Stop Budgeting and Start Planning!

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Originally Posted on ActiveRain

It’s that time of year again: BUDGETING

Executives and business managers around the world are TRAPPED in conference rooms trying to create plans and budgets for the upcoming year.  And then they need to revise and rationalize their budgets after review by the CFO.  And then they need to revise and rationalize their budgets again after review by the CEO.

Rinse and repeat.  Rinse and repeat.

Why are all “budgeting” processes largely a waste of time?  Finance teams and executive team need to think about continuous strategic planning, instead of budgeting.

What do I mean?

The current budgeting exercise is a pure unadulterated tragedy of the commons.   I, as an exectuive,  throw my full budget requests into the pot as there is limited personal downside to my requesting more budget so that I or my people work less or I have greater probability of hitting my objectives.   In a company, there is limited upside in executives or managers doing more with less.  I have never seen a business manager say “increase my revenue target, ‘cause I have a lot of gas in the tank.”  Even if the CEO or CFO keep the revenue forecast flat, I guarantee that executives would start coaching the numbers down.  It’s just human nature.

The CEO and CFO of a company need to be excellent at strategic planning.  “Budgeting” should be happening everyday and there should never be a budgeting cycle where executives have a free pass to reset their expense budgets and increase headcount.

So how does the CEO and CFO move from budgeting into strategic planning:

1) Back of the Envelope Model: The CEO should maintain a back of the envelope financial model for the company.  It should not be more than 20 lines in Excel.  It should clearly communicate to every executive and employee what the key levers for the business are to achieve an aggressive revenue target.  If the CEO cannot communicate this, it is likely he or she  needs to work harder to be crisper with his strategy and how the business model works.

2) Look at Investments, Not Expenses: Every dollar of increased expenses need to be viewed as an investment with a return on investment.  Too often, managers argue to increase expenses without justifying a financial return to the business.  Any time an increase in expenses hits the CFO’s desk, the CFO should quickly understand the return on that investment in a dollar metric.  For example, the return on investment for adding a sales person, a marketing manager or an engineer should be easily understood in a common language.  That language is a simple return on investment calculation – dollars returned to the business for dollars invested by the business.   That means for every incremental dollar being spent, you should have a strong perspective on the financial return on those dollars.  The entire company should share in this mindset.

3) Aggressive Accountability: Executives and hiring managers should be held accountable to justify the return on investment for ther headcount and their expenses.  This is a really unusual thing to say and it rarely happens.  The CEO and CFO should be pushing their executives and their managers on the financial return and the investments they are making every day in their business.   The CFO should be challenging the CEO and other executives based on the underlying drivers and unit economics of the business.  The CFO should create a culture where getting resources should be reasonably hard for the company.  The CFO should be pushing managers to be creative and forcing the discussion whether we should be doing certain activities and what must fall off the plate.

Every dollar spent must be a CONSCIOUS decision.

Every dollar a company spends should be thought of an INVESTMENT, not an expense.

Once your company moves to investing from expensing, then you can move from budgeting to true planning.

Blogging on ActiveRain

Nikesh Parekh - CEO of ActiveRain

Nikesh Parekh – CEO of ActiveRain

It’s been some time since I wrote a blog post here on WordPress.  The reason hopefully is pretty obvious : since 2011, I have been the CEO of ActiveRain.com, which is the largest blogging platform and social platform in real estate.

You can find my profile at www.activerain.com/nparekh and Nikesh Parekh’s blog  here at www.activerain.com/blogs/nparekh

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ActiveRain – Largest Blogging Platform & Social Network in Real Estate

I will be blogging most actively on ActiveRain.  I may return to WordPress someday, but for now, the water is fine in the ‘Rain!

Zillow Charging for Mortgage Leads

Just saw this news today – Zillow has started to charge for mortgage leads, just like LendingTree, LowerMyBills, or the number of other companies in the space.  Zillow had entered the real estate space saying that Zillow will only charge for advertising and not enter lead generation or become part of the transaction.  The challenge is that the revenue opportunity for local advertising on a CPM basis is pretty small.  Zillow has done a great job at growing traffic to more that 10 million UU per month.  Assume that they get 20 page views per UU and a $3CPM.  That puts Zillow at a $600,00 per month in revenue or $7m in annual revenue.  The problem is that there is a finite number of in-market customers at any point.  In order to become a bigger business, Zillow needs to decide whether they go broad or deep.  i.e. Do we try to attract 20m UU who may be interested in a broader variety of home related services or go deeper with the advertising customer providing leads or becoming part of the transaction like Redfin.  Based on the below, it looks like Zillow finally decided that the market of mortgage advertisers is actually efficient and it is a bette rbusiness for them to sell leads.  Check it out.  Would be interested in hearing people thoughts.

http://blog.leadcritic.com/company-news/zillow-company-news/zillow-to-charge-for-leads

 

 

Zillow Mortgage MarketPlace Launches: LendingTree in Reverse, For Free

Zillow Mortgage

Well, after much anticipation, Zillow has launched their Mortgage Marketplace.  In typical Zillow-style, they are doing things in the reverse of the lead generation industry which generally has benefitted the consumer, which is to be applauded.  In a nutshell, Zillow’s Mortgage Marketplace requires the consumer to go to Zillow, fill out a form that is similar to a mortgage long form found on LendingTree or LowerMyBills.   The consumer is REQUIRED to register with Zillow to receive bids.  The mortgage information is anonymousely sent to registered mortgage brokers and banks on the site.  These mortgage brokers and banks then respond to the consumer with offers.  It is the then up to the consumer to follow-up with the mortgage broker to get more information.  Consumers rate the mortgage brokers based on their responses and service. 

The Positives:  In general, like most things that Zillow launches, I think it is a pretty bold service that will result  in great value for some consumers.  For consumers who want to fill out a mortgage request and receive bids and spend the time to follow-up on those bids, those consumers will likely save some time and get a good deal.   Assuming Zillow is able to build a significant market of mortgage brokers who are willing to respond to lots of different types of loans (which is the challenge in mortgage – all brokers and banks want the same loans), consumers should win through a competitive bidding process.  If the mortgage brokers were able to see how their competition was bidding and then drop their fees even further, that would be really interesting.

The Challenges: 

  • For the Mortgage Broker: The Zillow Mortgage Marketplace reminds me a lot of the HomeGain Agent Evaluator product that HomeGain launched with in 1999 or 2000.  It was a pretty innovative product that went against the grain of the industry.  Of course, HomeGain was charging a referral fee and Zillow is not, it was a challenging product in that it required the real estate agent or sales person to do a lot of work upfront before receiving contact information or having a strong sense if the lead was qualified or valid.  Lead generation as a marketing medium is challenging in that the sales person must follow-up with the leads to really understand how qualified they and on what time frame the person is going to be buying – really buying, not just what they put info into the form.  With the Zillow Marketplace, the mortgage broker must do a decent amount of work upfront before knowing whether they can even compete for the deal.  I can see a % of very motivated and hard working mortgage brokers using the Zillow Marketplace, but I think the fall off in participation will be significant if brokers feel it is not a good use of their time to respond to inquiries versus their own web sites, direct mail, or purchasing leads.
  • For the Bank: Those who have managed a mortgage lead gen business know that the business revolves around the large mortgage brokers and banks that have massive call centers that need to be productive.     The keys to these call centers are highly qualified leads and VOLUME, VOLUME, VOLUME in a very narrow set of loan parameters or filters.  Zillow Mortgage Marketplace is doing something very different than the way the mortgage industry currently operates.  LendingTree launched in 1998 and the mortgage industry has been adapting to working LendingTree leads over the past 10 years.  Now most banks have large call centers dedicated to working mortgage leads.  It has taken 10 years.  Assuming that Zillow can drive significant volume of mortgage inquiries, Zillow will need to invest in coaching the large brokers and banks on how to operationalize this kind of marketing to get them to be interested and successful.  If Zillow can not drive significant volume, I doubt the big banks and brokers will participate at all.
  • For the Consumer:  BankRate and many of the reputable lead generation firms like LendingTree and LowerMyBills spend a significant amount of time and resources on assuring ethical lending practices, fraud prevention, and preventing predatory lending.  Zillow should easily be able to address this, but consumers should be wary of the different participants in the Zillow Mortgage Marketplace, especially initially until the mortgage rating system is viable.

Zillow continues to be an amazing company.  In real estate, Zillow gives the home valuation information away for free making up the the gap between the $1-3 banner ad CPM in real estate and the  $250 lead gen CPM with volume of consumer impressions.  Now in mortgage, they are giving away free leads to mortgage brokers and banks.  Those leads when monetized by 3 lenders are worth close to $200 a lead.  I assume Zillow is planning on long-term relationship with the consumer and targeted banner advertising opportunity at a CPM ranging from $30-90 on sites like BankRate.

Regardless, Zillow is fun to watch.  My five year ARM is coming to a close and I submitted a lead on Zillow.  Can’t wait to see what happens.

A Tale of Two Cities: Yahoo vs. Google

      

It’s rare for me to discuss an article in the Seattle Times or San Jose Mercury News, but a good friend of mine David Eraker, CEO of Mindsite and founder of Redfin, saw this one.  Great review of the relationship of Yahoo and Google and how the battle between Google, Yahoo, and Microsoft was foretold in nascent business development relationships from the early 2000’s. 

As someone who has spend a significant part of his career working the backrooms and lobbies for business development and corporate development (I am on the advisory board for the University of Washington’s Business Development Certificate Program), I thought it was a very interesting article of the power of good business development in terms of relationship building in the industry.  Clearly Google has been pretty tactical in their business development or corporate development activities over the past nine years.  It seems like that business development really set the stage for Google ascent to power.  In many companies, business development is an amorphous function that has limited power and limited ability to forecast landscape changes or drive new opportunities for the companies.  Companies that do not invest in business development (especially on the Internet) and enable business development professionals to drive revenue or change can really miss out on big opportunities. 

More on good business development to follow soon. 

HERE IS THE ARTICLE: Yahoo Pays the Price for A Good Deed to Google  

Zillow Launching Mortgage Offering to Compete with BankRate

 VS      

There is no doubt that BankRatehas the most powerful business model in the online finance world.  They have established themselves as the “gold standard” web site for consumers when checking interest rates on home mortgages.  BankRate provides objective information on interest rates and loans and then has rate tables where they list the rates from local banks and mortgage brokers.  Just like movie trailers, the best part of their business model is that the advertisement is the entertainment or the content that consumers are looking for.  Tom Evans and Steve Horowitz engineered an Internet Hail Mary for BankRate in 2005 when they shifted their business model from a paid listing business to a pay per click business that really scales with traffic.  Since early 2005, the BankRate stock has soared from about $10 to $40-50 a share.  It would probably be higher if not for the real estate and mortgage mess the country is facing.  Interestingly, BankRate is one of the only companies in the space that is not seeing wide spread defection from customers. 

Though it has been rumored for months, Zillow just announced that they are getting into the mortgage business.  It is unclear what the business model will be.  VP Jorrit Van der Meulen posted on the Zillow Blogthat mortgage brokers and banks can apply for FREE access to Zillow traffic.  Mortgage brokers have to pay a $25 application fee.  Limited additional details are available.  This is certainly an interesting opportunity for Zillow.  The Zestimates has been very powerful in the real estate industry enabling consumers to do some homework when considering refinancing their house.  Now it seems like Zillow is looking to either commoditize the mortgage lead generation players like LendingTree and LowerMyBills or go straight after the BankRate rate tables

Maybe they won’t charge the brokers for it and just make money from the advertising around it.   Zillow is a bold company.  They have taken the unusual approach of not charging the industry for advertising, but trying to surround the information with banners from Lexus and Pella windows.  The online real estate industry has always believed that best monetization of those eyeballs are from the real estate industry players (real estate agent, brokers, mortgage brokers, banks) and not the associated services. 

Zillow may just prove conventional wisdom wrong…  Or not.

Great Overview of Online Local Advertising Options

Here is a great run down of all the major models for local advertising and the current pricing of the major players.    It is probably the most comprehensive list that I have seen.  Note the variety of models from slotting (monthly subscription) to pay per click to pay per call to search engine optimization for a fee.  Take a look.

Internet Advertising Matrix