Alisha's Management Blog

Lean or Fat!

2008-08-17T09:02:00.000-07:00

It is said Lean goes with Six Sigma. Six Sigma is the process Quality tool while Lean is the process Speed tool. I have warned earlier to stay away from applying any of this to non-repeatable knowledge based industry. But lets view this in the Services context.

What do I mean by services? I would say Tagging Baggage at the airport terminal is service. Cooking food and serving it in a Restaurant is a service. Designing a chip is not the service we refer to here even if you are an outsourcing partner to Intel and you are offering your services to them. Because that’s non-repeatable to a large extent on the time scale. i.e. you have a cycle time of 2 years and with non-repeatable nature of work. OK you do design, verify the chip and prototype it. But you do a different design each time and based on the different design you do different verification and prototyping. So application of Lean and Six Sigma to this would produce false positive results and will mask the problems and lead to failure.

First of the things I like to do is to get rid of all the Manufacturing related jargon. And then to understand that Lean is an analytical framework to make processes faster. And the only thing it essentially says is to remove waste which is there from 30-80% in any service process. Whats waste? In standard Lean terms it is termed as anything that doesn’t provide value to a customer. It goes implied that customer pays for value and that this would correlate to revenues.

The second thing I would like to do is to create learning throughout the organization. Third most of the waste arises from decisions that are not based on facts. Now this might seem contradictory to management philosophy of making decisions on partial data. But since you are talking of processes you would have lots of repeat data to base decisions on.

“Think big, act small, fail fast; learn rapidly”-Lean Principle

Lean does talk about empowering the team but it shouldn’t be confused with people oriented methodologies which have people at the centerpoint. People oriented methodologies also need to make decisions on facts and for that we will visit MultiVariateTesting in the next article.

Six Sigma: A Critique!

2008-07-20T07:34:00.000-07:00

I love six sigma, no, really!!! I was talking to someone who said “Six Sigma in the Knowledge Industry is like eating a Burger with Chinese Chopsticks” when I asked my brother as to what Six Sigma meant to him he told me “If you want someone to not interfere with the companies operations put him in the Quality department in Six Sigma projects”. Some more responses are “If you want to get promoted really fast Six Sigma implementation is the way to go” “It’s a sales buzz word to impress clients”

I started wondering and decided to have a deeper look at the methodology. And I love the knowledge economy and hence my assessment would have that in mind.

What do we have here? The fundamental principle of Quality.

“Eighty-five percent of the reasons for failure to meet the customer expectations are related to deficiencies in systems and process… rather than then employee. The role of the management is to improve the process rather than badgering the individuals to do better”-W.Edwards Deming

When was Six Sigma formulated? 1982 at Motorola. That was the industrial revolution and everything was production based. Wake up this is the knowledge economy. And who’s leading this economy? Oracle, Microsoft, Google, Yahoo, Sun and… Are they Six Sigma enabled? Hell No! the reason is primarily very simple. Six Sigma is a process methodology and is absolutely is a misfit for the Knowledge economy and companies. Does McKinsey or Lehman Brothers follow Six Sigma, ofcourse no. For Six Sigma to work you should have Repeatable and Reproducible Processes and Outcomes because that’s what you are going to improve. And this is based on the premise that in 85% of the cases human skillset and capability would have ZERO impact on the process. And you would achieve Six Sigma process capability if you reduce defects to around 3.4 defects per million opportunities.

So at McKinsey which is a knowledge based company. You don’t have operators yanking at machines producing Sugar Candy. So for every analysis decision that a McKinsey team takes could have 10 other options and the team could take 400 decisions to arrive at the right strategy for the company. So which means that there are 10^400 (10 to the power of 400) combinations in the decision making process and only one of the combinations is the right strategy. This number is more than the number of particles in the known universe and the chances of mistakes is 10^400 – 1 . That’s why Six Sigma will never work in a knowledge based environment.

So what about the revenue saving figures of various companies using Six Sigma? There are two aspects to it. The biggest profit figures are from manufacturing companies. But the services companies attribute revenue savings wrongly to six sigma benefits. While the concept of Six Sigma is irrelevant to knowledge companies the Six Sigma process improvement methodologies are generic problem solving tools which could be used in all companies across the board and it is this which benefits companies and not anything to do with Six Sigma. Basically its like going to Somalia and saying you spent $1000 to improve Living Standards by 6000% for a village. That’s what happens when problem solving methodologies are used in companies which use adhoc management techniques. They return results which are miscategorized as Six Sigma benefits.

And you could dismiss all this by saying that “The author is a proponent of People Based Methodologies”

Now I’m going to eat a Burger using a ChopStick. When I finish doing that in 3.4 million years I will get back to answering the comments on this article.

Growing the Salesforce

2008-07-07T06:12:00.000-07:00

“Attitude Aptitude Experience Training Skills Closure Rewards”

I did mention that Sales is the most performance oriented function in the organization today. Which is highly lucrative for MBA’s the others being Private Equity, Investment Banking and Management Consulting.

So the first thing that happens is when you create a taskforce to go out there and sell your products is that the sales people don’t have a clue about the product. And then you decide to bring in people who have a similar background. That’s the first flaw. The reason being organizations today don’t have the culture of investing in people and everyone wants to show quick performance figures and go up the ladder, so it better be good and it better be quick like 6months or 1 year which is enough time to prove that you have justified your paycheck.

Part two of the problem is to artificially jackup the sales targets to what you have proposed/agreed to the board or your Top Management.

So for the part one the solution lies in building a sales force. You get people with some experience in sales with an aptitude for the function and the attitude that’s needed to make it in your industry. You train them on the products and the market. And then they use the skills to go out and Close the deals. Followed by quick rewards as incentives and bonuses to the salesforce. Sounds simple? Its first principles but then no one is following it.

The second problem is drawn from organizations I know of who draw the sales targets on Excel sheets. So basically the Top Management says the target is 140% of the previous target. Where did that figure come from? Gut? Instincts? But this is a great way to break any salesforce. And what ends up happening is that the sales force tries to cut short the sales cycle in a bid to close more and more sales, promising anything and everything under the sun. Who suffers? The Engineering who tries hard to deliver but fails. Once you break promises you are soon termed by customers as illreputed company. And with that goes the future of the organization.

And it all started with some overshot numbers on the Excel Sheet. Or someone who needed to justify his paycheck.

Unless you are aiming for the IPO or a sellout at an exaggerated valuation. It is not worth the risk to overshoot sales targets in the short term. Because it’s a long term death wish. The answer lies in organic sustainable growth.

Failing Knowledge Economies

2008-07-07T06:09:00.000-07:00

We live in the knowledge economies and I have heard of PCMM and CMMi and god knows what. I used to follow the Carnegie Mellon Institute’s website 10 years back. And they have done a great job nevertheless. I see many consultants around me who say they are Six Sigma consultants or PCMM consultants and others. I also agree that sometimes a company is required to be Six Sigma compliant and have people maturity levels to compete for deals with various companies.

And hence the need for the costly $500/hour consultants who enable Six Sigma in your organization. But the bottomline is this no amount of processes impact the People Based Organizations (Manufacturing/Production are Process Oriented Organizations). And considering everyone from telecom to software to embedded to pharma are all people based. It is not hard to see why there is little or no competition to the world leaders. If people are the key to success I don’t see many companies putting any effort on that front.

The whole bottomline in this learning is that having an MBA is good but thinking that Creating Excel Sheets gets you the results is behaving like an Ostrich which sinks its head into the Sand on sighting danger. Or better it can be termed as being in an alternate reality.

People People People!!! People is what gets you places. And while Processes and Statistics are necessary to measure monitor and control the growth of an organization it is not a substitute for People. And by that I don’t mean going out there and getting another PCMM certification.

Nurturing, grooming, communicating, leading is what gets people to work.

And in absence of that we will always hear stories of how people leave high paying jobs to do something they want. How exit interviews are full of lies. Nepotism, Empire building, Harrasment, Employee Turnover numbers, Employee Disatisfaction…

Sadly there is a dearth of leaders in organizations today. Its all about going up the ladder by hook or crook. Luckily for most excel sheets and cookie cutters do the trick.

Now once you have the people the second part is to build a Knowledge Ecosystem, a topic for another post.

On Going Global

2008-07-04T06:46:00.000-07:00

India has gone global but sadly according to current figures its Real Estate industry has more PE investment than Technology companies. I was pointed to some real estate deals that were the costliest in the world. And as we all know Indians love Gold and Real Estate. Sadly for us the Chinese are in love with Technology.

According to McKinsey Germany and USA have the highest value added per annum per employee and India is 30 times lesser on those figures. China has the highest value added per employee per unit labor capital costs. And hence it is quite clear why the Chinese technology sector is booming. But labor costs in china are increasing as much as their productivity increases. What that means is if you put $1000 in china in 2007 and 2008 each you will get the same amount of output.

Sometimes native Chinese companies are more productive than the Foreign companies in China. The largest companies in both the segments are far more competitive than other smaller companies. In essence I would say in this world it is better to be a Technology company based out of China. And in China it is better to be a native Chinese company. And amongst that it is the bigger you are the higher productivity advantages you have.

So in plain and simple English terms don’t you think that’s a perfect market to be in? These are the perfect competitive reasons that are enabling China to be a Global Economy. But this post is about India. So lets talk about India.

Between India and USA all the core Technology work happens in USA. In India the foreign companies have better productivity and brand value than the Native Indian companies. And the bigger companies have almost the same productivity as the smaller companies i.e. in India there is no advantage in being bigger.

How did we end up this way is the question we need to ask ourselves and to find an answer and then to implement it to correct the Market Equations. Otherwise on a unrelated note it will happen that in 2100 A.D. we would say to ourselves “We cannot do anything today because we lost the Patent Wars a hundred years back and we couldn’t start then and we are left with no capability to do anything now” The bottomline is that this needs to be fixed urgently at both Macro and Micro Economic scales, both in terms of Federal Policies and Corporate Functioning.

But frankly nobody I talked to could disagree with my assessment and couldn’t also provide a solution.

Two Quotes

2008-06-30T09:23:00.000-07:00

"Usually there is nothing advantageous in choosing the familiar approach other than that it requires less effort and thinking and lesser blame for failure when it doesn't work out."

Another one from one of my friends

"A witty quote proves nothing. Not even this one."

I know two geniuses...

2008-06-30T07:08:00.000-07:00

One is Tesla and the other one is Bill Gates. I'm not saying there aren't others, ofcourse there are but the former two have created a great impact on this world.

This is an email within my peer group and it talks about Tesla. You all already about Bill Gates the Phillanthropist. Somehow as business leaders it is more difficult to create an impact on the world than perhaps leading the Army, Being the President, Dalai Lama, Nelson Mandela, Gandhiji, President Lincoln. This world is a place to live in and there are leaders in all fields of life which merit mention.

There is no Nobel prize for being the CEO of IBM or Sun. But it is leadership in all walks of life that change the world. And we have to learn to respect our leaders and learn from them. Somethings cannot be taught in schools. I personally think we kill all hopes of someone doing something for the world very early on in School and divert them into Money Minting Machines.

------------------------------------------------------------------------

I should be more careful with friends. You told me about this 2 months back and I got a chance to read it today. That's bad on my part. And I risk losing close friends due to my lazy habits.

I think this is the link you were referring to… http://en.wikipedia.org/wiki/Nikola_Tesla

This is what I think. Tesla was a genius and he was a very simple person with very modest family background but that said he was clearly eccentric like all geniuses. Edison's character hasn't come out very well either. This is an article on Tesla and will contain the viewpoint of his sympathesizers. Whatever be the facts they are always rewritten by winners, and history as we know it today might not normally be what happened, for there is no live witness and even if there was one alive today his opinion would be adulterated too.

The other thing I noted is that like all the best people he had grown beyond the fight for means and ends. Somehow there is a reciprocal link between them and achievements. All those who are successful in their fields have little regard for money and despite their genius don't spend even an iota of their brain on furthering their prosperity which they clearly could.

Even though today the world is much more organized in terms of harvesting gains from knowledge & research it still succumbs in parts to touts and people of mediocre thought process. But all I would say is that we shouldn't think of all this as mere artifacts of literature but as an act of bearing witness to the evolution of the species. For it is now that the world is growing and taking shape, the technology is mature and what now stands before us is the prospect of leaping across and beyond the boundaries of faith and science.

And jump we will.

Do send me more articles worth the calories burnt on reading them. For I would prefer intellectual simulation over the rich trash thrust down my throat everyday by the media. Today I have no regard for works of fiction but I still need a square meal for my brain, which we all do in some proportion as humans, without which it would decay into oblivion.

-------------------------------------------------------------------

How not to listen to customers: Sometimes you shouldn't!

2008-06-30T06:50:00.000-07:00

Why is this mentioned on this blog? Because it’s a classic case study of how not to listen to customers. All companies proclaim they are customer oriented companies and they have SLA’s to resolve customer problems in X hours. Sometimes customers don't really comprehend what they are asking for and its implications to the company theirs & ours and the industry. Like I say beware of what you ask you might get it. But considering that most companies management are not populists when it comes to strategy it is quite safe. But in some cases of community driven and open source projects it could be disasterous. And thats where the difference lies. The latter have massive manpower and will to get ahead but lack the coordination in terms of a unified strategy.

Please refer to http://www.iht.com/articles/2008/06/29/technology/digi20.php

But what is Randall Stross asking for here? He is saying something like this, Microsoft should scrap windows and create a new OS afresh. Isn’t this contradictory? First there is so much hue and cry because companies cannot run 10-15% of their programs on Vista and they are crying about not adopting it and how bad it is. And now they are asking Microsoft to create a new OS from scratch which will not be able to run any native legacy applications whatsoever. How is that going to solve any problem? If no current applications run on it other than perhaps Managed CLR apps which might run, if they are not using any OS calls, once the CLR is ported. Doesn’t that mean that Microsoft’s market share would drop from 90% to about 20% in no time. How good could that be for Microsoft?

To think of it all Microsoft products would need to be ported to the new OS and so would all the applications around the world. This seemingly simple suggestion would cost over a Trillion dollars if not more to companies. Imagine everything would need to ported from Oracle 11i, Oracle Database’s, SQL Server, Windows Media player, IE, Firefox you name it.

And everyone should be excited about this? Why?

Apple has a small market share and what worked for Apple will not work for Microsoft i.e. creating an OS afresh. I think the problem that everyone has with Vista is more of the Memory/Processor hogging nature than with other actual problems. I don’t buy comments like ‘We have to learn a new OS’ because the world will evolve and learning is a continuous process.

I bet everyone would be more than happy to spend 20 hours a day on Facebook trying to figure out all the app’s and writing messages to friends but they wouldn’t be able to spend a total of about 25 hours once to learn the Click-Use Vista.

Lets say I wrote a counter article about all the shortcomings of Linux and then would Linux developers be ready to recode the OS from scratch?

On the other hand a Trillion dollar business opportunity for software vendors would stimulate the economy or it could bring the world to a standstill. Even if a new OS is released by Microsoft in parallel we are looking at another 10 years before applications are ported to it. Those who want to learn how the evolution would take place in the view of a new OS have a look at Singularity or Cosmos and follow their progress. They will get bloated almost as soon as Windows did. Windows tries to give an Out Of The Box Experience and hence is a huge package while these OS’s could allow features to be plugged in or taken out. Is that Good? People aren’t willing to spend 20 hours learning Vista can you expect them to learn assembling their own OS how ever user friendly it is? I’m referring to end users.

I think as far as testing and upgrading applications is concerned it is worth the effort and will cause minor headaches compared to creating them afresh for a new OS. ;-)

Personally I would rather buy a more powerful machine with more RAM and Quad processors, than wait for a new OS, and carry on with my Business.

Gross Margins & World Wars

2008-06-17T10:13:00.000-07:00

I’m located in India so wherever I see I can see Services companies around me specially in the IT space. I was reading the figures for Gross Margins for HP (6%) and IBM (12%) and every company I see around me otherwise has targets of 30-40% GM’s. Some people are proud to say that their projects have gross margins of 80%. That should be great wouldn’t you say? The more the gross margins the more would you grow. Not exactly here’s how.

There is tremendous pressure from Clients across the world on India and China with the coming of coutries like Mexico and Brazil entering the IT Services space to reduce billing rates. You won’t believe me if I told you that most projects in most companies have billing rates equal to the Daily Wage/Hourly Rates of McDonalds workers. The companies simply accept the demands and bid at even lower rates by employing armies of fresh college grads who haven’t absolutely no knowledge about how business works. To top it all companies are actively throwing out talent and shying away from the Intellegentia. Because they are costly. The only companies that can now afford talent are Product companies in Bangalore. Google is in Bangalore and to tell you frankly they offered one of my friend from a well known startup Rs 1 Crore (i.e. US $2,50,000 pa) to join as the Team Lead (Which is a very common position to warrant an offer like this under normal circumstances). That’s the cost of real talent.

We have bigger problems to solve than pushing Gross Margins up. Instead of throwing talent out of the companies we should concentrate on building a meritocracy. How many IT companies in India hire Ph.D’s? Do they need them?

When you have a country like India with one of the lowest per capita income in the world, one cannot pride by claiming that a certain firm provides employment for 1 million employees at the salary level of US Daily wage labourers.

We need to build ecosystems around the firms. Ecosystems in which the talent thrives and grows. Otherwise we cannot curb this situation which has grown into MacroEconomic problem at the level of countries. At the end of this decade in 2 years all the talent in India would have fled the country and with no means to nourish or replenish it. A college is like a nursery where you can seed talent but it needs the rich industrial environment to practice, grow and flourish.

On top of this there is an increasing emphasis on Process Compliance and Documentation. It is like training sportsmen for Olympics by putting elaborate processes in place to monitor them walk through the high jump hurdle, without any world class coaches to teach them to jump across. Creating graphs on the Excel sheets doesn’t get the job done how ever pretty the graphs are.

So you basically not only lose talent, you lose knowledge, you end up losing projects and any credibility and then you become yet another services company without any individuality. That amounts to no unique advantange amongst competitors and which in turn leads to a higher reduction in billing rates and then the Gross Margin falls down to where it started from. But now you have lost all capability to compete and sustain yourself as a world class company. That is a situation where you cannot return from. That’s the reason there are 10,000 services companies in India and other than the top 3 none ever stand out or grow any further.

All this can be avoided if you seed the company with 10% highly skilled talent and keep it that way. Otherwise you will end up going to war having an army of 10million soldiers with batons and no artillery or air power.

The Quality Conundrum

2008-06-10T10:57:00.000-07:00

The world over Indians pride in their education system, while the rest of the world believes that the US education system produces better leaders. Most of the US MBA programs use collaborative, interactive, case based studies. Whatever the college is, its teaching philosophy is highly people oriented. Manufacturing companies use low skill labour and rely mostly on process based methodologies. VP / CEO’s of companies don’t comply with any metrics or processes to produce better, faster, taller CEO’s what they do is very individual and highly skilled.

If we can say that Process Based methodologies are used when the skill is low and People based methodologies are used when the skill is high. Could we say that we could solve quality problems in low skilled environments by using the Corollary that “Shifting to people based methodologies could push the skill level upwards and hence the Quality”?

If the conjecture holds true then we could in fact solve the so called Quality problem. It just has to be seen in a costly real life experiment and empirically proven.

An Engineer's View of Venture Capitalists (IEEE Spectrum, September 2001)- A Review

2008-06-08T09:46:00.000-07:00

Please refer to http://ycombinator.com/tredennick.html The statements in quotes have been paraphrased from the original article.

“The VC community is a closed one. It caters to a restricted audience. In fact, you don't get to meet a VC unless you have a personal introduction. Don't send them your business plan unless the VC has personally requested it.”

I personally don’t see a problem with this statement. Honestly the whole world works like that from trying to make a girlfriend to meeting the CEO of Microsoft. This is very simple to understand there are some pickup joints like a Pub/Discotheque and you can walk up to women there because you know they are there to meet men. CEO’s might come to conferences where you can meet them because that’s what they are to do at conferences. But the best way to get to know a woman is through an introduction through a mutual friend. Similarly Bill Gates would definitely meet you if your wife knew Melinda Gates and she introduced you to Bill. There is no big deal here infact. Some people will wait their entire life to get to know Cindy Crawford. Some would stalk her every day. If you stalk Cindy you will lose your credibility and chance and will be thrown into jail. Similarly if you run behind anyone too much they will not value you. Say what you have to say and walk away and leave it for them to come back to you. If you send your business plans to everyone it shows in the way you send it to one VC and he will ignore you, without saying anything about the greatness of your idea.

“VCs don't sign nondisclosure agreements. That affords them protection if they like your ideas, but they want to fund someone else to do them.”

First it is a legal liability to sign too many legal documents. You are opening yourself up to being sued. With the kind of money VC’s have one mistake would make them liable to lose everything in their fund. So yeah I guess it is normal for VC’s to reduce their liability as do I. I don’t sign too many things. That said the way the brain works once an idea is inside one’s brain it becomes difficult to classify it as classified. Our brain is not a filing system which can categorize and lockup ideas within itself. Once an idea is in someone’s head it is bound to appear in some form somewhere else where he/she is involved. So to expect someone to be able to create a filing cabinet inside his head of the 10,000 ideas he/she comes across during the month would be unrealistic. The best thing to have is to have ideas that cannot be copied easily or be so far ahead in your business so that someone else who copies will be far behind and you will be able to capture the market by the time they launch their prototype.

“VCs are sheep. VCs either all fund something or none of them will. If you ride the crest of a fad, you've a good chance of getting funded. If you have an idea that's too new and too different, you will struggle for funding.” That’s debatable. It is like this. There is no way of telling if the stock market would go up or down the next minute. Forget about predicting how a business will turn out in the next 7 years (The normal time it takes to exit the business successfully) No amount of mathematics or financial wizardry will give you a definite correlation to any of the parameters you choose. So some VC’s consciously decide to follow other bigger VC’s in whatever investment they make. The bigger VC’s follow examples of sectors (which they have mapped) and understand and has startups previously funded by them which have succeeded. That’s one way of predicting the outcome. Everyone has to base their decisions on something. VC’s are humans like us. They are not visionaries or born with a purpose to work for global betterment or specifically nanotechnology.

“VCs aren't technical. Mostly, they aren't engineers-- even the ones with engineering degrees. An engineering degree is a starting point. If you design and build things, you can become an engineer; if you work on your career, you can become an executive or a venture capitalist.”

Most VC’s either have Engineering Degrees and have gone on to do an MBA at Wharton or Sloan. So for one thing the elite VC’s are highly educated. Sadly that’s not true for all of them. But whatever the case maybe. If they don’t practice engineering they are bound to lose grasp of it. And even if they could be engineers for some part of their life’s they wouldn’t understand the whole breadth of technology. So like all our commerce or business graduates they spend a lot of time with techies learning the latest buzz words and hurl it out in their conversations without understanding what the implications of what they are saying are. But that’s true for every CEO of a Pharma company or Coca Cola. Don’t you think they go home and ask their kids to tell them what Facebooks App’s are and which ones are the most famous? That doesn’t mean they are bad CEO’s. Everyone has to work in a diverse environment with expertise in one or two subjects and mediocre knowledge of others and everyone has to manage somehow. How technical do you expect the VC to be to grasp biotech, nanotech, silicon wafer tech. , Web 2.0 all in one go?

“Experts aren't very good. The VC will send at least one "expert" to evaluate your ideas. Don't expect the expert to understand what you are doing.”

First I think the word Expert is overhyped. Everyone from an IIT Engineer to a Ph.D in Mathematics to Nobel Laureates’ will say something in public as if they know everything about it and will rush back home or their labs and when no one’s watching will rush through the math’s and equations to figure it out and try for another 2 months or so. I’m surrounded by Managers, Leaders, Engineers who behave like they know everything. Being an Expert is over hyped. I have seen many people try and convince others by dropping Designations e.g. “I was the Director Of Engineering of Yahoo.” The bottom line is to find out who has the paper and pen and is drawing shapes on the paper and convince him a bit more about your idea. If the Expert was the brother of the woman you desired wouldn’t you give him extra attention. Ditto!!!

“VCs don't take risks. VCs have a reputation as the gun-slinging risk-takers of the electronics frontier. They're not. VCs collect money from rich people to build their investment funds. Answering to their investors contributes to a sheep mentality. It must be a good idea if a top-tier fund invested in a similar business. VCs like to invest in pedigrees, not in ideas. They are looking for a team or an idea that has made money. Just as Hollywood would rather make a sequel than produce an original movie, VCs look for a formula that has brought success.”

Hey! Everyone is there to make money. You want to make a quick exit and so do the VC’s. They are trying to make money too. Its about supply and demand. The money is in demand and in short supply. Every person with money will try to reduce risk in whatever way they can conceive of or deem fit. If something has worked in US and is being copied in China. VC’s will rush to it. Because that’s the fad and known to work. When someone gets a chance like that it is normal that they won’t look for anything else. The problem is your problem, you have got something that no one’s ready to pump money into. So like everyone with pathbreaking ideas you have to be ready to slog it out till you can prove to the world that what you are doing is infact what they need. But the thing is if you can do that with little help you would find yourself on the Forbes List of Richest People in the world. Because you would have done it without losing much equity early on in your startup life. That’s what happened with Mr. Gates too. So look at things from a positive standpoint. You will end up one of the richest people in the world. Yooo Hoooo! Do you have it in you to slog it out?

“Venture funds are big. Too big. If your idea needs a lot of money, say $100 million, then you have a better chance of getting money than an idea that promises the same rate of return for $1 million.”

No Comments!!!

“VCs collude. VCs collect in "bake-offs" that are the VC's version of price fixing. They discuss among themselves funding and "pricing" for candidate start-ups. Pricing sets the number of shares and the value of a share, and is typically expressed in a "term sheet" from the VC to the start-up. VCs optimize locally.”

Its like this. I have known entrepreneurs who already KNOW that their business is worth $13m instead of $100m OR who would take anything (Irrespective of what they claim or are asking for) If the VC says Valuation=$33m or if the VC says Valuation=$56m they would take either option anyway. It shows on their face. I’m not talking about being a Hollywood hero and telling a VC that you expect $1bn valuation either. But most entrepreneurs are not businessmen. They simply have to understand that the financial industry depends on supply and demand. Which is a very simple Economic concept. Money is in demand and in short supply through a limited set of VC’s. They WILL call up their friends and ask if they are funding you or not and at what price. But it normally doesn’t happen in places where there are lots of VC’s and the amount can be funded by a 1000 VC’s according to their criteria. So the best bet is to make enough money to be able to stand on your feet before you ask someone to buy you a bicycle. Not because the necessary condition for riding a bicycle is to be able to walk but simply because if your dad doesn’t buy you the bike you would be able to walk a reasonable distance on your own and not cave into anything you consider unreasonable according to you. The cost of startingup is at an all time low.

“VCs don't say no. If the VC is interested, you can expect a call and, eventually, a check. If the VC is not interested, you won't get an answer. Saying "no" encourages you to look elsewhere-- that's not good for the VC, who prefers to have you hanging around rather than going elsewhere for funding. Fads change; the herd turns; your proposal may look better next year. In addition, the VC may want more due diligence from you-- to add your ideas to a different start-up's plan.”

I had a friend who was so hated by everyone. He used to goto every girl in college and tell her he liked her and then when some of them came back to him after a while he told some of them “Sorry I have moved on. Thanks anyway” Trust me when there is money involved. Even if you tell someone you don’t need him and he needs you he will come back again and again, specially if that someone stands to make a hundred million dollars by coming to you. You just have to be good enough to realize if someone needs you or not. Which is a pretty human trait. And after that everything will boil down to supply and demand. Now that doesn’t mean you be impolite. Just say you have a specific time frame and have a Plan B. Don’t worry too much The VC’s who usually come in earlier get better multipliers than who come in later. So they make more money by coming in earlier and they know that. They are hard pressed for time and its valuation implications.

“VCs have pets. The VC's version of a pet is the ‘executive in residence.’”

Eric Schmidt was brought in by the Google VC’s as the CEO and look what he has done for Google. So I don’t want to comment either way. But only, if you don’t agree with something you should have the guts/sophistication to say no and that you would like to consider someone else.

“Your idea, your work, their company. The VC's CEO gets 10 percent of the company. VC-placed board members get 1 percent each. Your entire technical team gets as much as 15 percent. Venture firms get the rest. Subsequent funding rounds lower ("dilute") the amount owned by the technical team. Venture firms control the board seats. The VC on your board sits on 11 other boards. Board members visit once a month or once a quarter, listen to the start-up's executives, make demands, offer suggestions, and collect personal stock options greater than all of the company's engineers hold, with the possible exceptions of the chief technology officer and the vice president of engineering. The VC's executives control the company. You and the rest of the engineers do the work.”

Sweets. Life was never designed to go by your definition of fairness. Its all about money. If you are not careful enough you will lose everything. And that’s true for everything in life. With women, children, school grades, friends, jobs. Life is tough. But the mathematics and the game plan behind dilution and takeovers is not. You just have to figure it out yourself.

I never ever review other articles. But this article was one which I really wanted to talk about. There is no point hating anyone or grumbling over something. The financial world is pretty straightforward and has the same human beings which inhabit the rest of the world.

"The best businessmen in the world are good psychologists too."-Aditya

Look Ma My Cookie Cutter

2008-05-31T07:10:00.000-07:00

Cookie-Cutter: means "lack of originality or distinction"

There are so many things to do in this world and as we grow up our brain adapts and creates cookie-cutters for the most common tasks. When we were babies we fiddled around with toys trying to pick them up and as we grew up we learnt to stretch our hand forward and open up our fingers, position our hand better around the object and then to grasp it and withdraw our hand, closing towards our mouth. Once we get a cookie cutter to grab objects we seldom try any other approach. It takes months to learn to grab a baseball or a cricket ball. Once you learn it you stick to it for the rest of your life.

Bravo! We have learnt to pick up things. We do the same thing in our lives in our jobs. This is really good for operations but really bad for any business that needs to be the worlds best. You can create a 10^th global ranking organization out of Cookie Cutters but never the worlds best.

“We have quality issues” No problem, create a circular mentioning our policy for quality assurance, send it to the customers. Send a memo to our employees mentioning our checklist before we push something into production. Lets watch the dashboard for the next 3 months for results. Or else we will go back and do this a couple of more times.

That’s the problem. That’s a cookie cutter. That’s what all managers do. They have learnt through some readymade solutions that they know seldom bounce. And anyone who asks for anything is to be served the Cookie-Cutter solution. You know you don’t have to behave like McKinsey and say Structure Structure Structure in everything you do. But even if you don’t go that far you simply have to resist dishing out your three favourite cookie cutters, my manager in my previous job had 3 of his favourites the round one, the square one and the heart shaped one. And I hated all of them. How many times have I screamed in my head ‘This is what is sinking the company’ but who was I to say something. I was perhaps the lowest most form on life in the organization. And we had other workshops, brainstorming sessions,360 degrees, trainings, processes... You know what they all had in common? They were all cookie cutters. They were served in my face with the same ignorance… with manufacturing precision, without any originality, doomed to fail.

I have always valued Grey Hair, my father has absolutely no Grey Hair but I still think he is one of the most genuine genius’s on this planet. But I have always preferred someone in his late 20’s or early 30’s when I needed to do something important. Because unlike those Grey Haired clueless people who everyone hates but learns to live with, the former actually do arrive at better solutions (They need umpteen times more capable moderator for the brain storming sessions)

This is an open ended theorem that could be proved or disproved for decades. It is such that arguments both ways will both hold true without falsifying the other side.

But I will end my theorem with “Grey Hair<=> Bunch of cookie cutter’s” Hence Conjectured with loads of honest ambiguity to allow the meager genuine geniuses to pass through and violate this theorem.

Entrepreneur Ageing

2008-05-27T08:22:00.000-07:00

An entrepreneur starts out with a skill or technological asset that he and the founding team has acquired that may or may not be needed by the rest of the world. When an entrepreneur starts off he is ignorant (refer. Corporate Ageing article on the fundamental timeline of an organization) most of the entrepreneurs don’t transition into innocence and rather die out due to a cash crunch. The longest phase of a startup is innocence. This is where some startups get the break they long for and breakout with exponential customer base. And they move to being calculative. Most entrepreneurs have a limited one track experience of one technology and they are limited to that technology and all their plans and calculations are limited to that. It takes humility to accept ones limitations and to beg borrow steal to acquire a broad skillset and become a technology generalist. But that’s where entrepreneurs move to being innovative. They still do not have the resources to try it all out and they usually sell out/make an exit and turn investors. They expect other entrepreneurs to make money for them and they spend a lifetime waiting for their next success. Most entrepreneurs do not move onto the innovative stage and stay stuck to their original single track of technology that made them successful. They still try other ventures and call themselves serial entrepreneurs but there aren’t many successful examples of serial entrepreneurs. The biggest successes are ones who have made it really big on their first startup and never had to start from ground zero again.

Beg, Borrow, Steal: M&A, Our Career Options

2008-05-27T08:15:00.001-07:00

No not literally. But it’s a catchy way to start a controversial topic. All of us consider ourselves as Ethical and Honorable firms. Before we start lets refer to two things here

The list of acquisitions by Microsoft

The list of acquisitions by Google

It is easy to note that a companies like Microsoft, Google and Yahoo have grown a lot since their inception. And they are considered to be the most innovative companies in the world. Some would say Yahoo is Dead. I would just say referring to the Corporate Ageing article I wrote earlier that Yahoo is having trouble moving from Calculative to Innovative despite all the money. It needs a fresh rethinking of its Operations & Strategy. Perhaps a lot of people need to be let go. Lets concentrate on Google and Microsoft for the time being.

Microsoft started its lifecycle by acquiring Dynamical Systems Research and created Microsoft Windows Operating System out of it. It went ahead to acquire ForeThought, Vermeer Technologies Incorporated , Jump Networks, Visio Corporation and deriving PowerPoint, FrontPage, Outlook, Visio respectively from them. Google acquired Applied Semantics and Sprinks and created AdSense/AdWords which is their bread and butter today.

It goes unsaid that the best of the best in the industry have been out-innovated by smaller firms targeting and succeeding with technological breakthroughs. Somehow the best way to innovate is in groups of 10-20 without any corporate bureaucracy. Which also says a lot about the way even the best known companies operate. The top performers are often ignored and the top is usually filled with people who are outright incompetent (however educated they are) or have gained incompetence by sticking to one-track narrow business vision or by adopting bureaucracy whole and sole. Creating Excel and Presentations is their business. Which is what I said in an earlier post on hierarchy at technology companies (which proposes the best way for tech companies to operate, its not the depth of the pyramid that’s wrong its who’s at top that needs changing)

Now that we have identified the source of the problem and a possible solution for it. Lets also acknowledge that it might not be possible to change easily. So the next part is the learning from all this. The most important thing to note is that you can be God Sent/Ph.D. from Stanford or MIT/Chinese/Japanese/India/German but they way innovations and the brain works is that once you move forward in one direction using up a lot of your energy it becomes difficult to evaluate and switch to alternative approaches, and also it becomes costly to try out the myriad variations to solving a problem. This is where startups succeed and get bought over by the best companies of the world. So if you hit the Corporate Mid Life Crisis (which basically means a bottleneck in the innovation process, could happen at any stage in the corporate lifeline) your company could be filing 300 patents a year but that one innovation that’s going to change the world could still elude you. You have to beg, borrow, steal. Which is why most of the topmost companies spend a whole lot of time attending and sponsoring Startup Competitions, Seminars and Conferences. Just to pick up that one good idea that they need. Creating a presence also goes side by side.

Lets draw the analogy to our own personal career, having a Mentor is a standard prescription. But no mentor can be effective enough. You would need to beg, borrow, steal some knowledge and skills from your colleagues and industry experts. In the same light forums, expert discussion groups are a nice idea. Being in touch with people across the world in various labs would help too. An MBA would work well too, perhaps not so much so for the classroom teaching but more so for networking and the 2 years of job break would give a better perspective and a chance to try out various unknown/impossible/hidden alternatives.

Enoughsaid, it is far easier to integrate acquired skills into a personal repertoire rather than integrating e.g. a Skype acquisition into eBay business. This has to do with an M&A culture in a company. Companies who are startups have difficulty integrating an acquired technology while companies like Microsoft who have started with acquisitions in their foundations face lesser difficulty. It’s an unconscious management mindset that you either have or have not. If the M&A is a career stunt by a top VP or CEO then it is bound to fail. If the acquisition is not heartfelt and accepted by the engineering ranks or if the acquired company team members are treated as outsiders then again the integration fails.

My Payday: Job vs. Entrepreneurship

2008-05-19T09:52:00.000-07:00

Salary and payday make the most of discussions at coffee tables. Usually the CEO’s salary is the highest in most conventional companies but equally in some companies there are people who earn more in terms of salary compared to the CEO (Usually where the CEO is taking a token salary).

Lets look at a few facts…

Company	CEO	CEO’s Salary	CEO’s Total Stake	Company Revenues
Cisco	John Chambers	$13m	$272m
EMC	Joseph Tucci	$4.7m	$81m
HP	Mark Hurd	$26m		$108Bn
Microsoft	Steve Balmer	$1.3m	$12Bn	$51Bn
Google	Eric Schmidt	$480,000	$6.6Bn	$16Bn
Apple	Steve Jobs	$1 (One Dollar)	$851m	$24Bn
Oracle	Larry Ellison	$61m	$24Bn	$18Bn
IBM	Samuel Palmisano	$21m	$74m	$99Bn

The first thing to note here is that Steve Balmer, Steve Jobs and Larry Elison were founders in their respective companies. I’m assuming Steve Jobs was fired from Apple and lost his stake, now he just has $851m (Unconfirmed speculation about how he has such less stake in Apple) but he is an exception otherwise Founders of Companies are worth the most in this list of CEO’s. (Bill Gates is also a Microsoft Founder though not the CEO but is the Richest Man in the world). The richest non-founding CEO in the list is Eric Schmidt from Google at $6.6Bn

So the rule of the thumb is if you want to DO WELL do an MBA and take up a job and slog it out for the rest of your life and you will do well. If you want to DO REALLY WELL you have to start your own company (Assuming you know what you are doing) and help change the world and then slog it out for the rest of your life. THIS IS MY MESSAGE TO ENTREPRENEURS. Entrepreneurship is difficult and has a psychological aspect of the entrepreneurs social circle. E.g. in India it is considered more respectable to work in a Reputed Company (???) at a salary of $10,000-$40,000pa than trying something on your own. The former is also related to Stability and Sane-ness.

In the table I drew up above it is obvious that everyone who became the CEO due to a JOB (even though they are some of the most reputed, talented and educated people in the world) simply cannot compare to the FOUNDERS OF SUCCESSFUL COMPANIES.

The mantra for Starting up is to normally work in a job for 3-4 years and then startup, unless you have a degree from Harvard Business School, MIT or Stanford. So that you can go back to being considered for a job in a favourable lateral hiring. Contrary to popular opinion 4 years of unsuccessful Entrepreneurship experience is equivalent to Zilch and not even compared to your batchmate who has so called gone through the rigours and stability of a regular job and would be your senior by now. You should know you are risking this.

Other thing I have noticed is that people in Jobs at so called Reputed Companies will have inflated Ego’s while an Entrepreneur has gone through unsuccessfully through a humbling experience.

I could keep on writing more and more but I guess my point is made and you have the above table to show others who are skeptical about being an entrepreneur. Succeeding or Failing is another matter. I have compared Success in a Job vs. Success In a Startup.

The Art Of Software Development

2008-05-18T03:53:00.001-07:00

I was never a proponent of Process Centric Software Development Methods. I personally prefer People Centric Methods. I have been using them for the last decade and these are the only methods that succeed. Companies who have process centric software development methods are some of the poorest software development companies in the world.

This is the Powerpoint Presentation with the details. Click here. I'm too tired today maybe I will extend this post another time.

Corporate Ageing

2008-05-15T10:05:00.000-07:00

There is a revolution happening at GE. And Jeff Immelt is at the helm of it. Why is this important? It will be evident as we discuss “Corporate Ageing” (Don’t look up the term up on google yet. I coined it a few years back). Whats corporate ageing? Well, the concept is simple. When you start a company aka Startup; VC’s ask you if your core team members have worked with each other before, that’s the first stage ‘Ignorance’, no one knows each other or how things will work out, what to do and what not to do, or how to do things. The company grows through it to a stage where its ‘Innocent’ where leaders in the company usually throw the dice and keep their fingers crossed hoping that things would work out well, so much so for their corporate strategy. Then the company becomes ‘Calculative’ where some best practices are documented, they know their business and stick to things that work and they can predict outcomes to a certain extent. The last stage is ‘Innovative’ where the company takes risks and innovates. The only point to note here is that the transition from Calculative to Innovative is primarily by crossing a monetary threshold.

In big companies you can say that the Corporate Division is Calculative but the Engineering is Innocent. You can place different verticals, sister companies, divisions on different points on the timeline. This also lets you understand why divisions between companies don’t gel together. Because their placing on the Corporate Ageing timeline is different, which shows their thought process and behavioral traits. But that’s the matter for a different article.

Lets see what happened with Google as an example. When Larry Page and Sergey Brin started writing their search engine and trying to raise capital. They were Ignorant about everything. They were Innocent till the stage when they tried out Adsense. And after it worked out they became Calculative. Then they Head Hunted Eric Schmidt from Novell who pushed Google to Innovative which also came about with $14bn per annum influx of money from Adsense. Now Google is an Innovative company. (Please don’t read this by comparing number of patents filed by Google over the years, this is on the Corporate Ageing timeline, in terms of corporate culture)

Lets see whats happening at GE. When Edison started work on the light bulb he was Ignorant. GE evolved through that becoming Innocent and staying Calculative with their Six Sigma methodology for the most part of the century. That way GE is the slowest Ageing company. Jeff Immelt is pushing GE through Innovation. They have long crossed the monetary threshold but GE is a slow growth company (In terms of Corporate Ageing).

There are a few reasons for that Leaders cannot be calculative and innovative at the same time. I say that and Jeff agrees with that from what I know. When a company becomes a company of immigrants and learns to work with that and has the money it suddenly becomes Innovative. Think of it this way when the company has accurate measures to measure everything from a pin moving on the production floor to quality and inventory. It is suddenly over measuring for its own good. It is a bottleneck that prevents leaders from risking anything to avoid going out of bounds of the Organizational Metric Boundaries. This blocks innovation. Suddenly when you have enough money and corporate immigrants they break through the threshold barrier and kick start innovation and risk taking.

More on Corporate Ageing in a later article.

Hierarchy at technology companies

2008-03-02T01:44:00.003-08:00

What are technology companies? Every company uses some or the other technology to create its product/ services but that doesn’t make them technology companies. Tech companies are ones whose past/present/future will be decided by the success of the creation or application of the technology around which their business revolves. So Toothpaste is not a technology product. Nor is Coke. A shoe to certain extent. But Microprocessors and Software…Certainly!

So the above statement also gels well with our intuition about what a technology company is. This article proposes “Let the whole company report to the CEO and the CEO report to the CTO. And the CTO and CTO report to the Board. With the CTO with Veto powers over all decisions made inside the company. And the Board with power to make the ultimate decisions.”

Absurd? No! not really. That’s how all the technology companies function informally. The CEO being dependant on the CTO to make all the strategic decisions. The only thing this article is proposing is that this arrangement which works rather amazingly well and should be the only way for the Technology Companies to work, should be Formalized. How about calling it the “CTO Prime Corporate Structure”???

Sorry guys I’m no good at Coining English Terms. But I think the point has been made.

Private Companies are easier to run

2008-03-02T01:44:00.001-08:00

… if you know what you are doing. Many times in life you will encounter a situation when your boss has not gone through the same career path as you have and has a different perspective to things. Maybe he is a Wharton MBA in finance and you are an ace engineering scientist at Intel with a Ph.D and Post Doctoral Research experience. That’s something we call can identify with. And…

When you run a company, people inside the company and outside the company have different perspectives too. Of the inside forces a company has to deal with are

1) The middle management

2) The top management

3) The Board of Directors

4) Investors

Of the forces a company has to deal with are

1) The self proclaimed critics

2) The so called industry veterans/experts

3) The Wall Street

4) The Early Adopters

All the above 8 groups have different perspectives to things. To summarize the middle management doesn’t share the same vision as the Top Management or the Founders of the company or even the Investors. The Top Management has to take the strategic decisions to keep the company afloat and survive the dark waters ;-) (Sorry to put it that way but I kind of think that’s true) The investors are too busy thinking about their retained stake and returns on investment and dilution with further investment. But they have learned to be patient with time and are not that trigger happy any more.

The self proclaimed critics in the industry are people who have little or no implementation experience and have not walked the path themselves. That makes them different from the Industry Veterans. The latter on the other hand have vested interests and their own set of biases. For example they think that Microsoft or Google is invincible, so you never tell them that you plan to take on them anyway. But the ground reality is that “Many Kings came and Many Kings Went. Challenging a king was always considered Treachery/War but then there was one Alexander” Maybe Google and Microsoft are great Kings but they might not be Alexanders, only time would tell. Then comes the Wall Street, if you are a public company they want quarter on quarter returns and they don’t care if you are revamping your product line or restructuring your corporate structure or shifting your mission. All they want at the end of each 3 months is whether your Revenues etc. etc. grew at e.g. 15% compared to the same time last year. The Early Adopters are the ones that take your products whether they be Medicines or Chocolates or Microprocessors or Software. What they turn around and tell the world will affect the way people look at your product. If they say something adverse the number of people even picking your product off the shelf would reduce to 15-20% of what they would have been.

This doesn’t apply to startups alone. I have been trying to pen this down for quite sometime now. This applies to product launches by Fortune 100 companies and Startups alike.

So if you are launching a new product, do away with the Middle Management. The Top Management would have to get involved. The Top Management should have Founders/Owners if possible. They would also be on the board so that reduces the groups to Two inside the company (The Top Mgmt. And Investors) The Investors are easier on us poor souls these days and are waiting for that magical 7^th year Exit that will give them Nirvana. So it basically boils down to Managing the expectations of JUST ONE GROUP inside the company THE TOP MANAGEMENT.

Everyone in the second group is extremely dangerous to handle. No one can handle the self proclaimed critics but the industry veterans can be engaged in a WIN-WIN scenario by creating an ecosystem around the Product that you are launching. The Early Adopters similarly should be involved with the Product Engineering to guide on issues. They are like the first customers to your New Restaurant. You simply have to please them as much as you can. They are like reporters who will write columns about your Cuisine.

Most of all keep your Company private. If while doing all this you are also listening to the Moanings of the Wall Street you will miss the High Tide. If you are a public company with no other choice. Think seriously about launching another Private Company/Startup for that project and keeping that private and then merge it with the main company later. Yeah I know its tougher than I make it sound. But you have to sit back and figure all this out yourself.

It pays to push the boundaries

2008-03-02T01:43:00.001-08:00

Sometimes you make more money by being the second in an industry and being second in many other industries and geographies where the market leader is not present or someone else is the market leader. But a business is not always about making the most money or about making an easy buck. That’s a shallow proposition presented by shallow companies which are struggling with survival thinking that cutting throats gets them the one magical ingredient to make it big. Successful companies create an ecosystem around themselves.

But the best part is the companies that succeed or succeeded big time at some time in the past have always ‘Pushed the Boundaries’. That’s what is identical amongst all successful companies in their path to success.

What is a Boundary? A Boundary is an accepted Norm of what is considered normal and what is not. A Boundary also demarcates between what is also considered as normal thinking and what is not. So to push the boundary means defying the norms (No we are not talking about doing illegal things) we are talking about things like a fashion designer creating a Pink Colored Line for Men, or a Doctor prescribing IceCream to treat a cold, or FedEx declaring it would deliver next day what come what may. It is things like these that make a company stand out from the rest and if it makes monetary sense and appeals to the taste of customers those companies succeed big time.

It is the thought process that separates the winners from the rest. And the only person standing between you and your success is yourself. It is up to you to take it from here.

Are Middle managers Innovation bottle necks ?

2008-03-02T01:41:00.000-08:00

Oh My Gosh!!! That’s it. Companies have always talked about flat structures and VP’s always have their pet projects they always look at personally. But nobody puts their finger on it. This is it “The Middle Managers are Innovation Bottlenecks” The origin of innovations are from the ideas inside the first thinkers head. Nobody will be able to replicate that idea/passion/originality or whatever you call it better than the thinker who thought of the idea behind the innovation.

In a company anyone can innovate or plant the idea. But if it comes from the grass roots it is clipped by the middle management. If it comes from the middle management it is clipped by the top management. What remains is a Meta-Idea or an idea in the minds of the top management which originated somewhere else and is in line with his vision of things. This is a Meta-Idea, the so called inspiration for the rest of the company to work on. The bottom rank in the company works towards realizing this idea which is now coming from the Top Management. The middle management is just going to sit there and diffuse the implementation of this already diffuse Meta-Idea. So it’s best for Corporate Innovation to do away with the middle management in the path breaking innovation projects.

It’s not that middle management is a corporate Idea and Implementation diffuser. It is just the way the corporate structure functions in multi-billion dollar companies.

That said this way. I’m off to prepare for my daughters upcoming first birthday bash. And I’m doing away with the middle men. It’s important to me and I’m going to organize it myself. I will talk directly to the caterers, flower shops, gift shots, invitation card printers etc.

Prime, subprime mortgage, inflation and the US Economy Slowdown

2008-02-05T20:32:00.000-08:00

One of my close friends was asking me whats happening in the world economy and what should be his strategy? In short I told him to do a Warren Buffet.

Any country’s economy in the world whether it be Spain, China, New Zealand or Canada or even Trinidad revolves a lot around Mortgage and Lending money. People borrow money with an intention to do something that would give them more money than what they are paying to borrow that money. To build houses, dams, roads etc. Prime mortgage is that section or Mortgage industry where credit scores are high, investment criteria are strict and not everyone qualifies. Sub-prime mortgage is below that where you can get a loan even if you have poor credit scores, can’t meet the terms and conditions for repayment and so on.

Even in the two line definition in the above paragraph you can see that Sub-prime mortgage sounds like a risky affair. People default on loans all the time and their Collateral is auctioned or repossessed and sold to make up for that. No issues there either. The problem happens is that when people default in massive numbers. So in the US this year lots of defaults happened in the sub-prime mortgage space. The people defaulting were linked to or had invested in other economies, markets. They had to be pulled out to recover the default. This is how the cris is spreading from US to other countries and even indirectly as the value of the US bonds and guarantees goes down.

Now lenders will start saying that previously I used to lend at say 4%/annum interest but everyone is defaulting around me and the risk is high I’m not going to lend any money till I get 13%/annum as I need returns in line with the risks I’m undertaking. Soon as this phenomenon picks up inflation goes up. Interest rates goes up. And more people default (through indirect connections) in the prime mortages.

As more and more houses get auctioned Real Estate prices dip to half what they were. Consumers cut down on spending to repay loans and the market see’s a slump. Distress sales in the stock markets lead to Equity indexes falling with Financial Institutions pulling out to repay their dues.

All in all it’s a good time to sit back and get ready to be FIRED FROM YOUR JOB. But other than that to stash up all your money and to jump into the Stock Market or Real Estate market at half the price levels from 3 months back. i.e. do a Warren Buffet.

What do good managers do best?

2008-01-31T07:53:00.001-08:00

It doesn’t take a Harvard Degree to figure that one common thing between all good managers. That one trait that enables them to manage better than the rest. They organise all information around them into manageable ways and they play mind experiments with the information arriving at decisions in split seconds. If you invest in 200 companies your investments are unmanageable. But if you invest in 200 companies and organize them into 10 buckets of 20 companies each and the buckets denoting companies from pharma, technology, real estate and so on. And then you follow news and do mind experiments with the information of certain sectors going down or picking up you will be able to strategise your investments better. Though this is a very basic example and it seems rather obvious. But this according to me is the one thing that great managers have in common.

“They organize information around them in manageable ways and play mind experiments on those pieces of information”

The P2P Revolution is about to begin

2008-01-25T21:22:00.000-08:00

These are very exciting times at MetaASO, my startup. We should be releasing our Mermaid line of products very soon. What is Mermaid?

1) Mermaid is a suite of FREE P2P v2.0 (Peer to Peer) products that do not require any servers.

2) They allow you to create your own private P2P network. Which means that only those people who have access to the network can use it. So you can create a network for your family, friends, company, country, club etc.

3) Currently only 5 products are going to be released. They are Mermaid Movie, Multisource, Webcam, News and Meeting.

4) Mermaid Movie enables you to broadcast WMV files, even of HD quality in real-time around the globe.

5) Mermaid Meeting enables you to have text/audio/video/screen sharing meetings.

6) Mermaid Webcam allows you to broadcast your webcam/mic. to the world.

7) Mermaid News allows you to share news in real-time with your network.

8) There are 4 platforms supported-

a. Windows XP SP2 32-Bit (The most common OS in the world) + .Net Runtime v3.0

b. Windows XP SP2 64-Bit + .Net Runtime v3.0

c. Vista 32-Bit

d. Vista 64-Bit

Linux(s)/Unix(s)/Mac will be supported in the near future.

An internet connection >= 256kbps is required.

9) The softwares can be downloaded free from the website when they are released in a month.

The urls are: http://mermaid.metaaso.com , and http://www.metaaso.com

Mermaid intends to change the way our society functions for the better. We intend to bring the world closer and make it a cozier place. We want to put the power in the hands of people to start their own tv channels, radio stations, news networks. We also believe that the best software’s should be free. This is the way the internet should be and is going to be in the future.

The revolution is about to begin…

Fundamental Analysis/Business Plan???

2008-01-07T06:51:00.002-08:00

Hi,

I was talking to a friend of mine who said he doesn't want to spend too much time creating a business plan and wants to spend all his time developing the business instead of running around trying to raise capital. I'm not sure if he won't have to run around. But let me try help him with creating the business plan. A Business Plan is a strategy document and I will spend sometime on addressing that in another post. But a business plan has sections dedicated to financial projections that I'm going to address now.

I have created a financial projection spreadsheet with some important ratios. If you are used to doing fundamental analysis this sheet will look familiar. I was trying to locate some ready made spready sheet from edgar service of PriceWaterhouseCoopers but I guess it has been taken down.

So have a look at the sheet and lay around with it. It should suite being incorporated in business plans of most startups without much modification except for the numbers.

Here is the link.

Something about Bonds?

2008-01-07T06:51:00.001-08:00

Both bonds and equity are securities. But an equity holder has a stake in the company while a debt issuer is a lender to the company. So basically a bond is issued by a company/organization (think wild… government’s issuing bonds to fund a war, War Bonds) the bond purchaser pays the company typically $1000 which minus the issuing fee goes to the company. The company then issues interest periodically. Also called ‘coupons’ because initially companies used to give investors printed coupons with dates on which they could be encashed. The interest rate could be fixed or could vary depending on LIBOR (London interbank offer rate) or even a market index (again think exotic) Or it could be a zero coupon bond which trade at a discount price. Convertible bonds can be converted into stocks.

Now since you are lending company some money you are higher up in the food chain than stock holders of the company. In case the company goes bankrupt bond holders will get a part of the recovery money through sale of assets of the company. While shareholders will get nothing if at all.

Interest rates?

Suppose you bought a bond at 10% interest rate (fixed) if the interest rates rise to 13% since the bond pays 10% nobody will want to buy that bond and its price will fall. Yield is defined as interest-payment/bond-price and since interest payments are fixed if the bond price falls then the yield increases. While you will still make 10% and don’t have to lose sleep over it the mutual funds, banks and other organizations will lose sleep over it as the value of their portfolio will decrease. If the interest rate falls to 7% and the bond is paying you 10% then the bond is giving higher than market returns and its price will increase.

R’ber call and put from our previous discussions. The buyer of the bond can Put or sell the bond back to the writer/organization who will then repay the bond in full. The Call options allows the writer/organization to pay up the bond prematurely. Such options exist in some bonds either freely or on specific dates in the bond maturity period. Why would someone want to do that? A Buyer would want to Put if the interest rates rise (e.g. to 13% as he is getting 10%) he will get more money somewhere else. The organization will exercise the Call option if the rates fall (e.g. to 7% and it doesn’t want to pay 10% to the bond holders)

Fixed Income?

Any financial instrument that pays a fixed amount periodically is a Fixed Income instrument. For example stocks are not fixed income but Bonds maybe as they may give a fixed interest payment periodically.

What is leverage? A leveraged buyout (LBO)?

2008-01-07T06:50:00.000-08:00

Leverage in financial terms is a ratio. In terms of what you are doing divided by your contribution. So if you are buying out a company for $80m using $1m of your own money you have a 80x leveraged transaction.

Finance is not much fun without leverage. If all you could do was use your $1m then its not that much fun. Most of modern financial industry uses leverage. Hedge Funds use as much as 80-90x leverage. i.e. they have positions which are of 80 times value of the total money with the hedge fund.

Now how does leverage work? You want to do something i.e. acquire a company for $80m and then sell it for $400m later. So if everyone contributed to $80m fund and expected similar returns everyone would make 5x returns (minus 1x principal). But different sources of money have different expectations. For example if you spend $1m of your own money and raise the rest from the debt market (e.g. big banks) those banks are paying clients 8% returns and expect to make 12% for themselves. So now the bank needs to make 20% on their capital. If you offer the bank 40% on their money (i.e. $79m, called as ‘high yield debt’) you will have to pay them $110.6m in the end.

The equations for you will be. Invest $1m of your own money and raise $79m keeping your and target company’s (the company you plan to acquire) assets as collateral. You will place this debt on the target companies balance sheet NOT YOUR’s. And you will use the target company’s free cash flow to pay the loan. At the end of 1 year you will sell the target company for $400m or take it public at that price. You will need to pay back the bank $110.6m and will be left with $299.4m which you will get in return for investing your $1m which will amount to 299x returns for you.

That is the phenomenal amount of returns you get on leveraged transactions. This is basically what finance is all about. ‘Leverage’. The most important word in finance.

So lets see what are the risks involved. What’s funny is that the target company is paying for the loan used to acquire itself. With a high value of loan it could go bankrupt. Which will happen normally if the EBITDA of the target company is lesser than its interest expense. If the company is very cash flow positive you can get the board of directors of the target company pay a huge dividend to your company (you own 100% shares of the target company! Right?) Any cash flowing through the equities is taxed and though loan/debt payments is not. So that’s one more consideration.

Some of the money raised could come from Private Equities also. Which is usually 5-10% of the capital raised. It is not preferred by acquirer because the PE fund will expect returns in proportion to its stake unlike the banks who would be happy with 40%. That’s why PE money used in leveraged buyouts is low. Other options are bonds (called Junk Bonds or High Yield Bonds) They are rated poorly by the rating agencies on the investment grade as they are risky and provide high returns.

But how do you buy a company for $80m and sell it for $400m? First a target company is one which has good cash inflow. And it has some financial or operational inconsistencies. Typically the acquirer set’s up a stock option plan for the management of the target company and aligns the management interest in maximizing the revenues in the short term. So the debt is pulling the target companies valuation down and its spurge in revenues are pulling it up. As long as EBIDTA stays a lot above interest expense the company would survive. So basically you fix the company to make it appear more attractive. When you bought the company you took it private or got it delisted in the stock exchange. You can now sell it to another company/investor or take it public again.

Think of all this as a game. There are no hard and fast rules. If you can leverage legal and existing financial instruments to achieve your goals. You can call it the right way. LBO was conceived of by some wall street experts around 1940. So if you approach finance with the mindset of playing a game (within legal bounds) you will do well.

Management Buy Out?

This is a Leveraged Buyout in which the management of the company takes over the control of the company.

On Entrepreneurship in India

2007-12-05T06:11:00.000-08:00

I just had a chat with an old time friend who has been covered by BusinessWeek as one of the Top 25 entrepreneurs in Asia. We were discussing entrepreneurship. The gist of the discussion is as follows.

India has seen an explosion of entrepreneurial ‘ideas’ in the last decade. There has been a lot of Venture Capital and Private Equity activity but mostly at the second stage. This is still a dearth of startup capital. Indians have resorted to creating websites. Anyone who knows JSP/ASP/PHP creates a website. The truth of the fact is that India is still a brick and mortar economy and there simply isn’t just a critical mass of internet presence in India. Indian’s are very poor authors and social contributors. If you start an Indian search engine you simply wouldn’t have enough Indian material to show. In India the web is a way of chatting, hunting for dates and booking flight tickets. Online Auctions and marketplaces have suffered on grounds of ethics. Though it is debatable that people on ebay in US are ethical. No one would buy a car online in India. Most of the eBusiness is centered around brick and mortar businesses with a strong brand name and an initial web presence.

One definition of Entrepreneurship is ‘To exploit the difference between supply and demand using the locally available differentiators as drivers’ 90% of Indians want to startup to get away from a suppressive boss or to make some money because they heard some 20 some year olds in US made millions. The other 10% start with ‘Lets do X in India as it has succeeded in US and is still not there in India’ It goes unsaid that such attempts have very poor success rates. Entrepreneurship is seldom about creating long lasting value but rather a half hearted attempt at creating something, making an exit and retiring. Which capitalism is the way the world works but if you start with this idea it negates the basic reason why businesses should exist i.e. to exploit the gap between demand and supply or by creating a demand and then exploiting the difference between the newly created demand and supply.

In the absence of seed capital Indians have resorted to wage arbitrage or internet business models. The former has been partly responsible for India’s growth in the recent years and the latter is something that is the easiest way of doing something without investing lots of capital which doesn’t exist in India anyway, and for which the Indian economy is not ready yet. Also for the latter to succeed would require a change in the basic thought process of consumers in India. It would not only require an effective supply chain and infrastructure but also mostly an effective Legal System.

Entrepreneurship has existed since the Stone Age, starting a Mom & Pop Store is also entrepreneurship. But unless you can be the next McDonalds or Walmart it is not considered investment worthy. Most of the so called entrepreneurs in India have never sold a ‘pen’ to someone. Why is that important? Business is just not in the blood of the Indian Middle Class. Some of the businesses that are doing well are Realty, BioTech, Pharma etc.

The educational system that Indians and the world is so proud of especially the primary and secondary education system in India doesn’t promote risk taking, independent thinking, standing by your decisions but promotes a Will Suffice attitude. With a weak foundation only the strongest will to unlearn everything learnt in the past and learn everything afresh would lead to success. Another factor preventive large scale success which might just require a generation to change.

We will conclude by saying that if you want to startup on your own do all of the following:

1) Get some exposure to some country in US/Europe and some country in APAC.

2) Try something small and try to see if someone needs it and is ready to pay for it.

3) Try to keep your commitments low, entrepreneurship can be very tasking financially; most people fail and all those who fail normally go bankrupt and ruin relationships with family and friends. Try to keep a PLAN-B.

4) Get a good education early on in life. Debatably it is not required though but will give you a better perspective and confidence to standup for what you believe in.

5) Lastly whatever you do or say Think! Think! Think! Ask yourself honestly after a time gap if what you were thinking makes sense.

Lastly I’m not a Doomsayer and I wish you well.

The Power to Damage

2007-11-02T10:58:00.000-07:00

The Japanese came up with a concept in the mid 70’s called the “damage caused by a product”. And instead of measuring how effective a product was they started measuring how damaging a product was. Though it might not seem obvious as to what this could imply. Let me try and illustrate with an example.

Today I was talking to one of my friends who works in a startup which got $35m funding for its first round. They had 4 developers in US and 7 developers in India. My friend started today’s conversation saying “Man there’s too much politics. I cannot do this for Rs. XYZ more per month. I will resign.” Upon probing he said “Everyone shouts at me. I was about to be fired today.”

The problem as I understood was that since the CVS server was in US in one place and the two geographically separated teams used to commit code into it. One team used to wake up to find that the build is functionally broken. And both the teams used to blame each other, on many occasions the VP Engg. Stepped in and things were still not resolved. My friend had made some mistake in merging code between the Trunk and the Release Branch. And was screamed upon by the US team members, perhaps even the VP Engg. And he was ready to put down his papers.

Statistically I have seen 3 CVS mistakes committed by US developers compared to 10 mistakes committed per Indian developer. It would seem that the Indian developers were incompetent. But the truth of the fact is that Indian developers do not have experience with working on geographically distributed projects working on the same codebase on the same CVS server module e.g. Sourceforge.net open source projects. But even that didn’t turn out to be the real problem.

The problem in fact was far simpler. The build engineer WAS NOT TAGGING the builds so there wasn’t a ‘recent’ stable build when it was needed to be deployed. Any commits/merges to the CVS would be checked for compilation problems but almost every time the functionality would be broken. Whenever they would need to deploy the code they would take the current code and it would most probably be non-functional. Though not rocket science I just told him to ask the build engineer to Tag tested and functionally stable builds, which would delay their releases by 1-2 days but would solve the problem.

Now coming back to “The Power to Damage”. You see the build engineer made a mistake of not including tagging in the build procedure. And nobody ever looked at this mistake. The US team would call the Indian team incompetent and they would retaliate. And the VP would step in and the problem would remain unsolved. So eventually the VP would lose his credibility till the point that all of them together would destroy the very fabric of the Startup. The young team would fight against each other till they ripped the company apart even before it could gain momentum and try and compete against other companies. These fights between the initial members of the company would create instability in the company decades later.

Usually people have some potential to damage others but as you go up the hierarchy the damage potential gets amplified by the power you have. My honest advice to everyone has always been to control the damage you inflict onto others. They are like psychological scars which employees take from company to company, going undetected in the interviews and most of the time of their jobs until they have inflicted so much damage to organizations and other employees magnifying as an avalanche.

Some people believe offence is the best defense. And it is highly debatable if it is an effective strategy or not. What is clear though is that if you are calm and composed, ethical and professional in your outlook (A La Harvard MBA Honor Code) when everybody else is flinging mud at each other then I’m sorry to say the Harvard Graduate would lose. The situation can only attain stability if the top most management stepped in and took a no-bullshit stance. Followed by trigger happy firing of managers who don’t comply (You are fired-The Apprentice). Suddenly the whole corporate outlook would change. Theoretically it should work but don’t take my word for it.

An interesting telephone conversation with the CEO of a midsize software services company

2007-07-07T05:45:00.000-07:00

Created using memory recall and hence has a lot of omissions.

Aditya: What do you think are the topmost problems your company is facing?

CEO: More and more offshoring companies are bidding for the contracts in US at even lower rates. With our margins decreasing over the last few years and wages being 40-60% of the revenues we are hard pressed to look at short term goals instead of long term goals. How do I ensure that my company grows into a fortune 500 company in the next 20 years. I don’t think we will because to get there in 2 decades we ought to be planning in that direction which we are not.

Aditya: I think this is a multifaceted question. And the answer to the falling billing rates is that when you are not offering any USP over other companies other than in terms of size, stability, ISO/CMM certifications and hourly rates or some combination thereof. So the first and foremost thing to do is to create Intellectual Property, not necessarily through patents and copyrights which should be done at a later stage, but to create a huge intra company knowledge base. This is to be brought about by a cultural change where people consciously contribute. The second thing to understand is that technology is an enabler so instead of thinking about semantics, artificial intelligence and knowledge mining techniques/implementations/products you should start with a KB which is simple and heavily indexed and searchable. Most of the times CEO’s keep shouting ‘We need commitment, we need efficiency’ but that’s not going to work so easy when creating a knowledgebase. People are wary of losing control by giving away their knowledge so you have to watchout for contributions to the KB which are half hearted and hiding more than what they share. You can rate contributions on 1-10 (based on content/length/quality/topic), avoid repetitions unless they add to the knowledge and provide incentive for people to contribute to the knowledgebase per article/word. Lets call this the ‘Knowledge buyback program’

CEO: I didn’t think of that. We do tell the clients that we have people with 10 years experience on mainframes and 300 Sun certified people. But I guess we don’t have a fine grained differentiator. What is your opinion on attracting talent and rewarding employees? Keeping in mind that we have very low margins.

Aditya: Billing rates are a function of the talent of the consultants and they should be looked at so. Blanket rates across the company used in billing and bidding for contracts should be avoided. This frustrates the clients who have to pay an exorbitant amount for a low skilled consultant and it frustrates the really talented consultants by artificially leveling their billing and hence the salary they can demand.

There is nothing called an industry standard salary. We are not in a school where grade 3 people should be paid ‘X’ and grade 4 people ‘X+Y’. You also cannot have a blanket salary level. Are you saying all your managers are created equal? Or just different by tiny margins? Or that a senior manager is necessarily better than a manager? In the entire history of your organization have you ever fired senior managers? Are you sure they are accountable for performance, or do you describe your organization as bureaucratic? Do you even keep a count of the talented people who have left your company or have gone into mediocrity in the absence of adequate rewards?

CEO: Is there another way other than assigning employees to salary bands and fixing salary bands with respect to designations and roles? How else would our organization function? Yes, it is true we have never fired our senior managers but I wouldn’t call ourself bureaucratic.

Aditya: Over the last 2 years I have been telling my clients to shift to fine grained control. And I have always said Mckinsey charges around $10,000/day and people pay them for their services. So would they pay you if you provide something that is truly exceptional. For that you have to adopt the ‘Reward for Value’ strategy. Every consultant should be assigned a billing rate depending on his capabilities and should be assigned a base salary as a function of his billing rate, taking in to account overheads, experience, skills, contributions and non-billed time. Managers should be paid as a function of their experience, skills, contributions and the billing of their team.

We have talked about this in the past and I have said that sales is the most performance driven function in the company while engineering and consultancy are not so. And now I would add to it that “A company would become what it rewards” If you say the driver for your company is cheap labour, I would say it was when offshoring started, but now I would say that the drivers are Skills, Knowledge, Passion and Excellence. Excellence is not an industry standard.

CEO: I think we need to retune/rethink our business model in terms of people, skills and billing rates. Thankyou for your time.

Aditya: Thanks and have a nice day!

Derivatives: Futures, Options & Swaps

2007-06-11T00:46:00.000-07:00

Derivatives are of two kinds

Options
Exchange regulated futures, forward contracts, and SWAPs

Swaps

A swap is an agreement between two organisations to exchange sequences of cashflows for a fixed period of time. At least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price or commodity price. SWAPs are not traded in exchanges but are rather Over-The-Counter (OTC) between two private parties and there is always a risk of default.

Interest Rate Swap

Two companies decide on a notational principal amount, which never changes hands. And then fix a time frame e.g. 2 years and e.g. a quarterly payment period. Company A pays B a fixed interest rate e.g. of 6% and the company B pays A a floating interest rate e.g. Inter-Bank Interest Rate + 1.5%. Only the difference of payments changes hands. By doing this the companies can change their fixed rate assets into floating rate assets and take care of their floating rate liabilities and vice versa.

Foreign Currency Swap

Suppose there are two companies in US and India respectively. And the exchange rate

is Rs 40/$. Each company is comfortable in its country and gets a favourable rate loan. US company gives Indian company e.g. $1000,000 and indian company borrows Rs 40,000,000 locally and gives to american company. Over the next e.g. 5 years american company pays 11% (indian interest rate) of Rs 40,000,000 to indian company and the indian company pays 6% of $1,000,000 to the US company. At the end of the 5 year period they return the principal to each other, irrespective of the exchange rate. And hence they can fulfill each others foreign currency commitments.

Futures

In futures the margin amount is held by the broker towards the settlement of the contract and applies to both the buyer and the seller. The margin requirement is almost 20% and is continous. Every business day, the broker will calculate the margin requirement for each position. The investor will be required to post additional margin funds if the account does not meet the minimum margin requirement. E.g. if I buy ITC stock futures at $50/share, the lot is 100 shares or $5000 Both seller and buyer have to put $1000 into the trading account. If the price increases to $55/share then the buyer’s account will be credited with $500 and the seller’s account will be debited $500. Some maintainence charges also apply.

Futures are used by speculators who have no interest other than profts or by Hedger’s who buy a future contract in exactly the opposite to the stock position. For example

If I buy 100 ITC shares for $50 and sell a 2 month ITC future contract for $55 (or $5,500) the mathematics are as follows:-

Price after 2 months	Value of 100 shares	Gain from future contract	Net value
$45	$4500	+$1000	$5500
$50	$5000	+$500	$5500
$55	$5500	0	$5500
$60	$6000	-$500	$5500

So you see I’m stuck with $5500 even if the prices increase a lot but the best part is my profit will always be $5500-$5000 = $500 after two months. My position is hedged and after 2 months I have to buy a $55 ITC future contract and sell my 100 shares.

There is very high leverage with futures. Though you could lose more than your margin. In case of a margin call you have to decide whether to deposit the money or liquidate.

Options

Lets see a case where you purchase 100 $60 shares of ITC outright, on 50% margin @11% interest and 1 year options with a strike price (price of purchase[call] or sale[put]) of $40 at 12.25% premium. Also assume that after 1 year ITC share appreciates to $70. An option price would reach 0 value at the expiry of options, which means if the options are not excercised. Options can be on an index, currency, commodity or stocks.

There are two basic forms of options. A call option provides the holder with the right to buy 100 shares of the underlying stock at the strike price, and a put option provides the holder with the right to sell 100 shares of the underlying stock at the strike price. If the price of a stock is going to rise, a call option allows the holder to buy stock at the price before the increase occurs. Similarly, if the price of a stock is falling, a put option allows the holder to sell at the earlier, higher price.

A stock option is a contract that guarantees the investor who has purchased it the right, but not the obligation, to buy or sell 100 shares of the underlying stock at a fixed price prior to a certain date. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires.

	Stock	Margins	Call Option
Cash Down	$6000	$3000	$1500
Borrow	0	$3000	0
Carry Cost	0	$330	$300
Risk	$6000	$6000	$1500
Returns	$7000	$7000	$7000
Return %age	16.67%	30%	66.67%

Finance 104: The largest finance market in the world-Forex

2007-06-05T03:46:00.000-07:00

It is a trillion dollar market that works 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday.

Currency Pair	What traders call it?
EUR/USD	Euro
GBP/USD	Cable
AUD/USD	Aussie Dollar
NZD/USD	Newzealand dollar or Kiwi
USD/JPY	Dollar Yen
EUR/JPY	Euro Yen
GBP/JPY	Sterling Yen
CHF/JPY	Swiss Yen
USD/CAD	Dollar Canada or C-Dollar
USD/CHF	Dollar Swiss or Swissy
EUR/CHF	Euro Swiss
GBP/CHF	Sterling Swiss
EUR/GBP	Euro Sterling

Earlier we have talked about ‘short’ and ‘long’ positions in a previous post and you could open a position by either buying or selling of which there are three ways. Market order, Stop Order and Limit Order. ‘Market order’ is placing the order for e.g USD/RS at 42.0987/42.0993, This figure means you can sell at 42.0987 (the lower of the two prices) and buy at 42.0993 (the higher of the two prices). ‘Stop order’ means you want to buy or sell if the prices increase/decrease beyond a certain level, this can be used to open a position if you are predicting large movement in a certain direction, but is normally is used to ‘Stop Loss’ when the prices move away from your target and you want to cap the losses. ‘Limit order’ is placed to buy below a certain price or sell above a certain price, it works like this if USD/RS is at 42.0000 and you think it will dip to 41.0090 and then rise above 43.0000 you would place a limit order to buy at 41.0090.

$100,000 is called a ‘lot’. Normally you would trade with your money and would divide your portfolio of e.g. $20,000 into 5-6 positions to curtail risk and will also set stop loss prices. But you could trade more than the money you have, its called ‘margin trading’. Suppose you put $10,000 in your trading account and your broker gives you 10% margin ratio which means you can trade $100,000 (‘Lot’) by placing 10% of it, or $10,000 into the account. In case your position deteriorates below a certain level you will get a ‘margin call’ which means the broker will automatically close one or some of your positions to limit losses. You are in a way getting short term credit from the broker for margin trading. And he is going to charge you an interest or premium for that. If you were not trading on margin but with your money then you don’t have to pay anything but on margin for USD/RS you will have to pay ‘overnight interest’ each night which is calculated as ‘Difference in the interest rates of both the currencies per annum/365’ e.g. (11%-6%)/365 * $100,000 = $13.69 per night.

Every currency pair is associated with a minimum price change e.g. 0.0001 also called a ‘Pip’ which is used to measure changes in price and hence profits or losses.

Fundamental analysis is the evaluation of non-visual information to evaluate trading activity and make trading decisions. Whereas technical analysts utilize charts and mathematical indicators to quantify price activity, fundamental analysts utilize market news and market forecasts to qualify price activity. Usually for short term trading you would use technical analysis and for long term trading you would rely more on fundamental analysis which usually studies interest rates, inflation and political stability among other parameters.

Lets talk about technical analysis a bit more. We try to calculate the ‘support’ and ‘resistance’ levels by which we mean that a currency will trade above its support levels and trade below its resistance levels. Once it breaks them it follows through. This is done by drawing a straight line ‘Trend Line’ through all the peaks or troughs of prices identifying resistance and support. Another method is to use ‘moving averages’ which acts towards smoothening of prices and when the trend is up it denotes support and when the trend is down it denotes resistance.

Fibbonaci retracement is used between a low point and a high point by dividing the region between 0%, 23.6% (8/34), 38.2%(55/144), 50%, 61.8% (8/13) and 100% using horizontal lines. Each percent figure is derived by dividing a fibbonaci number by its Nth succeeding number. Though it is not completely understood and as to why it works. It shows resistance levels and support levels.

VC’s come in two flavours: Early adopters and Follow the crowd

2007-06-02T09:52:00.000-07:00

I was talking to the VP Engineering of a company in US and we were discussing our VC experiences. We mutually came to the conclusion that there are two distinct categories of VC’s. First, the ones that have turned billionaires doing what they do best i.e. running a business, and the second Institutional VC’s which are a part of a big company with a lot of money to invest.

The former understand technology when they see something. And they are more used to recognising and investing in companies which will provide breakthrough solutions which are not yet a proven market. The latter usually follow the crowd and they usually make statements like ‘We should be investing in the Web 2.0 companies’ or ‘We should allocate 20% of our portfolio for media companies”

So depending on what is the stage of the technology, market and product you should judiciously select the VC’s to partner with you. Apart from the fact that you should raise seed and get some revenues and look for VC’s from your local area.

VC’s are human beings too, though hatred against them is more than against the Devil himself. And they get a fixed e.g. 2%/year of the money they manage and they get a percent share from the returns on the investments they make. They would rather lose a good deal than invest in something that nobody else is looking at.

I think Guy Kawasaki does a tremendous job in his book ‘The art of start’. I would conclude this post by saying that most VC’s are like girls they seldom say outright no unless you say/do something outrageous. They will keep you hanging, keeping their options open. Telling them, there are other girls that are interested in you usually doesn’t do any good. You should look good on their portfolio of boys they have been dating. If you have satisfactorily dated many women in the past they would like to be with you. If you tell them you would be Tom Cruise in 3 years they would turn away but if you modestly tell them you would be Seinfeld in a TV Series they would ask you out rightaway. And they will always partner with you and dream of replacing you with Tom Cruise within 2 years.

download

Hedging: The present, the future and the Founder’s passion

2007-06-02T09:49:00.000-07:00

“Live today fight another day”

Stand anywhere in the Silicon Valley and look around, you will find atleast 300 corporate hoardings. Most of the companies will never be anything other than modest organisations. They will turn out to be lifestyle businesses for their founders and will employ perhaps a 100-500 employees each, giving them a livelyhood. Most of the companies are fighting for survival, ‘don’t lose this account’, ‘if we close this sale we will meet our targets for this quarter’, but not beyond that.

Most managers preach something and practice something else. Such is the hypocracy between what they say they will do and what they actually do. But none of them do it conciously, it comes naturally to them. Strategy Consultants often say that managers are doing just the things that will keep the boat afloat when they should be doing more. Unless you are a cash strapped startup you should hedge the present and the future and cover your position with backup strategies. (In financial terms)

Companies reward performance which give immediate results because the process of rewarding starts when the results get delivered. Going by that it is not in the interest of the managers to do anything that doesn’t give quick results and gets them the next promotion. They are not Jack Welch (of GE) who stayed in one company for 30 years, they are in the company for 4-5 years and would leave in a duration which will be almost as much as the tenure of their CEO. In this world of ever changing CEO’s and executives they also want to goto the board with results that their managers and they have delivered in the quarter or half-year or one year at max.. Why would they be interested in doing something that the next CEO will claim as his victory before the board?

This is the reason why the founders of a startup are the best team for the company. It is said they come with unparalleled passion. While that’s [passion] qualitative. In my research it boils down to their commitement to focus on both present and future initiatives. Because the founders will stay for ever unless they are kicked out by the VC’s.

download

The Strategic Edge: Relentless Competitors

2007-06-02T09:46:00.000-07:00

I have heard from management guru’s that competitors are relentless. They never give up, they work 24x7 and they have Japanese rigour and American management skills. The bottom line is that competition happens in spikes. Most of the time companies lie low, a process which I call Natural Competition or Natural Management. These periods are separated by spikes of Strategic Competition or Strategic Management initiatives. With strategic initiatives comes strategic failures. That’s one of the reasons why strategic initiatives come in spurges. They set new equations and things return to the new equilibrium untill when things are upset again in the future.

My first point is that your competitors are as human as you are. And you need to strategically tackle them, Natural Competition means maintaining the Status Quo, doing whatever that’s been happening till now. Money gives your competitors resilience but if you are above the basic monetary threshold you can fuel your strategic initiatives. Strategic competition compresses time. What is achieved in 10 years of natural competition is achieved in 1 year of strategic competition. Do repeat the previous statement once more this time replacing achieved with lost.

Strategies come from ideas and innovations. Most ideas are generated, proposed, declined, lost in the pile’s of paper and forgotten. But ideas that are infeasible today become viable in the future but they are never proposed again by the initiator once they have been turned down once. The executives know that it is not the right thing to do today but the middle manager never proposes them in the future as he doesn’t have the big picture of the business scenario changing making his ideas a great option in the future.

This brings us to the notion of an innovations and idea database just like the knowledge repository. Knowledge is what leads to innovations and innovations & ideas lead to strategic actions.

Think about it!

download

Finance 103: Arbitrage, Cover, Short and Long positions

2007-05-30T07:34:00.000-07:00

A ‘short position’ or ‘being short’ or ‘short selling’ is a term used to denote a person who will benefit from prices falling and hence he would want to sell at current price and buy at a lower price in the future.

A ‘long position’ or ‘being long’ or ‘long buying’ is a term used to denote a person who will benefit from prices increases and hence he would want to buy at current price and sell at a higher price in the future.

The ‘Spot price’ is the market price of a commodity, security or currency at the present. The ‘Future price’ is the fair price of the commodity etc. in the future taking into account all the payments such that there is no arbitrage.

To ‘Cover your position’ is to put a cap on your risk using some financial mechanism or instrument.

The simplest arbitrage between countries occurs when the interest rates are different. So if in India they are at 11% and in US they are at 3% then I would borrow $1000 in US at 3% for 1 year and then convert it into Rs 40,000 @Rs40/$ and use it in India in a risk free interest bearing instrument for one year. And I would cover my position by buying a future contract to convert my money back into $’s after 1 year at Rs40/$ or somewhere close to it. As observed in the financial industry any arbitrage position achieves almost instantaneous equilibrium. In our case by echange rate fluctuations or interest rate changes, or future contract rate change.

If you borrow $1000 in US and convert them into Rs today. Invest them and convert them back into $’s after 1 year. Your position is not covered.

If the future price of a commodity is not equal to its spot price growing at a risk free interest rate. Then you have a spot-future arbitrage.

Another common situation for arbitrage is when lets say Google stocks trade in NY stock exchange and also in Washington DC stock exchange but at different rates. But such simple arbitrages don’t occur anymore and close quickly.

Most of the scandals happen when high volumes of money is used for arbitrage which doesn’t work out, a party fails to deliver or if the money is leveraged/borrowed. Big banks and governments try to bail out the finance company in a hope to prevent economic collapse due to avalanche effect of other companies going bust because of one company.

Finance is going to be tougher than that but not that difficult either. Lets talk about a few more things in the near future.

download

MPT: The three fundamental lifecycles

2007-05-30T04:54:00.000-07:00

As companies we have to relate to 3 fundamental lifecycles and they are market lifecycle, product lifecycle and the technology lifecycle.

Market Lifecycle

Crystallization – New products are introduced and demand starts to increase.
Expansion – Awareness grows and everybody’s mother, father and sister wants to be in the business.
Fragmentation – Too many variation of products and too many player, no clear winner
Consolidation – players leave as competition increases and profits fall, leading to M&A (Mergers and Acquisitions)
Termination – nobody wants the product category and nobody produces it anymore

Product Lifecycle

Introduction – A new product is launched and awareness is created with a view to capitalise in the future.
Growth – Competitors enter the market, market shares stabilize
Maturity – Intense competition, advertising and low profits, players start leaving
Decline – Probably there are better alternatives and costs are cut in a failing attempt to attract customers.
Withdrawal – The product is withdrawn

Technology Lifecycle

Bleeding edge – High potential but no customer statements/proof of ‘adoption leading to tangible returns’
Leading edge – Proven technology with few specialists
State of the art – It goes without saying that this is the technology of choice
Dated – Is one of the many alternatives
Obsolete – Nobody uses is except for ones who are stuck with it and are dieing to do away with it.

Like all models these three representations of lifecycles of technology, market and product have limitations. They go hand in hand but they serve as a mental reference framework for the management. It is good to know how you place yourself in the three lifecycle stages. It assists in decision making though things are not that clear. There are products that have been leading the market for the last 2-3 decades and there are technologies and products that have gone from introduction straight to withdrawal leaving a hole in the investors pockets.

Think about it.

download

Earned Value Analysis

2007-05-30T03:24:00.000-07:00

Earned Value Analysis is a method used to monitor the progress of a project and it uses cost and schedule to do so.

The first step to do this is to start with an estimate of Planned Cost (PC) and measure Actual Cost (AC) for each Task. So after lets say 3 weeks you will have a figure for Total Actual Cost (TAC) for the project so far, e.g. 1,300 and the Total Planned Cost for the whole project TPCWP e.g. 3,400

The second step is to calculate Planned Value for each week. And then to accumulate it form the start to the present date to get Total Planned Value (TPV) e.g. 1,950. And e.g. TPVWP for whole project = 3,300.

The third step involves calculating the progress of each task for which we use the 0-50-100 rule. 0=Task not started, 50=Task started but not completed, and 100 task completed. This gives us the Total Earned Value (TEV) of the project till date. E.g. 1,700

So Schedule Variance % = (TEV-TPV)/TPV = (1700-1950)/1950 = -0.128 or 12.8% behind schedule

And similarly Cost Variance % = (TEV – TAC)/TEV = (1700-1300)/1700 = 0.235 or 23.5% under budget

Also the estimate for the completed project = TPVWP * (TAC/TEV) = 3300*1300/1700 = 2523 below budget if the trends continue

This should give you a fair idea of how a project cost and schedule is monitored. Most companies have integrated formulas to include Quality along with Cost and Schedule. Which complete the Cost-Schedule-Quality Matrix. All the latter methods I came across were propreitary. Hence I have not mentioned them here due to copyright reasons.

What is interesting to note with EVA is that it disciplines the Project Managers to use a common lingo for reporting progress of a project and it also forms the basis for executive dashboards in a project based organisation. The first dashboard that I implemented was for GE Connecticut.

Use Case Point Analysis

2007-05-30T03:21:00.000-07:00

Please download the Use Case Point Analysis sheet. UCPA works with use cases as the basic unit of work. Based on the Actors/Use-Cases and Environmental and Technical factors it arrives at an adjusted use case point value. Which is converted to effort, which in turn leads to schedule and cost calculations.

I have seen the whole hue and cry about PMP and Sun/Microsoft Architect Certifications and the like. The problem with the Academia in such scenarios is that they teach and test single loop knowledge and totally neglects double loop learning about how to come up with solutions to problems in a real business environment. An enlightened manager uses UCPA knowing that what he is doing will result in figures off by +-40% of the actual and he continually improves and tunes the model to his line of business till he gets acceptable results with more and more learning.

I have already mentioned about this in the post on phillosophy behind models. Do have a look at this in that context

The reference framework for solving cases!

2007-05-30T03:20:00.000-07:00

Contrary to popular belief I think that solving a business case problem requires a lot of domain knowledge.

Everyone comes to the table with a mental framework to relate problems to. Fresh MBA’s or Engineers can only relate to what they have read in the books. Which is mostly poles apart from what happens in a real business.

Once I was teaching a class and I said “People don’t usually co-operate…” and I asked them what they understood by that statement.

The one from a marketing background said “When I call up clients and ask them if they would refer us to their aquaintences who would be interested in our service. They say they will get back to us but never do. And I don’t like insisting for something my client is absolutely not ready to do so that I don’t lose him”

The one from Project Management said “My team members do not respond to constructive criticism they almost always retaliate and create complications.”

The fresh MBA student said “My peers know that if I don’t have access to some information I will lose a grade and in relative grading they would be ahead of me and hence they don’t share critical information.”

The executive said “When the company is in trouble I call expensive management consultants and I can see that they know that we are doomed with our project but they do not share their best conclusions with us while I pay them through the roof.”

A quick analysis says that all the students of my class came to the class with a reference framework against which they learn more and more things. Each of the 4 students will not be able to relate to each others context. At this stage I wouldn’t like to speculate how to get a better reference framework all I would say is that given two employees to choose from I would choose the employee for a project who has a better contextual framework.

download

Are CEO’s invincible?

2007-05-30T03:19:00.002-07:00

CEO’s inevitably are the richest employee in the company and people might think they have absolute power but nothing prepares you for the shock when you assume the post of a CEO and realise that you spend all the time worrying about the board and the shareholders. You spent all your time between talking to clients, attending conferences and rush to the house for a 4 hours nap if you are lucky.

All the common misconceptions about a CEO are lost within the first 3-4 weeks of the job. You are so dependant on the executives for everything but that’s what delegating is all about. By the time problems percolate up to you they are beyond repair. If you call McKinsey they would know that too and they will work hard, sell you the solution and walk away knowing you are doomed.

And nowadays with most companies pegging the CEO’s pay package heavily with corporate performance there is constant danger of being axed. And the incoming CEO is expected to quickly and magically fix all the problems left around by his predecessor. In the case you are fired it will be a high profile highly publicised media spotlight event. Not many companies would be willing to bring you on board after looking at the word to word account of your failure given to justify your removal circulating in the industry.

Then why is the CEO’s post so desired by everyone. Anyone who is worth anything and dares to dream, dreams of being the CEO of Microsoft/GE one day. I think there are better job descriptions which turn out to be more fulfilling and offer more stability. How much money is enough?

So whats your take on this?

download

Value and Costs: Whats the big deal?

2007-05-30T03:19:00.001-07:00

A decade back in my first startup I simply took time off one half of the day to sit back and just think about what we do and how we do it and then for the rest of the day I sat down assigning costs and the value added to the business for each task. By the end of the day I had figured out which things I needed to concentrate on and monitor and which ones needed to be changed. This is a very common approach used in Business Process Reengineering. And is in fact the first step for identifying a Change.

It is assumed that when you start with this process you would not have the complete picture. In very big companies nobody has the big picture of how the business works. But this can be a boon rather than a limitation. If you know everything about how things work and who does what work, you would be inherently biased in bring about change.

The most important aspect of this analysis is the repercusions on making conclusions from the analysis and the change agent making those conclusions. A change process is most effective in a business environment where the meritocracy prevails and it is acknowledged that when the VP and a Team Leader make suggestions the one based on facts and with most merits is chosen for implementation. It is assumed that in case there is a deadlock then the VP has his say. The important concept is that can the organisation accept that the VP could be wrong and the Team Leader could be right in judging a situation, and can the VP accept that a Team Leader could be a better judge of the situation than him.

I have and will be talking about many management practices and people always email me with things like ‘We cannot follow all of them, what should we do’ My response is that while it is easy to associate costs and value add for tasks the bottomline is you could take any concept and create ingenious ways to bypass it and nullify its advantages. This would be true for anything you do. The best strategy is to start with a few things and move onto more and more advanced strategies and practices as the organisational management maturity improves.

download

My views on interviews

2007-05-30T03:18:00.000-07:00

An interview has only one purpose ‘to judge whether a person will be successful in his new role’ to start with it is necessary for executives to agree upon as to what is the best job description. And before they take any interviews they have to agree upon a plan which outlines how they propose to go about finding out if someone is or not is a right fit. I have seen interviewers walk into the meeting room to an interviewee and not even caring to look at his or her resume. And hence the interview rather than finding out the strengths and weaknesses of the interviewee and how to utilise him in the company in the long term boil down to a few specific things that need to be done by him to get the immediate project off the ground or completed. Leaving no purpose for the employee in the long run in the company. How many interviews do you see where at the end of the interview the HR tries to sell the company to the selected interviewee? And in how many cases is the career path known to the interviewee before the time he makes the decision.

The HR comes up with two big numbers which they use and they are the number of employees to recruit for each designation, and the total cost below which the recruitments are to be made. Which I admit are very important but in the absence of the factors mentioned in the above paragraph they fail the whole purpose of hiring. In management of employees/customers or other human aspects you will be left dealing with numbers without an insight as to why some customer decided to go with another company/provider. And on the other hand if you do not create aggregate numbers you will not have the bigger picture.

The next problem with interviews is that multiple interviewers, and the same interviewer during multiple interviews choose inconsistent and tangential interview patterns. This also gets complicated because even the top performer at one companies interview performs with varying degrees of success during all the other interviews. So the probability of the interviewer and interviewee hitting it off during one interview is rare. This leads to extensive costs of conducting interviews. While good candidates are out there but you get a feeling that your job is so special that no one available in the market is fit enough to do it and that you are hiring a second choice, which is not good for the future.

After talking to many people I came to the conclusion that by the end of the last round of the interview the interviewee has already made up his mind as to how long he will stay in the job. The rest of the time during the job he is confirming or refuting his assumptions. The HR is the face of the company to employees an irresponsible statement like “We promise a lot of things but we don’t necessarily have to deliver all of them” from the HR of a reputed company while justifying not giving the promised raise to the whole team of employees, hikes up the attrition rate immediately and has an avalanche effect, while the manager is not at fault but will be held responsible for the attrition.

Most interviews after 5-6 years of working in the industry boil down to whether the interviewer likes you as a person. Most of the systems in companies are control systems without feedback (ref. engineering) Everybody takes interviews but nobody tries to measure how effective the interview process is over time and to continously improve it.

download

The Practicality Behind Management By Exception and Covert Leadership

2007-05-30T03:16:00.000-07:00

Management by exception is basically a practice of management where the management report only deviations from the expected values above a threshold to the higher ranks. And covert leadership is leading your employees without excercising too much control or making a presence. They both might seem different but are not that different. They both revolve around empowering your managers such that the organisation can scale in size.

There is an inherent flaw in the approach from the point of view of Management Consultants. In both the cases by the time the problem reaches the top management and to them it is too late. GE has a practice of everyone trying to find problems and jumping on them to solve them. The golden rule of the thumb is ‘If you cannot find any problem in the company then there is a very big problem’ On the other hand in small companies and startups where the top management is involved with the lower ranks in everything the biggest issue is that the top management has to compromise on their dealings outside the company and mostly sales which takes the biggest beating if the CEO is too involved with e.g. how the chip is being designed.

The corporate heirarchy has inherent mechanisms for losing problems under the pillow rather than fixing them. The most common logic used for that is “Don’t change the winning team” as the world is too complex for management to figure out why the team is winning but as long as the team is winning they don’t want to touch it. As and when small tips of the iceberg-problems show up they are ignored and one fine day the team collapses. I’m using ‘team’ synonymously with ‘process’ e.g. don’t change the winning process.

So management by exception and covert leadership boils down to a ‘Don’t Distrub Sign’ unless hell breaks lose in most companies.

download

Perspectives on Key Projects and Startups

2007-05-20T10:31:00.000-07:00

Once I was talking to the VP of a company and after trying to diagnose what went wrong in a key project. We came up with various causes from team, costs, stake holders and forecasting. Still none of us was convinced what the real problem was and how such failures could be avoided.

Then after a week I woke him up at 3 am US time and told him “Your perspective!!! Key projects are similar to startups if it fails everything could be lost. You should be realistic while creating the strategy, optimistic while executing the project and pessimistic while taking risks”

Star Trek III: The Search for Spock

2007-05-20T08:33:00.000-07:00

Unlike an protege that you train as your replacement you have to find a Spock in your team to implement the most critical projects. That’s the reason executives hop companies with their teams. If you were sent to China to start an offshore center you simply cannot avoid carrying your winning team members with you, which would contain a few Spock’s.

So what are the attributes of Spock?

1) He worships you for reasons you and he himself don’t know

2) He executes anything you set before him given time and resources

3) He will be dependant on you to take the decisions which he will follow

4) He usually doesn’t mind doing monotonous low skill jobs a lot of the time

5) He has excellent Single Loop Knowledge in his domain of expertise

6) He cannot even concieve of a situation where he fails you or the company

Spock will never be the CEO but they will be the pillars of the company they are a part of. It is best to identify them very early on. I have known a lot of startups where the CTO of the company is SPOCK to the CEO, will never be the CEO and is never trained as a replacement and never attempts it either. But this logic works in middle management and lower ranks also.

download

And then came the realisation

2007-05-20T08:32:00.000-07:00

There are two categories of people ones who have always been employees and others who have run their own companies and have also been employees. I wouldn’t choose a line of arguement which says one is better than the other. But I have grown respect for entrepreneurs. I have always professed that what seperates the winners from the ones that have not yet won is the thought process. And most entrepreneurs have evolved through one extra stage of the thought process.

Most entrepreneurs start with a vague idea of what they and their capabilities are and go through self realisation in their attempt to build the worlds largest companies or in the process of failing to do so. Entrepreneurs usually have an intimate understanding of the market and the process of starting a business. They are not guru’s at a few specific things but rather they do almost everything reasonably well and a few things exceptionally well. If the boat goes down and there is no one left they have the capability, morale and intention to steer the ship and jump off the ship last. They are also usually more commited and treat the companies money like their own, and everytime they do spend they take as much care as if it is their money they are spending. They have a pretty accurate picture of what their strengths and weaknesses are and they have walked the balance between risk and rewards and know their risk profile. Most of them have made enough money for life and money is not a consideration for them to jump jobs but do so rather because of problems they identify with the company which everyone else is reluctant to fix, and hence they are your best internal critics.

I would say an entrepreneur or two add spice to an already excellent team and complete the circle.

download

A life that has not been thought through is not worth living

2007-05-20T08:30:00.000-07:00

The husband lives in Boston and the wife in New York City and the husband drives down on weekends and comes back to work on Monday. That’s what life has become in modern days. Sometimes a couple lives together and one partner has to compromise on his/her career and select a second choice job option just to keep the family intact. Stability in ones life is essential to reaching the top position and trust me on this that you would require 2 brains than 1 to get to the top post. Most of the worlds top CEO’s have very successful marriages. A marriage provides more than stability, your partner provides you essential criticisim and insights about your job when you require another perspective, sometimes even when you don’t ask for it.

You do not become the CEO of any company by accident. Sometimes you won’t even know that you are being considered. It requires years of effort and you simply have to realise that performance is an essential condition but not the sufficient condition. Most of the alumni of IIT’s and MIT that I have come across share the notion that their performance will get them the top job one day and that they don’t have to indulge in politics. I disagree, the human aspect to career growth is an important factor in going up the corporate ladder. And who else to point out your mistakes and help you navigate your ship to the harbour than your partner. Every career move that presents before yourself causse a huge impact on your partner and kids. And a new job is going to be very tasking atleast initially and you simply have to come back to the relaxed environment in your house to rejuvenate.

If you are in a 60-70 hour week job or if your job keeps you away 50% of the month. You have to sit back and rethink what you want in life. It might work for sometime but you have to set time apart for family and strike a balance. If you are not thinking you will not realise when you are messing up. Of all the thoughts about life and the wonders of the world I would suggest some time off to self reflect or perhaps a sabbatical to take you away from the job for 3 months.

I have seen many softwares that enable you to plan your life. I wish it were that easy but that’s a good start nevertheless. In the end it is the thought process that sets apart the winners from the rest.

download

Who am I?

2007-05-19T06:09:00.000-07:00

I’m the creator of this blog. My name is Aditya Yadav, I’m 31 years old and of Indian origin. I’m a B.Tech and M.Tech in mechanical engineering from Indian Institute of Technology, Bombay. I’m a technology and management consultant and the CTO of a startup.

I graduated from IIT with a $275,000 pre placement offer from GE Industrial Systems but in those days I was involved with my grid technology startup and with the debate in India on brain drain. Me and my friends decided not to leave India but to grow here and contribute towards the progress of this country. The greatest influence in my life has been my father who is currently the AVP at Merril Lynch in USA.

In 2002 I got married to a very pretty girl called Renu and 2 months back the stork delivered a baby girl to us. We named her Alisha. And one day I was sitting and thinking about all the people who have helped me be the man I am and have shaped my career and then I thought of the people who will shape my baby daughters career and personality as she grows up, I wish I could do something for them and give them something in return. I think knowledge should be free and with that goal I created my blog to share the learnings from consulting engagements from around the world.

I also wanted to create a knowledgebase of actionable management articles which I could give to my colleagues in my next startup or the CEO at any company could give to their Managers and Executives. I usually do not concentrate on theoretical topics and mention them only if required to support another article on the practice of business strategy.

Of late in my free time I’m work on creating 3D animation. 2 years back I composed my first techno music album the link to the first track is at the bottom of this post. Also, I have also created a podcast of this post which can be heard and downloaded below. You can expect more and more blog posts accompanied by podcasts in the future.

I’m sure you are looking for the best of the best in management thinking and practice from around the world and that’s exactly what you will get on this blog.

Bye and hope you have a nice day!

Aditya Yadav
aditya.yadav@gmail.com

download

download

Finance 102: Some Simple(!!!) Calculations

2007-05-19T02:25:00.000-07:00

Net Present Value/Internal Rate of Return

Simply put if an investment of $1000 today gives one payment of $1100 it is providing 11% return which is the rate of inflation which is the bare minimum and nothing is gained and nothing is lost. If it gives $1200 after 1 year and using the inflation rate of 11% the net present value of the return is 1081 which indicates that it is a good investment (not the best but good) another way to look at the same calculation is to find out the rate at which the $1200 return gives the $1000 present value which is 20% (rate of return) which is higher than the rate of inflation of 11% and hence it is a good investment.

Value at Risk (Risk and Returns)

“VaR is a number that expresses the maximum expected loss for a given time horizon and for a given confidence interval and for a given position”

If you have invested $1,00,000 then if with 95% confidence you can say that your loss if any at the end of the time period e.g. 1 year would be less than $2,000 (95% VaR). And you actually hope to or actually make $40,000 at the end of the year then your return on risk ratio is 40,000/2,000 = 20 times. Investors (VC’s and Private Equities) compare this number between different investment choices to make the decision.

While the above two calculations seem simple they are not, the first calculation is dependent on the accuracy of forcasting future cash flows, and the second calculation depends on the calculation of correlations, volatility and confidence levels all of which require massive mathematical modelling and statistical simulations. But on the face of it this is what companies like Merill Lynch do.

Finance 101: The Introduction

2007-05-19T02:23:00.000-07:00

Corporate Finance deals with primarily two things

Raising Funds
Managing/Investing those funds

The efficient market hypothesis states that “the market value of a company reflects the discounted value of its future cash flows” In a perfectly efficient market “All investments would receive only their risk adjusted rates of return” but these are merely theories and the whole finance function revolves around exploiting imperfections. I would also like to mention that the biggest imprefections exist in the product market. Which is why I tell fellow entrepreneurs to start product companies, which maybe difficult in the beginning but provide unparalleled returns, unless they are happy with mediocre returns in other markets and also know how to exploit them. Surprisingly there are very little technology products emerging out of India. The risk profile of entrepreneurs is not the same as the ones in US.

Highly qualified CFO’s spend a lot of time and effort into accounting tricks to disguise whats happening. This is done with an intention to affect market valuations. And this is precisely why the CFA Institute has a whole section on “Accounting Shenanigans” in an attempt to bring transparency into corporate finance.

The whole function of finance deals with the relationship between percieved risks vs required returns. To understand this I will say that the your relative who invested $1,00,000 as seed in your startup percieves little risk whereas a VC who expects 30x returns on success, or their money returned before you get anything in case of moderate success, is infact percieving very high risk on the same project.

Every investor has a risk profile and an investment portfolio. They do not invest in things below a certain risk value because the returns are not there and they do not invest above a certain risk level. And then they try to balance out risk by creating an investment portfolio, a company which raises funds balances out risk using a project portfolio.

Whether it be a portfolio of investment or corporate projects. The choice between choosing the portfolio constituents is such that items in the portfolio move in different directions at different speeds so in the case of calamities some make profits and some make loss hopefully more profit than loss in total. Using scenario analysis, the portfolio manager will simulate various hypothetical evolutions of events in order to determine their effect on the value of the portfolio.

Financial strategies add value to either the Company, or its Shareholders or Both. Everything that the company does has to be judged with what value it is adding and to whom. A financial strategy has many internal and external stake holders and they form the agents (Agency Theory) they get different returns when the company succeeds or fails on a project and hence they think in different ways. The seasoned CEO and the top executives will shy away from high risk high returns projects to keep their job safe. (Tieing the executives pay to the performance has been discussed in an earlier post) A sound financial strategy also tries to bring the stakeholders together in working towards the common goal and avoid conflicts of interest.

What do Project Managers Mean by Risk Management?

2007-05-19T02:22:00.000-07:00

The value of a risk is (Total Cost Of Risk) x (Probability) of the risky event happening.

e.g. $1000 * 20% = $200 ---(1)

If he can avoid risks by taking some measures and that reduce the chance of the risky event to e.g. 60% we will have Probability*Mitigation = Modified Probability

Which gives us mitigated value of risk as follows

$1000 * (0.2 * 0.6) = $120 ---(2)

The mitigation results in savings of (2) – (1) = $200 - $120 = $80 ---(3)

If the cost of mitigation is $20 ---(4)

The ROI of mitigation is Savings from Mitigation minus the Cost of Mitigation or (3)- (4) = $80-$20 = $60

This number is used to choose between different mitigation options.

Project Management deals with risks by recognizing risks, creating mitigation plans, computing the numbers for cost of risks and mitigation savings, and then assigning differnet people to monitor risks as the project continues.

The phillosophy of modelling

2007-05-19T02:04:00.000-07:00

Any model used for analysing a business problem and arriving at a solutions is only as good as the assumptions that go into creating the model. People in some companies specialise in just creating and simulating the models while other people excel at mindlessly applying the models to solve business problems.

As a business evolves many models become ineffective without the management realising so. Capital One was one company that excelled at modelling consumer credit card spending behaviour and they utilised it to the maximum by creating numerous specialised credit cards.

I conclude my post by saying that if you have to succeed in a market you have to excessively model the market you are in. This is one thing that sets apart the market leaders in this world in every industry segment which the other companies fail to understand. To move from the second position to the market leader and to stay there depends excessively on modelling. If you see the difference between Google and Yahoo this is precisely the biggest difference.

Don’t be too nice!!!

2007-05-17T22:24:00.000-07:00

There are managers who are extremely rude and unconcerned and just hand out tasks and take the deliverables and send out status reports. Then on the other hand there are managers who are too nice.

Recently I spent a lot of time asking people if they thought someone was nice and what did he do that made him/her nice. I categorized the results into two categories.

He is nice because he sacrifices on himself to give us something we need.
He is nice because he gives me more than I deserve.

Sadly, the nice person in both the above categories is not going to be able to sustain being nice for long. And hence the title of this post ‘Don’t be too nice’

The way of being nice that would work in the long run is

Be truthful
Spend time understanding others viewpoint and concerns in sincerity
Be fair when you take decisions
The golden rule, if nobody else is losing anything you should let the subject have what he wants.

Our Next CEO, where have you been?

2007-05-17T22:22:00.000-07:00

If you are aiming for the top you should know about what’s happening across the world. The world over the top position is increasingly going to people without MBA’s from Harvard or Wharton or similar. The time taken to reach the top from an entry level position has decreased to about 20 years in Fortune 500 companies to 8-10 years in Startups. If you have grown with a Startup and are not the VP in 6 years then you have to rethink your strategy. Women are taking 4-5 years lesser at Fortune 500 companies to reach the top, if they do. High profile MBA’s are clustered around the Senior management positions. At technology companies especially the trend has been to not hire non-techie CEO’s. Depending on your background you should select the companies you want to grow with.

There are certain tell tale signs which should make you think. At Mckinsey it is not if you will have to leave it is when you have to leave, so the expectations are set from the start and the employees are prepared and handle the separation extremely well and move onto very senior positions in the industry. But employees get stuck in the corporate world more often not knowing when they should leave the companies. As the age at top position is decreasing any delay in moving up adversly affects his chances of reaching the top. People who reach the top are usually the youngest in their peers, lack of recgnition is a prime reason for moving out of the company. The typical modern day CEO is a job hopper and has been through atleast 5 jobs in his career (on the conservative side) He has been in on technical roles for around 2 years each and in a management roles in a company for around 4 years in each. Job hopping is not so taboo anymore. On the contrary it is advisable to spend 1-4 years of your career in a different continent to understand working with cross-cultural constraints. The typical CEO has also been through a stint in sales and finance and has traveled for 50% of the time at some stage in his life. Do you have a well balanced rounded resume? Are you growing in your company?, are you not in the top 10 employees of the company? Are you working 70 hour weeks and are getting burnt out? If the answer to any of the questions is negative then you should seriously consider changing jobs. In the long race the person who moves ahead without exhausting himself is going to finish the race faster.

Are you a thinker or a do’er or both. It would matter if you want to reach the top position. A lot of emphasis in the recent years has been on people who have come up the ranks doing things and reached the top with an extremely well developed thought process (management thinking). Being a do’er or thinker alone doesn’t get you the job. Hence the drop in the Top school MBA’s reaching the CEO positions at technology companies. These companies Biotechnology, semiconductor, software etc. are actually the companies that are really growing and are going to change the world.

The ideal CEO would have worked through both structured and unstructured environments of bureaucratic corporate’s and startups. In the former things happen themselves and there is a lot of inertia in the company and the management ranks which has been in existence for a long time. While he has been involved in motivating people and generating the momentum at startups.

The last point is that, just because you have been fired once in your career or have taken setbacks in your career path shouldn’t put you off and out of the race. In today’s world firings happen because of a 100 other reasons other than performance and the CEO candidate takes a lot of risks and when the stakes are high, setbacks do happen.

Winning the Trust of your Juniors

2007-05-17T09:23:00.000-07:00

There are a 100 ways to get along with your juniors and I don’t want to list down the top 100 ways to do so. I will only discuss one of the things I have done and how I have succeeded immensly with my juniors whether in my startup or other companies where I was employed.

Well the first step is to make it clear that nobody works for you they work with you. What worked for me was to talk to my juniors about job prospects and where they are applying for jobs. But if you tell your juniors, that they should tell you if they want to discuss career prospects, its not going to work. What I used to do was to very casually tell my juniors “I interviewed for XYZ companies and we couldn’t agree on a mutually agreeable salary package as they were inflexible and came to the table with a fixed mindset to procure cheap commodity technical labour which I’m not!!!” or something like “I was discussing with IBM that after the IPO of my company I would join them and work with them for sometime but I wonder if IBM would provide me with the excitement that I crave for” After sometime one junior approached me to ask about some company he was applying to about which he wanted to know. After he went back and told everyone else that Aditya can be trusted and gives honest advice, which I actually did. Soon all my juniors were talking to me everywhere, over coffee, over lunch, visiting my residence on weekends.

Employees want to talk about career prospects inside and outside the company with someone who can guide them. If that person happens to be their own boss, nothing like it. I have known the CEO of a previous startup who sitting in US used to expect his employees in the India office to work their backs off and love the company as much as he did. Let me tell you it never worked and he still hasn’t figured it out that he was paying people $8,000 per annum and he was going to make a $100million by selling the company and that the commitment levels would be poles apart. If his key employees applied to other companies he used to treat them as traitors.

When you open up discussions about career prospects, especially for your juniors, applying outside the company, you gain instant trust. Now I would like to point out, I did give them time off from work to attend the interviews. But what I never ever did was to take any decision for them. I always used to explain them the options and what are pro’s and con’s of each option but I always asked them to take the decisions themselves. This was to make sure I didn’t betray the trust that my senior management had placed in me and I was inline with my commitments to the company. Contrary to popular belief attrition in my teams throughout my career was less than 5% because whenever my juniors used to come back with an offer giving them e.g. a 40% raise I used to ask them “So what have you decided?” they used to tell me “I’m not going, I will never find a boss like you.”

People resist a lot when you tell them during the appraisal that they did poorly. But when you tell them that they need to learn XYZ thing to have a better edge in the interview and for their career they do everything in their abilities to learn XYZ and they usually do it in record time. Which in fact works out very well for the team and the company. Trust me if someone has decided to leave he would have gone anyway but in the above scenario he would turn down offers to stay with you and you will know about whats happening in the team all along. And even if he leaves he will call up for the next 20 years discussing his every career move because he knows he has a trusted friend who was also once his boss. This also put me in a very good position during the appraisals and I was very comfortable telling people things like “You messed up, you could have done better. I hope you realise I wouldn’t be fair to others if I granted you the exhorbitant raise you asked for…”

Think about it.

The perfect meetings

2007-05-17T09:19:00.000-07:00

I usually send out the agenda for the meeting in advance giving people time in proportion to the preparation they need to make for the meeting. But I know we cannot do without the “Lets meet in 15 minutes” kind of meetings. It is difficult to propose the ideal timespan of a meeting which would work across the globe in all companies and for all purposes. But I know that meetings should not become drags and that’s what decides when the meeting has to end soon. Most non-strategic one way communication can be done over email and can be followed up and revised in the meeting within a minute or two.

Everyone attending the meeting should know how much it costs in Dollars per 30 minutes for everyone to meet based on calculations using internal/external billing rates or wages of participants, it is better to have a rough figure than to try to get the accurate cost. A meeting is like an event that needs to be managed by the organiser of the meeting. He should not control or orchestrate ‘what’ someone speaks but should certainly control ‘when’ someone speaks and for how long so as to maintain discipline and engage everyone. In no case should more than one person supervise over a meeting. Everyone should understand that the reason to call for meetings is to discuss things that everyone attending needs to be a part of, if something concerns only a few attendees it should be discussed at an alternate time and/or location.

Meetings between people become effective if the people attending the meetings also attend a party together earlier, obviously hosted specially for them to get along. If people from different teams meet at meetings without knowing each other in a casual environment such as at parties they meet as strangers and offer very high resistance. Based on the observations made by the organiser as to who mixes around with whom at a party when left alone concludes alliances and affinities between people and is a good indication of how people will allign to arrive at decisions at meetings. Which can be used to prevent hijacking of meetings.

Decision making meetings should be conclusive, and as any mediated negotiation if it is clear from the start that in case the meeting is inconclusive within a reasonable timeframe the organiser shall make the veto decision. This softly forces attendees to work harder to arrive at a mutually agreeable decision in the meeting.

In the morning people reach their ‘I’m fully awake’ state at different times, after lunch the brain slows down and near the end of the office hours everyone wants the meeting to end ASAP. According to my research the best times for meetings were around 11am and 4pm

Contrary to popular belief if discussing a topic in a meeting takes 30 minutes but you decide to write an email then the collective time spent by everyone reading and writing emails to and fro on the topic, and attending the meeting is more or less the same. So you don’t necessarily reduce costs by sending emails but you avoid pulling everyone off their schedule and impacting the continuity of the work they are involved in which is difficult to quantify.

After the agenda for the meeting has been dealt with the organiser should ask if anyone wants to discuss anything that’s relevant to everyone and requires their input. This makes sure that if someone is depressed on not being heard speaks up and doesn’t completely resist future meetings or simply alienate himself from future meetings. This is the tricky part but should be dealt with.

But everytime you call for a meeting ask yourself “Is a meeting really required?”

Game Theory: The theory behind win-lose and win-win strategies

2007-05-13T02:57:00.000-07:00

Game theory involves thinking through the future, and coming back to the choose the best present alternatives to get you where you want in future. It is pretty well researched and straight forward and firms rarely go wrong but the firms lose because they choose the wrong game altogether. I quote from an HBR article “Game Theory is a systematic way to understand behaviour of players in situations where their fortunes are interdependent”

Broadly categorized there are two types of games, ones with rules of engagement and secondly freewheeling games.

There are four strategies in a game, Lose-Lose, Win-Lose, Lose-Win (Nobody plays to lose and make the opponent win unless perhaps an exhibitionist playing strip-poker) and Win-Win. While game theory has been applied widely from economics of nations to the stock market but in a business scenario it is best used in developing a competitive strategy. Win-lose strategies often backfire and a Win-Win strategy has more chances of succeeding because the opponent has nothing to lose but rather gain from the strategy if your intentions are clear to him in advance. (That’s a topic on corporate communication)

In a win-win game opponents are not forced to give up ground hence they will offer less resistance. It also doesn’t force the opponent to retaliate the game is more sustainable.

Take the following scenarios

Someone makes a derogatory remark at you.

Not many people think through what is going to happen if they punch him and then how he will retaliate and what they will do and then what he will do.
People usually know they just want to punch that guy
Most people usually simply punch the guy without even thinking

I would go on and say that the above mentioned game (Lose-Lose) might be a losing proposition in all scenarios. (Companies losing because of playing the wrong game all together) Maybe the best game (Win-Lose) would be to ‘complain to the authorities’ (But you don’t even consider that because then it tould affect your manliness image [The mindset]) or perhaps a game (Win-Win) where you explain what you did that led him to make the remark hence becoming friends.

What options do you have?

Change the rules of the game: Provide a 100 F16’s to Pakistan to fight against India
Change the scope of the game: Exclude the nuclear war option from the battle game
Change the game: Change the game of war by trade agreements or threatening sanctions
Change the value brought into the game: Instead of fighting a full scale war limit it to a high tech war in Ladakh
Change the players of the game: Bring UN in negotiations between India and China.
Change perceptions: That a war is going to result in calamities and so it should be avoided

I’m not a mathematician and wouldn’t like to be called a perfectionist and am certainly not teaching a grade course at Harvard Business School. So I’m not going to go into the mathematics of the Game Theory. I would just say before doing something important list down your options and for each option, see how the opponent is going to react, and then what your reaction would be, and then what you are going to do, and perhaps a few more iterations. If you like what you see at the end of the chain, you should choose the corresponding option at the beginning of the chain.

On Corporate Policy: Creating – Improvising – Deleting

2007-05-13T02:46:00.000-07:00

What is a corporate policy? A corporate policy is an instruction that states what needs to be done by the managerial staff of the company under certain conditions. Instead of rushing for the CXO’s approval under routine circumstances a policy statement could be followed. A policy statement sets guidelines for the smooth operations of the company without requiring the business leaders to spend an enormous time on taking decisions mostly required for day to day operations.

Most of the managers blindly follow policy which in one way is good to maintain discipline in the company but in a way is detrimental because anything that has not been thought of while making the policy and doesn’t fit will be turned down blindly by the managers.

On one extreme policies are required to be created as you grow from a one-boss environment into a multi location 1000 or 1,00,000 people company with layers of management hierarchy. And on the other extreme in big companies policies actually come in the way of further growth of the company and the management may need to improvise on the policy or delete them altogether.

I have come across policy statements and documents at various companies I have worked at or known of during the last decade and half. While I don’t want to name names and criticize them I would simply state that they are the most important management instructions written down in stone and employees and prospective employees have to live and abide by that. They better be thought through in breadth and depth.

According to me the essential sections on a policy document should be as follows:-

Policy statement
Aim of creating this specific policy
The assumptions at the time of creating this policy
The instructions to execute this policy
Discretionary powers for managers
Contact name for escalation and the process for requests for change of policy

Since they are self explanatory this article adruptly ends here. And I go off to cuddling my baby daughter and thinking of what curfew time I need to set for her [Again a policy ;-) ]

CEO/Executive Compensation, Stock Options and Recapitalization

2007-05-13T02:41:00.000-07:00

In US a typical CEO makes/loses 2-3 cents for every $1000 increase/decrease in the company valuation. And they have less than 1% of companies stock on an average. While this may not be true with Bill Gates, Steve Balmer and Warren Buffet but the world has more companies where this statement is valid. It is also observed that the CEO’s salary is sensitive to varying degrees on success’s and failure’s. It is in the best interest of the Board of Directors to link the CEO’s performance to the money he makes by allocating more stock options for him. While this is certainly possible in small and mid size companies it will not be possible to give a high percentage share of stocks to the CEO at IBM. Things should not stop at just the CEO, all executive managers of the company should also have varying degrees of stake in the organisation.

Traditional approaches to solve this problem revolved around Variable Compensation across the company, issueing of Stock Options and Bonuses. Variable compensation for employees with salaries in the range of US$60,000 will only backfire as that salary level is for sustenance and basic needs. Variable compensation works best in the Median-Top price bands. Talented people will self elect themselves for companies with higher salaries and performance based pay programs while the mediocre would go in for more risk averse and bureaucratic companies.

Stock Option plans have been known to get exhausted in 5 years of vesting after that the attrition rate returns to previous levels or even more. A solution to this is to Recapitalize the company. Which is a term used to change the companies capital structure by exchanging bonds for stocks (i.e. Issueing bonds and buying back common stock) Recapitalization was used by bankrupt companies to restart operations. It was used by takeover targets to increase debt by issuing bonds and handing out large amounts of dividend increasing share price and debt making the company less attractive for takeover. But Recapitalization can also be used by issuing bonds and buying back common stock and then creating a Renewed Stock Options plan. Which eventually works towards creating a company owned by the management.

This is not a mathematical equation that I could prove or disprove on paper such that it will work across all the companies of the world. But recapitalization should be looked at a case to case basis.

Firing a CEO and Executive Managers is a very costly business not just in terms of money but also in terms of non-quantifiable factors like the new CEO and Executives taking 1-2 years to understand the companies business and the industry, to perform at their peak.

Summary: Increase the CEO and Executive pay package and also increase their stake in the company. Also creating a %age bonus pool from the companies pretax earnings in excess of a threshold does well. It looks expensive initially when you think about it but better performance, motivation and performance based pay results in increasing the company valuation to a level that offsets the costs involved in such a move. The rule of the thumb is that imposing a limit on salaries for outstanding performers means creating a floor for poor performers. This leads to the gaurantee that the organisation will attract mediocre leaders who turn in mediocre performances.

Women are soft, gentle, loving and caring & The Glass Ceiling comission

2007-05-12T04:25:00.000-07:00

Doesn’t that remind you of your mom? Growing up as a boy I had little or no respect for girls but as a man I have immense respect for women as I have begun to comprehend the superior capabilities of women in general. In US 45% of the employees are women and biologically and mentally women are more advanced and far complex than her male counterparts. Training and experience being equal women tend to outperform men. Had it not been for the ‘Invisible Glass Ceiling’ (Google for Glass Ceiling Comission, 1991, USA) I would forsee women dominating Corporate USA. In a knowledge economy the emphasis on physical proficiency is down to a minimum. Leaving absolutely nothing out of the reach of women not even the CXO positions had it not been for the Glass Ceiling holding them back.

The Glass Ceiling is defined by the Commision as – “Those artificial barriers based on attitudinal or organizational bias that prevent qualified individuals from advancing upward in their organization into management-level positions.” Over the last 3 decades the gains by women in entry level management positions has not translated into gains at the Top Level positions. Women who socialise at work tend to go some distance faster and stop rather than reaching the Top Position. Women inadverently fallback on their feminine tactics in dire circumstances. To reach the top you have to go through the King Makers and they are mostly men and they do not want to be in a position in which they can be easily manipulated by women using anything that men normally don’t do, and which they are used to and know how to handle. The definition is at the top of this paragraph but this is the inherent reason behind the Glass Ceiling.

Women single handedly have immense game playing capability good enough to play the men against each other, and influence the board decisions irrespective of the composition of the board of directors.

Problem Solving: What people say and what they mean?

2007-05-12T04:23:00.000-07:00

To solve a business problem it is essential to get to the bottom of the problem. People do not mean what they say and every problem that is stated is designed (Conciously or Unconciously) to defend the position of the person who originates the problem statement.

If your partner says ‘You don’t love me anymore’ it could mean he/she is infatuated with someone and would like to pursue the alternative relationship. This statement defends your partners position. The famous Sienfeld TV Series ‘Its not you its me’ statement is designed to defend the position of the speaker such that it leads to an imminent breakup without telling the subject that he/she has lost her attraction.

If a manager says ‘Our product rocks but the marketing is ineffective’ it could be true or may not be true. It could mean that the product is worthless but he doesn’t want the product line to be dropped because that might mean the dismantling of his team and hence his source of authority and power in the company.

Those SAT’S were a piece of cake, the Case interview required practice, Real life problems require almost a little bit of everything. But to formally state the categories of problems in a matrix fashion, I would say

Accurate Problem requiring Accurate Solution->School days, SAT’s/GRE’s/GMAT’s (Easy – 3)

Accurate Problem requiring Inaccurate Solution -> Case interview (Hard-2)

Inaccurate Problem requiring Accurate Solution -> What life and business’s throw at you (Hardest-1)

Inaccurate Problem requiring Inaccurate Solution -> Patchwork/Quick fix problems (Easiest-4, The most tempting, least time consuming but most expensive)

The approach to solve these problems is to interview the people involved and to rephrase the question. And then to solve the business case. If the problem (A diagnosis problem) has already occurred and has one cause then an iterative root cause analysis can be performed as demostrated below. If the problem is an estimation problem or a decision problem use the method used to solve a business case.

$e$ : car will not start
$d$ : battery is dead
$c$ : alternator does not function
$b$ : alternator is well beyond its designed service life
$a$ : car is not being maintained according to recommended service schedule

The effect, $e$ , could be prevented by addressing any of the other factors. For example, attaching jumper cables from another car (addressing factor $d$ ) will probably allow the problem-car to be started. However, this solution is not likely to provide long-lasting relief from the undesired effect, as factor $c$ will ensure that the car shuts down again in a very short period of time. Addressing factor $c$ by repairing the alternator may solve the problem for a longer period, but factor $b$ will eventually result in another age-related breakdown in the alternator. The alternator could be replaced with a new unit, addressing factor $b$ , thus allowing the car to be driven for an extended period of time. However, factor $a$ will eventually ensure that the car breaks down again for some other reason. Clearly, the best solution to the problem (and many other potential problems) is to maintain the car properly, which addresses factor $a$ , the root cause.

You are only as good as your last performance & The Defence!

2007-05-12T04:22:00.000-07:00

At Mckinsey you are only as good as your last performance (aka engagement). You miss the train once and nobody would want you in his/her team and very soon you would be out of McKinsey. While other organisations are not that critical about the outcome of each assignment and they might not fire you after one failure. But when it comes to selecting someone for a critical assignment the choice is usually made from the people with sucessful recent assignments.

As I mentioned in an earlier post the key to reaching the top is to have a streak of successes and that depends a lot on luck besides effort, training and experience, as the outcome of a real life business assignment depends on so many factors, known and unknown that the outcome cannot be predicted. While choosing the project is one way of being successful to a large extent, you might not be given the chance to choose the project.

The strategy on being an assigned a project is to identify the risks involved upfront. Don’t say ‘This project is going to fail because of…’ or else you would be termed a Doomsayer, start with ‘The risks involved with this project are…’ and the list could contain for example things like ‘The project faces a hostile VP in the client company who could influence the clients Go – No Go decision’ You have to r’ber that the defence utility of the risks that you identify as the project proceeds diminishes logrithmically to zero (Risks identified before or at start are valued the most and at the end are valued at zero). If the project fails the only thing that could form your defence is proof that the project failed due to reasons identified at the beginning of the project which couldn’t be addressed due to external factors outside your control.

The company of dwarfs

2007-05-12T04:21:00.000-07:00

Mt. Everest became so by out growing other mountains and not because of worldwide shrinkage of other mountains. The same hold true for companies. Great compasnies cannot be built by downsizing the companies or downsizing the employees. Advertising legend David Ogilvy observed that most people have a tendency top hire down, they are insecure about their jobs. A manager intimidated by an employee who has greater knowledge or expertise in some facet of the business is likely to constrain that employee's potential for fear of being shown up. This results in countless lost opportunities, not to mention high employee turnover when those unrecognized people seek challenges elsewhere.

Every manager should be asked to hire an employee more talented than him to replace him. But that doesn’t work that easy. It is a well known fact that ‘Managers do not promote their juniors they promote their sub-juniors because his juniors are a threat to him’. Going by that logic managers should not have a role in hiring their immediate juniors but instead a manager should be allowed to hire only his sub-juniors. In the hierarchy shown below

A <- B <- C <- D <- E

The decision in choosing E should be made by the managers C, for D the B managers should decide. This will ensure that the organisation continues to grow with every hire instead of becoming a company of dwarfs over time.

What a Microsoft/Yahoo union could mean

2007-05-12T04:20:00.000-07:00

Yahoo is basically an internet business and microsoft has both a desktop and internet presence. While I do not think Microsoft is gaining much by the way of the merger, I think it is eliminating one online competitor than creating the ability to beat Google. All the three Microsoft, Google and Yahoo have enough Ph.D’s and talent in general to put the rest of the companies of the world to shame.

Acquisitions have a higher chance of working out than mergers between companies of equal size and of such size because the power equation is set right from the start. The reason lies in being able or not able to create Synergy and Harmony between the employee pools and vision of both the companies. If you are not from MIT, unless you are really exceptional an MIT guy will not respect you at a subconcious level, a Harvard MBA tends to not respect anyone other than Harvard MBA’s. People tend to make groups and assume the group identity and phillosophy over time. In an acquisition of a relatively small company the group coming in tries to find a new identity but it knows that the acquirer is in a dominating position, with effort eventually things work out. It is the risks and opportunities inherent in the human organization that will make or break the chances of success of M&A’s. Two companies individually used to ruling the planet in their domains might not easily be able to share the throne in ruling the planet together.

If things go wrong the Microsoft+Yahoo union could end up creating an entity with groups thinking in tangential directions. It will be a battle between the employees responsible for creating a $38billion company and employees responsible for creating a $100b company as the union evolves. Actually giving Google an edge contrary to the aim of the Union.

Competitive Strategy And Mind Games

2007-05-12T04:19:00.000-07:00

Kids play games, imagine this, two kids pick up stones of equal size and one tells the other one “Put your stone down. I’m stronger than you, I will mince you like meat” and the other kid puts down his stone and concedes. If you thought drawing up a competitive strategy would win you the battle you might be atleast partly wrong. It’s a mind game too, the first step is to drive fear in the heart of the competition, if that doesn’t work you have to battle it out in the market. Usually it is just sufficient to influence the leader of the opposition aka the CEO. Sometimes it is too costly to defend a strategy or too costly to tackle multiple competitors.

It backfires too at times for example at a new years party at the start of this century the CEO of Maruti told the CEO of Tata (Both are Automotive companies in India, Tata was into trucks and heavy vehicles) “Tata ji you can forget the small car segment” The latter went back and told his engineers “come hell or high water, design a small car and I will launch it before the next new years party” The rest is history and India saw tata produce the first indegenous small car. Just before the launch hell froze over at Maruti as rumours spread that the Tata small car would be priced under Rs 1,00,000 (about US$2000) Luckily for them it debuted at around US$6000.

But that’s an example of the fear psychosis that CEO’s play into each others mind. If as a kid you never got to bully anyone, well, its time again to start afresh. The next time you are in the presence of CEO’s from an industry segment watch what they say to each other. Simple sit back and watch and learn from the pro’s.

Employee Loyalty in an Organization

2007-05-12T04:10:00.000-07:00

Lets break down employees into 3 segments

1) Employees that joined the organisation and are ready and looking forward to leave from the day one in search for the dream job, pay package, relocation to home town, better hours or softer travel requirements.

2) Employees that will not leave unless something drastic happens because they like the job, identify with the company and its vision, love the boss, are based in the same town.

3) The employees that are undecided and can be influenced.

While retention strategies should concentrate only on the target segment rather than all the employees, the way to handle the situation depends on the category the employee falls in, among the above mentioned. While the retention strategy is fairly obvious for the first two categories the last category will be discussed below.

‘The Avalanche effect’ If a critical person leaves it would cost the organisation around 2 times his salary but indirectly that would also imply that his co-workers are also looking for a change on the side. Employees leave managers not organisations. The retention rate is a reflection of the immediate supervisors management capabilities. The best employees have special needs to learn and grow and would be extremly ambitious. The HR should target this segment.

The top 5 drivers for the top strata employees are as follows:-

Learning and Knowledge gaining opportunities: They know that they can learn faster than the rest and that one day their superior knowledge, learning capabilities and efforts will differentiate them from the rest. Hence they want more and more opportunities to acquire knowledge. Without which there would be no differentiator between them and the laggards.
Growth: These employees work harder and smarter with the aim of going up the ladder faster. If they are not growing or someone blocks their ascent and they cannot get around him. They would not think twice before joining another company and start afresh in the hope that things would turn out to be different.
Respect: It has been found that employees in this segment show the most tendency to stick around if the CEO/CTO calls them up and praises them in private or public (more effective but impacts other employees and could be termed as unfair by them). Almost anyone senior praising them does the trick other than the immediate supervisor. (Logic: They want to be respected outside their domain of influence)
Freedom of speech: These employees think that if they are not allowed to speak freely they wouldn’t be able to impress others with their knowledge and hence wouldn’t be able to grow.
Money: The best employees want more and more money irrespective of whether they need it. A corporation has to simply realise that employees have a life and their job is just a part of their existence in this world. They spend 60 hour weeks at their job and have no time for creating a social circle and on weekends they would like to mingle around and money can get them social acceptance in the small timeframe they have for social activities.

The ‘Top Employee’ Lockin strategies which work 80% of the time.

Give the employee a lavish salary, how about 2 times the market norm. So that no other firm can afford to hire your target employee.
Give the employee a Senior enough designation incompatible with his age such that a company of equal capitalisation or more would not be able to offer him the same designation.

Ace The Case 103: Structured, Hypothesis based problem solving

2007-05-09T09:12:00.000-07:00

There are two broad categories of problems that a Strategy Consultant solves.

1) Estimation problems e.g. How many bus stops are there in USA? How many footballs are there in Argentina?

2) Decision making problems e.g. Should we launch a fast-food chain being in the fashion business? Can we hope to beat google in the next 5 years in the search domain?

In a real business case solution ‘Decision Making Problems’ involve a lot of ‘Estimation Problems’ to test the hypothesis.

The problem solving process

1) Create a list of issues making up the problem you want to solve. Make sure the list is MECE (Mutually exclusive and collectively exhaustive). The first part means is that if the issues are dependent the analysis is very complicated hence keep the list items exclusive, and the second part suggests for the list to be complete. Ideally the list should have 2-5 items, 3 is ideal.

2) Generate the Initial Hypothesis (Figure out the solution even before you start). Study the facts and do research and find out the key drivers. And with each key driver make actionable recommendations regarding each driver. Find out the issues involved with those recommendations and create a tree structure of key drivers-> recommendations -> issues -> sub issues. Test the hypothesis using the facts and research.

3) Summarize and explain the solution concisely and precisely in 30 seconds.

4) Create a detailed implementation plan if the solution is partially or completely accepted

Keep in mind:

1) No two problems are the same so don’t use cookie-cutter solutions

2) Don’t boil the ocean, there is a lot of data be judicious in analysis

3) Don’t try to twist the facts and fit it into the solution

4) Relax, the clock is ticking but there is no bomb going to explode.

5) Work in a team, bounce ideas on people

Ace The Case 102: Data Sources

2007-05-09T09:11:00.001-07:00

Use the following free and subscription services to dig data and research the problem.

1) North American Industry Classification System http://www.census.gov/epcd/www/naics.html

2) http://www.business.com/

3) http://www.corporateinformation.com/

4) http://www.census.gov/cir/www/

5) http://www.ita.doc.gov/td/industry/otea/

6) http://www.hoovers.com

7) http://www.thomasnet.com/

8) http://www.fisonline.com/

9) http://www.hemscott.com/

10) http://depts.washington.edu/balib/stocksites

11) http://global.lexisnexis.com/us

12) www.sec.gov/edgarhp.htm

13) http://www.thomson.com/solutions/financial/

14) http://reportgallery.com/

15) http://www.library.hbs.edu/guides/

16) http://www.ewp.rpi.edu/hartford/library/industry/industry.htm

17) http://www.fuld.com/

Ace The Case 101: Consultants, Managers, Leaders, Case Interviews and The Practice

2007-05-09T09:10:00.000-07:00

We all work at organisations in different domains and industry segments but the essential approach to solving a business problem remains the same. The management consulting firms hire the best of the best breed from MBA schools and put them on consulting engagements. The clients usually bring in the consultant as a full time employee in a senior management position after a while. I will call them the ‘Consultant Managers’ for this article’s purpose. An organisation has Managers that grow up the ranks, lets call them ‘Groomed Managers’ for our discussion. Lets list down some attributes of both the kind of managers.

The attributes of ‘Consultant Managers’

1) Extremely confident in dealing with unknown business scenarios

2) Extremely developed business analysis skills

3) Is a Business Generalist without any specific domain knowledge

4) Works with facts and doesn’t like to speculate

5) Has no experience implementing a strategy but takes good decisions

6) Mixes around with CEO’s and CTO’s very well

7) Comes from a meritocratic organizational structure with little or no time for office politics

8) They have functioned as external agents and hence are extremely Unbiased

9) If there is a problem given the resources they will solve it

The attributes of ‘Groomed Managers’

1) Varying degrees of confidence to deal with unknown business scenarios

2) Little or no business analysis skills

3) Is a specialist and comes with a lot of industry and domain experience

4) Works mostly on instincts

5) Has grown up the ranks excelling at implementing strategies and following corporate decisions

6) Little exposure to CEO’s and CTO’s of the industry

7) Is used to office politics and has grown up the ladder and survived most of it

8) They work in the company and mostly have extreme bias’s and resistance to change

9) If there is a problem they tend to ignore it

It can be easily concluded from the attributes mentioned above that the ideal leader has to be a mix of the two categories. ‘Groomed Managers’ bring a lot of experience and will take a lot of time and effort for the ‘Consultant Manager’ to pick up so the solution is to take the cream of the ‘Groomed Managers’ e.g. ones from IIT’s/MIT/Stanford/IIM’s and to teach them to analyze and take decisions like a strategy consultant.

I do not want to talk about tackling case interviews but rather the practice of solving business problems. An interview as such is a time constrained process of arriving at a quick and dirty solution which as such has no business use while the practice involves digging down both facts and experience to list alternatives and to choose between them hence arriving at ‘The Solution’ and a consequent Implementation Plan in such detail that even a fool can understand and follow it.

Fame, Reputation, Networking and a Leader’s Brand Image.

2007-05-08T10:28:00.000-07:00

Imagine this. Cindy Crawford and I are sitting at a dinner table and she is talking about the perfect diet and her newly released Workout Video … “You know you put two slices of bread together and in between them you put slices of cabbage, some onions and tomatoes and sprinkle some salt and pepper…” And I am talking about the future of the world, robots and artificial intelligence becoming a part of life and how a Galactic Empire would come into existence within 1000 years of life being found on other planets in the galaxy.” And all the while everyone would interrupt me and go “Cindy please tell us about the soup” “Cindy, is being a vegetarian good?”

That’s what a leader becoming a brand gets you. You can talk trash and people would start pondering about the Hidden??? Meaning behind your statements however senseless and boring they are. It is not you but your image that does the talking.

There are two kinds of employees, ones that look upto the organisation for an identity and the ones that have become so big that organisations try to please them. The former always compromise in life and the latter always end up with a retirement package of $150million [or proportional, in other parts of the world]

Every leader that is growing up the ranks has to make the transformation and grow to be bigger than the organisation they are working for. They have to evolve into a brand and make a presence across the globe and create a community of followers. Whichever method you choose to get there whats important is to create a Brand. You will know if you are there if Disney invites you to fill the CEO’s/VP’s position and doesn’t even ask for your resume or conduct interviews. They simply make an offer after trying to guess what you would like to go for.

The same logic applies while networking also. You are only as good as the reputation of the person recommending you. There is no point spending half your life attending business networking events if you don’t have an image that draws a crowd. Charisma might open a few doors but what really works is your brand image. You simply cannot avoid putting in the effort into building one. If you want to network you have to 'BE-MEAN', Brand image, Energy, Money, Enterprise, Achievements and an existing Network.

Trainings that work

2007-05-08T08:51:00.000-07:00

I hope you all r’ber about the learning process we talked about in an earlier post. We categorised learning as single loop learning and double loop learning and that single loop was mostly if-then and how-to’s and double loop built upon single loop learning by reflection and the act of negotiating the environment over time (aka experience).

I was called upon to start an R&D division for an organisation a few years back. As a part of that engagement I had to train a lot of people about various things. Initially I simply walked into the room with a presentation and handouts, but after a few trainings I realised that trainees were simply not following what I was saying and still had questions like ‘What’s Orchestration?’, ‘What’s R.E.T.E.?’ at the end of the trainings. I went back to the basics of learning and realised that as kids we pick up a vocabulary and then try to use the vocabulary to associate them and learn concepts. Trainees were simply still stuck with understanding the new vocabulary of a business problem that needed to be solved even till the end of the training and the training was ineffective.

The next few trainings by me constituted of me sending out a list with definitions of ‘What is X?’ kind to trainees well in advance. When I started the presentation I would spend discussing the ‘What’s’ for sometime even before talking anything else. I found that with the vocabulary clear to the trainees the trainings became a more engaging experience and I had really good sessions after the trainings discussing ‘Wouldn’t it be nice if it was done this way? Why is it done that way?’ Which made me conclude that the trainees had comprehended the material and now were spending time reflecting and integrating the learning into their brains. [A double loop process]

Why is this important?

As your organisation grows and experts are running short on time you cannot spend a lifetime transferring knowledge. The trainings have to be crisp and effective the first time everytime. What I have presented is very simple conceptually and the single loop learning of ‘What’s’ leads to double loop learning at the end. Which is a good check to see the effectiveness of the trainings.

Acronyms that work

2007-05-08T08:49:00.000-07:00

Management theory works a lot with creating acronyms to convey the essence and to make the concept easily memorizable. As an organisation forms its own management philosophy it will create a lot of acronyms.

During a couple of my consultations I put forward some acronyms and then it struck me in the followup engagements that the client is simply not picking them up, and they were certainly not using them.

Look at this:

I quoted from Lee Iacocca’s 10 C’s to describe the driving force for leaders. They are as follows - Curiosity, Creativity, Communication, Character, Courage, Conviction, Charisma, Competence, Common Sense and Crisis.

My clients put in lots of effort but simply couldn’t seem to recollect and hence not use the 10 C’s. Is it just them and me or do you think acronyms like EBIDTA (Earnings before Interests Depriciation Taxes and Ammortization), BATNA (Best Alternative to negotiated agreement) and ABC’s of Diplomacy (Avoidance, Bypass, Cutoff) are easier to r’ber and use? 4P’s and 3Z’s are great but more difficult to digest and use.

I concluded that Acronyms should phonetically stand out and create an image in the minds of the managers to be effective. Choose your acronyms well, it could make the difference between the management philosophy being used or sent to the trash bin.

Why Concoct a Winning Streak?

2007-05-07T10:02:00.001-07:00

Winning is as much psychological as it is a result of training and experience. The Indian cricket team is very talented but just that it doesn’t know how to win. Teams that win 4-5 matches in a row have a higher probability of winning the finals than the team that has won 2 and lost 1 match. Can we concoct a winning streak for the indian team? Do you think making the indian team play a few match's with the Intra-India winners before the series going to do the trick? If they lose then they would need to think about replacing the team players and bring in fresher talent, if the latter beats the national team many times in a row. It gives the Intra-India team a chance to play with an international team and gain important exposure. It also prepares them for moving into the national team in the future and create a fallback pipeline of players.

Young companies should also use the same philosophy. Instead of competing head on with the industry leader in the main market geography they should chart out their course to the main geographical market through alternative geographies which are not yet under a market leader monopoly. This creates a steady revenue stream for the startup. The other option of entering the main market in a niche segment might not be a viable option as it might not provide the venture capitalists a good enough return on investment multiplier.

If you want to survive you have to learn to win, concoct a win perhaps!!!

Learn to Relinquish Absolute Control

2007-05-07T10:01:00.001-07:00

Founders of startups are usually very talented. So the first thing they do is to micro manage their venture. That’s a good thing to do too, when you are small and need perfect operations without the redtape and miscommunication of strategy. But the startup is not going to stay small all the time. The founders tend to do everything themselves and why shouldn’t they? It has gotten them so far and they have survived the initial hurdles. The rule of the thumb is if you want to grow you have to relinquish control.

If you want to grow you would need finance and you may have to bring in outside investment in the form of venture capital or private equity. You will have to relinquish absolute control and make room for a more democratic decision making process in the board room. You have to be answerable to your investors. So the only option is to learn to relinquish absolute control.

If you want to grow you have to grow your ranks and bring in seasoned managers. If they are to be productive they have to be given the chance to share the decision making responsibility. They might be located in alternate geographic regions and might have to function with little or no supervision and they will have to deal with clients and make split second decisions/commitments when none of the founders are around to consult. It is important that the founders empower their future managers and learn to trust them in running the company together. It is true that the key decisions will still come from the founders but the founders have to relinquish absolute control.

Why is this important?

Many companies make mistakes in the growth stage and struggle to grow and manage operations as their market share increases and they stumble from tree to tree and consultant to consultant to analyse whats wrong. While all the answers would come from a critical self-reflection by the founding team.

Offshore Outsourcing!

2007-05-06T05:29:00.000-07:00

The last decade has seen work move from US and Europe to Russia, Brazil, India and China. Moving the work offshore is not the same as outsourcing. A captive unit could also be offshore but it is not called outsourcing. Outsourcing is similar to sub-contracting whether locally or from the other side of the world. The rule of thumb is if the work is critical to the business it should be done at a captive unit.

The salaries offshore are 1/5^th or lesser than that in the US. Though it will take 2 people to do the same job and those 2 people each will take double the time one person takes in US. And combined with quality issues and the management overheads the effective costs come to around 80% of the onsite costs. US businesses are truly global and they have done business across the globe. That single piece of knowledge amounts to their business schools being the best in the world. “What is learnt in US stays in US” [Analogous to the Las Vegas saying]. The biggest issue with moving work offshore has been the transfer of business and process knowhow.

Some of the companies that moved to India like McKinsey, Intel, PWC and Microsoft have had higher degree of success than the rest. The reason being these companies actually treat their offshore employees as equals, they are very selective about hiring and usually hire the best of the best in the country and the salaries are at par with international standards. These companies work in a decentralized fashion and have come offshore to exploit the talent rather than just the costs. They avoid the large overheads by doing A-Z work offshore rather than driving the offshore work from US. Talent is 10 times more scarce offshore, had it not been that they would have started their own companies and thrown Microsoft and Intel out of business by now. I’m not saying they don’t know Java or .NET or that they cannot design a microprocessor, its just that if they can design the microprocessor they have no clue how to build the motherboard around it and then to how to go about selling it on the other side of the planet. Its just that nobody in their vicinity has ever done things like those and no one talks or teaches how it can be done.

Cutting costs do not imply being indiscriminate. In US you hire one guy among 100 quality prospects. Indiscriminate hiring of 500 people in one month is not unheard of offshore. The general rule of the thumb is the expectations that you have from prospective employees in US do not hold true offshore because they simply have no clue about your business and they are not from McKinsey to learn it themself’s in 3 weeks time. Contractors who do a little bit of everything for a large number of companies do not specialize at anything and lack business knowhow. If they did they would have come up with world class products using their 33% workforce which is always on bench (‘Bench’ means sitting idle drawing a salary)

What does all this say about the future?

A Mercedez in India costs 2 times the cost in US for the same model. A Plasma tv sells for 160% of the cost in US. The one bedroom apartment in which I live in Delhi costs US$1,00,000. The economy in offshore countries is moving so fast that expenses are outpacing the supply of money. Everything is now working on 20 year loans and credit cards. Salaries are increasing by 30% every year pushing towards hiring of more and more fresh graduates at lower costs who have a lot to learn before they can be productive. All this is either leading to mass firings and a recession in offshore locations or to a massive restructuring of the offshore companies and how they work.

Grassroot Change Management

2007-05-06T05:27:00.000-07:00

We have talked about innovations in an earlier post. Every innovation would require a change in the way the organisation functions. On one extreme are the small changes that affect a few employees or a group or two, and on the other hand are changes brought about by mergers and acquisitions which warrant a planned and monitored project like execution.

The first thing that needs to be done is to summarize the change in your mind. A small document which contains the benefits, summary and impact needs to be created. Is the impact above a threshold? No, then get approval and circulate the document, ask for feedback and call back 2-3 times to check if the change has been implemented or needs to be re-inforced.

If the change impact is above the threshold and warrants a separate project the next thing is to circulate the benefits-summary-impacts document and call for a briefing of affected managers, talk about benefits first, then summarize the change, and then talk about the impact. Managers are people who implement change, so this is to create a buy in and to sort out implementation issues early on in the change process. Go back from the briefing and create a detailed impact analysis containing the names of people, groups and processes being impacted. Identify the sources of resistance, risks involved and any special tactics required. Create a small offline video briefing and send it across or host it on the corporate intranet.

Do you need to implement the change in phases? A multi/single phase transition plan needs to be created. Which contains instructions for individuals and groups containing their responsibilities both current and after each change-phase, details the systems and processes that need to be changed, and also a time frame for the change.

Time for a sanity check. Send out the transition plan to see if you have judged their [employees] present responsibilities accurately. “If you can’t map the present you cannot map the future” A team of three change agents works out to be the best. One is an Initiator, one an Implementor and the last the Re-inforcer. The change project team is composed of all the managers who are responsible of bringing about change in their groups and hence throughout the organisation. Ask each manager to brief their teams and create an offline video briefing, circulate to their team and to post it on the corporate intranet.

We have already done the sanity check, now is the time for the communication effedctiveness check. Pick up some of the video’s and watch them to find out how much has been understood by the managers and their level of commitment. Send out the change project specification document to each project managers. Followed by creation of project plan’s. See if you can test the effectiveness of the change project with a pilot involving one or two groups. But from this point onwards it becomes Project Portfolio Management.

Periodically during and after the change project. The change has to be reinforced. A company is about its people. And change management deals with mostly with the human side of change, a computer will not raise its hand and resist a change in its programs it is the people who will.

What we just talked about is a single instance of a change project. If your company is in 20 geographic locations you would need to create a Vice President ‘Corporate Evolution’ and a related group of managers in each location to co-ordinate change projects globally.

Marketing Legalised Adware & Selling!!! Software For Free

2007-05-05T00:58:00.000-07:00

Marketing gurus have often debated about licensing and features of products. The world of software evolves every day around the globe. From US at one extreme with the highest purchasing power to countries like India & China with perhaps 20 times lesser common man’s purchasing power. And to think of it I have lived for some time in both parts of the world. I have seen linux develop over the last 2 decades into a mature and robust enterprise class operating system and then going partly commercial. It is evident that not everything can be sold for free in the conventional sense because there is a tangible cost of development and operation that needs to be recovered.

70-80% of the world cannot afford to pay for software and does not want to pay either BUT they would purchase other commodities and consumer brands. They deprive themselves of everything else and buy a 50inch plasma tv at 160% of the rates in US. I think the battle on piracy is futile. As long as a huge gap in purchasing power exists piracy would exist. What is seemingly becoming an alternative is to provide end-user softwares in two versions both with full features. One that shows targetted advertisements periodically and is free of cost, and the other with no advertisements but requires an upfront or annually renewable fee. The version with ad’s will eventually earn the product company more in a year than the licensing fees from the commercial version. Today the former is categorised as adware. But tomorrow the world could accept it as ‘Legalised Adware’ which would follow the global norms on what is acceptable and what is not.

In the end it is going to require a global shift in marketing strategies.

The process of innovation

2007-05-05T00:25:00.000-07:00

As companies try to out-innovate their competitors they need to monitor the innovations coming out of the company. According to Peter Drucker the source of innovation are

Unexpected Occurences
Inconsistent Incongruities
Process needs
Industry and Market changes
Demographic changes
Changes in perception
New knowledge

Unexpected occurences are sudden business successes which just seem to happen and need to be exploited. Incongruities would imply innovations which arise out of exploiting inconsistencies in technology, market etc. Innovations could also stem from the needs to improve processes. Industries and markets could change overnight leading to opportunities. Demographic changes, for example the the emergence of large numbers of affluent young adults could lead to more high end fashion good becoming viable. Changing the managers perception from a glass is half full to half empty leads to many opportunities. New knowledge whether scientific, technical or social leads to innovations.

The organisation has to carefully analyse the sources of innovation and segregate innovations based on simplicity. Effective innovations start small otherwise the customers would get confused.

An organisation is filled with people who generate ideas by the dozen. They do so to make their presence felt in the organisation. The leaders should distinguish between the relatively easy process of being creative in the abstract and the infinitely more difficult process of being innovationist in the concrete. Of all the ideas and innovations that are brought to the notice of the organizational leaders, the ones that are accompanied by an implementation strategy, a project plan, impact analysis and the originators commitment to see it through form, serious candidates for further development.

Reference: The discipline of innovation- Peter Drucker

Who to look to for advise?

2007-05-05T00:24:00.001-07:00

An organisation should be very selective about who it takes advice from. With all those success stories which people tell after succeeding should be overlooked. It is easy to come up with an oration in the end about the process. It doesn’t mean if someone else replicates the steps they will be successful. It should also avoid advice givers who have seldom had the nerve to expose themselves for any substantial length of time to the rigorous discipline of leading an organisation, particularly literary businessmen. You can come back from japan and copy 10 things they do and when you get stuck on the 11^th thing you will wonder what the japanese would have done. Because you cannot think like them and what you come up with won’t fit into the 10 things based on their phillosophy, resulting in a patchwork strategy or operation, which is doomed to fail.

To be or not to be a customer driven company

2007-05-05T00:23:00.001-07:00

Contrary to popular belief it is not beneficial to be entirely customer driven. An organisation should be informed by customer input but should take the heavy responsibility of coming up with new products and services on their own. Don’t ask the customers for solutions as it undermine’s your innovation process as customers know only what they have experienced and have a limited/isolated frame of reference. The organisation is at the centerpoint communicating with all the customers across industries and segments and is in a better position to arrive at a solution. Customers will go with the accepted norms and ask for missing features than come up with anything breakthrough. Do not listen to customers too closely (not even your first customers) instead discern the difference between what customers are able to say and what they want across the industry. Sounds absurd? For example don’t ask the customer whether he wants a dialup or broadband connection ask him what he wants to do with an internet connection and whether he needs it while travelling or while at home.

Startrek’s remote galaxy planet of eternal bliss

2007-05-04T22:19:00.000-07:00

“What do you do when you create your own company from scratch, to avoid being the Wild Wild West?”

“Primal Leadership”

You should value Primal leadership which implies emotional intelligence, self-awareness, empathy and rapport with others. A startup works best on the concept of ‘Mood Contagion’. It is very important to assess the style of management and the fit into the way the rest of the founders think. It would be the thought process that would set you apart from the competition if you clear the initial cash crunch. Organising a team selection process around the fundamentals of Primal Leadership corelates to extreme synergy, a process impossible to emulate in bigger companies. This will make sure you don’t spend most of your time resolving conflicts inside the ranks.

“Pygmalion: Self fulfilling prophecies”

Be careful of what you say or are percieved as. At all times people are assessing you and trying to figure out whats on your mind and what you think of them and the future of the company. Mentors should transform prodigy’s by treating them well. Silent treatment, tongue-lashing, email flaming should be forbidden. This will help prodigy’s tone down their defence mechanisms at times of failure, to reflect and be self-critical instead. The last thing you need in a startup is discontent over how people treat each other. As it is the initial employees would be working for Equity and just enough money to keep the lamp burning at home. There are no luxuries of life that they could fall back to after office hours and rejuvinate. The growth process is most affected by Pygmalion or so called self fulfilling prophecies. If you keep on hammering onto employees that they are worthless they would turn out to be so, if you tell them the competition in the market is impossible to break into the employees would giveup and eventually make you go out of business. The rule of thumb you can fire a guy but not treat him bad. It might not affect your client relationships but would also ruin your image among prospective employees.

“Wealth Happens”

A phillosophy on wealth is that it happens as according to Mark Buchanan ‘Wealth Happens’. Wealth distribution follows a Pareto Curve and would be brought about by the pursuit of our self-interests. Self interests should be declared and acknowledged even between partners. It also helps explain a persons behaviour to a large extent.

The wild wild west: A saga of corporate firings and the ascent to the top

2007-05-04T22:13:00.000-07:00

Do you really need an MBA/Ph.D to survive in the corporate jungle. I was sitting and looking back at all the firings I had learnt of in the past decade of employees with 5 years of industry experience and above. Of which I excluded the mass firings. It seems as if performance didn’t matter at all. In 1 of the 3 groups the majority of the guys had two things in common. One, they were extremely talented and two, they were in someone else’s way up the corporate ladder. In the second group the parting was because of ego clashes. The last group was fired because of the corporate policy of letting the bottom 10%-15% performers go.

This brings me to the topic of ‘Power Centers’ in a company. There are mainly two types of powerful people in a company, ones who have been in the company for a very long time and hence know everyone and can whisper things to them in confidence. The other ones are the ones that hold the biggest customer accounts or are responsible for the most money coming into the organisation. The next is the concept of ‘Fellable Adam’ which states if you look close enough you can find a dozen faults in each and every human on this planet whoever he/she may be.

“Ph.D’s and MBA’s from IIT’s/MIT/Harvard automatically don’t get you to the top” The logic behind that statement is with the degree you have you would get an Admit!!! To the organisation with perhaps a 1000 employees with the same degree e.g. If you join Lehman Brothers you would find atleast 300 MBA’s from Harvard/Kellog/MIT/Stanford/… in your incoming batch and they all work 60 hours a week. Just the MBA from Harvard won’t get you to the top at Lehman Brothers unless you join a Mercedez repair and service workshop in which case it inadverently would. What gets you to the topmost post is the concept called ‘The Midas Touch’ which means after a certain point in your career you might figure out what works and what doesn’t in your industry segment and call it lady luck or subconcious knowledge anything you [are allowed to] touch will turn into gold e.g. Any account you take grows by 300% a year. The Midas Touch builds an infallible reputation for you and the Board of Directors take a look. The Power Centers hate you, if you keep your mouth shut, smile most of the time and are calm in dealing with things, the board will appoint you to the CXO’s position.

So what have you been doing all this time. Every weekend you talk to your better half for 30 minutes about the office and take down notes about ‘Power Centers’ and their behaviour towards you and in general. But now you are in the CEO’s seat. Whats not good for the company should change. And since you head the company anything that threatens to destabilize the company internally should be eliminated. Time to go back to the notes you made. Simply fire all the ‘Power Centers’ that are adverse to your leadership. Please don’t feel guilty about it, I don’t feel guilty at all to offer you the advise. You are the brain of the company and you cannot afford to have hands and legs of the company not responding to your leadership and effectively crippling the company. In legal terms these firings are called ‘Firing without cause’ I like to call it ‘Eliminating the Impedance’. On an average 25-40% of the VP’s/Director’s and CXO’s wilfully or forcefully part ways with the company with the change of the CEO.

Could things be better? Ofcourse! That’s the topic of my next post ‘Startrek’s remote galaxy planet of eternal bliss’ But I would recommend you read this post once again with your better half.

The Company, Commodities and Brands, Publicity And Advertising

2007-05-04T03:52:00.000-07:00

“What is a brand?”

You stop by to drink water at the airport lounge. What you just consumed is a commodity. Water is a commodity. You walk into the Mall and buy packaged water for $4 from Pepsi. You just bought a branded item. The mineral water from Pepsi brings an image of quality and reliability to your mind and you don’t hesitate in spending the four dollars while you could have gotten the water for free if you walked a little further. A brand is associated with consumer loyalty which brings them back to the product and makes them walk further to buy the product.

That’s the image companies try to build in the minds of the people. But a company is not a brand. A company is a company and a brand is a brand. Ford is the company and Mustang and Fusion are brands. It is essential to keep them separate for many reasons, companies can be sold or merged or can have their names changed but they would want to maintain the consumer loyalty. So if tomorrow Ford changes its name to Rockster people would still come to the dealer and ask for Mustang and find out about the name change and start calling the car they own Rockster Mustang.

But how do companies go about building this image? It doesn’t take a year but rather somewhat like a decade to build a world class brand. Most of it is done through publicity and not advertising. One can say publicity is for free and advertising costs money. But advertising doesn’t bring in any reasonable amount of sales. Publicity is what happens when a talkshow talks about the company or a magazine publishes a review on your product on how fascinating and useful it is. Publicity builds a brand. Even a $100m advertising campaign just maintains the brand and keeps the brand from vanishing from the consumers mind, gently reminding them of the choice they have. But advertising is the most useful tool for preventing competitors from breaking into the market.

That said I’m off to have some Cola.

Venture Capital 104: Valuations

2007-05-03T02:50:00.000-07:00

The valuations for public companies is very easy to calculate. It is based on their existing share price in the market and the total number of shares outstanding.

For companies with stable revenues we calculate what is called EBITDA (Earnings before interests taxes depreciation and ammortization) the valuation is usually 6-10 times EBIDTA. Or the net present value of the future cash inflows for the company could be calculated based on which the valuation could be arrived at.

But what about private companies. VC’s invest usually in companies that have very little revenues and will make losses for the next few years. Here the valuation is based on the product, market, the first initial customers and the management team’s capabilities and reputation.

Venture Capital 103: The Board Room and Protective Clauses for Investors

2007-05-03T02:47:00.000-07:00

“Who controls the company? Answer: The board.”

Hence the most imortant part of a negotiation with investors is the board structure. In our previous example the stocks were divided as (40%,40%,20%) between (Investors, founders, stock option holders). So a Democratic board would look like 2 members representing the investors, 3 representing the common stock holders. Total 5 board members

A Representation board would look like 1 Investor representative, 1 common stock representative,1 independent member. Total 3 board members

The general rule of the thumb is to keep the board small so that they can take faster and better decisions. The CEO should also get a board seat but should not be from the common stock holders representatives as that would deprive the Common stock holders to elect all its members as one seat will always have to goto the CEO. So ideally a seat should be created on the board for the CEO. This seat should be separate from the investor seats and the Common stock holder seats. In case of the representative board the independent member could be suggested by the VC’s in which case he will be their man hence tipping the board into their control.

R’ber the board makes all the strategic decisions in a company. The board can fire the founders and the CEO. So it’s structure is a critical factor for the negotiations.

Sometimes the investors could be a minority in the board. But they still want to safegaurd their investment so the investors create a lot of Protective Clauses on the term sheet. These are basically Veto Powers which they will have and can exercise irrespective of the amount of stocks they hold in the company. Read them carefully. Consult a good lawyer to explain them to you.

The investors on the board can fire the founding CEO and bring in their CEO and give him sizeable stock options. And work with him to not raise future rounds from other investors so that the initial investors can solely invest in future at a very low valuation. This is very detrimental to the founders and the company.