Salaam Bombay

Last week the dastardly terrorist bombing of Bombay’s suburban trains brought global terrorism another step closer to the largest democracy in the world – India.

Bombay is a city very dear to me and my wife. We started our working life in Bombay and worked there for 5 years. Took the train from Andheri to Churchgate and back everyday. I traveled in the same first class coaches that seem to have been targeted by the terrorists. Life wasn’t all roses – the 3.5 hours total commute didn’t leave us much time to enjoy Bombay. But when we did we fell in love with it. We loved the theatre (Prithvi), restaurants (Samraat, Mahesh lunch home), movie halls (Eros, Regal). The heady mix of high finance and Bollywood. The professionalism at work. They all endeared us to Bombay. But most of all it was the people of Bombay.


IT industry bashing – the wrong reasons

I write this in response to Giridhar Rao’s comment. He brought a scholarly paper to my attention that in a section on the Indian IT sector claims that the sole basis on which India is competing is wages. (You can find the paper here. You can directly scroll down to the section on The IT sector if you like). It also claims that India should not be called a ‘knowledge economy’ but a ‘low wage economy’. The article seems to be well researched but reaches odd conclusions at least for the IT industry.

My response to the thrust of the entire paper, if it has one, is ‘So what?’


Namaste America

Last week Al Gore was a guest on Jon Stewart’s Daily Show. He was there of course to talk about the Climate Crisis and his new movie the Inconvenient Truth. Since the audience at the Daily Show is fairly liberal, Gore got a very warm welcome from them. But what was strange was that Gore greeted them with folded hands. Damned if it didn’t look exactly like a Namaste. It was very casually done, no theatrics around it. I suspect he had done the very same thing many times before.

I was of course very tickled about it. I have long held the view that Namaste is a superior greeting to the handshake in the age of the Avian Influenza. Handshakes transfer germs and are a surefire way of spreading the virus when there is an outbreak. The WHO realizes this and has come up with the ‘elbow bump‘ which is just too hokey to work. Asian greetings like Namaste and the Japanese bow are, in this respect, superior. Although in Japan the formal greeting in business is still a bow, while Indian business (though not politicians) has completely adopted the handshake. Pity.

The other thing going for Namaste in the US is that it is closely associated with India and India is hot right now. India is of course in the news because of the nuclear deal still winding its way through Congress. As an investment destination for business it has to be number one or pretty close. Bollywood dancing is all the rage. You can find Kurti inspired women’s fashions all over the place. And Indian food in the grocery stores.

The big news is that from next summer, Indian mangos will be available in the US. Being that they are much superior to the Mexican variety I think that will win us a few more fans state side. Some say that the mangos are a fair trade for nuclear technology. Some say that we’re giving away the mangos too cheap! The mango deal was done during President Bush’s visit to India along with the nuclear technology deal.

The affinity between the two countries is good for both countries and for democracy everywhere.

Gimme a break – a tax break

Are there industries in India more profitable than the IT industry? If there is one, it must have an awesome business model. Companies like Infosys make 25% net margins after taxes. At $20B in revenues, the industry is no longer a small industry needing encouragement.

So why does the IT industry not pay corporate income tax? Not just that, under the SEZ act, that tax holiday will now be extended, indefinitely.

In the late 80s, early 90s, the STPI Act was used to incentivize the then fledgling IT industry. It was needed. The Software Technology Parks were needed. The cost of a telecom link to the US was high. Many small companies in the STP could share a telecom link. Custom duties were very high on computer hardware, software and networking equipment which could make IT company uncompetitive. So there was the duty-drawback. Last but not least, there was a 10 year tax holiday on export revenue out of the STP. For all this the companies within the STP had to be 100% export oriented.

So far so good. I might have an issue with the tax holiday, but the incentives were timely and well directed. The industry, led by a few major companies like Infosys, TCS and Wipro grabbed the opportunity. Later their ranks swelled with many other smaller companies. Soon the BPO industry (also called ITES or IT enabled services, I think to justify their need for special treatment) also swung into action.

Fast forward to 2006. We now have a large and still rapidly growing IT and BPO industry entirely focused on offshore services to developed markets. Most of the larger firms are very profitable. The custom duties are way down. Telecom bandwidth is dirt cheap. So why in the world would the industry need more tax breaks?

That it doesn’t is very clear. Not just because of the reasons I give. But because industry leaders like Nandan Nilekani say that they don’t. However, if the SEZ provision is available, it would be irresponsible for them to not secure the best tax status for their shareholders.

The income tax lost to the IT industry, by my calculations came to $1.3 B last year. That would be a pretty significant % of the Indian govt. budget. Why would the Indian govt. run a deficit budget, skimp on investment in infrastructure yet spare the wealthy shareholders in Indian IT companies? One could argue that since deficit financing causes inflation, the government is taking from the common man and giving to the wealthy shareholders of IT companies. It is no wonder that the Finance ministry does not support this loss of revenue.

You could also argue that a tax holiday has no impact in the IT industry. If you make profits, you get the benefit of the tax break. But if you make profits, why do you need the tax break? The IT industry is not a capital intensive industry like say the steel industry, where a certain RoI must be met, beyond just being profitable.

The SEZ Act might make sense for many, especially manufacturing industries. For the IT industry it does not. But, profitable industries have wealthy industrialists. Some of them know how to lobby the government. Then there are the real estate developers, who too stand to gain by getting the right to develop the SEZ parks. They too have deep pockets and political connections.

In 10 years when we need to take a relook at the SEZ act, the IT industry will be even bigger. The industrialists will be wealthier. If I were a betting man, I’d say, this ain’t going away.

Green Guilt

Yesterday was Father’s Day. I got a great gift from my wife. A TerraPass.

Since time immemorial, man has paid for his sins, quite literally, by slipping a little something to God. At the temple, the church and the mosque the pundits, priests and mullahs will always make it easy for you to leave a little behind in the collection box, in case it makes you feel better. With TerraPass, I just put something into the collection box of the temple of the future, and I must confess, it does feel better.

In a weaker moment last year, I bought myself a sports car (a BMW 645Ci for those in the know). Its looks, the ride, they awaken the senses. Unfortunately, it gives just 17 miles to the gallon. Energy efficiency and such green thinking happens to matter to us. So my passion for the car was contaminated by this guilt – Greenhouse Gas Guilt. The guilt of adding to the world’s CO2 was gnawing at me well before Mr. Gore’s well reviewed documentary An Inconvenient Truth. But it was still not enough to get me to trade in my car for a Prius.

Enter TerraPass. For $50 per year or so, my car is now ‘carbon neutral’. I pay TeraPass and they in turn invest that money into clean energy projects which are ‘carbon negative’ thus neutralizing my gas-guzzler. TerraPass became my Ganga Jal. Instant moksha.

I think TerraPass is a terrific idea. The company is for-profit and so it keeps a portion of your fees for operational costs and profits, but the rest is invested in projects that may not have happened were it not for TerraPass. I can see carbon-neutrality become a hip thing among businesses too.

While we’re on the subject I’m glad that finally some real marketing minds are working for the Green camp. Till a couple of years back we were calling it Global Warming. Most of the developed world happens to live in temperate climates. If you live in Chicago, Global Warming doesn’t sound all that ominous. I can see some people in Minneapolis not being scared at all of the warm toasty images that Global Warming created. The term then changed to Climate Change (still weak) to now Climate Crisis, which I like the best. Fear and Greed – that’s what makes people move. Mix well and add a little Guilt to taste.

The Worth of a Job

It’s been a long time since my last post. Perhaps too long. Things have been busy at Gridstone Research, the startup I work for and blogging had to take a back seat for a while.

So to make up for it, here’s a meaty subject. Why do people in different professions get paid what they get paid? It’s an interesting subject and I thought I would find some research on it on the internet, but I couldn’t. There’s a lot of data on what people get paid in different professions, but the question we are trying to answer is why.

Let’s first clarify the question at hand. We are not dealing with executive compensation here, although that is quite an interesting (and topical) subject in of itself. We also know that in any profession the higher you sit in the organization chart the more you get paid (generally). What we want to compare here is compensation in different professions – investment banking or software sales or retail bank front office – taking out the effect of position and years of experience. We will ignore stock option related windfalls, which are anyway becoming rare. And for this piece, we assume that we are comparing professions in the same city, so there is no cost of living impact on wages.

After all the assumptions in the last para, you are still left with a significant variation in compensation both at entry level (out of college or business school) or at any time marker after that. The question is why? What makes some jobs worth large amounts of money while others are so-so?

Here’s my hypothesis. If the person in a job can directly impact the company’s profit in a significant, measurable way that job will get paid more than someone in a job that doesn’t.

That sounds almost like a truism. But let’s examine more closely what it means. An example will make it clearer.

Take the job of a Portfolio Manager (PM) at a Mutual Fund. The PM decides which stocks to buy, hold or sell for the Fund. He almost entirely determines how the Mutual Fund performs. If the Fund performs well, its shareholders make higher returns than other comparable funds. The word spreads and more money pours into the Fund swelling the management fee that the Fund Management firm charges. The average mutual fund in the US had assets of $1.05B and expenses of 1.25% in 2005. A 25% increase in assets increases the firm’s fees by over $3 million which should largely drop to the bottom-line. As you can see, the correlation between the PM’s decisions and the business outcomes are very high. Also, and importantly, there are few if any other things that matter. Unlike in a manufacturing company where many people contribute to the value and quality of the product, the PM might depend upon the recommendations of the Fund’s Analysts who research companies, but he makes his own final decisions. Random events or luck play a minor role, especially if these events impact the benchmark as well.

The PM’s job therefore fits our criteria perfectly. He directly impacts the firm’s profits in a significant, measurable way. Not surprisingly, the Portfolio Manager for a Mutual Fund in the US is a highly paid job. Many of them take home over $ 1 million.

Sales people in most industries that sell to businesses tend to get paid more. What predictions can one make about compensation in the Sales profession using my hypothesis? A Sales professional will be paid more when Gross Profit (or Contribution) per Sales professional is higher (significant impact to profit). A salesman for Boeing should therefore be one of the highest paid salesmen in any industry. Also Revenue Producers will be paid more in the Professional Services industries where the Partner or the Banker is the product himself. The client often knows and trusts the Partner or Banker and will give him the deal because of him and not the company he works for (direct impact). Therefore, Management Consultants, Lawyers and Investment Bankers all get paid oodles of cash.

A school teacher’s job is a tough one. They mold young minds. A good teacher can be a glorious thing for a young student. What can be more important than this job to both individuals and society? Yet school teachers are paid very little in almost every country. I have often struggled with this paradox. Why wouldn’t we pay school teachers more and get the best we can for our children?

Let’s take a school teacher’s job and evaluate it against the criteria in our hypothesis. A school teacher definitely directly impacts the outcomes for particular students. This impact can be undoubtedly significant. You might decide to become a writer because of a superb English teacher, or totally lose interest in Biology because of lousy one. However, a school teacher in the US typically works for a public (government) school and not for a business. And the outcomes for students discussed above are not exactly measurable outcomes. So a school teacher’s job doesn’t fit the criteria in our hypothesis on a couple of counts. So school teacher salaries will predictably be low, attracting average talent and with lower incentives to excel.

On the other hand, consider the teachers in Delhi’s IIT coaching classes. Their outcomes are very measurable – the students’ JEE rank. The students’ JEE rank drives both the enrollment in the coaching classes and the fees per student. No wonder these teachers can take home as much as Rs. 15 lakhs a year, a salary that an ordinary school teacher in India can only dream of.

I think the hypothesis in general works. But like most things in the complex world of business, it’s hard to make rules stick. There are always eddy currents that produce exceptions. If you find any, let me know.

The Virtue of Simplicity

The airlines business is a complex one. The pity is that most airlines
reflect the complexity in their business onto their dealing with passengers.
Passengers like me hate it.

I am planning a trip to the East Coast (I live in the San Francisco Bay
Area). The trip is a 3 city trip over 4 days. I generally prefer to do my
own travel planning. When I was at Infosys, I would talk to our company travel
agent.  Now, in a startup, I find it easier and cheaper to  do my own
travel bookings on the internet.

So far, all my trips to New York have been on JetBlue. They have convenient flights and low prices. This time I
need to go to Boston and Chicago as well and so JetBlue won’t work. So
I go to and check out the flights. My conclusion after 45 minutes
of research and copious note-taking – if I want to minimize my travel cost, I
will have to travel on 3 different airlines and fly in and out of different New York airports.

For most airlines, pricing is a game of revenue maximization. Here are some
tricks of the trade:

1. If you book your travel early you get a cheaper fare. Everyone uses this
one, including Southwest Airlines.
2. Refundable tickets cost more than non-refundable. Again, very widely used.
3. Take a hub, dominate traffic in and out of it and charge the earth for it. New York to Boston round
trip from two different New York airports can be $200 or $600 based upon the competition on that sector.
4. Round-trip fare is heavily discounted versus point to point.
5. Saturday night stay-over reduces the fare quite a bit.

There are countless other tricks that are all designed to maximize revenue.
Optimization engines and pricing rules in the innards of airline pricing
systems are some of the most complex you’ll find in the business world.

As a passenger I hate this whole system. I hate it that it takes me 45
minutes to do my tickets. I hate it that even after that, I don’t know if I
made the right choices. I hate it that I can’t travel back on a different
airline that has more convenient flights without paying a hefty premium for it.
And I cannot develop a trusting relationship with an airline who charges my
$600 when an equally good (or equally bad, depends on your perspective) airline
is charging a $200 fare for the same itinerary.

So here’s my question to these airlines. Do their fancy price optimization
algorithms put any value on what I can only call torturing the customer? I’ll
bet they don’t because they have no way to measure it or put a value to it. The
reason simplicity in business is so rare is that there are no good ways to
measure the cost of complexity. And so your finance types in the company can’t
put it into their cost-benefit analysis spreadsheets.

Complexity costs. Customers like simple products – simple to use, simple to
understand. They like simple pricing models where the price is linked to the
value they receive. This is not just true about simple-minded consumers. Business
buyers like simplicity as well.

Southwest Airlines is a company that I truly admire. The genius of Southwest
Airlines is in how they have become the most important airlines in the US by
simplifying it for their passengers and for themselves. In the morass of
complexity that is the American airlines industry, Southwest Airlines is a
shining beacon of hope. Not only is their pricing dead simple, everything about
the airlines is that way. They fly only Boeing 737s. This simplifies, crew
scheduling, training, aircraft maintenance and spares. They have only one class
– coach class. There is no seat assignment. It’s first come first serve. And
their frequent flier program is a tribute to simplicity – 8 round trips and you
get a free roundtrip to anywhere they fly. You would need a full book to fully
document the frequent flier program of United Airlines.

No wonder Southwest Airlines has delighted customers and a growing business.
Its market cap at $12.64B is way above much larger airlines like American
Airlines and United. They understand the virtue of simplicity. They understand
that it not only makes for happier customers, it also makes operations run
cheaper and faster.

Now if they’d only fly to the airports I need them to fly to.


In big business the phrase ‘cost of doing business’ is often employed to justify a cost that is deeply embedded or can’t be justified on an Return on Investment basis. Sometimes it truly is necessary. Often it is just handy management jargon to keep something from being cut by the accountants.

In a startup, on the other hand, the cost of doing business has a very real meaning. It in fact means exactly how it reads – the cost of running the startup. In management speak this is often referred to as the ‘burn rate’. And I am here to tell you, that the cost of doing business for a startup is going down fast.

There are many trends that impact the cost (and ease) of doing business for a startup. The two  that I think are particularly pertinent to the cost of technology are – open source software and usage based pricing. Sometimes both these things get combined.

Let me give you an example. As an ex-head of Sales, I believe in a company acquiring good habits on Sales process early. Ergo, we use a CRM system at Gridstone. When making the choice for a CRM system we never even considered licensed software. If we had, I suspect it would have cost us several thousand dollars per user per annum, for something with the functionality that we need. We probably would have needed outside consultants to implement it adding more to the cost and time to value. Most startups nowadays don’t even consider that option.

The next option, which is very popular today is which is a hosted internet application. The company is very successful and is growing like a weed. Their price for the Enterprise edition – $900 per user per annum. Simple to implement. Good service. Works like a charm.

We were almost going to go with when we heard about this open source CRM software called SugarCRM. SugarCRM is also a company. I think the way their business model works is that they, and outside collaborators, work on the open source version of Sugar, which of course is free to use and comes with the source code for others to tinker with. But SugarCRM the company also develops add-on modules like Sugar-Outlook integration that are not open source and are priced per user per month. Sugar also offers hosting and training services around SugarCRM. If we wanted to take the full hosted solution with add-on modules, we would get an excellent CRM system that matches in functionality for the price per user of $480 per annum.

Now SugarCRM is open source and anyone is free to use it themselves or host it for others for a fee. There are dozens of hosting service providers who will host SugarCRM for you. Some of them even have add-on modules. And you won’t believe the prices. The service provider we finally went with charges us $5 per month. Not $5 per user per month. $5 per month period. For the usage it allows, for us it practically means unlimited users! Plus the price includes hosting for a few other applications as well. It’s a brave new world!

Now technology costs are not the only costs for a startup. All costs related to people, office space aren’t going down. But tech costs are a major component of the costs especially for early stage startups. For two guys in a garage, the quintessential valley startup, their runway is now much longer than it used to be. In the future more  tech companies like Flickr will be going straight from garage to selling the company. It is ironic that this should be happening in an environment where venture capital is so abundantly available.

Zero touch traffic enforcement

One of my co-founders at Gridstone Research was driving us back from lunch in San Mateo a month or so back. As he approaches a red light where he is supposed to make a right, he doesn’t come to a full stop. He just ‘rolls’ through the right turn. Flash, flash from the wierd looking gadget across the intersection and a month later he’s got a ticket for $371! He had been caught commiting a traffic violation by technology.

My colleague was none too happy, but I was laughing my head off. Not just  because the guy hates to lose money to such things, but mainly because I had just paid off an identical ticket for an identical violation near my home in Fremont. And my wife had contributed to the same cause a month before me. It was thoroughly enjoyable to see someone else bear the same pain.

I tried to piece together how this technology works. There is a sensor in the road that senses the speed at which you are approaching the intersection when the light is red. If it is above a maximum speed it sets off the camera which takes a frontal picture of you and the car. As soon as you turn right there is another sensor that times how long you took to get from the first sensor to the second sensor and if that time is less than some minimum, it assumes (correctly) that you did not stop at the red light. The camera then flashes again, getting the back side of your car. A couple of weeks later you get a ticket in the mail with all the time-stamped pictures clearly establishing your violation.

When this happened to me (just a few weeks after I had finished making fun of my wife and her ‘rash’ driving), I was upset, but also fascinated. I thought this was just so cool that traffic could be enforced without a police officer. The technology being used is pretty reliable. It does not make mistakes (far fewer than people at any rate). It uses no discretion. Unlike a police officer, it does not let off blondes in convertibles. It is always on. And best of all, it costs far less than the police officer. This, I thought, was great for traffic enforcement. The Fremont Police Department thinks the same way.

But then I thought there’s got to be more to this. I’ve often heard anecdotally that the Highway Patrol gets very strict in its enforcement a couple of weeks before the end of their budget period ends. Why? Because they have revenue targets to meet! You might say that’s not the purpose of the traffic ticket. But in the real world local governments need money to run. I am quite sure that the Red-light Cameras are being sold to the local government by justifying them on an RoI basis. If you invest so much in the camera system, the increased revenue will return your investment so many percent a year. etc. etc.

But wait, it can get better than that. If I was the Red-light camera system company, I wouldn’t even sell it to the city. I’d install it free and take a cut of the revenues. This way everyone wins. The city makes no investment and gets revenue from where it had none. The company gets an annuity, high margin stream of revenue from an unsuspecting public. The Fremont Police Department may proclaim that they are doing this for red-light enforcement. But we know better. Not that I hold it against them. Fremont city underfunds many civic services and I’m happy if they can enforce traffic rules and raise revenues.

That leaves the question – what is this company that makes these camera systems? It turns out that the company that does these red-light camera systems is an Australian company called Redflex Group. Which is unfortunate since my broker doesn’t let me buy Australian stocks. I think they are on to something. Redflex Group has a Traffic Systems business and a Communications business. The holding company’s stock has been doing rather poorly, I don’t know why but the Traffic system business has got to be smoking hot.

And guess what else is available from Redflex? Photo speed enforcement on highways! For those of you who have forgotten what 65 miles an hour feels like, there’s a traffic ticket coming your way.

The right time for labour market reform is now

In my first job out of business school with Hindustan Lever, as Area Sales Manager I had a team of over 20 unionized salesmen. I ran a Voluntary Retirement Scheme in my first year and then again in my third year by which time we were down to half the original team size. Yet we introduced new brands in the market, grew our sales and in general did well as a team.

In my third year I took over a small new business of hot beverage vending for Lipton (at that time a division of HLL). The business was small but growing rapidly as we expanded our city coverage. In Sales, Distribution and Service we had about 50 people. Of this the number of direct Hindustan Lever employees was 2. The rest were all outsourced, contract or distributor’s employees.

I then moved to Infosys in the US and over my 11 years there, hired scores of employees onto the company’s US payrolls. I also had to let go of some people for performance or other reasons. At all times, I was acutely aware that I myself was an ‘At Will’ employee. I could be fired with two week’s wages without giving a reason. As long as the reason was not discriminatory (race, sex, religion etc.) I could not bring legal action upon the company.

My experience with the vastly different labour environment in both India and the US has driven home a very important lesson – a business exists to make money for its investors, not to provide employment. And that is, paradoxically, the best way to generate employment.

Let’s take a look at how India’s labour laws distort the business environment and harm employment and employees:

1. It discourages capital investment – particularly in service oriented industries. Investing capital means taking risks. Market risk – the risk that the business may not succeed – is a risk that ‘comes with the territory’. In most countries, investors know that if their business fails in the market, they close down the business, sell off the assets at knocked-down prices, book the loss and take the remaining capital to some other investment opportunity. However, in India, failure, or a downturn, in the market also means that you are still saddled with the payroll costs because you can’t restructure or layoff anybody. You can’t exit the business because employees will lose jobs. That’s something investors don’t have to deal with in most countries. You look at so many rusting factories in every major city in the country where the factory owner has not been able to layoff employees even when the networth of the company has gone down to zero, and you wonder – what a colossal waste of assets. You also wonder –  what do future investors think when they see these rust-buckets? More likely than not it’s – ‘That could be my investment 10 years from now.’

2. It provides no incentive for raising productivity through automation. Look at all the government offices or offices that have unionized staff like banks. To the last one, they opposed computerization. Why? because it could do the job faster and so it would reduce the number of jobs.

Yes it will and that is a good thing. Doing more work with fewer people raises productivity. Productivity raises incomes. The developed world’s prosperity is entirely linked to higher productivity. Also higher productivity creates the surplus (or the profit) that can be invested to create more jobs.

3. If you want to produce a quality product or service it needs carrots AND sticks. With an employee who is not performing, you train, you mentor, you put them on Performance Improvement Plans. But in the end, the employee needs to know that if his performance does not improve he can lose his job. Without this freedom for businesses to manage for performance, it may be possible to compete against companies who are similarly hampered, but it is a clear disadvantage in the global market.

4. It pushes employment generation into the informal sector. In my second stint at Levers I would have loved to hire people directly into the company instead of outsourcing critical functions like Sales. With the Levers brand name as an employer we would have got great talent which would have been better for the company. However, Levers would not do that for a new business that could have failed leaving them with employees they wouldn’t know what to do with. So all of the hiring was done by outsourced contract firms. Did these employees get the PF and benefits they would have got at Levers? I doubt that very much. I don’t think these contract firms even paid any taxes since they were probably classified as Small Scale.

In summary, the current labour laws in India distort the business environment to where it reduces employment generation by discouraging investment, reduces income growth by discouraging productivity increases, reduces quality by taking away the freedom to manage for performance and pushes employment generation into the informal sector.

Whenever I bring this up with people in industry in India, I am given many reasons why this is not a problem. Someone says ‘Only 20% of my workforce is unionized, I just work around them’. Another one will say ‘If you really want to fire an employee for performance, it can be done.’ But most of all the reason I get is ‘But the economy is doing so well why do we need to think about redundancies and labour flexibility?’ On the contrary, it is because the economy is doing so well that this is the right time for labour reform.

I believe this is the most important reform that government must now address. However, this is also the most difficult. Dismantling industrial licensing was like a walk in the park compared to this. With the government dependent upon the CPI(M) to stay in power makes it almost impossible to do major reforms. But major one-shot reforms aren’t the right answer anyway. There should be a 10 year road map on labour reform. But starting now. Let’s begin the discussion.