Advice for First-Time CA Home Buyers - My Experience Buying a Condo (part 1)

Having spent the last 12 months buying a home, a condo to be exact, I want to document and share my experiences so that others may learn from it.

Basics: Condo in Southern California
Previously sold in 2006 for ~$450K; Short-sale.

Buying a home can be a long and complex process. As a perfectionist, I wanted to understand everything. But even with a good head on my shoulder, I quickly found there is too much to read and understand. If you are juggling full-time work plus buying a house, likely, you won't have time to read and understand everything.

Tip 1: Don't try to understand and micro-manage everything. There is simply too much information. Instead, prioritize and get the most important pieces of information correct.

I started the home buying process by doing some general research (e.g., reading a whole lot of "first-time home buyers" type of info. Looking back, I it was an disorganized process and I probably read and re-read a bunch of information that I didn't know exactly how to use.

Thus, to help you, first I'll summarize the key people you'll have to deal with throughout the process.

1. Buyer: YOU
2. Buyer's Agent: The person showing you the homes, "helping" you through the process.
3. Mortgage Broker / Direct Lender: The person(s) giving you the loan to buy the property, unless you are paying all in cash.
4. Escrow Agent: The person helping with the closing process, making sure what the Buyer and Seller are doing is compliant with various instructions and regulations.
5. Title Agent: The person giving you title insurance for the property.
6. Homeowner Insurance Agent: The person giving you hazard insurance (fire, flood, earthquake).
7. Homeowner Association / Homeowner's Association Mgmt Company: If you are purchasing a property in a planned community, the community association.
8. Seller's Agent: The person helping the Seller sell the home.
9. Seller: The current person trying to sell the home.
10. Seller's Lender: The lender(s) that own the loan on the property you want to buy, if there is a loan.
11. General Property Inspector / Pest Inspector / Appraiser / Others: Other folks you'll have to talk to likely at some point in time during he process. More on some of these folks later.

As you can see, there are a lot of people involved in the process. I definitely didn't recognize this until I reflected back on the process a few days before closing. Most likely, when you start shopping for a home with your Buyer's Agent, he or she won't tell you all of the above. He or she will just start asking you about what house you want to buy and show you around. Not the route I'd go, but let me tell you why I think most Buyer's Agents don't tell you the above:
1) tell you all this information takes a lot of time and you might be only a potential client. If I spend all the time educating the Buyer but the Buyer uses another Buyer's Agent, I'd have wasted a lot of time for little gain
2) if most people knew how complex the home buying process is going to be, they'd walk out the door

Tip 2: Learn what role each of the person above will do for you. Research it online. Ask your Buyer Agent. (Some of the folks will be recommended by your Buyer's Agent.) In any case, your Buyer's Agent is there to "help" educate you, but recognize that he or she won't help with everything.

For me, I began by interviewing a bunch of Buyer's Agent (as recommended by several websites) before picking my agent. Good evidence in general, but pretty useless in hindsight. Why? Because even after spending time doing a bunch of interviews, in hindsight, my Buyer's Agent didn't live up to my expectations (perhaps my expectations are high).

Tip 3: Interview a few Buyer's Agent and pay them some money to ask an experienced agent to go through the ENTIRE home buying process with you. For first-time home buyers, the more knowledgeable education you have ahead of time, the better the actual process. While most agents are going to say "I'll be there to guide you when it's time", usually, guidance at that point in time is too little too late. Recognize that once an offer to buy an house is accepted, there is only typically 17 days to get everything done and you likely have a job to balance at the same time.

My first agent: I picked because he had 1) great credentials, 2) good recommendations from past customers that I personally called and 3) lots of experience (been an agent for 10+ yrs). But after I started working with him, he started handing me to his daughter (also an agent) to lead. I didn't mind that at the beginning, but wasn't the excited about the idea.

Perhaps I didn't have the right working style and had asked more questions than typically, but ultimately our relationship didn't work.

My second agent: I picked someone again with experience and specific knowledge of the condo area I was looking to purchase. She's been extremely helpful to getting everything together and pushing me to make decisions. Again, an extremely nice person, but overall, I didn't feel I got everything I had "expected" from my agent.

I think its partly because I couldn't really trust my agent to act in my best interest knowing the incentive structure for an agent (more on this later) and partly because I wasn't always the most communicative with her about all my intentions (again, back to the incentive structure).

Tip 4: Having a Buyer's Agent who is willing to educate you and put you first is the most important. If you are smart and hardworking, you can probably pickup all the other pieces of information. But an experienced agent who can tell you about the pitfalls is key. The fundamental problem for first-time home buyers is that there will be questions you do not know you need to ask until too late. That's where a good Buyer's Agent comes into play.

But recognize most good/great agents probably don't like first-time home buyers. Why? Several reason.

1. First-time home buyers are more needy and require more hand holding, as you can see from this post.
2. First-time home buyers typically buy smaller/cheaper homes => resulting in smaller commissions for the Buyer's Agent.
3. First-time home buyers may talk to multiple agents before either picking an agent or not going through with the process => thus if the first Buyer's Agent spends a lot of time educating the first-time home buyer, he/she would have wasted time with no gain.


Note: Incentive structure for Buyer's Agent. Buyer's Agents get paid by the Seller. It seems odd to me that they get paid by the Seller, because they technical have a duty to put the Buyer's interest first. Inherently, the current incentive model creates a conflict of interest in my mind, but recognize there is probably little way out. While you might structure a different kind of incentive structure (e.g., Buyer pays Buyer's Agent a fixed fee), most Seller's property listing specifically states the commission percentage for the Buyer Agent when the property is sold. Thus, even if you pay your Buyer's Agent and the Buyer's Agent doesn't pick up the typical commission, the Seller's Agent just gets to keep more.

After touring a couple of different properties with my 2nd Buyer's Agent, I quickly knew 1) what I liked and didn't like and 2) the type of property I could afford given my budget. Hopefully, you've already created a budget way before even starting the entire house hunting process. With a set of fixed criterias (e.g., location, purchase price, must haves, nice to have, etc.), searching for the "right" property for you should be simplier. When you finally find that property you want to buy, then comes the offer stage. But one quick detour before I get into the details.

In the Southern California market as of 2011, you will find a large percentage of the listed properties to be either short-sales versus standard sales/REOs. (I am not covering foreclosure auctions, because that's an entirely different ball game.) Let's understand the difference between a short-sale and a standard sale/REO.

Short-Sale: Seller typically still lives in the proerty and holds title (i.e., "owns" the property). However, Seller is trying to sell the property before the bank forecloses on the property because the Seller can't/doesn't want to pay the mortgage. Furthermore, the Seller is trying to sell the property for less than that is owed on the mortgage to the lender and the lender must forgive/write-off the difference (i.e., accept the short-sale.

Standard sale/REO: Standard sales, as the name suggests, are normal transactions. REO (Real Estate Owned) are sales of the property directly by the lender. Typically, the lender has already foreclosed on the proerty and held a foreclosure auction, but no buyers were found. Thus, the lender took control of the property.

My experience is with short-sale properties given the market condition. Let me illustrate: The condo I purchased previously sold in 2006 for a little north of $450K to a Mr. K. Mr. K took out two loans, a 1st and 2nd (junior loan to the 1st) from New Century Financial Corp (look them up Wiki...interesting history) to buy the property, basically paying 0% down. At some point, Mr. K couldn't pay the mortgage anymore. Mr. K was therefore in default and the lender started the foreclosure process on the property (i.e., to take the property from Mr. K.). Instead of going through the entire foreclosure process, Mr. K wanted to try to sell the property before the lender foreclosed (short-sale is better than foreclosure from a credit reporting POV). Mr. K put the condo on the market for around $290K. This is a short-sale because to get the sale completed, the lender must forgive/write-off $170K because as the Buyer, I would only pay $290K for the property.

Tip 5: Understand if you are buying a standard sale/REO or short-sale. Next, understand if it is an approved short-sale or not.

Because Mr. K wanted do a short-sale, he has to get the lender to approve this $170K write-off. An approved short-sale means the Seller has already gotten the lender to commit to XX dollar of forgiveness. So, if the Seller is listing an approved short-sale property at $290K, the lender would have already approved at least a $170K loan writeoff if the original loan was $450K.

Knowning whether the short-sale is approved is important for 2 reasons.
1) All Buyer's Agents prefer approved short-sales because they are faster to close whereby the Buyer's Agent can collect his/her commission faster
2) Getting approval for a short-sale can be a time consuming process (weeks if not months). This is also another moment to reiterate why you want an experienced Buyer's Agent to guide you through the process.

Note: Put yourself in the shoes of the Buyer's Agent. Because you get a commission from a sale, you want to generally guide people to standard sales, REOs, or approved short-sales before non-approved short-sales because the time to closing the home is faster. Who doesn't want to earn money faster? You got kids to feed and stuff to buy too.

As the Buyer, you have little influence on the short-sale approval process. In this stage, the Seller, Seller's Agent, and Lender must work out the details. A good Seller's Agent can be very helpful to guiding the Seller to get all the paper work to the Lender so the Lender can approve/reject the short-sale. But again, as the Buyer, its all comes down to luck. Now, if the Seller's Agent doesn't know what to do, the Buyer's Agent can help the Seller's Agent through the short-sale approval process. (Another reason why a good Buyer's Agent is important).

Once you know whether the property is a a short-sale or standard sale/REO and if its an approve short or not, now comes the offer. If it is not an approved short sale, recognize that you will be helping start the short-sale approval process (2 - 6 months) to get the lender to approve/negotiate/reject the short-sale. During that time, recognize that the Seller is in default on the mortgage (i.e., not paying the mortgage), thus the property can be foreclosed by the lender. Also recognize that even if you made an offer and the Seller has started the short-sale approval process, the property can still be foreclosed by the lender and go to foreclosure auction whereby it is either bought or not. Recognize that if it is not bought (i.e, becomes REO), the lender may not relist the property immediately.

I don't know exactly why the short-sale approval process takes a very long time, but I suspect its because
1) Seller has to get all the paper work to lender and Seller is slow getting such paperwork
2) Given the current market, lenders probably have tons of short-sale approvals to review. Recognize that each time there is an approval, the lender is taking a guaranteed loss and people don't like losses.
3. Multiple different lenders maybe involved the there are multiple loans for the property. These lenders have to work together, which isn't easy.

Tip 6: Buying short-sale properties requires patience and options. If you are set on buying a particular short-sale property, recognize that you may not get it, because 1) lender(s) may not agree, 2) Seller's Agent can't get the Seller to complete the short-sale process, 3) Seller may not qualify for short-sale, 4) lender may decide foreclosure is better because foreclosure auction can fetch a better price. Therefore, have backup properties in mind and make offers to more than 1 non-approved short-sale property if you are comfortable living in another property.

Now, after that long detour, we finally get to the Offer or what will be call the Residential Purchase Agreement (RPA). This is basically a long document where you make an offer to the Seller for the property and it lists out a whole set of information.

Tip 7: Find a blank RPA and read it. The California Realtors Association should have a copy somewhere online.

The RPA has all kinds of information, but there are a couple that are key:
1. Offer price and earnest money deposit
2. Loan rate and type
3. Inspection period before you can cancel offer limited financial impact

Most of the other information on the RPA are disclosures and notices of one type or another. I'll talk about one key disclosure in detail that applies specificallyl to short-sales: General Home Inspection.

Because a short-sale requires lender approval since the lender has to write-off some part of the original loan, lenders are very fixed on pricing. Once you make an offer for the purchase price of the property and it is approved, there is generally no room for further negotiations. Don't imagine there are necessarily several rounds of back and forth. Nor do you really want several rounds of back and forth. While it will only take you may a few minutes to come up with an offer price, your offer goes into some pile at the lender for some person to review and get back to you. Likely, you aren't the only offer because there are a lot of short-sales at the moment. Thus, you might wait weeks before the lender gives you an yes or no of an offer or re-offer.

So, let's say you offer $200K for a property and the offer is accepted by the Seller. (By the way, while the Seller will probably accept just about anything offer, its the lender who has to agree to the terms). So, now the offer goes to the lender for approval. In that time, you hire an home inspector to look over the place and the inspector discovers that most of the appliances are bad and the water heater has to be replace at a total cost of $2K. At that point, if your original offer is accepted by the lender, it is very hard to even negotiate a $2K discount. Basically, you'd have to withdrawal your original offer and make a new one for $198K, starting the lender review/approval process of the short-sale all over again.

Tip 8: Find a good home inspector (certified, with years of experience) and hire him/her to inspect the home prior to making an offer.

A home inspection in Southern California runs anywhere between $250 - $350. It isn't cheap, but you'll need to have someone inspect the place anyways. Don't be penny wise pound foolilsh here. Unless you are a general contractor or inspect, you'll need someone.

Note: Most inspectors will give you a report and in it, it'll list some mundane problems and some series problems that require repairs. A good inspector is someone who is willing to speak honestly to you and tell you which are series and which aren't. Many inspectors will simply tell you that he/she thinks there is a problem, but you need someone more specalized to look into the issue. For the general public, that's not very helpful information, but due to lawsuits, inspectors have gotten more and more "conversative" about the advice they'd give. Thus, find an inspector who is willing to do everything by the books, but also speak to you freely and offer advice on the property.

After you've inspected the property and you still likely it, you are ready to make the offer...but before you start, let's take another detour to explore "how to get a loan."

If you are like me, you probably require a loan to buy a house because you don't have tons of cash lying around. Therefore, you will need to speak to a mortgage broker/direct lender to get a loan. Given there is too much information on mortgages, I'm only going to cover the most basic (for more, please google Mortgage Professor).

Mortgage Documentation:
You are going to have to get quite a bit of documentation ready to get a mortgage. Gone are the days of no-doc loans. I had to have at least the following (you may require more if you have credit issues, income issues, or anything else).

-Valid ID (i.e., driver licenses)
-w2 statement
-last two month paystubs
-last month bank statement (front and back)
-last three years federal tax return

With the most basic information, the lender is going to run a credit report on you to get your credit score. This score while influence the interest rate for your loan. Now, I went with the most simple of loans (conventional, 30yr fixed, no points, 20% down, no PMI). Again, because picking a loan type (e.g., fix, ARM, w/points, no points, downpayment %) is an entire topic on its own, I'd suggest you go to the Mortgage Professor website and read up all about it.

Tip 9: If you are doing all the homework regarding the type of loan you want, a direct lender is the best route to do. Generally, they are the cheapest route because a mortgage broker typically buys from a direct lender, who does the underwriting for the loan. However, recognize that as a first-time buyer, you won't get a lot of hand holding from direct lenders. This isn't to say all mortgage brokers are better, but generally, at least brokers can talk to you and educate you about the process.

Once you pick the lender, write down all his information (company, address, contact person, phone). You'll need to provide this information later to Escrow. Now, onto the formal mortgage application process and opening of escrow, assuming your offer has been accepted by the lender.

Note: At this point, I'd like to talk a little bit about paperwork. All this process creates a lot of paperwork. The offer requires a RPA. If there is an counter or amendment to the RPA, there's paperwork. The Buyer's Agent will give you paper notices/disclosures about the Short-Sale process. At this point, most of the paper work, except the RPA, is just that, a notice. It seems all important, but a lot of is really "junk/educational" paper in my opinion.

Once the lender accepts the offer, you as the Buyer have a set number of days to open escrow and being the formal process of inspecting and completing or cancelling the transaction. At this point, things get real! Why? Because if you recall, you signed a RPA and made an offer. In that RPA doc, you stated that if the offer is accept, you (BUYER) will have certain obligations and you signed you stupid name on that piece of paper.

So, first obligation is to give the earnest money deposit to the Escrow Agent. Who is the Escrow Agent? Either you've already stipulated that or more likely, the Seller/Seller's Agent/Lender has stipulated the Escrow Agent. In any case, it's stated the RPA when you submitted it. Now you know why the RPA is important.

Tip 10: Have a personal check ready with the funds for the Escrow Agent written on, but not signed. This will move this process forward very quickly without you having to "wire" any funds to the Escrow Agent, as your Buyer's Agent may suggest (to the detriment of your wallet).

Once you hand the Escrow Agent the earnest money deposit and escrow opens, the clock is now ticking. As stated in the RPA, you have a certain number of days where you can still pull out from the transaction (i.e., walk away). After that day, you may 1) not be able to walk away from completing the transaction or 2) be able to walk away, but forefit your earnest money deposit plus additional compensation. Again, this is why the RPA is important, even though many agents may ask you to just sign and state that it's only an offer.

To open escrow, you will now meet your Escrow Agent and sign opening escrow papers. These documents are very important. Review the documents and compare them to the RPA. If it is a short-sale, in all likelihood, some of the things you listed out in the short-sale has/is not approved by the lender. In other words, that $500 dollars you wanted the Seller to give to you to help pay for repairments, the lender probably said no. Also, those 1 yr Home Warranty plans you wanted is also probably out the window. Why are these things gone?

1. The original lender is doing a large write-off. If the Seller is paying you anything out of pocket, the original lender is basically saying that "I [lender] should be getting that money or the Seller shouldn't have any money because he/she can't even pay the mortgage."
2. If the Seller doesn't have any money, then the Lender is technically paying these other expenses and the lender is basically saying no.

So, review the opening escrow docs carefully.

Note: The escrow doc will also list out certain obligations the Escrow Agent "must" perform. Once you sign the docs, the Escrow Agent will do what the doc says and use the earnest money deposit you in to pay for some of those activities. Example: Notify the HOA for and get HOA incorporation docs and various other information. Start the preliminary title insurance.

Next, you are now also going to formally start the mortgage application with your lender. But before I talk about that, let's take detour number 3 and talk about closing costs briefly.

Note: Most important part of this application is to lock in the interest rate and get a formal Good Faith Estimate for the cost of the loan.

To buy a house, there are various expenses, which I'll call closing costs for this article. I've group closing costs into three categories and provide you my experience.

Mortgage/Loan Costs:
1. Origination Fee - Technically, cost to "originate" start the loan.
2. Underwriting Fee - Technically, cost to research and underwrite this loan.
3. Processing Fee - Technically, cost to get the loan through the "proces."
4. Lender Wire Fee - Technically, costs to wire funds between parties (my lender to original property lender)
5. Appraisal Fee - Technically, cost to hire someone to appraisal the price of the property as part of underwriting
6. Flood Cert - Technically, getting a certificate from a third-party regarding flood information for the property (underwriting related)
7. Tax Service - Technical, cost for tax related expenses, especially to manage an escrow account
8. Credit Report - That credit report you got earlier, you're paying for it.
9. Interest for Partial Month - If you close your loan say on the 25th, this it he interest from the 25th to the end of the month.

With the exception of 9, all of the above can vary and technically, there is room to negotiate with your lender. Obviously, if you put your self on the lender side, you want to make as much money from the Buyer as possible, so you can create or pass through various costs. Another way to look at it, the lender could eat the cost in certain areas by "waiving" or discounting the costs.

For my loan of $200K, I basically paid $2.5K or 1.25%. I'm not sure if that's great or terrible, but based on my research, loan costs should be between 0.5% to 2% of the loan amount.

Escrow Costs:
Courier Services - Technically, cost to send things overnight. A lot of the documents, especially the notarized docs need to be sent to the lenders overnight so you have to pay for this fee.
Notary Fees - Technically, the cost to notarize the various docs, but more likely, source to make some money because your Escrow Agent generally has the notary powers.
Admin Fees: - Got to have an official place for the Escrow Agent to make money somehow for his/her service.

I paid $1K.

Title Insurance Costs:
Owner's Title Insurance - Price for insuring the Buyer
Lender's Title Insurance - Price for insuring the Buyer's Lender

I paid ~$1.5K

Note: Title insurance is ensure that other parties do not have some lien on the title, which will be passed from the Seller to Buyer (you). Lenders require, at a minimum, you buy Lender's Title Insurance so that the loan amount is protected.

Hazard Insurance (Fire, Flood, Earthquake): Insurance you have to buy, various depending on what you buy, but your lender/loan type will tell you the minimum you have to buy to get the loan. This is where you talk to that Insurance Agent.

Government Costs: Various government taxes and administrative expenses. Not much you can do about them, but you should be able to get these figures early on in the process.
Grant & Deed
Property Tax
Summplemental Property Tax
Other

Most of these costs various significantly between state to state and even county to county. Also, property tax depends upon the size and state you live in.

HOA Costs/Community Association Costs: To be honest, this is all administrative fees to the HOA management company. I have no control over the fees, but basically, it is a way for the HOA to make money.
Upfront Demand Fee
Move in / Post Closing Fee
Transfer Fee

I paid close to $1K to my cringe.

Inspection Costs
1. Pest Report - Technically, a report to discover if you had some fungus problems or rodent eating through the drywall
2. Home Inspection Report - Cover prior
3. Others - You can get a ton of different type of inspections (Radon, Heating, Roof, etc.). The sky is the limit, but you have to ask yourself, what's the risk/reward trade-off at some point.

I paid close to $400, to my delight.

Other Costs
HOA Dues - You pay dues for the following month to the HOA + any penalties that the Seller may have incurred if the Seller is late or owes money.

more to this later....

Winner of the 2010 Doorpost Film Project

The Man Who Never Cried from Bradley Jackson on Vimeo.

Multi-Sided Platforms Using non-pricing to influence

Two Step: max value for entire ecosystem created by platform -> max value extracted for platform.

Besides using pricing as a way to regulate and influence platform participants, platform owners have a range of non-pricing tools.



1. Increase/decrease affiliation barriers (entry barriers)

a. Restrict participant access [promote growth, reduce negative externalities to find the “right” type of affiliates]

i. Pricing (set a fee)

ii. Non-pricing (group, industry, category, invite-only)

b. Improve documentation and usability

i. Additional information

ii. Easy to navigate [Website refresh]

c. Define competition among affiliates

i. Winner-take all approach [market concentration of winner or only-one policy]

1. Funding awards

a. Ex-ante (participants submit an idea, the best idea get’s funding)

b. Ex post (participants all work on the same idea, the best execution get’s the funding)

2. Certification programs

3. Certification applications

4. Information share:

a. Ranking of developers [based on number of applications, number of kudos drive incentives on how they work]

b. Ranking of best application

5. Setting rules for facilitating interaction between affiliates (seller/seller, buyer/buyer, and seller/buyer)

d. Limit/Encourage interaction between participants [smaller network groups]

i. Community events

ii. Platform specific benefits for affiliates [differentiation from stand along channel where seller affiliates interacts directly with buyer affiliates]

iii. Encourage exploration rather than find and go [Where to implement this in a developer community]

e. Management of reputation and former affiliates





Developer motivations [Thus a cash prize may only affect on aspect] Thus need to non-pecuniary incentives.

• Intrinsic

• Learning from work

• Career concerns

• Status

• Community recognition

• Community affiliation



Extreme competition is itself a great motivator for developers.



Source. Platform Rules: Multi-sided Platforms as Regulators Kevin Boudreau and Andrei Hagiu.

Payment Basics 101

Recently, I've taken a position working in the payment space. As part of bring myself up to speed on payments, I've had to perform quite a bit of research.

To help others, I've decided to aggregate some of the best articles written about the payment space (see source). Below is my quick summary, which helped me remember all the stuff I had to read.

Payments 101
Payment Defined
To understand payments, it is important to have a standard definition. According to the Federal Reserve Bank of New York, payment is defined as “a transfer of value. ” But what does this transfer of value mean?

Celent, a division of Oliver Wyman expands upon this by stating that payment is a transfer of value between two parties using a value token or payment instrument. First, it is important to point out here that without another party, there can’t be a transfer of value (e.g., moving money from your pocket to your desk doesn't equate to a transfer of value). Second, the value token or payment instrument is important because it facilitates the transfer of value.

Payment Instruments
There are many payment instruments. In barter economies, the payment instrument is the good or service exchanged. For modern economies, money is generally the accepted payment instrument . However, other payment instrument exists such as check, credit cards, bank transfer, and stock transfer. Generally, these other payment instruments must be linked to money for the payment instrument to be “broadly useful.” Otherwise, the payment instrument will only be limited in usability and acceptance (e.g., Monoploy money is only good in the game of Monoploy for buying property and houses. You couldn't use the paper money to as a payment instrument for other goods or services outside the game.)

Credit Card as a Payment Instrument
The idea of a credit card “dates back to the early 1800s. While plastic wasn’t used then, merchant and financial intermediaries did extend credit on durable goods.” Thus, in the early days, the credit card was primarily a credit instrument rather than a payment instrument .

“In 1950, Diners Club launched the first general merchandise charge card. It was primarily used for travel and entertainment expenses for a more well-to-do customer.” This card did not have a revolving credit feature because all bills had to be paid by the end of the month. The first general credit card, the BankAmericard, was launched in the 1950s by Bank of America. “At the time, banking regulations limited the geographic reach of individual banks, so Bank of America found it difficult to compete with Diners’ nationwide access. To overcome this limitation, Bank of America licensed their card to other banks. Initially they were successful but soon became overwhelmed with the administrative task of processing all of the paper slips from member banks. In effort to address the growing needs, Bank of America decided to spin off the organization and it eventually became known as Visa. In light of Bank of America’s success with their card, a competing network of banks launched a third network in 1966 known today as MasterCard. American Express was launched in 1958 and Sears, Roebuck, and Co. launched the Discover Card in 1986.” (Braintree)

How Does a Credit Card Work?
To understand how a credit card facilitates the transfer of value (i.e., exchange of money) as a payment instrument, “it is important to first understand the participants and the models under which they operate.” There are two distinct models: open-loop and closed-loop. Visa and MasterCard operate in the open-loop model while American Express and Discover operate in the closed-model. (PaymentsRus)

Open-Loop Model Participants
There are at least five distinct parties involved in an open-loop model that work together to enable credit card. They are the following: Cardholder, Merchant, Card Issuing Bank, Acquirer (i.e., Acquiring Bank, Non-Bank Acquire, Acquire Processor), and the Card Network (i.e., Visa or Mastercard)

1. Cardholder: End-consumer (Party typically procuring a good or service from the merchant) who has been issued a credit card

2. Merchant: Provider (Second party typically selling or providing a good or service to the customer) who accepts credit cards

3. Card Issuing Bank: Financial institution that issued the credit card to the cardholder

4. Acquire: Financial institution that provided the merchant with the capability to accept the credit card and ensure the Merchant is paid

5. Card Network: Organization responsible for setting the payment scheme (e.g., rules that define the rights and obligations of all the involved parties, technical and operating standards, settlement framework, liabilities and dispute procedures, and other key, aspects of a payment transaction) and managing the physical payment network.

Typical Transaction
1. The Cardholder uses the card issuing bank’s credit card to pay for goods or services provided by the merchant
2. The Merchant submits the card transaction to Acquirer for processing
3. The Acquirer submits the information to the appropriate Card Network
4. The Card Network routes the transaction to the appropriate Card Issuing Bank for approval
5. The Card Issuing Bank either approves or denies the transaction based on various factors and passes the information back to the Card Network
6. The Card Network relays the information to the Acquirer
7. The Acquirer Bank relays the information to the Merchant and thus Cardholder

Above is the most basic example of a transaction using a credit card in a open-loop model. It should be noted that additional parties are often also involved. These parties may include a processor (i.e., acquire, acquire processor, payment gateway) or a reseller (i.e., Independent Sales Organization: ISO, Merchant Service Provider (MSP). Furthermore, it is also possible for the Acquirer and Card Issuing Bank to be the same for any given transaction. This type of transaction is called an “on-us” transaction, but still passes through the card network.

Closed-loop Model Participants
The fundamental difference in the closed-loop system is that the Card Issuing Bank and the Acquirer are effectively the same. With closed-loop systems, we will discard the term Card Network because there is no independent organization like Visa or MasterCard arbitrating between an Acquirer and a Card Issuing Bank. In this case, the simple term Bank will do and the primary Banks in the U.S. are American Express and Discover. The typical transaction process is similar to the open-loop except the Acquirer, Card Network, and Card Issuing Bank are the same party. Thus unlike Visa and Mastercard, American Express and Discover also issue credit cards and enable merchants to accept their cards.

Merchant Discount Rate/Merchant Service Charge
To accept a credit card as a payment instrument, Merchants must pay a Merchant Discount Rate/Merchant Service Charge (i.e., Discount Rate) to the Merchant Bank. This fee is typically calculated as a percentage of the transaction amount plus a small fixed fee. The fee varies anywhere from 1 – 5% + $0.10 - $0.50 . [This data is applicable only to the United States. Merchant Discount Rates may differ significantly in other countries.]

The money collect from the Merchant Discount Rate/Merchant Service Charge is then split among the Card Issuing Bank, Acquirer, and Card Network. According to Braintree, the Card Issuing Bank captures anywhere from 70 – 85% of the fee and the Acquirer (and its processor if it is outsource) and the Card Network split the remaining 30 - 15%. The first fee that is collected by the Card Issuing Bank is called interchange. To be precise, this interchange fee is not paid by the Merchant directly. Rather, the Card Network take a portion of the Merchant Discount Rate that is the Interchange and transfers it from the Acquirer to the Card Issuing Bank.

Interchange
The calculation of interchange is dependent upon various factors. Four main factors, according to Visa/MasterCard are: type of card (e.g., general, commercial, reward), merchant size (e.g., processing volume > $xx), processing mode (e.g., swipe, manual key in, card-not-present), and merchant category (e.g., retail, grocery, software).

Acquire
Now that we are a little more familiar with the terminology, it is really more appropriate to understand that there are actually two categories of Acquiresr: traditional banks (e.g., Fifth Third Merchant Services and Wells Fargo Merchant Services and non-banks (e.g., Chase
Paymentech, Heartland Merchant Services). While both are required to be licensed as a member of the Card Network, they differ in that the non-banks focus specifically on merchant acquiring business. Since I mentioned earlier that the Card Issuing Bank captures the majority of the revenue, banks have traditionally focused more of their effort on issuing cards rather than signing up merchants. Thus, according to the Aite Group, the non-bank acquires make up the majority of acquires.

Sources:
1. CREDIT CARDS: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges (Nov. 2009 by GAO) http://www.gao.gov/new.items/d1045.pdf
2. Taxonomy of Payments: Part I and Part II - (July 2010 by Zilvinas Bareisis: Celent, a division of Oliver Wyman)
3. Theory of Credit Card Networks: a survey of the literature (2001 by Sujit Chakravorti:FRB-Chicago)
http://ideas.repec.org/a/bpj/rneart/v2y2003i2n1.html
4. AN INTRODUCTION TO THE ECONOMICS OF PAYMENT CARD NETWORKS - [2003 by Robert M. Hunt:FRB-Philadephia] http://ideas.repec.org/a/bpj/rneart/v2y2003i2n3.html
5. Merchant Acquiring An Overview - (Feb. 2008 by Adil Moussa: Aite Group, LLC)
6. Where do credit card fees come from - (June 2008 by Bryan Johnson: Braintree)http://www.braintreepaymentsolutions.com/blog/where-do-credit-card-fees-come-from-cc
7. How payments work http://www.paymentsrus.com/additional-articles/credit-card
8. Various other sources:
http://www.virtualschool.edu/mon/ElectronicProperty/klamond/credit_card.htm
http://en.wikipedia.org/wiki/Payment
http://money.howstuffworks.com/personal-finance/debt-management/credit-card1.htm
http://en.wikipedia.org/wiki/Credit_card_number
http://en.wikipedia.org/wiki/Payment_card

Back from a long break

After two months of really nothingness, I'm back in the work slot. This actually feels a little different having not worked for such a long time. Tomorrow, I'm slated to wake up early in the morning and go to work. This might sound normal, but this time, I'll have to catch the bus, transfer to the metro and then transfer to another bus. Quite a communte, which is something new to me.

What is also new is the client and business. This will be the first time I'll be working for a resource company. I don't know much about resources, but from what I have gathered, they are slow and conservative. It should be an interesting new change. Now, I've got to figure out what I'll be doing on my 2 hour communte everyday. I have one book already, but I think I'll try to write a novel or short story. What would be an interesting topic?

How about, the death of Mark?

Coming back...with What's a Food Distributor

I've been away from writing for some time. It seems the last time I had a chance to write was prior to my vacation in Hong Kong. That was in May and it is now September...make that October. Time sure flies when you're having fun...or working.

So, what have I been up to recently? Let's talk about my last project and what I learned.
I finished about a month ago at a food distributor in Chicago. What's a food distributor? I'm glad you asked because prior to this project, I didn't even know such a business exist but it is all very logical if you think about it.

It seems that resturarnts needs to obtain food of decent quality and consistent prices. Now, your nice, top of the line famous bistro down the street might have the chef walk around the farmer's market every day at dawn to pick up the freshest and nices produce. However, the reality is that most of resturants in America don't have that luck (I'll touch upon this notion later). Rather, most resturants in America order from a food distributor. Food once order are then delivered directly to the resturant.

As a distributor, the there several very important components to your busy. One of the key is order entry with managing the supply chain usually next. Think about it this way, the orders taken by the company determines demand and supply for products. This in turn allows the distributor to think about routing, delivery, services, promotions, marketing, etc.

I was fortunate enough to get a peek under the hood of this large distributor. To say the least, the ordering processes is much more complex than most people think.

Think about a local resturant that you visit. Think of all the items on their menu. Now, think of all the materials that is required to make something as simple as a hamburger. We need buns, the meat, sauce, lettuce, tomatoes, pickles, etc. Each of these products have multiple choices. You can buy plain buns or maybe french rolls as buns. You can get organic lettuce from your local farmer or a larger supplier three states away. Each resturant, depending on the market it is competing in, will choose different products. Similarly, the distributor much determine which product to have on its order entry list for people to choose. Do you offer the one pound patty or the 1.3 pount patty? What about 90% lean or 95% lean? As choices increases, so does the complexity of offering each of these choices. Each item has to be priced to be sold. Keeping track of the orders, changing prices, and updating the order catalogy for new products becomes challenging very quickly.

This is part of the work that I was able to participate in. By understanding the order entry processes and looking at potential bottlenecks, our team was able to devise solutions to help the company.

The animal question

Recently, I had a conversation with someone regarding an interview question. She gave a great answer that I'd like to share with others.

The question: If you could be any animal, what would you be and why?

Now, before I give away her answer which I thought was very good, I'd ask you to think about it a few moments and say outloud or use the post below on how you'd answer.
..
...
....
.....
......
Still thinking or are you just trying to find out the answer? Seriously, give it a few moments and try to answer the question.

Good. Now that we have your answer, please allow me to ramble first on why I think the animal question is bad interview question.

In interviews, the primary objective is to gauge a person through a short period of time using various tests to determine if the person is capable of performing the tasks as demanded for the open position. There might be secondary objectives exists such as would the person fit within the culture of the organization or is the person someone I want to work with, but the primary objective is usually determined by the needs of the open position.

Now, one way to achieve the primary objective is by subjecting the interviewee to questions. The purpose behind such question is again to gauge the capability of the interviewee. With the animal question, I believe the key objective is to prob several areas:
1. personality of the candidate
2. innovative, creative thinking
3. ability to form coherent ideas out of thin air (bullshitting)
4. logic or lack thereof
5. communication style

While the question is successful in tackling several areas, it doesn't do any of the above very well with the exception of maybe number 3.

If you analyze the above areas, each can be tested with a more concise question. Logic thinking ability can be analyzed by asking the person to solve a problem and explain how they reach the solution. Communication style can be analyzed by questioning communication skills and methods. Creative thinking can be analyzed by asking if the person has developed new ideas. Etc. Etc. By tackling each area individually with better tailored question, we can arrive at a better view of the candidate than the animal question. But because most people are short on time and slightly lazy (myself included), the animal question is a tried question and it continues in its existence.

Now, away from my rambling and onto the answer.

She said she would be a snowdog because they work well in a teams (and must work in teams) but also are strong individually in pulling the sled. Was it really what she would be? I don't think so! But she answered it in a creative fashion with logic to boot. She followed by clearly explaining her reasoning (which I shortened for writing sake) along with a demostration of her personality: teamwork and individual strength. In essence, she was good at "form[ing] coherent ideas out of thin air" a.k.a bullshitting.

Don't get me wrong. I'm not writing to by cynical or to badmouth my friend. I know she's smart, a hard-working, creative girl who has a good understanding of what a interviewer wants to hear. Does this make her a great candidate for the job? I don't know, but I believe she should fit well in many organizations. Rather, my point is that because of such uninsightful interview questions, often times interviewing ends up being is less about demonstrating the skills for the job and more about getting the "right" answers.

Marketing: The Last Job You'll Ever Have?

Recently, I've been searching around the web to understanding the "advertising" industry. This all began with a conversation I had with a friend regarding the industry his works in. After my conversation, I decided to do a little research into his industry. This is where I hit the wall.

I couldn't find an easy to understand article anywhere it clearly describes the advertising space. While I found numerous articles explaining the 4 or 6 major players, the type of services each player offered sometimes number in the 100 if not more. Additionally, the largest players in the advertising space were holding companies such as WPP Group, which held so many companies that I found the following image on their website amuzing.



If I was a non-marketing executive trying to get my feet into the advertising door, I'd be quickly lost in the information overload.

That's when I stumbled upon the following speech given by Seth Godin. If you haven't ever heard of Seth, as I haven't until this video, you can find general information about him here:link

What made the video great was not necessarily what advertising agencies do or how to go about understanding the advertising agency structure. What Seth did for me was made me realize the power of market and how to best leverage that power.

You see, I was asking the wrong question in my quest to understand advertising. I was asking, what did people do? What I should have been asking is, what do customers (customers of advertising agencies) need? If we find out what customers need, we can then work backwards to determine what people need to do to fulfill those needs.

Anway, why not just watch the video. It's much more interesting than my words.

Shift Happens?

I recently attended an Accenture Technology Workshop Conference in Chicago. One of the best topics we discussed at the conference was the "shift" that is occurring in our society/economy today. This shift, as coined in the video below, isn't something new. Rather, the conference speakers believed, it is occurring at a faster pace than previously thought.

The original and subsequent video are posted below. If you're short on time, just watch the original video because it is shorter.





Back to the topic of shift.

I realized from the video that while this tremendous shift is occurring, most individuals are simply not ready. Just last night on 60 minutes, Steve Kroft asked both Senator Clinton and Obama if they had plans of enacting protectionist policies if elected as President to help relieve the economic pains Ohio is feeling due to the off-shoring of manufacturing jobs.

There is a fundamental problem with the acceptance of the question Kroft proposes. It goes beyond the fact that protectionist policies are not going to solve the problem of the shifting economy. Shutting our doors to global competition is probably the worst solution in "protecting" jobs and uplift the economy. One fantastic example of an extreme protectionist policy and its subsequent effects is detailed in "History of Humanity" by Sigfried J. de Laet. His writing on the Qing dynasty shows how protectionist or isolationist policies "limited China's dealings with other countries, so that China remained ignorant of the development of the world outside."

While such facts show the error in Kroft's proposed solution, the fundamental problem is his interest in such questions. Rather than seeking real answers on how our government can help us manage in a shifting economy, Kroft proposed to bait the two politicians with the humanizing, easy answer. Protectionist policies are always easier to do. It easier to close the door on a problem or blame China, India, your neighbor on the pains at hand. But the blame game doesn't solve the root problem which is that shift is occurring. How individuals outside manufacture, outside Ohio deal with the shift economy is the real answers that we need. Such answers are much more difficult and require more transformational changes than slapping on a tariff or reducing subsidies to business that outsource.

If we look at the deeper question that shift has presenting to our generation, then perhaps we can think of the right solution.

Success...What are the factors?

Have you ever wondered about what makes some people successful and others not? The following video is a presentation by Richard ST. John at the 2005 TED conference where he presents his research on the secrets of success.

Advice for people in their 20s

I recently had a conversation with my Manager and Partner on my project about advices for people in their 20s. The Partner gave one piece of advice that I think is particularly helpful.

My Partner told me that people in their careers early on often lack an understanding of what is best for them. People pursue jobs on the notion of "fun," but in reality, fun shouldn't be the primary objective. He suggests that in determining a career, it is best to first find out what is your "spike."

I asked him what this term meant and he replied, "Spike, is the key thing that you have that differentiates you from the rest of the crowd." He then went on to say that when you are young, if you can start concentrating on building skills that will lead to the creation of a solid spike, then you'll have a good solid foundation for the rest of your career.

I found this advise to be really helpful. I think in one way or another, most people generally apply this concept to their jobs by pursuing careers they excel in some form. This is usually due to the fact that they have a spike over their fellow peers. But as I thought about the advice, I started to refine it. During a conversation with my roommate, I realized a way to build upon the spike advice is to re-name the term to moat. Thus, the advice would be: "It is better to build skills early on the further one's moat" or something of that nature.

The reason for me to choose the term moat is because it is already a familiarize term investors use to evaluate companies to determine their differentiating factor. By applying it skills, I can transfer the same concepts and analysis.

Moats:
Moats in companies typically come in two forms: width and depth. Applied to skills, the width can be thought of as is how much general abilities and knowledge you possess. What are the general skills that you have to offer? A person might have a wide (i.e., knowledge of everything) but shallow depth. For competitors, such moats can be easily breeched. It might get your feet wet and you'll have a long walk, but no big deal.

Similarly, a deep (i.e., specific knowledge) but short moat isn't any more helpful because competitors can jump over the moat. For example, an individual with very deep knowledge of manufacturing might be highly valued until the entire manufacturing process becomes automated.

Thus, the best moat is the one that is both deep and wide.

Here is where I take the advice a little further. How does one go about building this wide and deep moat? To building a moat with both characteristics takes lots of time. Just think of how long it takes to construct an actual moat. Thus, I offer the following guidelines.

1. It is best to start off with building a wide moat when young. While wide moats won't get you very far, it is a good starting point because it allows flexibility in a career. If you don't know where you want to specialize in so having general skills that are transferable across industries helps more than learning specialized skills that are not.

2. After you realized which area you are particularly interested, it is then time to build the depth.

3. But having only a single area where your moat is deep isn't very helpful. It is best to have a few areas to maximize the barrier of your moat. Furthermore, by this stage of your career, you'll need less width and more depth.

Look, I just created my three stage development cycle for building the moat. If you have further suggestions, let me know.

Tuition for Higher Education

During the holiday season, I had a conversation with a cousin about the reason why top universities choose to accept outstanding students that are unable to pay. We were able to highlight the main reasoning as diversity. Our reasoning follows the following logic.

Since the population of students who are academically outstanding, but financial insufficient is small, it reasons that the universities accept those students over outstanding, but financial sufficient students is to create a diverse group of students on campus. There were other additional reasons we listed such as good PR, etc, but diversity seems to triumph over the other explanations.

However, this topic of conversation had me pondering why top private universities charge tuition at all. For some universities, tuition is a significant portion of revenue used to provide for operations. But for top private universities like Harvard or Stanford that have millions if not billions in endowments, the tuition they charge is only a small portion of their total revenue. A recent article that I cannot source stated something along the lines that Harvard’s endowment is so large, it can afford to give free tuition to all its students for the next 10-15 years.

With such vast sums of money, it no longer seems to make sense to charge students tuition at all. Assuming that the mission of a university is to provide unparallel levels of education to as many individuals as possible, it should reason that a university should open its doors to as many students as possible.

Thus, the question is why do top universities charge tuition? It would seem that tuition’s only function in this case is to act as an inhibitor. Middle class families that might be able to afford a Stanford might choose not to send their brightest to Harvard when a great state school will be 10-50% cheaper.

If the above scenario that I wrote is true, then the previous logic of diversity would have to be not the main reason universities outstanding but poor students free tuition.

Back off the Bench

Being staffed on my second project in the last two weeks of December was a little unexpected. While I was excited about getting off the bench and learning new things, I had hoped the new project wouldn’t start until January. But things happen as they do. So what’s the new project?

I’m working with three other consultants on a healthcare project in Los Angeles. We are looking at the IT side of the healthcare company to find opportunities to reduce cost/improve service. Unlike the last project, I joined this project from the get-go so technically, this is my truly first project.

One of the first things that I’m beginning to understand is how consulting is both an interesting and boring career. Take this project. It is scheduled for six weeks, from data collection to analysis to presentation. Given the short timeframe, we are utilizing an approach to solve the client’s problem that was developed during a previous project. Rather than reinventing the wheel, we are adapting previous outputs to make it custom tailored to this specific client. It’s like custom tailor suits versus bespoken. Sure, we make it fit, but we don’t go through the work of taking the full measurement.

As bad as I make that sound, the actual work in the project is customized for the client. While we have an approach developed based on a previous client’s work that is similar, even minuet changes on the client side forces us to re-adapt and change our approach.

But besides all this high-level stuff, I’m actually excited about learning something entirely different. For me, most everything is new so I’ve tried to concentrate on core consulting skills rather the specific business skills. Core consulting skill is best thought of as thinking analytically and structured thinking. I worked with a co-worker to recreate an issue-tree to help me understand the different work streams in this project and how they are interrelated to answer the key question of reducing cost for the client. This was the first time I’ve actually worked through an full issue-tree to frame the work and it was truly amazing how much it help explain what, how, and why we were doing the type of work required to answer the key question.

But learning to structure my thinking is only one thing new. I am learning how to manage expectations , especially creating the balance between worklife and non-worklife. I have realized now that managing expectations is almost as important as the work you actually product. Take the following example. You’re given some work that you’ve never done before. The manager allocates 3 hours to learn and produce some outcome. You go straight through and start tackling the work. After a few minutes, you find that you can actually finish the work in 15 minutes. You rush through; finish the work ahead of time. You’re manager is surprised and thus allocates you some more work expecting better outcomes and thus giving you a short timeframe. Eventually, you’re going to hit a wall where you’re going to miss an expectation.

In the above example, there are several steps you can take to manager the expectation the work produced. For one, you shouldn’t just dive into the work right away if it is given with some learning time. Create an approach and allocate time to different aspects just as you would create an approach to the large client project. This five minute prep-time can be as simple as thinking about the assignment, understanding what you need to do, etc. As they say, properly done prep-work can save you a lot of time later on so you don’t have to go through rework because you failed to understand some thing. After the approach, complete the work, but try to understand more than what you are doing. For example, if you are given the simple task of formatting something and you’ve finished the work in five minutes but were given 30 minutes, spend the remainder of the time reading the document. Try to understand why you were given the task of formatting the document and how the document ties to other documents. Learning to understand what you are doing or understanding the big picture is more important as you move up and get promoted so try to do it earlier. Besides, there is not always a positive reason to turn in work early. Now, if it is major work and you can turn it something early because it will save you/client/company money, then that is a calculated move. But turning in work early on simple tasks simply shows that you are an efficient worker bee and more work should be allocated to you given the same timeframe. Now, while it is great for the company to have you humming along at 100% efficiency at all times, we humans aren’t machines and that type of work simply is brutal. Rather, you should see when work should be turned in early and when it should be managed as on time. Finally, let people know how you work. Tell them if you think you’ll need more time early on and ask about it. It doesn’t help you or your boss to come back to him five minutes before it is due to say you need more time. If you set the expectation early, then others can work with you or around you. Obviously, this doesn’t mean asking for five hours to generate a single PowerPoint slide, but it does mean managing the time given to you.

Ask and you will/can be rewarded.

Pale Blue Dot

Sometimes, you find something truly unique and interesting to read while browsing through the numerous humor and news websites ... even if it was written a few years back.

Below is an image taken by Voyager 1 in 1990. It is a photo of the planet we and all humans currently inhabit as seen from 3.7 - 4 billion miles away.



"Look again at that dot. That's here. That's home. That's us. On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives. The aggregate of our joy and suffering, thousands of confident religions, ideologies, and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilization, every king and peasant, every young couple in love, every mother and father, hopeful child, inventor and explorer, every teacher of morals, every corrupt politician, every "superstar," every "supreme leader," every saint and sinner in the history of our species lived there-on a mote of dust suspended in a sunbeam.

The Earth is a very small stage in a vast cosmic arena. Think of the rivers of blood spilled by all those generals and emperors so that, in glory and triumph, they could become the momentary masters of a fraction of a dot. Think of the endless cruelties visited by the inhabitants of one corner of this pixel on the scarcely distinguishable inhabitants of some other corner, how frequent their misunderstandings, how eager they are to kill one another, how fervent their hatreds.

Our posturings, our imagined self-importance, the delusion that we have some privileged position in the Universe, are challenged by this point of pale light. Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity, in all this vastness, there is no hint that help will come from elsewhere to save us from ourselves.

The Earth is the only world known so far to harbor life. There is nowhere else, at least in the near future, to which our species could migrate. Visit, yes. Settle, not yet. Like it or not, for the moment the Earth is where we make our stand.

It has been said that astronomy is a humbling and character-building experience. There is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly with one another, and to preserve and cherish the pale blue dot, the only home we've ever known." - Carl Sagan

A quick introduction for CRM, ERP, and SCM

Today, I wanted to summarize an topic that I've been trying to get a basic understanding in my field. What does CRM, ERP and SCM actually mean? I hear these terms but what do they stand for? I decided to summarize what I've learned from CIO Magazine.

This post will began with an explanation of ERP since it is an component that both CRM and SCM can utilize. This will follow with CRM and SCM. Finally, I will discuss how the three systems work together. Sources for this post is listed below.

1. ERP stands for Enterprise Resource Planning software. What ERP software attempts to do is "integrate all departments and functions across a company onto a single computer system that can serve" ever department. Why would this be good for a company?

A typical example is that ERP can improve "the way [a] company takes a customer order and processes [the order] into an invoice and revenue." By using the same software across different departments, people can see in real time what is happening. Orders are processed faster through improved communication by utilizing the ERP software. There is a reduction in human error and lost paper (or knowledge) as information is retained in one centralized location.

Now, multiple this idea across all departments. Imagine HR being able to see Finance (improve HR's ability in staffing or compensation) while Finance can view Shipping (to determine if revenues should be counted for once a product is shipped).

However great the promises of ERP, the reality can be quite different. The first reality check is actually finding a software that works well across all departments. Each department has its own unique requirements that requires special software. To have one piece of software be the best in every field is a tall order. Second, ERP entails a more connected system. This is great in the theoretical stage but in real life, real-time systems is costly to maintain and update. Froe example, pre-ERP, HR was using its own software and processes, but post-ERP requires HR to update and provide the most recent information into the system. Otherwise, other departments, say Finance, might use out of date HR information in the ERP system to produce financial reports. That would occur less since pre-HR, Finance might actually have to call up HR to get the latest data. So with ERP, there must not only be new software, but new processes have to be created in the way people perform their jobs. In the previous example, the HR department might have to redesign some of their business processes.

Ultimately, those new processes are what brings the biggest improvements with an ERP implementation. Once a standardized procedure is implemented company wide, the ERP software will benefit from people utilizing the new business processes.

2. CRM stands for Customer Relationship Management. The goal of CRM is "to learn more about customers' needs ... in order to develop stronger relationships" such as

• providing tailored services and products
• help improve sales
• retain and discover new customers

While CRM is generalyl thought of in terms of software, like ERP, the software is only a tool. CRM is only as good as the strategy underlying.

Since the goal of CRM is "to learn more about customers' needs" and to build relationships, CRM is important for those companies that do not have a understanding of who their customers are or what their customer needs. A CRM system will include softwares and processes that can collect, analyze, centralize customer data from a variety of sources to help improve customer understanding. As example of CRM in action is a retailer collection information (Web, mailing lists, credit cards) that it can then combine to help target those customers through either promotional items (discounts) or products (special offerings).

3. SCM stands for Supply Chain Management. The purpose of SCM is to help "plan, source, make, deliver and return" products. In general, SCM applies more for manufactures, but SCM can also apply to retailers.

Think of a ship building company. It needs to plan how many ships to build and the resources they require (steel, electronics, wiring, etc.), choose suppliers to provide the raw materials or semi-raw materials (guidance systems, engines), manufacture the ship, help with logistics after manufacture, and manage returns (defects, recalls).

Now, while each industry might requires a different type of SCM system (manufacturing might focus more on planning, sourcing and making while retail might care more about delivery and return) the overall goal with SCM is to improve either each individual step which hopefully will improve the overall processes. Why is this good?

Think of terms such as "just-in-time." Pre-SCM, manufactures had a difficult time planning for production. Overproduction would often result in a waste of resources will underproduction meant lost profits. Retailers would sometimes be at the mercy of manufactures and would have to keep warehouses full in the event demand rises. But SCM can help solve some of these problems with the right information. Retailers could provide manufactures data on demand so manufactures can plan strategically to source and make products. This helps reduce delivery and manufacturing costs by making only as much as needed. Furthermore, excess returns are reduced.

With the event of global manufacture and extended supply chain, SCM becomes even more important. With companies located sometimes across oceans, having processes and systems in place to gain information regarding your supplies chain is vital to company planning. Rather than just examining the immediate supply chain, now, a manufacture might look at the supply chain of its suppliers and or its customers (retailers) to help planning. In turn, retailers or suppliers might examine the manufacture supply chain.

4. So how does all this together? To understand this, let's go back first ERP. Since ERP is a software system that is standard across all departments, it is best thought of as a central data warehouse. Both CRM and SCM requires an extensive amount of information for each to work properly. CRM needs data from Finance, Sales, Manufacturing, etc. that have been collect on customers. Similarly, SCM utilizes the data in ERP for planning. But ERP also benefits from CRM and SCM. Each system in turn provides feedback to ERP on new information. While each and function independently, it is the synergies gained from all there system that is one of the biggest gains.

Here is an example of an idea world:
"For example, if you wanted to build a private website for communication with customers (CRM) and suppliers (SCM), you will wan to pull information from ERP, CRM, SCM together to present updated information about orders, payments, manufacturing status, deliver, and return."

Source: "ABC: An Introduction to ERP" by Christopher Koch, CIO, "ABC: An Introduction to CRM" by Thomas Wilgum, CIO, "ABC: An Introduction to SCM" by Ben Worthen, CIO

Being Benched

Part of the life of being a consultant is being placed on the "bench." For those that don't know, being on the bench is the term used when a person is unstaffed. Sitting on the bench for a long period of time isn't a good thing for the company or the consultant for a multiple of reasons that I'll discuss later.

I've been on the bench for about 3 weeks now since the end of my last project. While being unstaffed for a short period, around 1 week, is great after a long and difficult project because it gives you time to catch up, longer periods of bench time isn't so great.

Here's how I've been trying to pass around my time but if you have better suggestions, let me know:
1. Attending training session such as Pricing and Organization Strategy
2. Reading things such as IT Strategy and IT management
3. General reading and keeping up with the issues
4. Adjusting my investment portfolio

But in the end, there are only so many things you can do to improve yourself. Being on the bench for too long hurts your "chargability," or the percentage of time you spend working on projects that can bring revenue to the company. One way to think about chargability is to look at the car rental business.

Imagine yourself as a rental car. The company has paid X amount of dollar to acquire you. In addition, they have spent X dollars upgrading (training and equipping) you. If you aren't being rented (staffed) to some customer, then you are not providing a good ROI for the company.

However, this only paints half the problem for being on the bench for a prolonged period. For yourself, being unstaffed meanings you aren't learning new skills. Sure, I've taken the opportunity to learn new skills through training but unless you put those new skills into actual usage, then those are just theoretical skills. Thus being on the bench for too long is a double whammy.

Finally, as an employee at Accenture, too long on the bench hurts your year end performance revenue since part of our performance is measured by chargability.

With all this said, what can be done to improve this? At the moment, I haven't figured anything out yet.

TSA: What are they for?

As consultants, we fly around a lot. After a while, one gets pretty good at judging transit times, dealing with fly cancellations and delays, and the inevitable TSA security screening. But, on one recent trip, I suddenly wondered what one specific procedure, the inspection of your boarding pass with an ID was for. What was the purpose of determining who you are and whether you are flying?

Now, several obvious answers pop up into mind. TSA is trying to determine if you are the same person as the person who bought the airline ticket. TSA is trying to prevent unauthorized entry into the boarding area. ID check is a first step of security by TSA to determine suspicious people.

But there are several flaws in this thinking. First, why would it matter if your ID matched your boarding pass? If I am not carrying any explosives or dangerous materials, why block my entry? Perhaps I want to wait inside the terminal and surprise my girlfriend when she arrives? Isn't the whole metal detector, explosive air puffer, and x-ray suppose to stop me from carrying dangerous materials? If TSA is concerned about people entering the terminal and using their physical bodies to create harm, that would mean that everyone is a potential threat. I could always use my fists.

The second argument is that TSA is trying to prevent unauthorized entry. Well, how would TSA actually know if I'm authorized or not? If you have ever printed a boarding pass at home, you know that it is very easy to duplicate a boarding pass. Heck, a PhD student event wrote a php script to generate duplicate NWA boarding passes. Besides, wouldn't actual terrorists just buy an airline ticket anyways?

Finally, ID check is a first way to determine if the person is suspicious. Now, this an area that I do find at least an acceptable answer. I would assume that a person carrying some bomb meeting a TSA officer where he has to hand over his boarding pass and ID would be a little nervous. But, then again, most TSA people barely glance at the ID and boarding pass. No questions are asked. In addition, I've noticed different airports perform the same inspection differently. Some use an ultraviolet light to check the authenticity of the ID (i.e. state driver license) while others just glance to check the name on the boarding pass matches the ID.

Perhaps TSA could save tax payers some money by removing this useless step in the security process and put the money into better training and more staff for the actual screeners.

Don't thinks security is bad? Take at look at this PBS documentary.

Oh, if you have other reasons that you think TSA does the ID check, please let me know.

Performance Review: Feedback

I've been told its important after every major or minor project to solicit feedback. Below is the type of feedback I received after my first project.

Pro:
I require minimum direction, can work independently with guidance
Good at quantitative analysis

Cons:
Require improvement in writing, specifically grammar, proofreading, putting ideas into text


Things to communicate in future projects:
1. What type of style does the person have?
2. Leverage the available skills I've learned and communicate what I have done.
3. Communicate at the beginning of the project expectations and work styles

3 Tips of being a good BA
1. Have analytical skills
2. Quality deliverables
3 Communicate, communicate, communicate

Things I Learned

It has been an incredible busy and exciting two weeks. I felt like I learned more in the last two weeks than in entire semester at college. Part of this reason might be because I’m actually hungry to learn rather than passively attending classes. In any case, it was a great opportunity so let me delve in a bit further.

About two weeks ago, I was tasked by the Senior Executive (SE) to perform an IT Spend Analysis on our currently client. It would be a two week turnaround time with the SE giving most of the responsibilities to me. I was a little apprehensive about the whole project considering it would be presented to the CIO of our client rather than just general senior client executives. To make matters worse, the SE was going to be on vacation the entire week when I would be performing my analysis.

But the SE had given me pretty good guidance on who I could reach out to for information that I needed. In course of my analysis, I got a chance to work with Accenture Researchers, specialist in finding difficult to locate information to use for my benchmarking analysis. I also got to work with the consultant on my project o go over the IT Spend Analysis process to understand both how the work should be done in a conceptual model and what type of information the results for the analysis would provide to the client. Finally, I had the opportunity to operate independently without close supervision on conduction meetings with client executives and Accenture SE, deciding research results and analyzing key findings.

There were definite moments when I was stuck or unsure of how to handle the situation. One area that I’m working towards is building a better working relationship with lower level client personnel that I would work on in a daily basis. I find that I can’t build the same level of report as I would like to have. This definitely impacts the working relationship at times, but I’m unsure how better to proceed.

Another area where I think I’ll be able to improve next time is time management. After getting an idea of the turnaround time necessary for different types of work, I’ll be able to gauge how long it would take me to complete different amount of work.

On the following Monday, I got to present my findings to the CIO. It was definitely an interesting presentation. I had expected it would be more of my speaking followed by a question and answer section. But it was more of a conversation rather than presentation. We would talk about a slide for a few minutes with him asking questions and then move on to the next slide. It was during the presentation that I realized why being able to calculate numbers in your head quickly for percentages or in general was helpful because when the CIO asked for numbers outside my calculations, I was definitely stumbling along. Furthermore, there were some pretty significant mistakes in my presentation powerpoint that resulted in me second guessing a lot of my calculations. Thank goodness the SE was there to help.

While in the presentation, I realized that confidence in a presentation results both from experience and knowledge. Even though the SE didn’t do any significant amount of work, she trusted in my slides to pull out key results and interrupt them on the spot. She had already credibility and her knowledge of the operations of the client coupled with many years of experience was something I lacked. I simply wasn’t comfortable making any large recommendations because I didn’t believe in myself or the numbers and ideas that I had.

But this wasn’t the only analysis that kept me busy last week. I also did work examining the outsourcing provider’s offshoring initiative. Unlike the previous work, this required less financial analysis, but I utilized and honed many of the same skills as in my previous work. In the end, I enjoyed both work very much and was able to manage them quite well without doing too much over time.

Which makes me want to end on a note; I think working overtime isn’t necessarily a good think. It shows a failure in time management and project management skills. Given the time frame needed to complete certain tasks, it should be that there are one and off times between work and non-work. Managing those is part of the work/life balance. While an analyst has less control, it should be a skills that requires learning.

Eighth Best Company

This year, Accenture was ranked 8 out of 95 companies in Business Week's "2007 Best Place to Launch a Career"

Below is my summary of their information. For full information, please go to link.

Undergrad Internships

No. of undergrad internships in 22006: 125; 2007: 183

2006 interns from the following classes:
0% Freshman
0% Sophomores
22% Juniors
78% Seniors
0% Graduates

2006 interns from the following majors:

17% Business
6% Computer Science
18% Economics
42% Engineering
9% Liberal Arts
2% Math
2% Science
0% Undeclared
15% Other*

100% of internships paid

Is there an official summer internship program?: Yes

Average length of summer program: 10 weeks

Average total intern compensation: $9,400

91% of eligible 2006 interns received full-time job offers

71% of interns with offers accepted

Rising senior interns attend a 3 day leadership conference which includes team building exercises, networking opportunities, panel discussions, and presentations.

*Other college majors include primarily: Management Information Systems, Information Systems, Supply Chain.

Applicants & New Hires

Applicants for entry-level jobs in 2006: 10,400*; 2007: 5,170*

Entry-level hires in 2006: 1,040; 2007: 517

Entry-level hires who were undergrad interns in 2006: 6%; 2007: 1%

Most important characteristics for new hires:

1-College Major
2-College GPA
3-Analytical Skills**

2006 new hires majored in:

17% Business
6% Computer Science
18% Economics
31% Engineering
9% Liberal Arts
2% Math
2% Science
0% Undeclared
15% Other***

*Entry-level applicant data represents only those candidates for whom we conducted a screening interview.
**Accenture also looks for strong communication skills, extra-curricular activities, leadership and whether or not the candidate worked part time during school (exhibiting skills to balance work and school).
***Other category for college majors comprised of primarily Management Information Systems, Computer Information Systems, Information Systems, Supply Chain, Operations Research.

Salary & Benefits

Entry-level hires since Jan. 1

Average base salary: $55,000 to $59,999

0% earn less than $35,000
0% earn $35,000 to $39,999
4% earn $40,000 to $44,999
7% earn $45,000 to $49,999
29% earn $50,000 to $54,999
37% earn $55,000 to $59,999
12% earn $60,000 to $64,999
10% earn $65,000 to $69,999
1% earn $70,000 and above

55% received signing bonuses with average signing bonus: $3,767

85% received performance bonus first year on job with average performance bonus: $1,500

Reimburse employees for education expenses?: No

Time Off

Is there a Paid Time Off (PTO) Bank?: Yes, 25 days.

Health Benefits

Do entry-level hires have access to health plan?: Yes

Employees pay part of the cost?: Yes

Does health plan provide dental coverage?: Yes

Extra charge for dental coverage?: Yes

Does health plan provide vision coverage?: Yes

Extra charge for vision coverage?: No

Are same sex partners permitted as dependents?: Yes

Pension and Profit-sharing

Do entry-level hires have access to 401(k)?: Yes

24 months to full vesting in 401(k)

Max. company match as a percentage of salary: 3%

Min. employee set-aside as a percentage of salary to receive max. co. match: 6%

Are entry-level hires eligible for profit-sharing program?: Yes

Months to full vesting in profit-sharing program: 24

Other Benefits

Does company match employee charitable gifts? Yes*

Max. annual company match for employee charitable gifts: $5,000

*In 2006, Accenture and its employees donated more than $5 million to 486 US colleges and universities through the Accenture Foundation matching gift program. All Accenture employees are eligible to participate.

Work Environment

44 hours worked weekly by entry-level hires on average

Does average vary by business unit, department?: (Business Week said NO, I say YES)

Entry-level hire work locations...

70*% in open work stations
0% in cubicles
25% in shared offices
5% in private offices
0% have no company-supplied work space

Does organization monitor e-mail?: Yes**

Does organization monitor Web usage? Yes***

Typical dress code: Business Casual; Casual; Formal/Business

Does organization sponsor employee volunteer opportunities? Yes

*A high percentage of a new employees' time will be spent at client sites.
**Company has ability to monitor email, but does not routinely do so.
***Company has ability to block specific web sites – only used to monitor inappropriate sites.

Training Programs

Does your organization have a formal orientation program? Yes

If yes, how many days is it? 25*

Orientation includes**:

Computer Training
Guest Speakers
Diversity Exercises
Team Building Activities
Tour of Facilities

$6,600 average spent on training, per new hire, in 2006

* Of the 25 days of orientation, 3 weeks are in the local office and 2 weeks are at our training facility in St. Charles, Illinois.
**Organization Overview, Corporate Citizenship, Telecom / Security, Benefits, Time Reporting, Facilities and Services, HR Policies, Technology Orientation, Corporate Required Training,and Core Values.

Does company have formal mentorship program? Yes

All employees are assigned a career counselor.

Employees are encouraged to complete 0-10 days of of additional training to specialize in a particular function or technology applicable to the role they are or will be staffed in.

Raises and Performance

How are raises determined?: Performance

When are entry-level hires eligible for first raise?: Between Sept. 1 and Dec. 1 - provided person is employed for more than four months

How are promotions determined?

Performance
Business needs.

When are entry-level hires eligible for first promotion?: September 1 following one year anniversary - most after 18 months

Frequency of evaluations: Performance assessed for every project - rating follows annual review

Important qualities

1-Profitability/Margin
2-Analytical Skills
3-Learning Ability

Min. tenure in years required for job change: 1