TL;DR

NixOS is a distribution with novel concepts including:

1. Native configuration as code using a uniform language: NixEL.

2. Reproducibility between the specification and the software installed.

3. Full rollbacks, even if a libc or kernel update fails.

4. Multiple versions of the same packages can coexist for several non-privileged users.

5. An insane quantity of prepackaged software: >40K.

6. The package manager works on top of most Linux distros and OS X.

This post will cover in detail why I made the switch despite my previous track record and the extreme difficulty for an old software engineer now converted into a manager.

First, I illustrate my experience with Slackware Linux. Second, I present the reasons why I moved to Debian and stuck to it for many years. Third, I describe a couple of incidents and day to day situations that led me to the Nix discovery. Fourth, I explain how to transition to it. Finally, I summarize the main points and present some reflections for the future.

Argumentation

My first love was Slackware, a distribution that forced me to do everything by hand because of its pretty basic package management system. During 1995 the internet connections in Medellín, Colombia, were awful. Downloading a Linux installer using a 28.8 Kbps modem needs patience and money. Through IRC, I managed to meet someone in town that sold me the current Red Hat and Slackware installers. Strangely Red Hat didn't work, and Slackware famous for being hard, ran smoothly. After that moment, my long trip to do everything from scratch began. For each application and its dependencies, I needed to:

1. Download the upstream source.

2. Read the upstream documentation.

3. Compile.

4. Install.

5. Configure.

6. Back up configuration files.

7. Document my tweaks for future use.

Mostly, I moved software from one place to another for years.

Near the year 2000, I planned to switch to a project that followed a similar development process as the Linux kernel and recently improved his already large and mature package management system: Debian. This project had clear guidelines to contribute, a bigger community, a broader software ecosystem, homogeneous documentation, and the most advanced dependency management I had ever seen. Everything became clear: less time downloading, compiling, installing, configuring software, or its dependencies. Just one command and everything arrived at my machine as expected. How not to become part of it? I fell in love again, and this time for a long time.

During all these years, my friends and I became Debian Maintainers, taught at universities, built a company, helped customers, made a private custom distribution, and became hobbyists during nights and weekends with the power of Debian, however, perfection was not even close. It was versatile, mature, stable, and relatively easy to handle in scale to solve several types of problems. However, despite using tricks such as preseeding or cfengine, each installation became what is now known as a snowflake, a unique piece of technology. If you wanted to install the same server, you still would need manual steps that inevitably never gave you the same result. You moved one thing, and another was broken. A minor software update silently occurred, and something that worked before didn't work anymore. Moving software was not only a complicated and expensive business but also a very fragile one.

In 2016, a discrepancy between software versions used to build an estimation was the root cause of financial disaster for a project. We had been using CLOC since 2012 to measure the source code size of an application that would be security tested. With this output, during the presales stage, we estimated the price following a simple formula. During the execution phase, we detected an inconsistency in the size of the application currently under test. As we went deep, we realized that different CLOC versions were in use. Again, a problem related to moving software.

Then I found a strange tool called Nix, that with its companion set of packages called Nixpkgs, could erase the problem from the face of the earth. This tool could be installed easily on every Linux, allowing us to maintain the OS anarchy policy that we had until now. Nevertheless, it would enable us to deliver the same piece of software to every possible person within seconds. The tool looked weird at the beginning:

1. Installing everything under /nix (store) is a clear violation of the FHS.

2. Most files are symbolic links pointing to weird names in the store.

3. To install a single package for all the users, you need to change a configuration file and “rebuild” the OS.

4. Each change creates a new entry on GRUB.

5. The disk gets full pretty fast, thus requiring a garbage collection process to remove the waste.

Despite how strange it was, it promised predictability, a requirement that was not always fulfilled, even for Debian, the distro with the strictest build policies and the better maintenance guidelines.

To personally experiment all the promises of this exotic beast, I decided to use it in my daily job gradually. From 2016 to 2017, I ran a Nix subsystem on top of my Debian Unstable. Then, I moved to NixOS over a virtual machine to find the workflows that fitted my needs and to get confidence to throw away my old habits. In 2019, I moved my host OS to NixOS unstable.

When I was forced to change my laptop twice, I received the validation of all Nix's promises were real. Just formatting the new machine, cloning the git repo that contained the full OS configuration, and waiting for the “build” process to end, gave me the same machine that I had before. Like in functional programming languages, it seemed like a pure function: the same output for the same input with no side effects. Since last year, the times of wasting effort moving software or catching bugs related to it are over.

Summary

After installing and using GNU/Linux for almost 24 years, I would say that the time spent moving software from one place to another is enormous. The implications of bad deployments are even more significant than the wasted engineering effort. Debian is still a pretty fantastic piece of work of the OSS community, and its habits are enrooted in many of us. However, Nix and its friends are solving the deployment problem tackling it from its roots. They are redefining assumptions and bringing a new era of stability, predictability, and joy for engineers. I hope that Nix prospers and will be the standard for many distributions in the future.

Conclusion

The main problem in achieving this future lies in the attraction of top developers from other distributions. Gentoo, Arch, and Debian are pretty vibrant communities and full of highly skilled developers. However, many of them remain skeptical when confronted with concepts like derivations, generations, store, rebuild, rollback, infra as code, non-GUI installation, flakes, etc. They think that Docker, Ansible, or other similar tools solve the same problem quickly, but the only way to convince them is by raising awareness of how much time they are still wasting moving software.

#linux #slackware #nix #nixos

Thanks to the possibilities of A/B testing, I decided to experiment by performing multiple tests on some of their advice. And to my surprise, the results were different from predicted.  I guess the experts weren't wrong, just that testing shows that in the business world, silver bullets don't exist.

The experiment I'm going to tell you about here was very simple.  Should the action on a landing page be at the top or the bottom?  The conventional wisdom of my close advisers was, unanimously, that it should be at the top.

To test this silver bullet, we designed an experiment where we ran the variations simultaneously for 40 weeks after first restarting the statistics.  The action with which we measured the conversion was the page display vs click on the "I WANT TO BE HEALTHY" button. (Here shown in green, “QUIERO SER SALUDABLE”). What does the experiment tell us about this silver bullet?:

In the table above we see three variants: A, AA and B. Variants A and AA have the button at the top of the page:

Variant B has the button at the bottom of the page:

As we can see in the first image, the conversion rate of the A and AA variants is between 6.10% and 7.63% (average 6.86%). However, the B variant has a conversion rate of 13.70%, a 79.55% improvement over the best previous conversion.

The difference between variants A and AA followed another, more subtle suggestion, where I was told I should change the order of the sections:

Again, the change proved to be insubstantial and contrary to the recommendation. The difference in conversion rate between Variant AA and Variant A was marginal (1.53%), that is, practically statistical equality. Andin any case the original Variant A, where “investment” appeared before “experience”, proved to be better.

The simple conclusion is that if someone gives you a silver bullet solution, you have to test it out.  In the long run the circumstances surrounding a business context are usually different and the important thing is to make identifiable changes one at a time, measure, compare, go back and repeat.

It all possibly began with good intentions (causes), but really it presents great problems (effects) for the technology industry of our country.  It’s even evolved a variation that looks different at first, but is really nothing more than the same problem on a different scale: "body shopping", or, as I call it, butt month.  

In this article we’re going to examine what this problem is and what are its causes and effects, so that in future articles we can look at better alternatives.

In a nutshell, butt-hour services are when someone charges you for sitting on their butt.

Let’s use an easy-to-understand comparison that’s similar enough to providing technology services: painting a house. When we look for someone to paint our house, we’ll find two types of service providers:  the butt-hour painter and the results painter.

The butt-hour painter will give you a quote for painting the house without looking at it. His model doesn’t consist in selling you the solution itself, but rather only part of the solution, which in this case is the painter's time.

The butt-hour painter will say that painting the house costs $30K COP per hour per painter. On the off chance that he visits the place, he may inform that the process will take between 5 and 10 days. However, the fine print will say that this duration is not guaranteed because other factors are out of his control (opening hours of the house, availability of materials, etc.).  The butt-hour painter will indicate that the paints and brushes are also not included and that you can buy them according to your needs. Typically you pay the painter these “butt-hours” in agreed time periods (weekly, fortnightly, etc.).

The results painter, on the other hand, visits your house, takes measurements and photographs, recognizes the area, determines the quality and color of the paint you require, and after understanding the problems and risks inherent in painting your house, will indicate that the process will cost a total of $3M independent of other variables.  

This painter also indicates that the job can take between 8 and 12 days, but clarifies that finishing the job earlier or later won’t affect the price. Payment is not according to specific timeframes but rather to progress on the overall result (milestones): for example, a payment of 20% when the courtyards are finished.

You as a reader, whether customer or supplier, can now probably quickly identify what percentage of your purchase or sale of technology services follows the model of butt-hour painters or results painters. I.e., IT guys who charge by the hour until the job is finished, or IT guys who charge for getting the job done, regardless of how long that might take. And I’m sure you’ll agree that in the IT sector of our country, the butt-hour model is the king of transactions. It’s the model most preferred by buyers, and the easiest to market for sellers.  

Let’s compare some attributes of both types of painters to understand how we as computer specialists essentially became nothing more than IT staffing agencies and that our relevance as an industry is in jeopardy.

The first thing to analyze is the total cost of the solution.  The butt-hour painter is selling only part of the solution and not the solution itself, so his quote is a unitary value of labor and not the closed value of a solution to a problem.  

With the results painter the final total cost is known in advance, therefore the operational risk is fully transferred to the supplier.  The butt-hour painter can sit on his butt and dawdle if he wants, spend an hour more, an hour less, spill a can of paint or two, and we’ll only know the total cost of everything at the end.  

From the buyer's perspective, opting for the butt-hour painter is to hope that by managing the variable costs of labor and materials the job will turn out cheaper than what the results painter charges. But do the theoretical savings of cheap butt-hours compensate running the operational risk?

A buyer has to put in a lot of cost management to ensure that his butt-hour service will end up cheaper, and this brings with it a whole slew of hidden costs.

Optimizing painter hours and materials implies spending time and money on the part of the buyer to ensure the proper use of resources: counting painter’s hours, negotiating hours, selecting and purchasing materials, among others.  

In the butt-hour model the buyer acquires administrative responsibilities in which easily managers of the parties invest two hours of their time each discussing whether a painter arrived at 8:00 AM or 10:00 AM to know if one, two, or no painter butt-hours should be paid. After subtracting the hidden costs, is the cheap butt-hour still cheaper?

A dimension apparently in favor of butt-hour painters is the speedy capacity to deliver a quote, and the low investment needed to make the sale.  

When you paint a house in butt-time you don’t have to estimate or precisely define the task at hand. You don’t have to measure the area of the house, you don’t have to make a detailed estimate, you don’t have to determine the type of paint, you don’t even need the house to be built already, or to have a house at all. You just send a price list in advance quoting a unit of time, so you barely have to spend any time preparing a quote, nor invest anything in attempting to make the sale. But is it really cheaper to not know what I have to do instead of investing in specifying the result I want?

Since butt-hour painters all use the same quoting unit—that is, the painter’s hour—, this model gains an advantage when being evaluated by the Purchase Department: supplier comparability.  If there are several butt-hour painters, you can compare them by looking at their skills rather than the quality of their work. For example, you can filter for painters with over two years of experience who are certified in heights and handling toxic materials.  

Suppliers who submit their price quote assure you that they will supply painters with the requirements you specify, and it’s assumed that painters who fulfill these requirements will all deliver the same quality of work. So when you compare quotes you’re not really comparing quality since supposedly it’s all the same—all you’re comparing is the hourly price. However, isn't it cheaper to have a supplier who is twice as expensive per hour but is four times as productive?

Taking all this into consideration, we can clearly see that the butt-hour service model encourages dawdling. Obviously, painters charging by the hour will be motivated to overestimate the time required for the job, or report more time than was actually spent.

Whereas on the other hand, the results model encourages innovation. Results painters must constantly be on the lookout for new technology or working strategies that will allow them to meet the defined objective in less time and cost.  

Butt-hour painters are very unlikely to develop and incorporate innovations, because doing things more efficiently means they’ll spend fewer hours doing the job—and therefore make less money. And anyway, innovating takes effort. Why would they do that if it gives no return? Better to keep sitting on your butt.

So, how can you innovate while in a company that works under the model of selling butt-hours?

You can’t.

The only option is to get rid of the model.

When there’s a contract between companies at a fixed value of butt-time, the supplier has to hire staff with a standard productivity and cost that lets him generate a profit margin.  So a paint company that uses the butt-hour model for services must pay all its painters pretty much the same. Therefore, there’s little space for the development and retention of exceptional talent. Painters won’t learn how to do a better job, and those that do, will leave. Retaining painters that can paint twice or triple the area per unit of time would imply having to pay them more, increasing cost without increasing income even when there’s a potential perceived benefit for all parties. 

For obvious reasons, in a results model the space for exceptional talent and wage differences of up to 3X or 4X are perfectly viable. Where would you as a buyer rather work, in a butt-hour company or a results-based company?

One thing that buyers like about the butt-hour model is that they can try to micromanage everything.  Since the buyer is trying to manage everything himself and find the absolute cheapest way to get the job done, everything can be challenged.

The time spent stirring the paint, how long the painters take for lunch break, what time they arrive and leave, the painting speed of Painter A compared to Painter B, the painting speed of everybody compared to the fastest painting speed of the best painters in the world, the method of painting, the use of brushes instead of rollers, everything.

Roles are challenged or replaced by the buyer himself or even supplied by the competition.  Essentially the buyer of a butt-hour service becomes the operations manager, research manager, and development manager of the supplier.

The ability to manage their own equipment ends up being a luxury only had by the results painters, whose method of work and hiring gives them the independence to achieve the results they initially committed to in their own way.

Why hire a painter and tell him how to paint? Could it be that in the long run you purchase capacity because you want to control more people? When the buyer gets to compare painter’s hours and challenge every part of the process, he ends up running the job his own way. Added to the standardization of skills and appraisal of man-hour price, butt-hour painters end up succumbing to disaster: commoditization.  

Now, the only thing that sets competitors apart is price. Essentially, the butt-hour painter goes from being a tech company to being an IT staffing agency. Meanwhile, the results painters get to keep their own method, technology, work culture, and continue to supply final results rather than man-hours.

Once man-hours (or butt-hours) have been commoditized, the sale moves on to the next stage: granularity. Here we add the client's micromanaging to his incessant search for cheap deals, so now he doesn’t want us to pain the whole house, he just wants certain walls, or certain parts of walls, or to patch up a hole left by a nail where a picture used to hang.

These small one-or-two-hour tasks end up generating sales that don’t even cover the fixed costs of the remaining six or seven free hours that can’t be assigned to that painter in another patch-up job on the same day. After a while the small projects start to outnumber the large ones, and butt-hour painters start bleeding out in their financial results.

Some savvier companies have understood the problem of granularity and have moved to a more advanced version of the butt-hour: the butt-month! (I.e., “body shopping”, SCRUM included). This way they avoid granularity, and whether or not the painter is busy painting houses, they pay him to be available to paint them (which increases the cost for the client).

Using this structure, the supplier generates a larger sale, because instead of man-hours, it sells man-months over long periods of time. However its role as a staffing agency is all the more emphasized, and because it’s commoditized and in high demand, prices must always keep going down.  

And here’s where your customer becomes your own competitor!  After a while the client will get offended by the obvious (the margin between the painter's salary and the end price of the butt-month) and determines to hire the painter himself, pay him more, and get greater value by saving on the profit margin of managing a worker himself. Butt-months only postpone death. In the long run, it's always the same man-hour.  

A results painter keeps looking for better ways to paint, better ways to pay, and keeps using trial and error in his search for the best and most efficient way to paint houses.

In short, results painters invest more time and money in the sales process by clearly defining what needs to be done, committing to a final cost, taking responsibility for estimation and execution errors as well as triumphs in case of achieving the result in less time and cost.  

By controlling the method and service from start to finish they have room to invent new ways of doing things, to take care of work culture and have their own organizational practices. They’re independent.  And lastly they have the greatest wealth of all: they can hire the most exceptional people given that they have room for a broad salary scale.

Butt-hour painters don’t have to invest a lot of time and money in preparing a price quote, because they don’t sell solutions to problems, they just rent time from their staff.  They don’t commit to a final cost because they only control a part of the solution. They promote cheap unit value distracting from the global perspective of the number of hours required.  For them, innovating is suicide, because doing things faster would mean selling less.  On top of that they end up with a large team of mediocre talent because there’s no financial capacity to pay exceptional employees on differentiated salary scales.

After seeing that in our country the large percentage of transactions in technology services is butt-hours or months, all I can say is that this is clear evidence of the triumph of the purchasing department over the general management, where the small picture wins out over the big picture. Because it’s obvious that the best bargain is not achieved by hiring the cheapest man-hour. You get the best bargain when you understand that it depends on the total hours spent, hidden costs, and the hours wasted sitting on butts.

General managers have been defeated by the buyers within their own organization, because although they know this, they still don’t realize that butt-hours and months means turning your client into a shareholder who has more control than you do. This doesn’t bring in any more income and takes away your freedom to do your job the best way you know how.  

For the supplier, this means playing a game that in the short term may bring growth and profit, but in the long run is unsustainable and creates minimal value. This is a game where we become nothing more than staffing agencies.

What happened at the end of the month or at the end of the year with the accounting of that money? I don’t know. Possibly the owner replenished it or entered it as a "miscellaneous" expense. In any case, I always thought this was rather strange. In the best of situations it made me think that this company was run like a mom-and-pop shop.

During my work supporting various companies and my own experience as an entrepreneur, I’ve identified two main groups of entrepreneurs:

• The Shopkeepers, where there are only one or two partners who work most of the time in the company.And the

• Meticulous Managers. These are the ones who have three or more main partners, plus external partners who don’t work at the company.

This arbitrary classification makes it possible to group outright divergent behaviors in cash management, accounting and, consequently, taxes.

Shopkeepers tend to record all sorts of personal expenses as company expenses, such as: lunches outside the business, transport for activities not related to corporate purpose, salary of non-working relatives, vehicle credits or properties that are not related to commercial activity.

In general, sole owners of a business who in turn work for their own company, consider it redundant or unnecessary to pay themselves wages and then pay their personal expenses from them.

Meticulous Managers, on the other hand, have a defined salary or payment of fees that is paid on a fixed month-to-month basis. They rigorously separate personal expenses from those of the company. They pay said expenses from their own salary, and gradually develop expense reimbursement policies that become increasingly strict (budget ceilings, associated payments - taxes, deductions, social security, etc.).

I guess these people aren’t meticulous as a rule, but because they have to be. As many partners work, very likely only one or two have the authority to spend company money, and they can’t set a bad example for others. Additionally, if there are external and/or minority partners, they’re forced to act more transparently so that they don’t affect their partner’s assets.

Using company money for personal expenses is not merely a distinction that sets one group apart from the other: it’s morally reprehensible behavior, a violation of the law. That’s not the proper way to do things.

In the Colombian Tax Code, Article 107, it’s indicated that expenses that are deductible from income must comply, among many others [1,2,4,5,6], with three basic principles [3]:

1. Causality: The expenditure must be related to the income-producing activity [6],

2. Necessity: The expenditure must be indispensable according to the commercial customs of the income-producing activity,

3. Proportionality: Expenditure must be reasonably proportionate to the income or the potential revenue-generating income.

In this sense, and in order to fully comply with the law, collecting receipts from a cousin’s gas tank or the lunch bill of a third party outside the company and incorporating them as a company expense is a violation of the principle of causality.

Paying interest on personal property such as vehicles or homes, without this having anything to do with the corporate purpose of the business, also violates the principle of necessity.

Likewise, paying the manager’s aunt and uncle the same amount as the manager when they don’t even work for the company, is a disproportion according to the commercial customs of any sector.

These are all gimmicks used by unscrupulous accountants and tax reviewers to reduce taxes, but that go against good conduct and defined laws.

This situation then leads us to answer the following question: if I am the legal representative, general manager, and full owner of my company where I work all the time, why can’t I record my family’s groceries as a company expense?

The answer is simple: because you created a company that’s a legal entity independent of the natural person, and that is subject to different laws indicating tax principles that must be treated with the utmost respect.

Obviously if you want to have a mom-and-pop shop, a small, disorganized business that you’ll never be able to sell in the future, you can disobey the law and never even be found out. Now that you know that, if you keep doing it, you’ll just be a sneaky corporate fox.

If, on the other hand, you want to change these behaviors and be an exemplary entrepreneur, then you have to pay the price of doing things right.

Give yourself a salary. It doesn’t matter how much—that’s a capacity issue and not a legal one. Apply the corresponding withholdings, pay the required social benefits, and by doing that, your salary will be tax-deductible. It’s causal, necessary and, I hope, proportional. You can sleep peacefully knowing you’re not stealing from the State. You’ll be running a business, not a shop.

1. Non-deductible costs and expenses.

2. Formal requirements for costs and expenses to be deductible.

3. National Tax Code – Article 107 – Necessary expenses are deductible.

4. National Tax Code – Article 618 – Obligation to demand an invoice.

5. National Tax Code – Article 617 – Requirements of the sales invoice.

6. Deductions must be causally related to income-producing activity, not income.

7. Concept 074532 of November 2, 2004.

Lawyers and accountants will often advise a person not to formalize until achieving a certain amount of cashflow or business deals that would cover the initial and recurring costs that formalizing implies. However, if you look deeper, nobody ever knows exactly what these costs are.

Let’s answer this question coherently by looking at financial statements and accounting records, and from these build a basic model of initial and minimum monthly expenses for a small business registered in Colombia. Consequently, this analysis is validated by the market, which means that for each spending component there exists a provider who, at the time of this publication, offers this service satisfactorily.

All expenses mentioned will be gross values: i.e., before taxes and deductions. The reason behind this is that taxes have to be paid whether you’re registered or not, so we don’t count them as a cost of registering.  The VAT collected must be returned at another time, therefore it is not an expense but simply deferred income. Income tax only applies if there are profits, and in any case it also applies to natural persons under certain circumstances.

The design criteria for our Simplest Business Entity (like a corporate MVP) will be as follows:

1. Minimum team: one (1) full-time partner

2. Laptops: supplied in kind by the partner

3. Wages: (see this article)

4. Work Culture: No teleworking, therefore leasing office space must be considered

5. Independence of partners: P.O. box, phone line, partnership

6. Partners experts in the product, though not in design, accounting or law

7. No favors liabilities: paying cash for required help

8. Economies of scale: annual or multi-item purchase orders from a key supplier

9. Target: marketing of a single clearly defined product or service

10. Rounding up: overestimating instead of underestimating costs in order to stick to the budget

11. Complying with all legal obligations in a timely manner

We invite readers to challenge all costs and concepts in this article. If a reader of this blog considers that an expense

• is not mandatory,

• has a better,

• cheaper alternative or costs less than presented,

please explain your disagreement in the comments so that we can obtain a better consensus on the minimum cost of formally starting and operating a company in Colombia.

We’ll start by identifying all strictly mandatory expenses related to being registered.  K will be used to designate thousands, M to designate millions. If currency is not specified, it refers to COP. USD will be used for US dollars and for the conversion between currencies we will assume an exchange rate of $2,500 COP.

1. Articles of Association ($350K/one time): These are the constitution and definition of the purpose and basic governance of the new entity that is to be established.  They can initially be written with standard templates found online, but it’s prudent to hire an attorney to validate them at the end.  The lowest fee for this service is 1/2 Minimum Monthly Salary (MMS).

2. Constitution ($400K/one time): Chamber of Commerce and Dian (equivalent of IRS) registration procedures must be carried out for the new entity.

3. Accounting and Tax Services ($2.4M/year): To keep accounting records, record them in the information system, present financial statements and settle taxes and reports required by the DIAN (IRS), it is necessary to have an accountant. The value is estimated at $200K/month

4. Commercial Registration ($300K/year):  During each year of operation and regardless of incorporation date, all companies in Colombia that carry out commercial activities must maintain a record of existence.

5. Industry, Commerce and Notices Tax ($480K/year):  Depending on the municipality in which the company has its operations, the ICA must be paid.  This value changes with annual sales but is initially paid in Medellín at $40K/month.

6. Certificates of Existence and Legal Representation ($60K/year): Once the company exists, this document issued by the Chamber of Commerce with limited validity (2 to 3 months) becomes its identification.  It must therefore be obtained periodically, and we’ll estimate needing 12 updates per year with a cost of $5K/unit.

7. Fixed Financial Expenses ($720K/year): Once the business exists, a bank account is required, one (1) debit card for physically carrying out procedures ($10K/month), and a virtual branch with a user to be able to do work online ($50K/month). It should be noted that what is most needed as an entrepreneur is a low limit credit card in the company´s name, however this is impossible to obtain for a start-up company.  All of the above prices and restrictions are based on Bancolombia's policies.

8. Variable Financial Expenses ($150K/year): This refers to the fact that once a company begins to exist in the financial system it must begin to pay a series of commissions for using different services.  In the historical review of our supports, the best model to predict these expenses is as a percentage of total operating expenses and costs. That is, the value increases or decreases depending on what is spent as a company.

   The suggested model is to estimate between 0.5% and 1% of period operating expenses for this point.  To calculate the annual value, we will assume an average value of 0.75% with annual operating expenses of $20M.  This point breaks down as follows:

   • Tax on financial movement: 4 out of every 1000 pesos transferred

   • Third Party Payment Fee: $2,500 COP for each payment made

   • Interbank transfer fee: $14,000 COP for each payment made

   • Fee per email sent: $200 COP for each email sent

   • Interest credit in savings account: <6% per annum on the balance

Taking the aforementioned points, a small company would have initial mandatory expenses of $750K ($0.8M) and annual recurring ones of $4.110K ($4M), therefore, monthly recurring expenses of $342K ($0.3M), for a total investment of $4,860K ($5M).

The previous section is the minimum cost of existence, however at the beginning, investment in other minimum items not mandatory to formalization is also required.  Below are those we consider to be in this category:

1. Brand Design ($1M/once): Most companies are created to market a product or service.  This is marketed by positioning a brand in the mind of the consumer.  Creating the brand means defining the audience, the message to convey and with it, basic graphic elements: logo, slogan, fonts, colors, templates for slides and for documents, etc.  This is an initial cost and from this other graphic elements can be derived quickly and inexpensively.

2. Landing design ($1M/once): At the beginning of this MVP company, creating a website--in addition to being slow and expensive--can be useless.  Initially, a serious, simple, rapidly deployed Internet presence that serves as a sales and conversion channel rather than an informative site is what is needed.  To fulfill this purpose, designing a landing page is the best solution.

3. Landing Page Service ($1,620K/year): Prices of the two previous items can be achieved if a web designer is given a tool so that--without engineers—they can build a decent site for the customer in less than a week.  The landing page service costs $135K/month, and includes hosting, statistics, A/B testing and can be modified in minutes by the entrepreneur without needing HTML knowledge.

4. Basic Communications Expenses ($460K/year): The most basic cellphone plan costs $35K/month, and a P.O. box $40K/year.  These two items allow the company to have a point of contact which is independent of its partners (no registering mom´s address in the company's RUT) and minimizes changes in contact info for the international world.

5. Location Expenses ($1.8M/year): Cubicles in co-working spaces or in nearby companies can be obtained for $150K/month per spot.  This includes chair, work desk, electricity, telephone, shared wireless Internet and possibly, access to some meeting rooms. Although it seems like a good option, our philosophy is that we are against teleworking, therefore it is presented as a minimum non-compulsory expense.

6. Domain registration ($150K/year): Every company has a domain that represents its brand on the Internet.  Unless you want to call yourself Coca Cola, the annual cost of the domain and its anti-spam protections for contact information is $150K/year.

7. Communications Services ($125K/year):  Lastly, email, calendar, chat, forms, online document editing and file sharing are required in order to be in touch with the world and market services.  Each Google Account costs $50 USD/year.

Consolidating the above, we now have minimum initial non-compulsory expenses of $2M, annual $4,155K ($4M), that is, monthly payments of $346K ($0.3M), for a total investment of $6,155K ($6M).

It’s important to note that of the $346K/month, $160K/month correspond to cubicle and communications expenses for each person.  That is, the highest and most significantly rising investment goes to work culture (not teleworking).  If, instead of one person, we have a team of three, the minimum monthly non-compulsory expenses practically double:$667K/month (92% more than the minimum). On the other hand, if the only person in the company decides to work at home, the $346K/month decreases to $192K/month (56% less than the minimum). In this category, work culture is actually the relevant discussion.

Therefore, adding the two groups of previous expenses--mandatory and non-compulsory--starting a small company requires $2,750K ($2.8M) initially and $8265K ($8M) annually, plus $1,920K ($1.9M) per additional person. That is, monthly payments of $689K ($0.7M) plus $160K per additional person, for a total capital requirement for a one person company of $11,015K ($11M). $13M if there are two people.

If you need to formally register a business, you must understand that no less than $5M of investment or income is required just to pay the corresponding registration, without accruing or investing a penny in other aspects of the business, and additionally between $6M and $8M are required for some minimum but not mandatory aspects.

To determine the annual sales we need to expect in order to make registration worth it and be able to cover costs while leaving a minimum of profitability, let’s carry out a comparative analysis of Colombian companies with sales of less than $200M/year and with a net profit between 5% and 10%. In this way we only analyze actual registered businesses and not registered subsistence businesses that don’t generate surplus capital.

The proportion of administrative expenditure above revenue is between 10 and 20%.  This ratio is 20-30% for sales expenses.  In other words, on a consolidated basis, operating expenses without cost of production or goods fluctuate between 30 and 50%.  Clearly these values include the labor component, which is usually the most important.

Based on this analysis we suggest that to maintain returns which are comparable and competitive to industries of the same size, registration expenses need to be between 5 and 10% of sales. Considering the $5M necessary for registration, annual sales must be between $50M and $100M.

To place these values in perspective in a small company, and considering the cost of labor, we discover that a company with an annual income of $100M is equivalent to a natural person with a monthly income of $8M or one who receives $6M from a labor contract.

I believe that after the financial exercise and knowing the reference ranges for registration, many questions arise as to why you want to formalize: to gain access to Chamber of Commerce benefits? Access to income tax benefits for startups? To abide by the law?

The final conclusion is that registration makes little immediate financial sense. It’s purely overload. All the good things you can do as a registered formal business you can also do as a natural person, such as keeping accounts or paying taxes properly. However, these are the two structural reasons to register despite the extra cost:

1. It groups risk-sharing into a single entity: This applies when there is more than one partner and allows profits as well as risks (lawsuits and losses) to be distributed in a single entity and in proportion to the risk. If not formalized, the invoicing and contracting partner will have full control on paper over profits and claims in which the company may incur.

2. It generates trust for market interaction: For investors it’s different to invest in a legal entity than in a service belonging to a natural person. For the government it’s essential that companies be more than two years old in order to grant promotional resources; for some customers doing business with companies is more suitable than doing business with natural persons; for attracting talent it’s different to be hired by a company than by a person.

In short, don’t formalize if:

• You are a single partner

• You are not expecting to receive investments

• You are not expecting to receive government resources

• You are willing to sacrifice some customers

• You do not need to attract new employees

Otherwise, invest approximately $5M/year to have access to investors, promotional resources, all types of clients, and to improve your position for hiring staff. Additionally, seek to invoice between $50M and $100M during the first year to make sure you stay in good corporate shape.

This article is mainly geared towards roles that are essentially computer jobs within the context of an employee working for a company, who in turn participates in a market governed by perfect competition with fixed wage layouts.

My main objective in using these rigorous tracking systems has always been to obtain as objective a view as possible of the resources that are actually invested in carrying out a specific task.  Everything centers around this point: understanding reality as accurately as possible.  Any obstacle that stands in the way of this goal must be eliminated.

Objective tracking serves a higher purpose, a long-term application, and that is to enable a sound platform for rational and fair decision-making. It does not seek to maximize productivity, nor minimize the consumption of resources, nor supervise, nor pressure; it seeks only the first goal: to objectively evaluate reality so that subsequent decisions on estimation, allocation, remuneration, rest, relocation and prices will be tenable and fair.

When it comes to implementing accurate time-reporting systems, the biggest obstacle is theself-perception of hard work.  Human beings always tend to think they work judiciously and more than others.  Therefore, when time-reporting systems are based on arbitrary judgments of how long you think it’s taken you to perform a certain task, you inevitably report more time than was actually spent. Humans tend to overestimate themselves, and the perception of their effort is no exception. For this reason, the first step towards accuracy is for work time to be reported automatically.

Systems that allow this do so through timers, mouse supervision, keyboard and screen monitoring, downtime alerts, and website classification, allowing for an accurate view of time use in computer-intensive work.  

The main objection to this is based on invasion of privacy. However, as long as users are given the option to interrupt tracking whenever they wish to take breaks for personal activities, it is nothing of the sort. With this feature, privacy is maximized, time tracking is accurate and users are given control to work at their own pace without affecting actual work time.

Another classic objection stems from the new generations’ insistence on their capacity to multitask. That is, to work and not work at the same time (because only working is out of the question).

People who pride themselves on having the ability to multitask should contribute to global productivity by becoming research subjects at a laboratory! To date, research in human behavior demonstrates these multitaskers would be the exception and not the rule since the brain is only able to perform one intelligent task at a time. Also, additional initial loading time or post-interruption time is required. The only additional activities that can be performed flawlessly at the same time are things as mechanical as breathing.

That is, either you’re a scientific anomaly worthy of experimentation that has the ability to perform two intelligent activities at once, or actually your job consists of performing one intelligent activity and several mechanical ones.  If you want to read blogs, chat, watch videos, or gossip on Facebook, go ahead: pause your work and concentrate on an active break that gives real rest. If, on the other hand, you really can do several intelligent things simultaneously, you can use these tracking systems to demonstrate your supernatural productivity and be rewarded accordingly.

In this style of time tracking it is important to clarify two concepts from a measurement point of view: Potential Work Time and True Work Time.  Potential Work Time is the amount of work time established on an employee contract.  In Colombia the maximum work time is 48 hours per week. This refers to how much time an employee commits to in exchange for pay. However, there is a cultural consensus and tacit agreement that this time is more of a range of employee availability than an actual work requirement.

For this we need to understand the concept of True Work Time: percentage of potential work time that an employee actually dedicates to a particular task (client, project, etc.).  During 2013 and 2014, data was collected and analyzed on a Colombian engineering team of 30 people, who used and still use automatic time tracking systems without explicit True Work Time requirements. It was found that the employees who manage personnel, projects and administrative functions had a True Work Time range of 90% to 100%.  

Engineers, on the other hand, in the vast majority of cases, ranged from 60% to 80% of True Work Time.  This shows that the type of work has a direct influence on True Work Time, and that 100% of True Work Time in some tasks is feasible, whereas over-exertion is totally out of the ordinary.

This point indicates another crucial aspect of my time management philosophy: no time quotas.  Having a total time report goal only leads to useless input and therefore actually hinders us from our objective of perceiving reality as it is.  There is no such thing as a True Work Time goal. People should not be told to report X time a day, Y time a month or estimate Z time total. Instead, people should be told to report reality and leave it up to each person’s conscience to use their Potential Work Time wisely.

When you set a quota, Parkinson’s Law comes into effect: work will expand to fill the time allotted for its completion. The capacity of an employee to achieve a task in less time is absolutely nullified. Managers naturally want to see Potential Work Time utilized 100% in all roles, but this is simply impossible. People need breaks, some more than others. People have different work rhythms. Our duty as managers is simply to observe what happens to ensure that everything is within reason.

Reasonable and recommended margins for deeper analysis of True Work Time are anywhere between 70% and 90%.  In a 48-hour work week, 70% of True Work Time is equivalent to 6.6 working hours per day for 5 days. In other words, a 33-hour workweek. This is a more accurate reflection of reality, and is actually lower than successful model countries like Australia who have a 38-hour workweek.  

On the other hand, reporting times of over 90% could be a warning sign that the person allows no space for informal interaction with peers, or a sign of voluntary over-exertion that could lead to burnout. If you notice someone working too much, your attention is required as well, if the company wishes to retain this employee in the long run.

Here it’s important to mention that we are human beings and not machines, and therefore any analysis of True Work Time on a specific day or week would be wrong. As humans we have irregular True Work Times. For this reason I recommend calculating trends using a rolling average, where each day you analyze for example the previous 20 days: simply add the previous day and subtract the first day of the period.  With this method you can always view a long period of Potential Work Time and True Work Time, making daily decisions based on relevant data samples.

The most common question that comes up when using these systems is, What is reportable and what isn’t?  Answers are derived from the most basic principle related to our initial goal: If it’s work-related it’s always reportable, regardless of whether it’s requested or not.  

For example, it’s reasonable for a person who is formally studying a topic of interest to the organization to report that time as training time. Likewise, time spent on commuting between cities and three or more commutes in a single day (the first two distances are equivalent to going to and from the office) is taken into account.

At this point we can see that in some situations, manual reporting is the only option, since during such times as work lunches, phone calls, travel, meetings or conferences the computer is not available.  With this in mind, it is perfectly possible to report times manually, and it is imperative to do so in order to be able to assign them to the corresponding cost centers.  For this situation, the recommended control derived from the aforementioned data analysis is to group employees into one of two possible role categories: highly and moderately computer intensive.  The first are the engineers themselves, the second being administrative and commercial staff whose roles contain extensive human interaction.  

To allow detailed individual analysis my suggestion of ranges at which to be alerted would be these:  For an employee in a highly computer intensive role, manual reports of more than 20% of True Work Time; for an employee in a moderately computer intensive role, manual reports for more than 50% True Work Time would be cause for concern.

Regarding this suggestion, once the alerted range is reached, I say that at no time is an employee’s True Work Time to be questioned, because there’s always the possibility that the employee is working while the reporting system is not in use. Only conversations over two or more months can lead to the conclusion that there are real problems with how this employee manages their time, and what critical decisions must be made regarding their relationship to the company.

In the event that an employee’s True Work Time exceeds 100%, I recommend redistributing responsibilities, extending delivery deadlines and immediately allocating compensatory time off.  If an employee report shows less than 70% of True Work Time, and investigation proves it reflects reality and not simply a reporting flaw, increase the level of assignments or shorten delivery deadlines.

Note that this is never about simply reporting more; it is about verifying whether or not the reporting tool is being used properly, and then reducing or increasing the person’s workload so that a fair balance is achieved for the whole team.

This goal seeks precisely to make the salary the only thing that differentiates some hours from others, and not that salary and generalized idle time make the distinction between the more and less productive people.

Time-tracking critics’ main argument is to say that not all hours are created equal, and that one person can accomplish in one hour what another person would do in eight.

Paradoxically, I absolutely agree. I believe that everyone’s outcome is different, and that this difference in value should be rewarded by salary, and not by idle time.  

If we look carefully at the following scenario posed by “high achievers”, we will see just how important objective time reporting is.

Orozco Hare earns $2M COP per month. He can easily accomplish Task A in just 2 hours, but takes a full 8-hour workday to do so.  Jaramillo Tortoise earns $1M COP per month. It takes her 4 hours to perform Task A. The remaining 4 hours of the day she performs additional Type A tasks.

When analyzing productivity, one might say that Hare is twice as productive as Tortoise.  However, if we incorporate the concept of salary and True Work Time, we realize that the Hare required 1/20th of a salary (one full day out of the 20 working days of the month: 2 hours working and 6 hours idling) to do Task A, equivalent to a productivity of $100K COP per Type A task.

Meanwhile, Tortoise required 1/40th of a salary to perform Task A, because although she spent twice as much time as Hare, she corrected the situation by using her Potential Work Time 100%, thereby rendering a productivity of $25K per Type A tasks.  

In short, not all hours are created equal, and this is reflected by the salary. To maintain wage equity it is imperative to maintain a relative standard of True Work Time throughout the team, both to control excess (over-exertion) and deficit (idleness).

In the previous example, assuming both Hare and Tortoise were to perform their jobs with equal quality, their salaries are perfectly balanced and fair. Hare, who is twice as productive, makes twice as much as Tortoise.

But when True Work Time differs, the situation deteriorates to the point that the true total productivity of Tortoise is 4 times more than Hare’s, and she’s getting paid half as much. In other words, giving someone who works 20% of their time the same wage as someone who works 80% of their time not only generates a negative impact on the team but also creates a real problem of unequal pay.

Another common objection to time reporting relates to the use of measurement systems by goals or results and not by resources used.  Once again, I completely agree with this objection. I simply believe that it’s inconsistent within the framework of contract type.  

In other words, you can’t profess to be “measured” by results, something that is typical of a service contract, and at the same time have an employment contract where results are out of reach.  Therefore, I agree that a person does not have to report time when the contract governing the employment relationship is based on fulfillment of a clear and defined result.

The easiest example to use here is that of a business person.  If a person has a clearly defined role with an explicit mission—such as the marketing of Software Z—and their compensation is defined as 10% of collected sales, obviously the time spent is inconsequential, since their productivity is embedded in and controlled by the compensation.  

Additionally, in this framework, the risk of unproductivity or failure to achieve results is transferred from the investor to the worker, therefore the administrative control function is incorporated.  It’s absurd, then, to expect:

1. steady compensation,

2. variable or unknown work time and

3. measurement by results where non-compliance makes no difference.

Expecting steady income without investing resources or taking risks is unheard of even for the most sophisticated of investors with preferential shares.

Once the concept of time reporting is overcome, another aspect of infinite discussion is the granularity of it, that is, to which object do I report the time I am working.  The possibilities are innumerable as I can report to an activity, a deliverable, a milestone, a project, a service, a client, etc.  

Here the recommendation is to start with the largest possible level so that all times can be grouped and mathematical operations with said data can be performed.  It is useless to report to activities and/or deliverables if all efforts of several people on the same grouping object are not later analyzed.  The best way to implement this is to start with reports to a project or customer independent of the activity or to the deliverable of the same. In this way you can always unite all efforts and intersect corresponding revenues to build profitability.  

In those internal activities where the client is unknown and therefore has no associated income, the best thing is to report to first level profit and loss accounts so that times can be multiplexed to allocate precise costs to corresponding accounts: operational sales expenses and operational administration expenses.

Automated objective time-reporting systems are the basis for maintaining an equal-pay-based, healthy work culture, built on facts and objectivity and not the whims or perceptions of a manager, when

1. They are clear on the agreed-upon Potential Work Time.

2. They understand that we are all human and we’re available during said time but we only work for part of it.

3. They use a rolling average to get an accurate trend of behavior, which, as always with humans, will be irregular.

4. They stem from good faith (assuming first that an issue is due to underreporting and not underworking).

5. They are uneven in the relationship between employee and company, compensating over-exertion and neutral towards absenteeism.

In short, automatic time-tracking systems do the following:

1. They do not seek to make us work all the time, they seek to make us work fairly.

2. They do not seek to supervise, they seek simply to learn how much work is actually done.

3. They seek for those who work excessively to have rest, and for those who work less than agreed upon to work reasonably.

4. They see to it that everyone has a similar True Work Time in which salary does make the difference, where people earn $1M and others earn $6M precisely because their performance in similar conditions is 6 times higher.

5. They seek to create a healthy and separate work/life balance, which is different from the idea that leading companies try to sell, where mixing work and personal environments seems to be the model to follow. This only leads to the invasion of family spaces, the perception of giving more than what is received or of working all the time in exchange for a great salary that consumes your life.

6. They seek to objectively evaluate the resources a person spends in accordance with the nature of the employer and employee contract, since compensation for results, although a possible scenario, must be associated with well-defined and permanent results in the labor relationship, an issue that in the knowledge industry is utopic.

In short, it’s not about working smarter instead of harder, but rather working reasonably and fairly, so that smart work will make a tangible difference to all sides.

Throughout my career, I’ve run the gamut of being a member of the audience, a guest speaker, on the panel of judges, an investor, and an advisor, and I’ve heard countless pitches by entrepreneurs where I can’t figure out whether they’re looking for investment or conducting an experiment in defending the absurd.

In the two to three years of attentive listening and rigorous note-taking on presentations of entrepreneurs, I’ve developed a brief method to rapidly filter out those who pretentiously sell hot air from those who quietly take action.

The first and most important thing is to not let the entrepreneur start the pitch before you (the advisor or investor) first conduct a brief quantitative interview. It will take no more than 60 seconds and will give you the appropriate level of understanding of the relevance of the team you have in front of you:

1. How long ago was your startup formally constituted?

2. How many partners are there?

3. How many of them worked full-time last month?

4. In addition to these partners, how many other people worked full-time last month?

5. How many sales did you achieve in the last three months? Or, alternatively for product companies,

   1. How many active users did you have in the last month? and,

   2. How do you define an active user in the month?

After this short interview, the presentation can begin. Now the next 30 minutes can focus on structural issues and not on the sale of hot air, big ideas, large market sizes, scalability, iterations, etc.    

With this small I.D. badge that all entrepreneurs and presentations should have as their first slide, the time and efficiency of many businesses can be maximized.  Many potential entrepreneurs may likely receive more help if they start with a little humility, and the empathy that can grow by addressing core issues the rest of the time may be more worthwhile even than getting the investment.

Knowing when the idea was established gives you a picture of how seriously a founder believes in what they’re doing. Though age does not necessarily equal wisdom, in entrepreneurship it’s definitely a symptom of courage.

The number of additional full-time staff is a sign that there is already a consolidated team and probably income.  

Lastly, the sales or active users of the last month shows you if they are able to get to the market with a product that solves a real problem, or if you’re simply looking at a PowerPoint presentation on a business that doesn’t even have a prototype or that was validated by letter of intent (I don’t know who came up with that).

All the questions are designed so that their answers must be based on quantifiable facts of the past, therefore they are precise, short, concrete, and escape opinion and subjectivity.  If they don't know the answers, you have before you someone trying to sell you something that even they don’t understand.

By using this method I’ve been able to narrow down my conversations to only serious teams who’ve already taken the initial step that they must take for themselves.

It is completely naïve (and yet, quite common), to think that the investor or advisor will help you quit your job, create your company, and make the first sale—steps that only you, the entrepreneur, can take.  The entrepreneur is the only one who can save up, quit their job, sell the car or motorcycle, lower living expenses, and tighten their belt during the first years of working towards what they believe in.

It's also important to remember that at some point we all start from scratch, and that the answers to these questions must be brutally honest so that dialogue can continue on the same page.  The entrepreneur's badge is not discriminatory. It’s a baseline for the conversation to occur at the level that the venture is really at, and to receive the help, advice or money according to the capabilities and time of each team.

Below I will present what in my opinion are the most common characteristics of pseudo-entrepreneurs who today ardently seek funding in these investor meetings and the reasons why they sometimes generate distaste:

1. Weakly constituted teams: They’ve known each other for a short time; they all work remotely, they’ve never actually worked together; they’re a group of friends who came up with the idea but only one of them actually does all the work; they lack the basic skills in sales, production and management required by a company.

2. Multiple simultaneous ideas: Absolute diversification of ideas, approaches, products, and segments, all in initial stages of the company; they have up to two and three divergent business lines with virtually no turnover or users.  Some go so far as to have several startups running simultaneously. The idea of do-over has given them an excuse not to persist, and they don’t even have a firm conviction that something can work.

3. Minimal dedication: They work simultaneously in another company; they work part time; they work flexible hours, or even worse, they consider that tracking work time is slavery and not a way to understand costs, maintain fairness and objectively promote the only way in which results can be achieved sustainably: effort and sweat, not ideas.

4. Astronomical money requirements:  The de facto standard for a pitch to a venture capitalist or an angel investor is to ask for $1M USD for software development, advertising, equipment, offices, salaries, and patents.  The founders seem to think that having passed the screening process gives them carte blanche to ask for these sums and be treated seriously. However, I find it vulgar to ask for such elevated sums of money when the arguments that support it are mere speculations.

   1. To illustrate how ludicrous this is, of the 420 technology companies in Colombia (ISIC codes K7210, K7220, K7230, K7240, K7250. K7290) only 20 achieved earnings after tax above $1M USD (data from 2013, with the dollar calculated at $2,700 COP) and their average is $5.5M USD. If we discount IBM, which is a singular anomaly at the top of the list, the average drops to $4.2M USD.  That is, you’re asking between 20% and 25% of the yearly profits of the TOP 20 Companies in Colombia, or half or more than the profits the remaining top 400 companies make in a whole year.  In short, what they ask is ludicrous not only because it’s a lot, but because investors with an origin in IT are actually quite poor. The place to ask for those figures is Silicon Valley, oil companies, banks or mega constructors who may not have smart capital.

I believe that every entrepreneur should be made to wear an I.D. badge at these social events. Just as rappers were distinguished by their baggy pants or skateboarders by their jeans dragging on the floor, every self-proclaimed entrepreneur should wear a badge with large, visible data about his company. He should wear several badges if he’s had several startups.

That way the truly remarkable people would stand out and we’d know who to go learn from, while the future-Mark-Zuckerberg big talkers would realize they need to shut up and listen more.

If nothing else, this I.D. badge would give context to know exactly who’s talking. We’d know if this highfalutin “Emissary of Entrepreneurship” is speaking from the shoulders of academics, or from the bloody hands and scraped knees of experience and results.

The first reason a company may decide to establish a variable pay plan is a fervent desire to incentivize its employees to work in the right direction, and so they hope to positively reinforce this behavior with money. 

Another possibility is, if their base income is already at market rate, the administrators may want to share with their team the wealth generated in the process.

Or lastly, if an employee’s base income does not correspond to the market salary, the shareholder is simply sharing their own risk with the employee by assigning a market salary with variations according to performance.  

Throughout this article, we will show how the noble intentions of the first two reasons doesn’t make them any less useless.  We won’t discuss the third reason, because if you decide to stay in that job, maybe your market salary is not what you think it is.

When you start these kinds of policies, just like with teleworking, people receive it happily. Especially because in the initial stages of implementation the variable is an additional salary component that they didn’t have before, and it brings with it the possibility of getting more income, regardless of the difficulty this may imply.  At worst, they’ll say: 'I didn’t have it anyway, so if I don’t earn it, it’s not like I lost anything'.

In short, variable pay will always be accepted at the beginning, unless the variable is implemented as a measure of salary reduction, which is another topic that we won’t discuss here. If you sign on to something like that it’s because there was no other option, and most likely the total benefits you were already receiving were above the market.

The first of the big dilemmas that appears with the definition of variable pay is about what kind of goals will be rewarded.  

On the deepest philosophical level, an organization is a team, and in this sense, compensation should be associated with the team’s overall performance (as in winning the tournament, in a football context). So bonuses, etc., should only be given if the company surpasses its profit goals. Granting incentives simply to meet the profit goal will increase spending, undermine profit, and put the company at risk.  

However, compensating based on overall company performance creates new problems:

• Profit is measured annually, therefore it must be paid annually. So the carrot is so far away that it doesn’t incentivize, overriding the original intention.

• Will anyone be truly incentivized to pursue the overarching goal of company performance when they know that their individual actions will have a minimal impact? The success of the company as a whole is the most logical goal to reward, and yet it ends up being a minimal motivator.

So if aiming for overall group goals doesn’t seem to work, we can look for an easier incentive: individual goals. They’re a “carrot” that is easier to identify and determine. And since they correspond to just one part of the company’s process (sales, expense reduction, etc.), they can be awarded over shorter timespans (quarterly, monthly).

Individual goals are a powerful carrot, for better or for worse. In football it’s the equivalent of giving bonuses to the one who scores the most goals. This does not necessarily honor the collective game or passing the ball to a teammate who can score the goal, as we will see below.

The most common variable pay scenario is payment by commission: if you sell more, you earn more, if you sell less, you earn less.  It seems logical, but is utterly foolish, especially when it comes to intangibles.  

When you incentivize this behavior, a salesperson seeks to sell at all costs. They’ll sell to anybody, whether they’re a good customer or not. They’ll convince the customer to buy things they don’t really need. Or they’ll sell at a loss and not care, because they’re going to change companies soon anyway.  Budgeting goals are no different: is buying cheaper buying better? Does buying less generate profit, or does it generate supply problems?

Some expert in compensation models will say:  "That’s why you need to have variable pay proportions for group goals and individual goals."  

That doesn’t solve the problem, in fact it just changes its magnitude.  From a human standpoint you’ll still think: "On group goals my influence is minimal, so I’ll seek to achieve individual goals regardless of the immediate and future impacts I have on the company".  It’s understandable, in the end: if all you measure and reward is sales, humans will behave accordingly.

Additional questions that arise regarding variable pay are:

• Does money actually incentivize quality, or even incentivize at all?

• Can people live decently on their base income and use compensation only as a surplus, or would the absence of these bonuses gravely impact their livelihood?

• Is it easier to overcome an economic crisis with a team who had no additional compensation to begin with, or with a team who systematically loses the compensation they’d come to expect?

• Variable pay is meant to incentivize, but in the long run does the novelty wear off? In the end does it actually do the opposite and cause discouragement when the incentive is not achieved?

• Does a manager really know the secret formula of balancing individual and group goals so as to lead to the fulfillment of the global strategy?

• How do exceptional employees feel when they start getting paid extra for doing what they normally would already do?

The message that gets conveyed by rewarding achievements with money is that things must be done for money and not because they’re the right thing to do.

In short, I believe that the relationship of an employee with the organization for which they work must be marked by a prior agreement in which there is a fixed salary according to the market rate as an exchange for the time that this person dedicates to the organization.  

Paying based on the results of the company technically means transferring some of the risk to the employee. If transferred for profit, it should be transferred for loss as well.  

Incorporating variable payment models stimulates selfishness in individuals. On a group level, variable pay increases the cost of the company without motivating the majority, and demotivating when it’s not won.  People need to be incentivized by the task itself. They should receive motivation from a fair environment that favors their development, and want to do things well because they understand their importance.

We need salespeople who can understand the customer and be able to say: "You don't need what I have, you don't have to buy from me.” We must have staff who love what they do, and who do things right because that’s the way to do them. In order to do this, our expectations have to be focused on doing things right, not just on making more money.  

In the end, Enron collapsed for wanting to meet the goal and earn the bonus, and for this purpose companies were created to hide losses. How does this differ from what your purchasing staff may be doing with your suppliers today, or what your sellers may be doing with customers in order to earn the bonus?  

As in the Enron case, you will notice too late.  If there’s a bonus to be paid, it should be given years after the actions taken, since the full and true impact of actions can only be seen with the passage of time.

1. An employee who currently earns $2 million Colombian Pesos (COP) in Company A and is getting ready to start their own Business B, must understand that the cost of being paid in their new company is not just $2M COP for 12 months.

2. Paying $2M COP under a service agreement is not the same as paying a $2M COP salary or comprehensive contract.

3. New startup companies in Colombia need to know what social benefits or payroll taxes they have to pay for every $1M COP they pay in salary.

4. Not all salary ranges have the same tax burden or workload.

5. It’s common for new entrepreneurs to calculate the price of services based on what they’re currently getting in cash, when at the very least they need to calculate costs and pricing using the final total cost they had in their last job (even if they don’t get paid that amount in cash).

6. When you want to standardize salaries in order to compare wage scales, the best way to do this is with the total cost.

Taking these issues into consideration, I created a model to know the respective total cost multiplier for different salary ranges and according to current law (2015). Over the past six months, several managers in different companies have successfully tested this model multiple times. However, it goes without saying that I’m not an accountant, nor a lawyer, nor an actuary, nor an economist, nor an administrator.  I'm just a systems engineer who's keen on getting things right and using the highest precision at the right time.

The model is built using the following assumptions: indefinite term labor contracts, fixed wages, no overtime, paying all legal obligations in a timely manner, only considering labor costs (not those that scale with it – like laptops, work area, furniture, access accounts, etc.), a company without any type of extra-legal benefits (medical insurance, etc.), and assuming that taxes are paid on 100% of the salary, we have the following:

• $644,336 COP (1 Monthly Minimum Wage, or MMW) has a total cost of 1.75X if the company does not pay the CREE tax,

• $644,336 COP (1-2 MMW) has a total cost of 1.62X if the company does pay the CREE tax,

• $1,288,673 COP (> 2  and < 10 MMW)  brings a total cost of 1.40X,

• $6,443,360 COP (>= 10  MMW) the total cost is 1.53X,

• $8,376,368 COP (>= 13 MMW) if it’s total compensation and not base salary, the total cost is 1.27X,

With these multipliers you can calculate the total annual cost to the employer of paying yourself or hiring labor.  For example, if you are offered a service agreement, you can use the multiplier as a divider to find the equivalent employment contract that you are being offered.

Recently Colciencias offered salaries of $6M COP per month to high-level researchers to come from prestigious universities around the world.  Many researchers accepted that offer.

Let's do the respective analysis.  Due to the < $8M range, these wages are not total compensation, therefore the multiplier is 1.53X.  The total annual cost of a senior researcher for a university would be $6Mx1.53 ×12=$110M/year.

We can also analyze how much money a researcher of this caliber would lose if Colciencias or the universities decided to change these $6M from a labor contract to a service agreement.  $6M ÷ 1.53=$3.92M, would be the equivalent of earning $4M per month on a labor contract.

These multipliers also imply that in the region of a $10M COP salary, not all that glitters is gold. It’s fundamental to know if payment is total compensation or base salary, because if it’s total compensation then it’s $10M ÷ 1.27X, which is equivalent to $7.8M in a labor contract, a substantial difference.

It also implies that if you earn $6,952,932 COP on an employment contract, you can propose to your employer to change to a total minimum compensation of $8,376,368 COP and improve your cash flow without affecting the profits and loss of the company you’re in.  

The staggered intervals also show possible optimizations typical of these models: Paying 2 MMW or 2 MMW + 1 peso implies annual savings on labor obligations of $3.4M without affecting the cash flow or social benefits of the employee.

Finally, this model includes a small historical calculation of severance pay of 1.5% of salary, however it completely ignores other costs (such as SENA apprentices, approximately 1 apprentice of 1 MMW for every 15 employees), provisions for unrecognized disabilities and paid leave that requires replacement, transportation allowances, communications and telework (there’s still crazy people out there).  I’m open to hear improvements, so comments on this article aren’t just philosophical discussions anymore, they’re improvements to the model.

In 2001 the word “entrepreneur” didn’t even exist.  In ninth grade I met someone through IRC and together we fell head over heels for a revolution that fused technology with my rebellious teenage communism: Free Software, Linux, Slackware and lastly Debian.  When we got to university we thought: "Finally we’ll get to learn about Linux!". However, by the third semester we realized that colleagues, professors, and enterprises would turn to us when they needed help with this technology.  That’s when we said: 'Let’s start a company'.

We named it Fluidsignal, and we weren’t thinking about getting rich, selling the company, buying other companies, scalability, product, or innovation… we weren’t even thinking about next year's salary.  We just thought that we loved Linux and that apparently Linux helped people.  We also felt that after studying together for more than 4 years we were already a team.  However, we had no idea what we were getting into.

After 14 years of working as an entrepreneur, I can tell you from my limited perspective what entrepreneurship means.  I know that many entrepreneurs will agree with what I’m going to tell you; however, being an entrepreneur and talking about failure is a weird crossbreed that you won’t see that often.  They’ll approve my version silently, because sadly, failure in Colombia is considered something to hide, not something to learn from.

Simply and crudely, being an entrepreneur means sharing risk with a group of people. It means investing time and money into a cause that could work out or could go badly, so that when we win, we all win, and when we lose, we all lose.

Generally the cause does not go well, as Marcelo Bielsa would say: “We should make it clear to the majority that success is an exception. Humans from time to time triumph. But they usually strive, fight, struggle, and win only from time to time. Only from time to time.”

• Entrepreneurship is like pooling your money with several friends and betting that money playing dice, hoping to defeat statistics by spending some time analyzing the geometry of the dice and the style of the dice roller.  After several rolls, you’ve either won and want to keep playing, or you’ve lost and want to get your money back.  In the long run it's not winning that makes you stay, it's the team spirit you’ve created, or the love of the game.

• Entrepreneurship means working longer hours than an employee with a salary.

• Entrepreneurship means hiring people for a fixed salary at an indefinite term while all you have for a company is contracts for the next two months.

• Entrepreneurship means being the last to get paid.

• Entrepreneurship means paying yourself far below the market salary.

• Entrepreneurship means backing the company's credits with personal or family properties.

• Entrepreneurship means hiring your best friends and having to suspend or fire them and very possibly lose their friendship.

• Entrepreneurship means realizing that the market doesn’t want, doesn’t need, or can’t use your dream, and that you’ll have to change your dream in order to understand that the needs of others are more important.

• Entrepreneurship means realizing that there’s a tougher boss than the boss: the client!

• Entrepreneurship means getting personally into debt in order to keep a team going and hopefully recover what’s been lost.

• Entrepreneurship means winning and realizing that for some, no victory will ever be enough.

• Entrepreneurship has little to do with wealth, and a lot to do with sweat and relationships to people.

Today, entrepreneurs are like the rockstars of business. The press talks about them, Ruta N rewards them, and investors inject tons of money into them (or so it seems). However, the realities are harsher than those perceived from outside.  As my mother used to say, “You can’t believe half of what you hear.”

In most cases, entrepreneurs have negative equity. The number of users we hear about is registered users, not active or frequent users. Sales go up and profits go down. The luxuries you see from the outside are paid for on the credit card or by company money.  Nothing is as it seems.

After playing the game, you realize that the only thing invariant in entrepreneurship is the relationships you build with people, because as an entrepreneur you generally have greater control over these. You decide who to partner with, who to hire, who to lay off and who to sell to.  These relationships evolve to create bonds of trust, bonds that allow more complex projects to be developed.

To conclude, I want to focus on relationships with your partners, the closest and most infinite relationships you can have. Getting into a partnership is worse than marriage. When you’re married and you get bored, the worst that can happen is you pack your things and leave.  From then on you no longer see your spouse, you no longer have to talk to them, you go and live in your space and determine how to distribute two pieces of furniture and the expenses of the kids.  Having a partnership is worse:

1. Companies are a type of asset that is difficult to appraise.

2. Companies don’t only spend money, they also have income potential.

3. Dissolving a partnership impacts your customers and therefore your revenue.

4. In most cases the value of the companies is due to the people or partners in them.

5. The vision and values of the company are the intersection of your and your partners' values.

For all these reasons, added to the madness of entrepreneurship, I think that when someone invites you to be a partner in their company—that is, to pay you with equity instead of cash, that is, to pay you with risk!—you should feel insulted.  It’s marriage times ten! It’s like asking your hand in marriage without having met you, without having ever had a conversation or a fight, without knowing what you like, how you think, how you feel and how you behave in the good times or the bad times.

Today when someone tells me they’ll pay me with shares, equity, or risk, I feel insulted. However, I forgive them. They don’t know it means getting married times ten.

Have you ever wondered why someone would invite you to a business and pay you with equity? Are they unsure of what they can achieve on their own? Do they want to share wealth and poverty with you? Or do they just have no currency to pay you with other than risk?

But strangely, teleworking is a dangerous practice. It’s a temporary motivator that becomes breeding ground for laziness. It finances and incubates your competition or a new venture on the time of your clients' projects. Teleworking is a killer of work culture.

At first, teleworking looks like a timely solution to the transportation problems we face today, and to reduce office and equipment costs. It seems an efficient way to quickly incorporate talent from other locations, and an essential motivator for employees who aspire to work from wherever and whenever they want.

All these benefits are true and enjoyable during the implementation phase, making the company attractive to recruiting and retaining talent. But the truth is that once the Hawthorne Effect has passed, telework hinders communication, breaks down any sense of belonging, accelerates employee turnover and presents an impediment to teamwork.

Over five years ago I had the experience of participating in one of the first teleworking programs in Colombia. This company had 40 personnel at the time and used teleworking to scale up to a total of 50 people. The company sold its headquarters, tables, mugs, chairs, desks, technical equipment, servers… everything except laptops. All employees according to their performance were gradually allowed to work from home or wherever they wished, and stipends were granted for transportation, electricity and internet.

Everything seemed perfect. Employee satisfaction was at a record high according to the quarterly evaluations. People reported reduction of transport and clothing costs, more free time, and more closeness with their families. The company decreased its operating costs. Additionally, it could grow quickly and easily: all we had to do was lease new laptops and we were ready for more engineers.

The Hawthorne Effect lasted between 6 and 18 months. Only after many analyses and countermeasures did we see the damage and havoc that telework had caused.

• Training and education that was previously made easy by proximity to peers or the availability of other more experienced engineers became more challenging.

• Bringing about simple organizational changes that previously could be discussed internally and implemented in hours now took weeks.

• Divulging anything important now required tremendous coordination over meetings and teleconferences.

• Networking that used to come naturally now turned into mandatory meetings that created a burden on employees.

• New hires could never learn the corporate values and philosophies that can only be absorbed through observation or informal contact with peers.

• Some of the employees created parallel companies from which they provided services.

• Turnover times of staff recruited during the telework period were shorter than those who entered during normal periods.

• What once set us apart became nothing more than a commodity, aggravated by the fact that the company was now sluggish and had less sense of belonging.

Through this experience I learned the essential value of work culture. This is the kind of culture that emerges naturally through face-to-face interactions, team lunches and breakfasts, the teamwork that comes from knowing you can ask an expert just by getting up and going to talk to them, or noticing the expression on a colleague’s face and being able to ask “Are you ok? Is something wrong?"

Teleworking can work as an exceptional measure, but not as the radical solution that it’s being sold as today.  Some of these exceptional circumstances are:

• You’re a freelancer, therefore you are a solitary player who does not require expanding or creating workplace culture.

• Your company has individual, well-defined, highly standardized tasks that require low creative processes.

• People who have been in the company for a long time and know the culture and values well.

• Highly mature professionals, with years of professional experience and a solid well-developed work ethic.

• Specific instances, such as certain days of the week, illness or family circumstances (example, newborn children).

But under any other circumstance, for young companies, employees who are still developing their work ethic, recent hires, or knowledge industries, teleworking will kill all work culture.

This is a post-mortem experience gleaned from more than three years of trying to make telework survive—that’s how long we took to detect and correct the problem. It’s the experience of seeing other North American companies implement this strategy and experience the same situation.

When reading a blog post or an exceptional case of telework implementation, ask yourself: is this really a proven success story? Or is it an early victory by someone who's just starting? Are they the 30 best programmers in the world and therefore will be successful regardless of environment? Are they programmers with an average age over 35 and therefore have a highly defined work maturity?

As an individual it’s comfortable to work anywhere, and you can get individual tasks done faster.  However, while everyone may be faster individually, the company is slower.  It's like having Herbie at the end of the line.

If you’re still determined to implement a teleworking program anyway, know that dismantling it later it will be harder and way more painful than starting.  We had to repurchase office space, install reliable internet, change salary policies, and see a decrease in employee satisfaction. Not to mention that we lost valuable talent when some employees refused to return to the traditional system.

However, despite all this, we had no regrets. Today this company regained its work culture, decreased turnover, improved communication, and discipline once again became a respected value. And the force of everyone combined, rather than individual efforts, has kept it together.

We’ve discovered that secret by accident, and called it simply: receipts. Over time we learned that, as usual, someone else had discovered it first, and that it’s actually called Revenue Recognition or Services Provided according to international standards.

To explain this concept, we must understand that normal, orthodox invoicing reflects a fact that has already occurred, a service that has already been performed, or goods that have already been delivered. If, in your business, invoicing always occurs after the service has been provided, no problem. Your life is easy and you can stop reading right now and go watch TV.

If, on the other hand, your business has situations in which bills are left up to goodwill, or involve clients who want to spend their budget before consuming the product, or where, for reasons of cash flow or trust between parties, the supplier manages to invoice and collect payment in advance… this article could save your business.

Let’s imagine a company that registers income of $1B with a profit of $50M. In principle we could conclude that the company required $950M to produce $1B. However, the income statements that are recorded in the Chamber of Commerce and other control entities don’t account for whether those $1B actually correspond to revenue earned (goods delivered, projects completed, services provided, etc.) or to advanced billings unrelated to the $950M of costs and expenses.

To illustrate the problem, let's analyze a common situation, especially at year’s end, where clients have a surplus budget and want to spend it so as not to lose it the following year. They request that $100M of the aforementioned $1B be invoiced in advance, that is, $100M that will have no associated costs in the current year from the supplier's standpoint.

These $100M are not actually income: they’re a supplier’s liability towards the customer. However, since the State always charges tax on the highest amount in its favor, (more profit equaling more taxes), accountants don’t rigorously separate account balances and tax balances. And so the invoice gets recorded as income.

If we were to subtract those $100M of advance invoicing from the $1B of total income, we’d see that the services provided during that year were equivalent to $900M. Therefore, with costs of $950M, reality would show a loss of $50M. If the advance payments were $200M or $300M, we’d be talking about losses of $150M and $250M.

To an unsuspecting board member or a tax auditor unaware of the nature of the business, this situation might go unnoticed.  Years could go by showing the business breaking even or making a profit when there are actually colossal losses hidden by advance payments during the year-end quarter.

Fortunately, eliminating this problem is simple:

1. Always invoice a service already provided; that way you never record income that hasn’t yet been earned.

2. Use prepayment instead of advance billings. Technically, this is money a customer gives in advance without being invoiced and is therefore recorded in balance sheet accounts rather than an Income Statement.

3. Finally, the simplest option which maximizes cash flow and depends on no one else is the issue of management accounting for services provided.

   Management accounting for services provided allows you to know your actual output and benefits from actual costs. Simply assign an economic value to the real earnings you had that month, regardless of whether they were billed or not.

   For example, if 40% of a $100M project has been completed by the end of the first month, we will say that in that month you produced $40M of income.

4. In any case, try to maintain additional control from the cash flow, reserving any payment received in advance in a savings or trust account separate from the overhead account.  Some less drastic but not particularly better alternatives are reserving only corresponding costs, or costs plus operational expenses.  Either way, if you’re billing in advance, it’s likely because you need cash flow, so I doubt you will be strict enough to implement this last control.

To determine this value you can implement various strategies. The simplest is an inside end-of-the-month company meeting where progress of each project is determined and its economic value is found. A stricter one is to request the customer’s approval of said advance; here the matter avoids inside manipulation and also places the company at the customer’s service.

Once this process has been carried out you can add all the monthly income, subtracting monthly expenses and costs to determine if you are working with a company that is truly creating value or one where the financial phenomenon of advance payments and others cover over one hole by digging another that can’t yet be seen.

The ramifications of not taking this into account are endless. Imagine a company that by December 28th has rendered services for $1B COP with an actual net profit of $100M. A customer requests an invoice (including prepayment) for an additional $200M. This company will close the period with an income of $1.2B and $900M of expenses, showing a profit of $300M, giving rise to almost $100M in taxes. That is, it unnecessarily pays taxes on $200M of supposed profit when in reality costs of providing the service still must be spent, and, assuming they are similar to previous expenses, would come to $180M, for a profit of $20M. Advanced billing caused you to pay taxes on $200M instead of $20M.

Saying and repeating it is like stomping around the house shouting, "Let's use a hammer!" "Let's use a hammer!". 

Any unsuspecting visitor will only be left wondering: what do you need a hammer for? What's the problem? Do you need to hang up a picture? Remove a nail, maybe? Does the neighbor need it? 

Innovation is no more than a way to reach something, a tool to tackle a more concrete problem or pursue a more sublime goal.

Things get worse when this empty word is given nuances and categories. Incremental innovation, radical innovation, disruptive innovation… And of course, here the semantics geniuses get into endless philosophical debates, because some argue that only what is disruptive is innovation, that any minor innovation is not innovation at all. This debate is all the more useless when we don’t even know if we want to hang a picture or remove a nail.

Its meaning today contributes little to the world of entrepreneurship or work in general. Getting rid of it will pull us out from the spiral of semantics and philosophy and will make us focus on defining the problem and taking action. Any action, no matter how simple, cliché, or old-fashioned according to the theorists… if it solves the problem, it’s innovation.

So let’s stop saying innovation, and instead make it take on the meaning of taking action to change, modify, and improve.  Let’s focus on identifying the action that will lead us to our goal, outlining it in detail, making a plan, and carrying it out.

Just stop saying “innovation”.