Then it was Honda’s turn. Workers in Honda’s four factories in China struck work bringing all production in China to a halt. Yesterday Honda gave a 24% raise to workers, who were still not happy.

The strike in of itself was quite surprising. From FT

The right to strike was excised from the Chinese constitution in 1982, and attempts by workers to organise outside the official All China Federation of Trade Unions are frowned on by Beijing.

Amenities at Chinese factories like Foxconn are actually considered to be good. From Guardian

Foxconn is proud of the fact that it provides a swimming pool and other facilities to its staff, as well as organising chess, calligraphy, mountain climbing and fishing.

At both companies pay is not great but is above the legal minimum wage. Many workers make much more by working overtime.

How is this, in any way connected with the Indian IT employees’ angst? They are both about employees having nowhere to go with their problems.

Even though their demands and managements’ responses have been focused on pay increases, Chinese employees taking on their managements, is not really about salaries. How can it be when most employees come from the hinterland where wages are poor, that is, when there are jobs available? It is because the workers feel powerless. They are lost in these huge organizations. Foxconn has 800,000 employees. Honda also employs a similar number across its four plants. The “official” trade union is not elected and is really part of the establishment – a proxy for management. The workers have nowhere to go with their problems.

Cut to the Indian IT Services industry. Most of the successful companies of today are very centralized in how they operate. Historically, this was necessary. To scale up they had to build an organization which ran efficient, repeatable processes. For that it was necessary to have strong central control. But the very thing that helped them scale engineering and business processes, made the middle management powerless and weakened the bonds between the company and employee. It failed at the most important aspect of scaling a company – in building a loyal, motivated workforce.

When a company is small, the founders or the members of the top management know everybody themselves or with one degree of separation. They infuse the whole company with their values. Employees form a relationship with the company based upon these shared values.

But as the company grows, one degree of separation becomes two, three, four and more. Pretty soon what top management gets to hear is what they hear from their direct reports. What they have to say is said to a select few or to the media. How do you continue to build trust with your employees? You can’t do it yourself. So you must have your middle managers become interlocutors for you.

The problem is that middle managers are so disenfranchised that they feel powerless. They are the ones who run the delivery teams, who make the company tick. But they don’t have the leeway to solve their own day-to-day problems. When they take their problems to their superiors they discover that they too are powerless. So they just keep punching the clock. If somebody in their team comes to them with a problem, they just say, “I can’t help it, that’s the way it is”. When the rank and file IT worker starts griping about the company, some of these managers stay silent. Others join the griping. Nobody defends the company. They can’t. They don’t believe in it themselves. That’s where the battle is being lost.

In the case of Chinese workers, establishing a union that is truly representative might actually be the solution. Empowering middle management is less effective. In manufacturing there is a “class divide” between managers and workers, often based upon education and qualifications. Very few workers will ever be promoted into management. So the “us vs them” feeling almost guarantees strife, especially if as in the case of Honda, the Japanese managers earn much, much higher salaries.

But in an IT Services company every engineer has the qualifications to become the CEO of the company. It should therefore be easier to bridge the divide. Also, regardless of the quantity of outpouring on the internet, it still does not represent widespread disaffection.

Winning back middle management is the first step in turning things around with employee relations. Stuffing their mouths with money just pushes out the day of reckoning.

Related posts:

1. Management Consulting in India
2. Why is Local Hiring in Offshore Services so Sparse?
3. Growth and the IT Services Pyramid

Mr Walk said a recent Indian Premier League cricket series had notched up 55m views on YouTube – more in the US than in India – and it found a market for Bollywood in Estonia by offering Striker, a Bollywood film, either on a pay-per-stream basis or free with advertising support outside India.

I watched the IPL on Willow.tv for $60 for all matches. That sounds like a high hurdle for ad supported YouTube, but it isn’t. To pay $60 for Willow.tv is actually foolish. I paid $60 for the T20 World Cup and watched 15 minutes of cricket (the India-Australia match, if you must know). Granted IPL will be different because you won’t be that wedded to any team that you won’t watch the other matches. But even so, there is the matter of the quality of the video, which is consistent but average.

YouTube being free will attract an audience that could be 100 times larger. The asking average revenue from each viewer therefore is much, much lower. The opportunity for advertising is greatly underleveraged. There were banner ads around the video frame this time from some money transfer service but I’ll bet the inventory was sold super cheap, since those were the only ads I saw. But what about the interleaved ads between overs and during drinks? Why do folks in the US have to see an Indian cellphone ad? All this can add up to much more than what Willow.tv is taking in.

My guess is that IPL will be free next year on YouTube.

Related posts:

1. IPL Notes
2. Why are IPL Cheerleaders all Firangis?

“Unfortunately SAP has made a few legal and technical mistakes, especially in Germany,” the billionaire co-founder of the 27-year-old software maker said. “This is nothing that can be put into Léo’s shoes. We have made a mistake . . . I was personally involved in decisions about the maintenance fees.”

Then there’s the new organization structure with two co-CEOs. I think much will be made of this but the reality is that neither of them will be the boss – Plattner will. He owns more than 10% of the company, is its Chairman and has two co-CEOs. He won’t be sailing much in the near future.

But the most important takeaway for me was this:

Mr Apotheker had lost the supervisory board’s confidence after an employee survey highlighted dissatisfaction in SAP’s top management.

Only 50 per cent of employees gave a vote of confidence in the executive board.

Am I understanding this right? That Leo Apotheker lost the confidence of the employees of SAP and was shown the door because of that? That would be a shocking development, if it didn’t actually make a lot of sense.

Employees are stakeholders in the company. In fact their stakes are driven much deeper than shareholders who can just sell the stock and be done with it. Employees at SAP also happen to know what’s going on. SAP’s challenges are probably very well understood by employees – a shrinking market for big ticket ERP software, the threat of SaaS and competing with Oracle. If the Supervisory Board (like the BoD in the US or India) doesn’t have its ear to the ground, at least they have the sense to get feedback from the employees.

Would this work in other companies? It wouldn’t work in Walmart, for example. Employees’ own interests there are largely in conflict with the company’s interests. Also, individual Walmart employees wouldn’t have a sense of the broad sweep of what’s happening across the retail market.

But there certainly are many companies in the technology and financial services industries where an employee survey could reveal a lot. If shareholder democracy isn’t taking a hold, maybe we should try employee democracy. But please, no unions.

Related posts:

1. IT Services Companies Should Empower Middle Management

To my mind, piracy of music:

1. Is inversely related to the chances of getting caught, which is very low.
2. Is inversely related to the punishment if caught, which is mild.
3. Is inversely related to the disapproval from friends and family who might know that you are using illegal music. This is almost non-existent.

All of these factors might indicate that piracy can’t be vanquished. But there is something that the music labels could do to start beating it back – reduce the cost of digital music dramatically.

Today the price of a song averages around $1. The marginal cost of delivering the next song is close to zero. So if you were to somehow know what the price to downloads curve might look like, all you would do is to set a price where the product of price and downloads was maximum. But of course, you don’t. Which is why the price of a song is stuck at $1.

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

Obviously, executives in the music industry have a pretty tough choice. First, they may not be able to convince all parties – Apple, artistes – to agree to a dramatically lower price. Doing it for one song doesn’t really work – it won’t change habits. They need to go the Full Monty. That’s a tough sell. Even if they managed to get that far, it is likely that revenue would plummet in the short term before it started rising again. On the other hand, it takes one bad quarter to get you fired.

The leap of faith is that reducing the price per song to a tenth of what it is today can take the share of legal downloads from 5% to 50%. Isn’t it time someone took that chance? After all, things can’t get much worse can they?

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The first thing to ponder is if Indian business practices are less modern. They may be technologically behind the best in the world and they might suffer on account of the creaky infrastructure that supports them. But is it also true that even in the context that they find themselves in, their business practices leave much to be desired?

The paper implies that this is indeed the case. I tend to agree with its conclusion. This is not to say that there aren’t well managed Indian firms – the research focused on mid-sized family owned businesses. But I think that it is safe to say that like technological innovation, management innovation is largely centered in the western world. A lot of it is applicable even to the Indian context, but it’s penetration is not too deep.

The authors then go on to say that the reason why Indian firms are not well managed is because management is not well informed about modern management techniques. They distrust outsiders and rarely use management consultants and so leave themselves in a low information cocoon. They don’t hire business school grads and there isn’t much mobility within the industry that could disseminate best practices.

One of the recommendations of the authors is that a robust management consulting industry could solve some of these problems. The research was supported and partly financed by a management consulting firm, Accenture. So this conclusion is somewhat self-serving, but not necessarily incorrect because of that.

After employee mobility in the industry, management consulting is perhaps the most successful way of disseminating new business practices. My sense is that Indian companies are not very open to management consulting in general. The cost is perceived to be very high. The change they bring about is thought to be too disruptive. And the improvement in the business, too chancy.

Maybe its management consultants who need to look at themselves to see if they are responsible for the underuse of their services in India.

Related posts:

1. The Genetic Melting Pot in India

This is pretty important in many ways. Google is willing to give up China as a market in support of free speech. Some commentators have said that they were getting thrashed by Baidu anyway and so there’s not much that they’re giving up. But that is wrong. China is going to be the biggest internet search market in the world in a few years. It is unquestionably important. To even be second in that market could be worth a lot. That Google, a public company, is willing to give that up to hold up a principle, is huge. I can’t immediately recall any sacrifice of this magnitude by a public company for a principle.

The Chinese government did not respond directly to Google’s press release. Instead it just reiterated that internet companies must abide by the law of the land. The Chinese authorities are unabashed in their quest for “managing” opinion on the internet.

From the New York Times:

“China’s Internet is entering an important stage of development, confronting both rare opportunities and severe challenges,” Mr. Wang said. “Internet media must always make nurturing positive, progressive mainstream opinion an important duty.”

Is this China just cocking a snook at the rest of the world? Are they saying “We are China. We make the rules. You obey them or leave.” Or is it that in their scheme of things, free speech isn’t a high priority? Or rather “managed opinion” is a high priority.

It could be a little of both. Hacking into corporate networks and Gmail accounts is bad stuff. I don’t think there is any school of thought (unless you call “Art of War” one) that will condone that. But they probably know that with enough deniability and their economic muscle they can just keep doing it with impunity.

But on censoring the internet, it may just be that free speech doesn’t hold the same exalted status as it does in the Western world.

India has regularly banned books that the government feels may incite unrest particularly amongst religious groups. In the Indian context I think that is a very pragmatic approach. It does mean that some works of literature are denied to the Indian public. It also means that this exception to free speech can be misused by a government. But on balance it is a modest price to pay.

Free speech is enshrined in the US constitution – the First Amendment in fact. Nowhere is it held in greater sanctity than in the US. But even in the Western world, the ideal of free speech can get tarnished as it collides with other laws. In the UK for instance, the libel laws are such that a science writer of repute like Simon Singh can be brought to his knees by the British Chiropractic Association because they don’t like the way he described chiropractors.

In China, for the society and form of government they have, uncontrolled political discourse on the internet, could be viewed as dangerous and harmful to society. A little criticism of the Communist Party one day become an Iranian style Green Revolution the next. Imagine a country of the size of China in the midst of what Iran is going through. It can’t be good for anyone, least of all for China’s political classes. I may not agree with their views on censorship, but I understand them. And it seems like most Chinese would rather be able to buy a car than have access to the writings of Chinese dissidents.

A great piece on China’s subtle censorship on the internet by James Fallows at The Atlantic.

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An interesting place where you see coevolution at work is in telemarketing. If you think about it, they are the predator and you are the prey. Their objective is to get you to pick up the phone and then not put it down. Your objective is to not pick up the phone.

Before Caller ID, you were losing the battle. You had to pick up the phone. You didn’t know who was calling.

After Caller ID, it was better, but not if you were prepared to ignore every call except the numbers that you recognized. Also, the telemarketers adapted and started blocking Caller ID. But then you started avoiding calls with no Caller ID. And then they switched back to numbers but no names or innocuous names. And so on.

Then came the National Do Not Call Registry in the US. That tilted the balance decisively in your favour. It still left the non-profits who are exempted from the DNC stipulations. You were still having to walk up to the phone when the local charity called and you didn’t want to donate this year. But then you got that new phone which can read out the name on the Caller ID. And that was that. End of the telemarketing nuisance.

Not quite. Last year I started getting robo calls on my mobile phone from a company selling extended warranties for cars. I pick up most calls to my cellphone, even if I don’t recognize the number. It was very irritating. I actually lodged a complaint with the FTC about these guys. Apparently many others did too. Thankfully its been turned off. The people behind it must have figured that whatever they were doing was worth flirting with FTC for. Or maybe they don’t even live in the US. Who knows.

I still get a moderate number of telemarketing calls. If you are of Indian origin, like me, you may still be getting calls from India. With telecom costs between India and the US dropping sharply in recent years, the call activity is going up as well. We regularly get calls from DirectTV and Airtel. The latter in fact has been calling from a Delhi cell phone to my cell phone (where did they get my mobile number?).

The companies that call from India use Caller IDs in different ways. Some of them send out a US number which I think is a losing strategy (one of them sends out a toll free number). Some of them block Caller ID, which, I believe is a better strategy. With almost no calls from telemarketers in the US, you are probably losing your old aversion of picking up a call with no Caller ID. Or maybe, I have a special situation. A friend of ours we regularly talk to had blocked her Caller ID at one time.

This is known to occur even in predator-prey coevolution where a defence that the prey had developed in response to a certain predatory tactic is lost through the millenia. When the predator evolves the same trait again, the prey has no defence against it.

Callers from India seem to have the ability to put just any old number in the Caller ID. Like say “2222″. Or use an Indian number. I will pick up any call with an Indian number on it. Which is why I get snagged often.

But it doesn’t end at Caller ID and getting you to pick up the phone. Since the dialing out is typically done by a dialer which connects an agent only after you pick up the phone, there is a lag before someone starts speaking at the other end. Most people will realize it’s a telemarketing agency and put the phone down. This must cost a lot in agent time at the other end.

Which probably explains, in a crazy way, the latest Caller ID tactic. Yesterday someone called us. The Caller ID name said “Telemarketer”. We didn’t pick up the phone. But if someone does, you can be sure they want to talk. And it could be the beginning of an honest, trusting relationship.

Related posts:

1. An Unsmart Phone and an iPad
2. No Google Voice on iPhone – Competition or Corporate Spite

His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

Although the data is not strictly comparable, it appears that the outcomes are at least as good, if not better than the averages in the US.

Dr. Shetty’s success rates appear to be as good as those of many hospitals abroad. Narayana Hrudayalaya reports a 1.4% mortality rate within 30 days of coronary artery bypass graft surgery, one of the most common procedures, compared with an average of 1.9% in the U.S. in 2008, according to data gathered by the Chicago-based Society of Thoracic Surgeons.

So what is behind the success of Narayana Hrudalaya. Two words – scale and throughput. It alone does 12% of India’s cardiac surgeries.

Narayana’s 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children’s Hospital Boston.

But this scale is not just a result of having more doctors and being bigger. The number of surgeries per doctor and the utilization of the expensive medical equipment is both higher.

Narayana surgeon Colin John, for example, has performed nearly 4,000 complex pediatric procedures known as Tetralogy of Fallot in his 30-year career. The procedure repairs four different heart abnormalities at once. Many surgeons in other countries would never reach that number of any type of cardiac surgery in their lifetimes.

There were some quotes alluding to the impact of such high throughputs on quality. But others said that the higher level of experience gained by the surgeons should actually result in better results.

I hope policy makers in the US are paying attention. (This was the most read and emailed article on WSJ online today). When the difference in price of the same service is 10X to 50X, there is probably more than one difference between the two systems.

The easiest one is of course wages. Aside from surgeons wages (the article says $110,000 to $240,000) which are somewhat lower, all other wages in the hospital system in India will be much lower – perhaps by 5X to 10X.

The other is scale. Centers like Narayana Hrudalaya are like oases in a desert and get patients from around the country. A 12% national market share is huge. Scale allows the hospital to negotiate and get the best deals for equipment and consumables.

But even putting both these together can’t explain everything. As Dr. Shetty says in the article,

“In health care you can’t do one big thing and reduce the price,” Dr. Shetty says. “We have to do 1,000 small things.”

But Dr. Shetty and Narayana Hrudalaya have the will to do that. No, make that compulsion. They have to lower the price to $2,000. Otherwise they don’t have a market. In the US, hospitals try to save costs to improve margins. Their revenue comes from patients who don’t care about the price because insurance is paying for it. That’s a very different dynamic.

A couple of years ago I was in Mumbai over a weekend and decided to take Hinduja Hospital’s Premium Health Checkup. It was a full day affair with a battery of tests and consultations (the page carries a list). It included lunch and a session on yoga and meditation. The total bill was Rs. 5,000 (it’s now Rs. 10,000 or about $240). Cut to the US. My annual physical is a half an hour visit to the doctor’s office and a lipid profile. That’s all. Total bill $540.

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As could be expected, the issue of Wall Street compensation raised its head again. And this time there is the weight of the federal government behind it. Banks that have taken TARP money will see their executive compensation capped. And the Federal Reserve has suggested that all large banks that fall under its jurisdiction will be reviewed on on going basis to ensure that executive bonuses do not produce risk taking behavior that could put the banking system at risk.

There are several memes that get mixed up in any discussion about Wall Street compensation in the media. Add a lot of emotion from a distraught public and it becomes for a tangled mess where the media feeds the furore but there’s no real understanding of the underlying issues. Let’s see if we can parse the issues out.

These are the issues as they are played out in the media
- Issue #1 – The taxpayer bailed out Wall Street. How can they pay themselves these kinds of bonuses.
- Issue #2 – The rest of the country is going through agonizing pain – high unemployment, pay freezes and cuts – how can these people pay themselves what they do?
- Issue #3 – Their companies have been (and some still are) hemorrhaging cash. How can they pay their investment bankers so much?

I don’t think any of these issues merit any attention from lawmakers. #1 could be argued many ways but at the end of the day, if the bank has taken TARP money and hasn’t yet returned it, the federal government as shareholder with special rights, can do as it pleases. Politics dictates that compensation should be curbed and so it will be. #2 amounts to appealing to a cold corporation’s heart – a futile endeavor. #3 is the company’s call. They have a board and shareholders. If they think that they need to pay top dollar to retain talent, then that’s what they need to do.

In my mind there are two fundamental issues that need consideration. One, is related to risk increasing compensation practices. The second is a larger issue of high, untrammeled growth in the capital markets in the last two decades.

On the first issue, everyone agrees that Wall Street’s bonus bonanzas encourage traders and management to pile on the risk, collect their super size bonuses and when things turn south, leave the shareholders to pick up the pieces. And when things go really really bad, like what happened to the markets last year, let the federal government foot the bill.

What is not clear to me is why the shareholders just stand there and let this happen. The expectation that the bank is too big to fail and that the fed will bail you out, doesn’t explain it. If you were a shareholder in Citigroup and held the stock prior to the crash, even though you were bailed out, you probably lost your shirt on Citi.

I am not sure what the answer to this is. It could be that in the normal course of things, shareholders don’t really exert any influence on the board of the company. Election of board members and votes on CEO compensation, need to see a lot more vigor in the shareholder meetings, especially in the US.

Or it could be that shareholders think they’re smart and will be able to get out before the stuff hits the fan – a variant of what the trader or management thinks – except that the employee just loses her job, the shareholder his savings.

It could be that there isn’t enough disclosure. That Wall Street companies, on the pretext of not revealing proprietary information on trades and investments, is actually throwing a cloak on dodgy, heads-I-win-tails-you-lose schemes.

There could be other things going on that only behavioral economics can explain. Thinking that if everyone has been doing risky trades for so long then maybe its not that risky, is both irrational and perfectly natural.

Whatever, the reason behind it, this nexus between risk and compensation needs to be tackled head on. It is going to be a very tough problem. But not addressing it is not the answer.

The other question is also a big one. In the last two decades, the capital markets have grown much faster than the rest of the economy. The chart here shows that the profits in the US Financial sector went from about 15% of total corporate profits in 1998 to over 40% in 2007. When an industry grows at that pace, the competitive intensity is low and margins are high. The use of technology raises productivity further increasing margins. In the capital markets the only significant cost is the cost of people. When there is no or low downward pressure on prices, compensation has no place to go but up.

But is the ‘natural’ size of the industry as a share of GDP what it is today or what it was two decades ago? Can an industry that essentially allocates capital, and doesn’t really make anything, have such a large share of the GDP? Is there something in the laws of the land that make it so? For instance the credit rating industry, many say, is a creation of legislation and would not have existed at least in this twisted model of today, had it not been for an easy regulatory environment. Are there other such areas that would wilt in the face of an openly competitive field or lower entry barriers?

I don’t know the answers to these questions. But I do know that if the world has a problem with Wall Street traders, bankers and CEOs making tens of millions a year, not just in today’s recession, but beyond as well, we will need to look at taming the industry, not capping salaries. If that’s even the right thing to do. Or possible at all.

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In my four years at Gridstone, I met many hedge funds on sales calls. We offered a research platform with deep data on public companies which should have been of interest to any analyst who invested in public companies based on their fundamentals. But slowly I realized that there were very few in the hedge fund world that actually researched companies to any depth. Most just “traded the news” or were what is called “momentum traders”.

There were reasons for this. Understanding companies requires time and application. At about twenty companies in one or two industries, you start hitting the ceiling of what is possible for one analyst to cover. Hedge funds often don’t have the assets to be able to afford that many analysts.

But I think the real reason is that it is too damned difficult to beat the index just analyzing companies based upon publicly available information. Everyone is seeking an informational edge over the market. Some of this edge is through channel checks and such legal but proprietary sources. Much of it is through rumors – legal but quasi-public. And some of it is through insider information.

Informational edge is a slippery slope at the bottom of which lies insider information – the most alpha-producing informational edge. If you are a high achiever like most hedge fund managers are, and you have profited from proprietary information in the past, it is almost irresistible to cross the line. It doesn’t help that the difference between the difference between a rumor and insider information is only in how the information was procured. A rumor very well could have started its life as insider information. On large caps, placing a bet that is significant for the fund but small enough to escape being noticed is not too difficult. My belief is that insider trading is far more common than what one major bust every few years will make it seem like.

For Raj Rajaratnam and Danielle Chiesi this was about their hedge funds’ performance. But why did Anil Kumar and Rajiv Goel get involved in this? Perhaps the price of admission to invest in Galleon – which was ironically a fund whose performance was based on insider trading – on their tips.

The other irony here is that two of the major players in the insider trading ring are of Indian origin. So is the prosecuting attorney – Preet Bharara – US attorney for the Southern District of New York.

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