Thursday, June 20, 2013

Acknowledging Everyone's Contributions Through Revenue Sharing

When I was a senior in college I worked in the kitchen at a pizza place called Lennie's in Bloomington, Indiana to make a little extra money. I made pizzas, sandwiches, pasta, and salads. I washed dishes, I coordinated the food going out to the tables, and I helped clean up at the end of the night. Typically I worked with 3 or 4 other people in the kitchen, along with 4 or 5 wait staff and a manager. Friday and Saturday nights during the school year were always incredibly hectic as Lennie's was, and still is, one of the more popular destinations in town. Needless to say, everyone was bone tired by the end of the night.

One of the lessons you learn working in the kitchen of a restaurant is the symbiotic relationship between the kitchen and the front of the house. Unless you've actually worked at a restaurant, I don't think you can appreciate the level of team work, dependency, and coordination that are involved in delivering a quality experience to the customer.

Management at Lennie's seemed to understand this and structured payment to their workers accordingly. On top of everyone's base hourly wage, the wait staff earned tips. But at the end of the night they left a percentage of their tips to the kitchen, who then divided them evenly. Sometimes if the kitchen had bailed a waitperson out in some way, say they had mis-entered a ticket and we had to remake a customer's food, that waitperson would give us a little extra to say thanks.

Fast forward 5 years to when I became a manager at a global consulting firm. They had a profit sharing plan too, but the profit target was arbitrarily set by the CFO and no one really knew how close or far away we were from hitting that target. It also felt very abstract to the point that if I saw some of that money at the end of the year, great, but I certainly wasn't banking on it. More troubling to me however was when I began selling work on behalf of the company. I wasn't a "salesman" per se, but in the course of doing business with a client, I would certainly be responsible for "inside sales" and grow the account over time. Yet I continued to make my monthly salary. I sold projects worth 6 and 7 figures, but saw no direct benefit monetarily.

The natural answer most companies go to then is a commission model. But commissions are usually reserved for sales people. Sales people are on the front lines doing the work to find new business and closing deals and they should be rewarded for that. But they would have nothing to sell if it weren't for the hard work of the teams behind the scenes. Stock options are also a tool companies use to reward employees and do technically give them ownership, but at startups and smaller companies like ours, those are far riskier than options in publicly traded companies. Options could indeed end up being worth a lot of money, or more likely, end up being worth very little.

At Inkling, we've been doing well enough that in the past few months we've hired 3 new people to join our team. In doing so, we had to think about new compensation packages and what they should entail. One of the things we're going to try is a revenue sharing and commission structure that applies to anyone in the company. Any revenue we bring in in the future, each employee gets a cut. If they are instrumental in a new sale, they get an additional cut on top of that. These cuts will be paid out the month the sale happens, not at the end of the year.

Sales matter and keep the company in existence. But sales wouldn't occur without a team behind the scenes working on a quality product. We're going to try and openly acknowledge this relationship just like it existed at the pizza place. As the guy primarily responsible for selling however, I'll try not to screw up too many orders.

Tuesday, June 11, 2013

Inkling Demoing at WorldFuture 2013 in Chicago on July 19th

The World Future Society's annual conference, WorldFuture 2013: Exploring the Next Horizon brings together the world’s premier minds to discuss the long-range future of science, technology, humanity, government, religion and many other topics. Sometimes called a “World’s Fair of Ideas,” WorldFuture 2013 will feature MIT Media Lab founder Nicholas Negroponte, visionary author Ramez Naam, Ford futurist Sheryl Connelly, and geosecurity expert John Watts.

The conference starts July 19th.

Being local folk, we've been asked to be part of the BetaLaunch event the night the conference starts, right after the Negroponte keynote. If you're attending the event, come by and say hello. It looks like it's going to be a fun conference!

Sunday, June 02, 2013

Risk Exposure as a Risk Assessment Metric using Probability Markets

Adam demonstrated how Inkling can be used as a risk assessment tool to estimate the probability of an impact occurring. This impact probability equation can be formulated as:

impact likelihood = probability of risk * impact likelihood given risk has occurred

Prediction markets are exceptionally well-suited for doing these kinds of impact assessments, especially in public policy concerns where risk probabilities are not easily derived from historical data or where public participation is an essential part of the deliberation process. You can take an impact assessment one step further by measuring the magnitude of a given potential impact with regard to its likelihood, commonly referred to as risk exposure. Risk exposure is the risk adjusted value of the consequences should a risk become realized.

Once you've derived a likelihood of an impact occurring, you can then quantify your risk exposure by multiplying the probability of the event occurring by the value of the total loss of risk.

risk exposure = probability of risk * total loss of risk

... or to calculate the risk exposure of an impact:

risk exposure = (probability of risk * probability of impact) * total loss of risk

The total loss of risk can be thought of in terms of the value of an asset, shift or loss in demand, number of people affected, value of ecosystem services, or any other quantifiable amount of utility that may be lost if a risk is realized. Total loss of risk may be something you already know, such as the value of your real estate assets or it could be a value derived from a third prediction market. For example, asking a question in a prediction market such as "how many barrels of oil could flow through phase IV of the Keystone pipeline in 2014?" will give you the total loss of risk of barrels of oil coming in from Canada via the Keystone pipeline. Multiplying that number by the probability that the segment is not built because of environmental policy outcomes will give you your risk exposure which can be weighed vs your investment. 

As a risk manager, an important thing to remember when dealing with total loss of risk exposures is that a low probability of a high loss of risk may be equivalent to a high probability of a low loss of risk. Therefore, many risk managers will construct risk matrices when evaluating their portfolio's risk exposure in order to see a full range of their risk decisions. Loss of life, for example should not be boiled down to risk exposure as a low probability of many lives lost is not equivalent to a high probability of a few lives lost. They are just not comparable.

As you can see, building a resilient portfolio is dependent upon minimizing your risk exposure. This can be done by: 1) setting aside enough resources to cover your risk exposure; 2) reducing the amount of total loss of risk you are taking on; 3) reducing your risk probability; or 4) mitigating the potential impacts should a risk occur. Finding the right balance between these 4 variables is the art and science of risk management.

We feel that prediction markets naturally lend themselves towards robust risk assessment tools. If you have used Inkling for risk management purposes in your organization please write us, we'd love to hear about it.

Pat Carolan
Inkling Markets