Using your time profitably

20/03/2012 Comments Off on Using your time profitably

Consultants sell their time. Okay, they sell their expertise, but their main factor of of production is time. A successful consultant works on maximising the value from their time. Here’s how I think of it.

There are essentially four types of activities for a consultant:

  1. paid work
  2. sales, marketing, and networking
  3. investment in new skills
  4. administrivia.

The paid work is what brings in the money. It pays for all your time and all your overheads, and funds that lavish lifestyle all consultants lead (oops, almost spilled my morning martini). Obviously, therefore, more is better.

But wait — how do you get the paid work? Well, that’s where the sales, marketing, and networking come in. You need to have work and potential work lined up, so that you can finish your current project and move on to the next and then the next. If you don’t spend some time on generating work, pretty soon the work will dry up. On the other hand, if you spend too much time networking, you won’t get any billable work done.

Let’s say you have a target income of $150,000. Maybe you know from experience that your average project size is $10,000. You therefore need 15 projects per year to make your target income. Maybe you are successful with one out of every five proposals you write, or 20%. That means you need to write 75 proposals to get 15 projects.

Now we can put some hours into the calculations. If it takes 10 hours to write a proposal, that’s 750 hours. Working 37.5 hours per week for 46 weeks (remember — 4 weeks holidays plus 11 statutory holidays), you have 1725 work hours in a year. After writing proposals, you have 975 hours to do the work. At a billing rate of, say, $150 per hour, that $146,000. It’s not quite your target but pretty close.

We can think of this as an optimisation problem. One line is the sales, or total project revenue obtained. The other line is billings, or revenue earned. The intersection gives the equilibrium earnings.

There are a two things to note. First, this consultant is spending 43% of work hours on sales! While that’s a bit excessive, it is probably right for newer consultants or for established consultants breaking into new markets. The rule of thumb for small businesses in general is to spend 25% of time on sales on marketing.

Secondly, this diagram tells us what we can change if we want to raise our income. We can try to rotate the blue ‘supply’ curve anti-clockwise. Alternatively, we can shift the red ‘demand’ curve rightward. How do we do that? It’s all about changing the components of those curves:

  • become more efficient at writing proposals
  • make each project a little larger
  • increase your success rate
  • raise your charge-out rate
  • increase your work hours.

In this example, changing the success rate from 20% to 25% reduces the number of proposals you need to submit, freeing up time for billable work. Over 60% of your time can be billed, raising income to over $160,000.

I’ve talked about just the first two uses of your time. The other two will have to wait for another day. However, the basic principal is this: equalise the marginal return on time spent on each task. Think about whether that hour you spend blogging is generating as much value as an hour spent writing a proposal.

Oh, wait….

Deleuzian simulation models

19/03/2012 Comments Off on Deleuzian simulation models

I picked up a book a while back from a university bookstore solely for its title: A Deleuzian Century? I have started it a few times but not finished it — it’s that sort of book (or I’m that sort of reader). Foucault suggested that this century would be Deleuzian, that Gilles Deleuze, a French philosopher, would be central to thinking in the 21st century.

I made it through both volumes of Deleuze and Guattari’s Capitalism and Schizophrenia and also read Brian Massumi’s excellent A User’s Guide to Capitalism and Schizophrenia. I admit that I don’t ‘get’ Deleuze. I can read the sentences and paragraphs, I can start picking up concepts like bodies-without-organs and rhizomes, but I am always outside the concepts the same way one cooks from an unfamiliar recipe.

Nevertheless, I am beginning to think that Foucault was right.

One Deleuzian concept that I find utopian and naive is the rhizome. A rhizomatic plant sends stems through the ground, putting roots down and leaves up from new nodes. The structure is nonhierarchical. Deleuze contrasts this type of growth with things like trees, which have a center trunk, a hierarchy of limbs and twigs, and an integrated existence (it can be killed as a whole). He uses the rhizome metaphor to describe new ways of becoming that are lateral and invasive, that don’t depend on hierarchy or permission. It is meant as a liberating metaphor.

I have just been looking at cellular automata models, including Schelling’s model, The Game of Life, and Wolfram’s classification of one-dimensional models. They are discussed in a excellent on-line course by Scott Page. It occurred to me that these are mathematical representations of Deleuzian thought. They are presented as flat models, as full depictions of their worlds from which patterns of organization spontaneously emerge.

Key to both the Deleuzian metaphor and cellular automata model is the idea of ’emergent properties’. Patterns and organisation are thought to occur spontaneously as a result of individual elements just doing what they do. For Deleuze, these are new ways of being — I hesitate to say new ‘identities’, although I think that’s what he’s aiming at. For simulation modellers, it is complex order arising from simplicity, such as Wolfram Rule 110.

Simulation model thinking is rhizomatic thinking. Like John Wheeler’s ‘it from bit’, it considers that the binary on/off can be the basis for all organisation and the rest is just emergent properties. The simple rules of a Wolfram model push themselves through blank grids to establish new patterns, which can repeat themselves with relying on the rest of the pattern.

Simulation models are becoming more important in economic and policy analysis. Stats NZ, for example, recently hosted Martin Spielauer from Statistics Canada to talk about simulation modelling. As these models become more accepted, so will the underlying thinking.

We are becoming Deleuzian without even knowing it.

Post-millennial Masters of the Universe

16/03/2012 Comments Off on Post-millennial Masters of the Universe

They don’t make the Masters of the Universe like they used to. Y’know, the kind who’d kick ass and take names, who’d run down punk kids under the freeway, who didn’t whine about their feelings.

Now, they want not just money and power, but also ‘moral fiber’ and ‘culture’. Otherwise, they will stamp their feet and leave.

This is the best response. Darth Vader writes:

TODAY is my last day at the Empire.

After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

I find myself longing for Leona ‘Only the little people pay taxes’ Helmsley.

(h/t Brad Delong)

Re-establishing the European financial symbolic

15/03/2012 § 2 Comments

In Zizek’s First As Tragedy, Then As Farce, he quotes Jacques-Alain Miller discussing the financial problems of 2008:

The financial universe is an architecture made of fictions and its keystone is what Lacan called a “subject supposed to know”, to know why and how. Who plays this part? The concert of authorities, from where sometimes a voice is detached, Alan Greenspan, for example, in his time. The financial players base their behavior on this. The fictional and hyper-reflexive unit holds by the “belief” in the authorities, i.e. through the transference to the subject supposed to know. If this subject falters, there is a crisis, a falling apart of the foundations, which of course involves effects of panic.

An agreement was reached on Greece’s debt this week. Note the passive construction of that sentence. I’m not really sure who reached the agreement. The troika (a word I always associated with folk dancing) of EC, ECB, and IMF was there; representatives from Greece and other governments were involved. Then there was the ISDA, who had to declare the event ‘an event’ in order to trigger insurance payments on the notes the creditors held. But who really inked the deal, and after which group gave their approval?

Also, the metaphors are again out in full force: a 75% haircut (what is that, a No. 2?), calm seas, turning pages, pulled triggers.

I’ve been wondering why it has taken so long. It was obvious months ago that Greece couldn’t pay, in the sense that there was no way they could raise the case and continue to have a functioning economy. Blood from a stone and all that. I realise there had to be negotiations about who would take the hit and how much, but that just seems such a technocratic question for all the proceedings we’ve witnessed.

This quote from Miller sheds some light on the problem. The agreement on Greece is an attempt to re-establish this subject-supposed-to-know. We thought this subject was firmly enthroned. ‘The markets’ know, ‘the markets’ decide; the judge’s decision is final. The voice of the authorities was the still point.

It wasn’t even the original financial problems in 2009 and 2010 that created this crisis of faith. Hey, stuff happens. Markets rise and markets fall (and you can make money both ways). Sometimes, people panic. That’s alright — we’ll just reset the timer and start again.

But it didn’t take. The original plan wasn’t enough. The smartest guys in the room didn’t pull it off.

I can hear the cry of the supplicant now: ‘Tell us, oh markets, what thou wouldst have us do to appease you!’ But the volcano kept erupting, the rains didn’t come, and Greece wasn’t fixed.

So here’s my metaphor for where we are now: after forty years in the desert, after forty days in the wilderness, trying to understand the will of the markets, we have written down the commandments of the subject-supposed-to-know. We fervently hope that if we abide by this agreement, we will be saved.

Borrowing to spend

14/03/2012 § 2 Comments

Was the Prime Minister trying to wind up economists yesterday? ‘Cause several people pointed out to me his comments on students loans almost as soon as they were published. This morning,  Eric Crampton at Offsetting Behaviour notices, too, and offers the PM some advice. The comments were:

That is about the only thing that will get [young people] out of bed before 7 o’clock at night to vote, but it’s not politically sustainable to put interest back on student loans. It may not be great economics, but it’s great politics. It is a bit of a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt. [emphasis added]

My colleagues were stunned at the realpolitik. Eric suggests that the political calculus may not be so clear:

Would students really get out to vote en masse if new borrowing were subject to interest charges? Would Labour really look at the current deficit projections and reckon promising a return to zero-percent loans a great idea?

I don’t want to wade into the interest-free debate, since it’s been beaten to death, resuscitated, then flogged some more. No, I want to talk about the next sentence, about borrowing debt.

The life-cycle hypothesis (LCH) is that people do or should try to maintain a relatively constant level of consumption over their lifetimes. Income, on the other hand, isn’t constant: it has a definite life-cycle path. The appropriate response is for people to borrow when they are young and their incomes are low and repay when their incomes are high, then save for retirement. This neat plan is constrained by problems with intertemporal transfer of income or wealth, and there are additional issues with uncertainty.

Here’s the key point: this applies to consumption as well as investment. 

The investment part is simple to explain. I borrow to pay for my education, which raises my human capital. This additional capital provides me with a higher income. As long as the increase in income is higher than the cost of education, it is a good investment.

The LCH says that people should also borrow to fund consumption. Students borrowing money to live comfortably is just consumption-smoothing. That is exactly what textbook economics says they should do. We can quibble about the appropriate amounts and whether expectations of future earnings are well informed, but that’s a different discussion.

If young people going out and borrowing is a tragedy, the plot was written by economists.

Teaching kids STEM subjects

13/03/2012 Comments Off on Teaching kids STEM subjects

This is a personal, ranting post. I hope you will oblige.

I use maths for work every day. Different sorts, different levels of complexity. Sometimes, it’s simple diagrams. Other times, it’s proper econometrics. I find I think best when I can toggle between an understanding of the subject matter and the maths we are using to analyse it. My dad was an actuary, and used maths every day. His brother was in banking (more maths) and their uncles were different sorts of engineers (more maths), including, yes, a rocket scientist.

You may have noticed that the people I mentioned are all males.

I have two daughters. They have inherited the family predilection for maths. They are doing well in school, yes, but also have an affinity for maths, a special understanding of patterns that goes beyond book learning.

When a girl is good at running, she is encouraged to run. She runs races at school, she gets prizes, she goes to regional competitions, her personal bests are celebrated. She is encouraged to challenge herself and others.

When a girl is good at maths, she is not encouraged. In each year, teachers prefer to stick to the curriculum. A girl who is ahead of the curriculum is money in the bank for the teacher — job done before we’ve even started. Besides, why would a girl want to get ahead? There would be nothing for her to do next year!

Yes, this is the attitude. No, I am not the only parent who has encountered it.

Maths are the basis for all STEM (science, technology, engineering, and maths) subjects. They are the sine qua non. You have to understand calculus and statistics to do the rest. If you make girls count back and forth along a number line because that’s this year’s curriculum, you are depriving them of the opportunity to get on with learning calculus and statistics. You are depriving them of the possibility of studying STEM subjects.

There is a lot of hand-wringing about STEM at school and university. There is also hand-wringing about STEM and women and minorities (here is an example). Some of it is posturing, absolutely. But some of it raises a valid point: why are children, especially certain groups of children, discouraged from these careers? And what do we do about it?

The ‘why’ is complex. It is easy to say that these are male-dominated subjects, but that can change pretty quickly in a given field. Check out, for example, the enrolment figures from the 1970s and 1980s for US law schools. Another factor is that teaching, particularly primary school teaching, is dominated by people from the humanities. Many people who study humanities are uncomfortable with maths; many don’t even see the value in it.

What do we do about it? Whatever it is, I know we can’t wait until the end of secondary school or university to support these girls. It has to start much, much earlier, from primary onward. A basic principle is: encourage excellence. Regardless of what interests a girl, regardless of what her particular skills are, encourage her to excel. If you find yourself saying, ‘Why bother with that?’, put yourself in time-out and come back when you are ready to be encouraging.

The future value of universities

12/03/2012 § 1 Comment

What will be the value of going to university in the future? The internet makes it incredibly easy to produce, reproduce, and spread information. I have the Library of Alexandria from my desktop, even from my phone. Why do we need universities?

Of course, universities themselves have noticed the situation. MIT is giving stuff away; New Zealand universities are trying to figure out how to deliver courses over the internet.

I think, paradoxically, that all this free information is good for the future of universities.

Let’s use a simple model. Universities provide graduates with two things: knowledge and signals. The internet provides people with knowledge but no signals. As the internet becomes better, it reduces the cost of producing information. This shifts the information supply curve out and reduces the cost. However, the signal supply curve is unaffected. Therefore, the price of signals relative to information actually increases. The premium for a university degree rises, even for similarly knowledgeable people.

There are two ways this might not be true in the model. First, internet learning can start producing its own signal. This is the point of finding ways to verify people’s identities and work on-line. If you can do that, then you may be able to produce a university-like signal. This will likely involve technology that is more invasive of our privacy. In fact, people may be willing to forgo some privacy in order to have better verification.

Secondly, the demand for information could also shift. What you know rather than where you went to school could become more important. This would require that knowledge become a more important factor of production than whatever signalling represents. However, the importance of networks and agglomeration in the modern economy argues for the reverse. Relationships are still important, and probably becoming more highly valued.

It’s about scarcity. University education is still scarce; information is not. Relative prices will shift to reflect the scarcity.

Universities have always had competition: correspondence schools, public libraries, autodidacticism. None of these has knocked universities off their perch, because none of them produces the same signal. I doubt the internet will, either.

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