyer appears to spend a lot of time to produce a small amount of tangible product.

I won’t speak to any specific billing practices, but keep two things in mind here:

a) Almost every lawyer is under constant pressure to bill more hours
b) Failure to understand the background and context of any piece of work is a dead-certain recipe for a botched job, sooner or later.

Put these two facts together and your simple request takes your lawyer several hours to understand and address properly. You should express your concerns here. Do it professionally and courteously, and invite your lawyer to explain why the job took as long as it did. My own guiding principle is to take enough time to get the job done right. If I need to adjust a bill to match the scope of the project to the expense, I (like most lawyers) am willing to work with my clients- so long as the relationship benefits everyone in the long term.

My lawyer wants to take over!

Web developers obsess about scalability; lawyers obsess about the inter-relatedness of things. Clients only need help with a specific issue, but there is a whole range of facts, plans and ideas surrounding it that may affect the choice among available legal options to resolve that issue.

Some clients interpret this as the lawyer wanting to take over everything. It isn’t (usually). It just means that your lawyer is worried that without all the facts s/he will end up giving you a piece of work that satisfies all your requests, but is still worthless or positions the company wrong- just what you asked for, but not what you wanted.

The flip side is that once the whole story is out, the lawyer sees a range of issues going beyond what the client initially asked for, and a simple piece of work turns into a major undertaking- and drain on cash flow.

There is a Two-Part Solution to both problems:

a) Your lawyer has a near-absolute duty of confidentiality to you as client (as long as you aren’t going to kill anyone), so tell her/him everything even marginally relevant. A good lawyer will be sure to draw that all out of you in any case.

b) Your lawyer should explain the range of options available (does all the work need to be done now? all at once?). You, in turn, need to be clear about the range of options you are willing to pursue, and in what timeframe.

My lawyer is so risk-averse that s/he misses the big picture!
Lawyers can easily get caught up in the sense that their job is to help steer the company around dangerous waters. This is partly true- a good lawyer will help you evaluate and mitigate risk. Still, since lawyers usually aren’t involved in the business’s day-to-day, it can be easy to focus only on the rocks.

You may need to brush against some rocks to reach good open water, so be aware that:

a) Your lawyer may see risk avoidance as an important part of his/her job

b) Your lawyer probably doesn’t know your business the way you do, and may not be able to see as far over the horizon.

Ultimately, it is your lawyer’s job to highlight the risks as clearly as possible, but s/he can’t decide for you whether those risks are worth running.

Digg’s “crisis”:http://www.forbes.com/2007/05/02/digg-piracy-youtube-tech-cx_ag_0502digg2.html over the 09 F9 encryption key release is a fantastic example of this. Digg community members posted multiple links to a software key that could be used to decrypt HD DVDs. Digg’s liability for hosting the links was far from certain, but there was a risk that if the huge companies behind the code chose to pursue litigation, the effort of defending it (even successfully) could have crippled Digg. According “Kevin Rose’s public statement”:http://blog.digg.com/?p=74, management decided that the risk of losing the support of its users was greater, and allowed the links to go back up. To date, the decision appears to have gone well for Digg- I am not aware that the key’s owners have taken any action.

Look for my next post: Why are lawyers so expensive?!

I’ll post this when I finish my economics degree, and the answer may or may not reference the “sand dollar hour” payment system pioneered in west Marin County, California (where every person was paid an equal number of sand dollars per hour of work regardless of specialty) and why that never gained wider use. Until then, thanks for reading. I hope this helps people everywhere understand how they can work (more) effectively with their lawyers.