Is SOX the mortal enemy of innovation?

by Rocco Tarasi

The Sarbanes-Oxley Act, commonly referred to as 'SOX', was enacted in 2002 as a response to Enron and the Enron-like financial scandals of the time. I'm in the enviable position of (1) being an ex-accountant and auditor, and (2) selling software that among other things is used to track compliance with SOX, which gives me some perspective on the impact SOX has had on companies.

Without getting into the boring details, SOX can (and has) be generalized as forcing companies to document their risks (i.e. "what can go wrong") and ensure that they have controls in place to prevent, or worst case detect, when something does go wrong. While it was a response to accounting abuse, SOX is sometimes interpreted by companies or their auditors more broadly to include virtually anything that could go wrong with the business. It can reach into the HR department, legal, IT, operations - everywhere.

What is the result? Overall, SOX seems to have put the fear of God in companies from doing anything out of the ordinary. It has resulted in stifling innovation in many companies. It may not seem like it from the outside - companies like Apple are still releasing new products after all - but behind the scenes, SOX has made innovation more difficult.

How? First, SOX brought the need to have written rules (policies, procedures, controls) for seemingly everything. More rules, less flexibility. Second, risks are now viewed more negatively than ever before. And not just accounting risks, but any business risk that could have a financial impact. Auditors don't like risks, and don't want their clients to have risks.

Innovation is often about doing something different, and it is much harder when there are more rules that govern what you are allowed to do. Innovation is also often times about taking risks, which is in conflict with how many organizations have adopted SOX.

I'm not saying rules are bad - I for one believe they are necessary, as long as they make sense. An area that they often don't make sense is in software selection. Some companies have, of their own initiative or through the scornful eye of their auditors, erected barriers for software selection so high that they prevent companies from buying cutting edge products that might still be in beta, or products sold by start-ups with no track record, or products delivered through the cloud. You guessed it - all too risky in the eyes of the auditor. Companies end up taking the safe route. You "never get fired for choosing IBM" - even if it costs ten times more than an innovative start-up product.

I recently received an I-kid-you-not 150-question IT checklist from a prospective customer that "needed it completed to comply with SOX." I have no problem answering good IT questions that help a customer determine which solution is right for them. In this case though, there wasn't a single useful question anywhere in the checklist. Literally, not one. "Does the vendor have password rules" and "Does the vendor use antivirus software" are frankly ridiculous questions that are not going to provide any reasonable information for system selection. Even if a vendor didn't have either of these - highly unlikely even for the smallest start-up - they would still answer yes. 150 questions later, the organization might have 'checked the box' on their due diligence procedure for SOX, but they have not in any way reduced their risks. In fact, they only thing they accomplished was tilting the selection in favor of the biggest vendors that employ armies of people to answer ridiculous questionnaires.

As companies grow they are forced under their own weight to institutionalize their processes, and that very action can limit their innovative potential. SOX has simply tripled that weight. According to the SEC, SOX compliance costs more than $2.3 million in direct costs at the average company. If those are the direct costs, it makes you shudder to think about what the indirect long-term costs will be.


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Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He writes about innovation at www.InnovationMinute.com with a focus on "everyday" innovations in business models, sales strategies, products and services.

Four New and Old Healthcare Ideas

by Rocco Tarasi

There are more innovations occurring in healthcare than anyone can count or keep track of, but I was particularly interested in these four - three that I've experienced personally and one that I've read about. They include a new product, a new pricing philosophy, a new business model, and a new distribution model.

1. Getting closer to the famous 'Star Trek tricorder'
   
   • GE's new portable ultrasound puts an ultrasound machine in a doctor's pocket - about the size of a smartphone. According to an early-trial doctor, "Having Vscan at my disposal at all times has allowed me to use ultrasound in a number of settings and with patients that I wouldn't have anticipated before." This isn't just a better ultrasound - in fact its probably worse, as the images are not as good as traditional machines. But it's now-portable capabilities mean it can be used to diagnose problems that doctors wouldn't have used ultrasound for before.
   
   
2. Wallet-busting ER fees
   
   • When we renewed our company-provided health insurance, the co-pay for emergency room visits jumped from $50 to $250. My reaction to that 400% price increase wasn't outrage but rather, 'good idea'. Part of the reason that ERs are clogged is because there isn't much disincentive from going. Increasing the price might be able to influence user behavior to either look for alternatives or to more critically evaluate whether the ER trip is necessary. Which leads to our next innovation...
   
   
3. More ER alternatives
   
   • I've used services like MedExpress before when I couldn't see my regular doctor, but I recently received a letter from my physician, who is part of a UPMC's medical juggernaut, that UPMC was opening its own off-hours clinic for nights and weekends when your normal doctor's office is closed. Apparently they've realized that people don't just get sick during business hours. Given the increase in my ER co-pays, this new service is a great alternative.
   
   
4. Pediatricians from the horse-and-buggy era
   
   • When we took our one-year old to the ER for last year, we waited 7 hours before we saw a doctor. While his injury fortunately wasn't critical (and he pretty much slept the entire time), we saw countless other kids sick or injured and in obvious pain stuck in the waiting room for hours. One little girl with a dislocated elbow was in the waiting room for over 2 hours. If you are willing to spend the money, there are some pediatricians that don't maintain offices but instead visit your house - or the ER - whenever you need them. Like the old days, I guess. They limit the number of patients they attend to, and charge a not-inexpensive fee per month per child, on top of what you pay for insurance. But for those with the money to spend - and if your kids are prone to injury - this can be well worth the price.

It is interesting to look at these types of innovations in the big picture. Several target the choke points like the ER, where a combination of alternatives and incentives serve to move the delivery of healthcare elsewhere. New products like GE's pocket ultrasound disrupt other chokepoints inside the hospital, offering immediate results from your exam room without needing to travel to another department. These are the business model changes and disruptive products that will make the most difference in improving healthcare.


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Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He writes about innovation at www.InnovationMinute.com with a focus on "everyday" innovations in business models, sales strategies, products and services.

Innovation Perpectives - All of the Above

This is the fourth of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'Who should be responsible (if anyone) for trend-spotting and putting emerging behaviors and needs into context for a business?'. Here is the next perspective in the series:

by Rocco Tarasi

There are a lot of easy answers to this question, but the easy ones are not necessarily the correct ones.

The first easy answer is "the CEO", because they are responsible for the strategy and direction of the business, are presumed to know more about their business than anyone, and are responsible for promoting a culture of innovation. But the CEO isn't on the front lines of most businesses - they aren't stocking the shelves with Proctor & Gamble goods at the grocery store, or working at the mall kiosk selling Blackberries, or greeting customers at the Citibank checkout window You can't trend-spot without the "spot", and it is difficult to do any spotting locked in the corner office. Plus, they probably have more than a few other things to do.

The second easy answer is "everyone." This is great in theory since they have the bandwidth and are on the front lines, and in a perfect world with unicorns running through rainbows this would be the answer, but in reality there are two big problems. First, it can't be everyone's responsibility when they already have "real" responsibilities (making sure the shelves are stocked, the right phone is sold, and the right bank account is credited) and they are compensated and evaluated based on those responsibilities. Second, most people probably don't care about innovating their job or their company, as much as we wish they did.

The final easy answer is "a designated manager/executive", probably someone with "innovation" in their title. This person would be the most motivated, since it would be their primary responsibility. And they could presumably put themselves into a position on the front lines talking to customers, suppliers and partners to identify trends. But the bandwidth of one person would be way too limited to be truly successful anywhere but the smallest of companies.

So the answer must be "D" - all of the above.

• "The CEO" can promote the right culture, and when given good information can make the right strategic decisions.
  
• "Everyone" is in right position and has the bandwidth to identify new trends, even if only a small percentage of people actively take the time to look.
  
• The "designated manager" has the motivation and incentive to foster ideas from "everyone", analyze those ideas and put them into context for the CEO.

So while the answer seems pretty clear, why is everyone bemoaning our country's innovation deficit?

• Hubris leads many CEOs to believe they don't need any help with innovation from the rank-and-file.
  
• Most companies don't have the culture or infrastructure to support those employees that are actually self-motivated to find trends and be innovative.
  
• Few companies designate a manager/executive with innovation responsibility. The CIO, if there is one, is often incorrectly presumed to have or share this responsibility but in reality spends 100% of their time managing the company infrastructure and reacting to fires.

Most of the media spotlight on growing innovation is on education, financial incentives, and political support. While those are all important factors, most companies have control over their innovation capability through a combination of the right culture, useful supporting infrastructure, and clearly defined responsibilities.


You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'Who should be responsible (if anyone) for trend-spotting and putting emerging behaviors and needs into context for a business?' by clicking the link in this sentence.

Image Credit: EssjayNZ on Flickr

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Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He writes about innovation at www.InnovationMinute.com with a focus on "everyday" innovations in business models, sales strategies, products and services.

The 'Captive Upsell' Business Model

by Rocco Tarasi

I was reading Free: The Future of a Radical Price by Chris Anderson the other day, and it got me thinking about other innovative business models. One of the best that I have encountered recently was at the Bridgestone tire store when I got new tires for my car.

What was so impressive was how they convince you to purchase an alignment while they are mounting your new tires. While your car is being worked on, they come out with a computer generated report that shows the misalignment of each of your tires, and offer to do the alignment for an additional fee. It is a very compelling sales pitch:

1. The computer generated report provides reliable evidence that your tires are misaligned, instead of just looking at the wear on your tires (a computer can't lie, right?).


2. To some extent, you have already experienced the problem that they are selling you a solution for - the reason you are there in the first place is for new tires, and misalignment wears tires out faster. The alignment is offering you a chance to extend the life of your tires, and you are most receptive to that sale when you are about to pay for your new tires.


3. Since your car is already up on the jacks, you believe - rightly or wrongly - that doing the alignment will be cheaper now than if you want to do it later. You've already paid, via your new tires, for the labor to get the car on and off the jacks.


4. You expect (and they verify) that it will only take a few additional minutes to do the alignment, since again it is already on the jacks. Deciding to get an alignment later will most certainly take more time.


5. You are already spending many hundreds of dollars on new tires, so the alignment seems inexpensive in comparison.

This honestly is an impressive sales technique. The manager that I worked with was personable and not at all pushy - he didn't have to be, he had all of the above factors in his favor. I bought the alignment - I wouldn't say I "happily" bought it, but I didn't leave there with a negative experience even though I spent more on the trip than I intended to.

It is interesting to compare this to a somewhat similar sales technique - an electronics store trying to sell you the extended warranty on your new technology purchase. How does that situation compare to the five factors above?

1. Reliable evidence? Not really. TVs, stereos, cameras, DVD players – they aren't known for their poor quality.
   
2. Already experienced the problem? Probably not. Odds are you are buying a new toy not to replace a broken one, but because you are upgrading (DVD to Blu-ray) or because you have a new need (like a bigger house).
   
3. Cheaper now? Yes. You can only buy the extended warranty at or soon after your purchase.
   
4. Only take a few minutes? Yes.
   
5. Inexpensive in comparison? Yes (usually).

So three "Yes" and two "No" answers. But those two "No's" are important - without reliable evidence you don't believe your new purchase is going to break, especially if you haven't had one break before.

The lack of evidence is also supported by countless stories you've read of how extended warranties are a rip-off. Perhaps if they lowered the warranty price then it wouldn't be considered a rip-off anymore - but then again, they have likely maximized the price that consumers would consider "acceptable" to maximize their revenues. If they lowered the price it probably wouldn't gain any new consumers, so they would be just giving away revenues.

There is one other problem with the extended warranty purchase - there is no "immediate gratification". The warranty payment is for something that might happen in the future. It doesn't make me enjoy my new TV or DVD player any more now. This reminds me of one more experience - buying my first big screen TV at Best Buy, and the salesperson talking me into an overpriced Monster surge protector. I bought it - partly for its insurance policy, and partly for the supposed immediate improvement in having a "cleaner electrical signal to the TV". I know, I know... but how did that experience stack up against our five factors above (plus our new sixth "immediate gratification" factor)?

1. Reliable evidence? Not for the "cleaner signal"
   
2. Already experienced the problem? Not for the cleaner signal either, but I did have a relative lose their electronics from a lightning strike.
   
3. Cheaper now? Not really, I could buy it at any time.
   
4. Only take a few minutes? Yes.
   
5. Inexpensive in comparison? Yes.
   
6. Immediate gratification? Yes.

When I think back to why I chose the surge protector and not the extended warranty, I think it was a combination of (1) from every news story I heard I knew the warranty was overpriced; and (2) since the surge protector served a dual role - part product improvement, part insurance policy, I was able to more easily justify the high price since it was still much less expensive relative to the TV itself.

I know that I didn't need a Monster surge protector, but I wonder how many other people have gone through the same thought process, and what other similar sales cases we could apply these factors?


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Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He writes about innovation at www.InnovationMinute.com with a focus on "everyday" innovations in business models, sales strategies, products and services.

Innovation Perspectives - Rethinking University Education

This is the eighth of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'What product or sector is in desperate need of innovation?'. Here is the next perspective in the series:

by Rocco Tarasi

Is there an industry more in need of innovation than education?

It is one of the largest industries in the United States, with over $1 trillion dollars spent annually. You are a consumer in this industry practically from birth until death. And yet most believe that the industry has lagged the pace of innovation so much that the education market today is comparable to the newspaper industry of 1999 - enjoying healthy profits before innovative start-ups disrupt their existing (archaic) business models.

The Washington Post recently wrote that:

"Students starting school this year may be part of the last generation for which 'going to college' means packing up, getting a dorm room and listening to tenured professors. Undergraduate education is on the verge of a radical reordering. Colleges, like newspapers, will be torn apart by new ways of sharing information enabled by the Internet. The business model that sustained private U.S. colleges cannot survive."


Students (and their parents) enrolled in higher education have experienced first-hand how strict rules conspire to make it harder to graduate on time - including the difficulty of transferring credits between schools and the difficulty in scheduling "core" classes that, for some reason, are never offered during the semesters you need them. According to the American Enterprise Institute, four-year colleges graduated an average of just 53% of entering students within 6 years.

At the same time that schools are working to keep you a student as long as possible, they are also increasing the cost. By how much? According to a FastCompany article, since 1990 the cost of college tuition has gone up more than any other good or service.

Maybe part of their problem is that they haven't figured out a simple concept called "economy of scale", where as more students are added the cost per student should decrease. And yet a Forbes editorial noted that the administrative and support staff at colleges between 1997 and 2007 increased at a rate double the rate of enrollment growth. It is not surprising though, since there is little incentive for colleges to control their own costs - after all, they are selling arguably the second largest purchase most people will ever make, funded almost entirely by guaranteed loans. What other industries have this type of built-in financial benefit?

Fortunately there are some cracks in the armor forming. Although the most recent Inc 500 list of fasting growing private companies included only four related to education, there are a number of start-up companies trying new ideas to disrupt the status quo:

• Open source textbooks from Flat World Knowledge
  
• Open source course content from the OpenCourseWare Consortium
  
• Degrees taught by volunteer faculty at the University of the People
  
• Peer learning from Peer2Peer University
  
• Competency-based degrees from Western Governors University
  
• Online education aggregators like Academic Earth.

These are all great initiatives, but there is a deep-seated cultural reason that the higher education industry has been able to stifle any potentially disruptive business models: the perceived value of where a person earns their degree is extremely high - arguably much higher than it should be. For real change to take hold in the industry, we need to think differently about how to measure and value education.


You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'What product or sector is in desperate need of innovation?' by clicking the link in this sentence.

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Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He writes about innovation at www.InnovationMinute.com with a focus on "everyday" innovations in business models, sales strategies, products and services.

Being Too Innovative Might Get You Fired

by Rocco Tarasi

A North Carolina principal was terminated for approving an "innovative" fundraising idea proposed to her by the parent advisory council. Their idea was to allow students to make a $20 donation to the school's new technology fund in return for 20 "points" that could be added to two of their exams (10 points per exam). For example, if a student scored a 68 on an exam they could add 10 points to make it a 78. After enough parents complained the school district stepped in, stopped the program, and terminated the principal (though they characterize it as "voluntary").

Maybe you like this particular idea, or maybe you don't. Either way, what I took away from this story is how difficult it can be for people to accept new ideas and thinking outside the box - especially when it comes to education, which seems to defy all natural laws of disruption and innovation. As different writes and readers have pointed out about this story, 20 points isn't going to make any significant difference in a person's overall grade. And does anyone really think this will encourage a student to slack in their studies simply because they can add 10 points to an exam?

But the quote from the article that shocked me the most was the following:


Teachers giving extra test credit to students who bring in classroom supplies is a longstanding practice at some schools.


The article didn't clarify that this particular school had this "extra credits for supplies" program, or which schools did. But there is ZERO difference between a $20 donation for extra credit and bringing in school supplies for extra credit, and if this is a "longstanding practice" then maybe it shouldn't cost someone their job.

The state's department of education officer said that "paying for grades teaches children the wrong lesson." I think that is a convenient excuse, and in fact you can choose to look at it the opposite way: if a student was given the choice of spending $20 of their own money on extra credits or on a new Transformers DVD movie, which would they choose? Perhaps that decision could itself be a valuable lesson.

The state also said that it would be unfair to students whose parents couldn't pay. This may be a more valid argument, but this could be easily solved by offering alternatives to the $20 donation, such as volunteer work that would require some effort or work from the students instead.

It's sad to see someone lose their job when they're taking the initiative to innovate, but mix an uber-sensitive society with an uber-political organization like a school board and the result shouldn't surprise anyone.

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Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He writes about innovation at www.InnovationMinute.com with a focus on "everyday" innovations in business models, sales strategies, products and services.