Thankfully, I had the email contact of one of the training coordinators and she pointed me to this little gem. I was pretty surprised to find out it was from the Veronicas, as I haven’t really liked any of their other songs. Probably the strings and the ridiculously fast beats (176 beats per minute!)?

“Alalalala alalalala”

Looking forward to returning to the blogosphere when I return (next week)! Albeit, I’ll be out of the country (so no Blackberry :-X), and have limited access to the internet and Google Reader (my Google friends will experience a sudden decline in shared items to read and the Google Wave collaboration I just started with Eric, Anthony, and Kevin will have to take a back seat for a few days), and I will just happen to miss out on helping my lovely girlfriend move in to her new place (I swear, it was a coincidence!).

Until next time… (and if you miss me, there’s a list of my favorite/popular posts on the right!)

With regards to the training itself, while I wouldn’t say anything we learned in particular stood out, the things that stood out most to me were:

1. Use of Examples – When our training group laid out “team norms” for our week and a half training session, I had insisted that training focus more on illustrative examples rather than teaching concepts. It’s not that I don’t like abstract concepts – I was considering theoretical biology for graduate school after all – but there is a significant difference between understanding a concept in abstract (i.e. demand slopes downward) and knowing how and when to apply it (i.e. using the slope of a demand curve to figure out an optimal pricing strategy, figuring out why prices are changing in a market) and a significant difference in one’s ability to remember an illustrative discussion versus a theoretical one.
2. Group Exercises – Almost every training day ended in a late night group exercise, where every training group was given an assignment to complete by the end of the night to present the following morning. While this cut pretty significantly into my sleep time, it was, in some ways, the most effective training I received. While the analyses themselves were never that difficult to perform (although given some of the wilder results in our corporate valuation contest, maybe more difficult for some than others), the key take-away I received came from having to assume more senior roles in our case team. Given our independence, we became not only responsible for the quality and timeliness of our analysis, but were also responsible for work-planning, prioritization and division of labor, and the integration of separate pieces of work from different people into one final package. This represented a major shift in perspective, and hopefully, a critical element of my future relationships with more senior colleagues.
3. Presentation Skills – I have not changed my view on the downsides of slide-umentation, and while I consider practice in consulting-style slide construction to be one of the less desirable things I gained from training, the need to present the results from the group exercises were very useful in revisiting my own approach to presentation construction. Although they were just simulated client presentations, the exercise in presenting to client senior management required us to take a more executive approach in deciding how and what to present. While this may seem obvious, I’ve found that it’s pretty difficult to “take a step back” from the analysis that I spend hours thinking about to consider precisely what (and how to convey that insight) a senior executive needs.
4. People – I met a lot of great people who work at the firm, and I’m looking forward to continuing to correspond with them in the future.

And now, back to my spreadsheets!

Until the 15th…

I thought I would be above that: “You mean, I have no work, still get paid, and can go home early? What’s not to love?”

And yet, here I am. Trying to convince myself that this is a good thing.

Yes, I know that consultant hours can be rough and that I will soon be craving easier days when I’m at the office crunching Excel models or pouring through customer data late at night. Yes, I know that this is a wonderful time to review subjects I’m not as familiar with (i.e. accounting, IT, a given industry, etc.) on the company’s dollar. Yes, this is a great time to be able to go home early and spend time with my family or do those things that I constantly complain about not having the time to do (today, I reconfigured our wireless network so that all of our home computers would enjoy coverage).

But, at the same time, I’m filled with a restlessness that just doesn’t go away which is compounded by doubts concerning whether or not I am ready for a case and whether or not the office thinks I’m ready.

To love or not to love, that ’tis the question. Whether ’tis nobler to…

The most logical means of evaluating an investment would be to perform a basic cost-benefit analysis on each investment relative to the others. This is no small task, as with each investment, there is always an element of risk that is difficult to gauge (i.e. maybe sales will jump by 100%, or maybe they’ll tank). There are also more strategic and less concrete benefits and costs which are difficult to assess the value of (i.e. Public Relations, worker morale, etc.)

But let’s say we knew exactly what the benefits in each year would be (i.e. investment A will pay off $10M in two years, $4M in three years, $100M in four years, etc.). How does one know these things? Usually you don’t – you just taking a look at the possible best, worse, and average case scenarios to get a sense of what the investments might be worth. So, how do you then evaluate the business?

What an economist or a financial accountant will probably tell you is to use some form of Time Value of Money/Discounted Cash Flow analysis to assess the value of each benefit and compare it to the value of the associated costs. That may sound like gobbly-gook, but, the principle of Time Value of Money refers to the fact that a dollar today is worth more than a dollar tomorrow, because that dollar today can be put in a bank or some other type of investment vehicle and be worth more than a dollar tomorrow. So, Discounted Cash Flow analysis really is just converting all the costs and benefits to “today dollars” so that we can actually add them up and compare them (in much the same way you can’t compare apples and oranges, you can’t compare today dollars with tomorrow dollars because they’re not the same).

This analysis explains why a company that can always deliver $100 of profit year after year isn’t necessarily worth an infinite amount of money (because next year’s $100 isn’t worth as much as this year’s, and the following year’s is worth even less, and so on and so on) and is, to my understanding, the dominant form of analysis used by consultants and accountants in assessing the value of business propositions.

A variation of this analysis used by Private Equity groups and Investment Banks is called the Internal Rate of Return (IRR), which performs the exact same Discounted Cash Flow analysis above but summarizes it up in one value which is basically the interest rate a bank would have to be willing to pay in order to make the costs and the benefits exactly the same. So, a good investment will have a higher IRR because it takes a much higher interest rate at a bank to make someone not want to invest in the opportunity.

To my surprise, however, I learned in training that there are whole groups of firms who do not use either method in evaluating business/investment prospects, but use the much more crude and less technically valid Cash Payback Period. The Cash Payback Period makes no specific allowances for the Time Value of Money (the idea that the value of a dollar tomorrow is less by a factor related to bank interest rates) and is simply the period of time required for a firm to earn enough revenue to pay back the initial investment. This technique thus biases the firm towards investments which provide a quick and high cashflow and away from potentially more profitable investments which are slow to return cash (i.e. most Research & Development ventures).

So, big question, why would anybody use this? One possible reason is that smaller firms may value early cash flow a great deal. But, a caveat to this benefit is that the Time Value of Money analysis factors in a “penalty” for future cash flows. In today’s world, certainly no bank or venture capitalist is going to begrudge you a few extra years to earn a much higher return, right?

The more “accepted” reason, however, seems to be that Cash Payback Period is much easier to calculate and understand. Never mind that it is less accurate (and in some cases not accurate at all), it’s much easier to explain how “in four years, we recoup all costs” than it is to explain “if we discount future cash streams at an annual rate of 12% then the present discounted value of the investment becomes…”

What this means is that for any professional involved in a consultant role (i.e. doctors, lawyers, wedding planners, etc.), being correct is not enough. You also have to communicate your results in terms that the client can understand. This certainly applies as well to doctors and brokers (no matter how cool Dr. Gregory House’s character on House MD is, seriously people, the vast majority of people aren’t smart enough to be able to treat people like that) and politicians (who are particularly good at this), simple seemingly “commonsense” reasons oftentimes win out over more correct rationales which are unclear and appear overly technical.

So, where does that leave the consultant? The consultant will have to politely and clearly inform the client why Cash Payback Period is not a good metric and explain what, without getting boggled down by technical detail, the discounted cash flow analysis says about the investment choices.

And yet, here I am. Sitting. Watching a video online. Instructing me in the mystical secrets of the apparently very difficult “Save As…” command in Microsoft Excel. Judging from the video, it would appear that my coding math models in MATLAB is orders of magnitude simpler than learning how to enter formulas and resize cells.

Anybody else notice a strange discrepancy here?