Now on Facebook!

Confessions can now also be heard on Facebook. Yes, if you (or your friends) are on Facebook, you can become a fan right here. There are links and information that I share exclusively on the Facebook page – so your investment may be worth it.

 

Image courtesy: The anti-Facebook logo by Craps-Y. I found it imaginative enough to deserve a bold-black text rather than the slightly elusive light gray that I normally use for attribution.

Life After the Recession: The New World Order

Outlook Business, a noted business magazine published by the Outlook group, ran an essay competition. The theme was the subject of this post. My entry to the competition did not win the first prize (and hence wasn’t published by the magazine). This post was my submission – perhaps my readers will find it worthwhile to read.

The popular joke goes that the world will not be worse off if the weather-men predicted the economy and economists returned the favor. Dangers associated with predictions multiply manifold when the subject is the economy and the time horizon distant. However, with some generality it can be argued that the current financial calamity has three main protagonists. Prognosticating their behavior and roles should provide a reasonable understanding of what to expect when sunshine returns to warm up economies around the globe. The trinity of Capital Markets, Business Institutions and Governments form the core cast of this drama, and also subjects of our investigation.

Capital Markets

Capital Markets are sitting ducks when it comes to apportioning economic blame after a crisis and it has been no different this time around. In the current situation, some of it is deserved. Capital Markets famously failed their masters who relied too much on its self-correcting mechanism. All constituents of the markets brought in their share of economic and policy narcotics that created a heady cocktail and predictably left a global hangover the day after. As retribution, all constituencies will have to take body blows. The sell-side players have taken the most bullets and will emerge very different on the other side. It is entirely likely that a lot of specialized boutique investment and advisory houses will give serious competition to monolithic investment banks, which will struggle to bring the same easy-liquidity driven advisory-cum-financing value proposition of yester years.

The buy-side, i.e. investors, may learn that it is fallacious to ask a barber whether one needed a haircut. Unfortunately their woes are not entirely over. Their main parameter of decision making – instrument ratings from oligopolistic Rating Agencies – has been mired in incentive-conflicts and that is least likely to go away. Left with little choice, the investor fraternity will have to spend more in their internal due-diligence creating a model that may evolve in the same way as buy-side Research has over the past decade. And that could finally drown the Rating Agencies in the same way sell-side Research has been impacted in the past few years.

The direct or indirect impact of effort duplication or increased compliance invariably is increased costs. Even as a lot of OTC instruments make way into standard-claused-exchange-traded ones, higher cost of surveillance and risk management will lead to higher transaction costs for participants. The only bright lining to this silver cloud of gloom is Technology, which capital markets will embrace more than ever before. Increased reliance on algorithmic trading, automated routing to best liquidity pools, automated trading desks, cutting down latency between front office and middle office and such other will have many positive impacts. Given the declining cost structure of technology, wider adoption will offset other rising costs of doing business. Also, it will bring about a systemic efficiency in the flow of information and capital, resulting in lesser friction in the capital market machinery. All this till human fallibility drives us to the next crisis.

Business Institutions

Marketing Guru Seth Godin famously said (and named a book) – “Small is the new Big”. Disappearance of Lehman Brothers, General Motors and other household names in the broking business should prompt Godin to write a sequel. The recession has stripped the last garb off colossal conglomerates that held onto business models and ideas of the past as they lugubriously dragged their bureaucratic organizations nowhere. While transnational conglomerates will still flourish, their businesses and operations will reflect nimbleness of start-up companies. Divisional management structures will become predominant just so the fire of innovation, so often found lower down the ranks, is not dowsed by monolithic organizational designs. Smaller companies are now much less afraid of their T-Rex sized competitors because the downturn has clearly thrown up the latter’s vulnerabilities. These nimble, specialized, technocratic organizations will drive innovations in the post recession world. As example, the automotive industry will see numerous innovations across platforms, products and components with complete democratization of innovation – across functions, geographies and size of companies.

The recession has also brought under light a fair amount of hidden skeletons in corporate closets. Investors have every right to be peeved at appalling standards of corporate governance across the world. Unfortunately the long-only investor fraternity has little incentive to display the level of investor activism that would force better corporate governance and management. It is here that Hedge Funds and Private Equity investors, given their single-minded focus on generating alpha, will play a larger role in the future. Businesses that pride on good management and governance will be a step ahead in attracting the right kind of investors and at lower cost of capital.

Many commentators have predicted an economic (and hence political) demise of the United States. The more probable scenario however is a decline in the US’ relative economic strength  – both in terms of its share in global wealth and its currency. Once Americans start living within their means, the consumption deficit created by them will have to be filled by consumption-power and internal-demand centric countries like India and China (not Russia – it being a commodity centric economy). This shift of consumption will compel multinational businesses to look at these countries in a totally different light. Local strategies, local supply chains, local business models catering to local demographics and trends will gain prominence over blind replication of global practices. Local leaders and managers will not only become important for global organizations, but Boardrooms – and I daresay CEO suites – will see more Indian and Chinese names than ever before.

Governments

The trouble with Capitalism, they say, is that it is the only broken system that works. A fair number of economies around the world currently function as State owned capitalist machines (Marx must be tossing in his grave). This inherent dichotomy has resulted in Governments assuming three roles – namely, Shareholders (from covert or overt nationalization), Market Makers (buying up troubled assets and providing liquidity windows) and Policy Makers (traditional reason for having a Government). The first two roles are reluctant and thorny crowns that the rulers have been forced to place on their heads and they should relinquish these sometime soon. And they will. However, like a newbie investor who has tasted his first fruit of speculative profit, some Governments will be more inclined to intervene in businesses in the future citing current success as an excuse. Government policies are likely to face the conundrum of tactical supervision versus strategic foresight – and at least for the medium term that might be resolved in favor of the former. This will most likely result in either a proliferation of watch-dog agencies or increased government participation in these institutions or both. Long term nation building, especially for countries that need strong forward looking leadership, might suffer the most.

Perhaps the most quoted line in the context of change is Lord Tennyson’s – “the old order changeth yielding place to new”. Irrespective of how the new order shapes up, the fact that it will see increased regulation, state intervention and rising importance of countries blessed with demographic-dividend is most likely. Curiously, the cornerstone of this evolution can be traced back to the next line of the same Tennyson poem – “…and God fulfils himself in many ways, lest one good custom should corrupt the world”.  Laissez-faire market structures, over-leveraged personal, corporate and national lifestyles, and by-a-few-for-a-few style growth cannot be called “good customs” but they sure did corrupt the world. These are edifices the new world order will strive to stamp out.

Post Script: Gopal Ranganath, General Manager, Jet Airways, won the first prize in the contest. You can read his essay here. Yes, it deserved to win.

Image Courtesy: Blue Fountain Media

Beta

The concept is very well understood in capital markets. Read all about it here.

You didn’t click the link, right? Go on, do it (the first 6 lines will suffice) – I’ll wait till then.

Now apply this same concept to businesses. You are running a business that makes wealth management software for advisor-driven investment situation. The market tanks 30%, 40% of wealth disappears on an average and 30% of a financial advisers (who are your main users) are laid off by their employers. In such a bloodbath your business shrinks just 10%. Standing ovation all around.

How will you do when the market turns back up? Is the reason for your stellar performance during the downturn because you really were not positioned correctly in the market? Before you take pride in your business being a great defensive bet, think of this. There are far less downturns in the market than upturns. Which one would you rather choose to benefit from?

Image courtesy: s3 images

From Pain to Desire

The obsession with “pain points” is well known as a tool to address customer requirements. To my mind, while this is a nice tool, it is restrictive.

Think of it this way. We visit the doctor much less frequently than we actually think of keeping ourselves healthy. We visit the doctor when we are in “pain” and she addresses our “pain points”. Our efforts at improving our living and health are aspirational and not quite driven by the immediacy of pain.

Focusing narrowly on pain points can result in either missing the big picture or concentrating efforts on a tactical solution rather than moving customers to a level where they experience something that makes their lives that much better besides merely relieving the pain.

In the days of portable CD Players the customer pain point was around making their music collection portable. Several companies solved this pain point by designing CD Cases (innovation centered on storage mechanisms, eye candies, media life enhancer etc.). Did the pain get solved? Yes. Customers however aspirationally desired to take their music mobile and not necessarily take their CD collection mobile. Apple, with its “media-free” i-pod took a completely different approach in solving this problem. They focused on the “desire-point” rather than the “pain-point”. The rest is history.

It takes a different skill to understand the user, drive his inputs, marry that with a business model and create “desire-point” solutions. That merits a post all by itself.

Zero

Not all successful products developed by your company should sell in the market and make money. They may well help a commercial product to be successful and pull away from the competition. And the way a product manager often runs with that product is to make it applicable for more than one commercial product. I’ll offer two examples.

Feedback. In the era of web-products, collecting user feedback has become easy. But isn’t it surprising how few products actually do it (and amongst those that do, how many actually listen?)? Your company has this enterprising spark who decides to build a feedback system for you to plug into your product as it is shipped to the market. Zero revenue from the feedback product – imagine how much better the mainstream commercial product becomes with this “zero-addition”.

User Behavior. Leads back to a question Seth Godin asks – “what are your assets”? A vastly underrated, yet not so difficult to collect, is user behavior. What does the user do after she has logged into your system. Okay – if it is sensitive I do not want to know the queries she fired, but which pages did she go to and in what sequence? Were there aborted attempts at some functionality? Did she purchase something or did not purchase something that she indicated she would? Imagine the value of this asset when laced up with predictive analytics and product/website improvement ideas that come from mining the behavior content. Standalone revenue of this “user behavior” product – zero.

Product Managers are very often wired for thinking hard dollars, marketing, Product P&L and the like. The lemming that ran against the others had a terribly difficult time and a very different mindset. To build such “zero-revenue” products you would need that.

Image courtesy: Prerido Zero blog

Everybody Hates Lumpy

Every business hates lumpy revenues. Volatility in revenues translate to volatility in profitability and a consequent increase in earnings risk. But shit happens, and so does lumpy revenues. Especially when a firm’s business model is such or its customer base is not diversified enough. Take a firm that generates company reports for investors and get’s paid by the output (terrible mechanism of compensation, but we’ll deal with this later). Outputs are invariably high during earning season. Now imagine a technology company that provides a SaaS based platform for our research company to facilitate data analysis, authoring and distribution. The revenue of this second firm will be just as lumpy – and synchronizedly so – with that of the first one. Is there a way out?

To my mind SaaS platforms will have to get multi-tenanted. This allows the platform to hedge away risks on a portfolio basis and also benefit from revenue diversification models of the individual tenants (of course so long as the activities under diversification happens on the same platform). Builders of SaaS platforms have to cautious how much non-generic functionality it builds into it. Staying with the research platform example, the vendor would want to not build asset class specific features exclusively and stick to just research (as opposed to say “Equity Research”). Client/Industry specific features and functionality will invariable tie revenue fortunes at the hip.

Lumpy there, lumpy here.

More Darts v Better Darts

Self explanatory, but I have seen several firms struggle with this problem. Making a prioritization decision isn’t always very simple.

We hereby agree…

A friend mentioned yesterday of a rather strange practice in their firm. Each time two divisions agree on anything that demands cooperation, they sign a document. A physical document. It is something like what happens when two nations sign a treaty.

My first reaction was that of WTF. This was a marquee IT services company and to me this step looked like moving back the forces of corporate evolution of decision making. I mean, can’t the two Divisional Heads just agree over e-mail or something? As I let my prefrontal cortex overpower the amygdala, the idea did not seem as ridiculous as it did at first. Divisions of large companies operate quite like independent entities and can become bureaucratic in their ways. Thus in way two such Divisions agreeing to collaborate is almost akin to two small companies forging an alliance and the exchange of signed dossiers doesn’t look too bad from that perspective.

A ceremonious announcement of an event puts a very public and visible stake on the ground, around which sub-events gather momentum. Pictures of reaching an agreement on e-mail are least likely to be flashed on the intranet or make it to the monthly magazine. Now think of the two Divisional Heads exchanging documents, shaking hands and key managers having cheese and wine after the event – very photogenic and intranet-friendly visual stuff. Everyone knows – difficult to hide. This then becomes the fountain-head of subsequent ancillary projects.

Product Managers endlessly reach such understanding with Engineering, Architecture, Testing etc; so should all those have signing ceremonies? Not really. To my mind three types of inter-functional (or inter-departmental) agreements merit a formal event. One, when the functions or departments have never interacted in the past so it becomes important to show a visible commitment. Two, when the agreement is a touch nebulous. Having a formal agreement puts out a strong message of intent that forces subsequent interactions to iron out the wrinkles. Three, when the two parties have had a history of failing at collaboration. The army and the navy of a country hardly showcase their reaching agreements but for Israel and Palestine it is a vital necessity.

Happy weekend, everyone. I am off for a go-no-go conference call. No, there will be no handshakes and exchanging of signed documents after everyone hangs-up.

Time Value of Ideas

Assets depreciate over time. So do ideas.

A good product manager learns to listen to the needs of the market and faithfully records them (actually a lot of them don’t. I am sure you are not one of them) to feed the roadmap. Sadly, engineering resources typically are fewer than what is needed to satiate all the needs. Backlog builds. And here is where the trap-door opens up.

Product Managers often carry forward their backlog inventory of ideas into a subsequent development cycle. FIFO or LIFO? Personally, I am dead against the deadwood FIFO and lukewarm towards LIFO. FIFO is a straight reject because more an idea asset stays in the backlog the more likely that it has depreciated in utility value. What was a strategic differentiator when first recorded as a need might just be either a me-too thing or worse – something akin to picking nickels in front of a steam roller today. LIFO stands – a priori – a better chance because they haven’t yet wimped out by the sands of time (hopefully).

Creating a product roadmap is a much involved process than just collating a backlog. Relevance of each idea must be evaluated with the market and competition before engineering resources are committed to build them out. Yes, it does place an additional overhead on Product Managers but would you rather find out those irrelevant product ideas or leave it to the market?

The Business-Technology stalemate

Business: The product behaves in the way it does because we were told that technology demands it to be architected in a certain way

Technology: The architecture of the system was driven by the demands of the business

Stalemate. This happens because often – specially true of large companies – business and technology are on their own trips. And they are faceless (read the two sentences replacing business and technology with “Stephen” and “Anna” respectively and the situation would look very different).

Sometimes technology gets a bad name because they seem to produce a lot of the architecture astonauts. I’ve also seen Product Managers come up with their SUV type designs for a simple bi-cycle. The way – perhaps the only way – to solve this is to break away from the temptation of setting up Architecture and Product Management councils. Pinpoint responsibility and then empower. You will see the difference.