MY UTOPIAN WORLD

This 13th October,2009 I performed the duty of responsible citizen of democratic India. I casted my vote for first time for Maharashtra state election after having missed it during last two occasions. Was I excited? Not sure about that but certainly wanted to feel the experience. So what did I discover? Nothing significant about elections but lot of lessons for political parties though. These are the various marketing lessons for them. I know I should not compare the business to election but still MBA cannot think anything other than that I guess. This post I would dedicate to my all marketing friends at B-school with whom I have fought relentless battles, that typical Finance Vs Marketing once.

Consumer behavior:-
I think political parties need to undertake this course for sure. They need to understand shelf space concept from HUL and P&G. Now what has it to do with elections? Let me explain. It is known fact that FMCG companies fight for the ideal shelf space in retail store to ensure that their products are sold more. Even in election the same principle applies. The person who is not sure about his vote would not go through entire list of 20-25 candidates. He tends to view the candidates from 3rd-4th to maybe say 9th-10th in the list. This set of candidates fall right under his eyesight by default. These candidates have more probability to being voted by undecided candidate. So I believe political parties must fight for the order of their candidate in the list.
Parties must also understand the simple concepts like person tends to favor the product whose advertisement he sees just at time of buying. It is very important marketing concepts and that is why one finds lot of advertisement by companies in shopping malls. So what should political do? They are not allowed to put posters in 100 mts or so near election center but they can cover entire area before that with their advertisements, billboards etc. I didn’t find it at all.
STP :-
I know our political parties have been very good at this. They have segmented people based on religion and have accordingly targeted them. But is this only segmentation possible? These segments were identified by British or maybe even before that. I think there is further scope to even segment each of the segments to yield better results. In fact past experience also confirms that. The success of Rahul Gandhi targeting youth in last Lok Sabha election, the success of BJP targeting middle and upper class in previous elections. In fact present demographic clearly indicates the age group 20-40 can clearly win election for any party. I believe marketers can really help in this pursuit.
Branding:-
Let us compare our election with American Presidential election and you would clearly note the difference in this aspect. Obama’s slogan “We can” and his brand was very strong which made Americans vote for him. Did we notice anything like that in this election? Certainly not. Parties still persisted with old icons and old slogans. They didn’t even package old stuff in new wrapper. At some places ‘gas’ really works.
Analytics :-
This has become integral part of marketing and political should fast catch up with this. There is some level of win-loss analysis being done but analytics would help to solve most of their problems. No efforts are being made in this direction.

I know this post would not go in national interest and I am not sure whether these suggestions are ethical to be implemented. Further they would not have any bearing if citizen has firm belief on particular candidate. But I believe there are good numbers of people who go to vote without being strongly aligned to any party and this suggestion can certainly influence them. I have identified need of marketers in political parties and it’s up to these marketing graduates who are searching for job to create demand for them in this altogether new industry.

This post is one more evidences about the way management studies have shaped my thinking. I could not have gained these insights without the help of the marketing courses undertaken by me during my course of study. The fact is that I am also shocked that pro-Finance guy like me also can write so much gas.

One more blog post on crises trying to answer same question which every newspaper writes about or every economy guru debates or discusses on various channels on television. So it’s obvious for you guys to believe that this blog would be nothing but copy pasted material from different sources on web. What else can fresh management graduate do other than, the very skill acquired (CTRL-C & CTRL –V) and now being groomed by corporate world? I believe it would have been same if it had no impact on my career but like other 2009 graduates my career has been one of biggest casualty of the crisis and so I do have fair amount of opinion at least on this topic. But at same time I can obviously not resist temptation of copying so like Mba assignments sources would be quoted.

‘Big Banks cannot fail’- It is believed by lot of people the part of the financial crisis was due to this assumption. But the crisis has proved this assumption to be wrong. It has also proved that if such banks fail it could lead to system failure. So what has action has been taken? No banks are allowed to act as investment banker like before on Wall Street. So did it have any impact? Have we ensured that we don’t create such huge banks whose greed can affect entire world? I have attached image below and it’s up to you to see and come to your own conclusion
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Doesn’t topic look strange? Yes I am referring to using derivatives in selecting IT solution. I haven’t got crazy working in IT industry after MBA finance but the fact is it relates. I read an amazing article from an analyst of Forrestor who had proposed this concept and I have highest respect for his knowledge and conceptual clarity of both the worlds – IT and Finance. So the credit for this post goes to him. I am trying in this post to explain my understanding of the report in simple words for benefit of non-IT guys.

Let me start with simple question – what does a business looks for from its IT? I know it may mean different to different businesses but in very crude terms we can say that IT must at very basic level facilitate the business to grow and thereby achieve its objective. Now the question for CIO is when business looks forward to IT for some solution to business problems he needs to select best from variety of alternatives available. This is very subjective since it has to take into consideration variety of constraints like budget, available skill set and future business outlook. But do all the necessary factors are factored in while making such decision? How is the cost-benefit done for each option? More often than not CIO would determine cost of implementation and the value of direct benefits from it and then select one which gives maximum value for given cost which should be within the budget. But is this the best way to take such decision? I will give simple example. Given business problem say introducing online shopping can be solved by solution A and solution B. Cost of solution A is say Rs 1 lakh while of solution B say 1.2 lakh which provides same functionality but with flexibility to add auction feature within a year. Now given above method of decision making CIO would select solution A since there is no way to factor the value of limited (time bounded) flexibility that solution B offers. So here if CIO is able to find the value of flexibility then he can make better decision. Then how to find its value?

The answer to this problem is call option from finance industry. This case is similar to concept of the call option which gives the buyer of the option a right to buy the underlying at strike price before expiry date of the option. Here also solution B offers CIO a right to implement auction functionality at certain determined cost within a year. The call options have value for the right they provide and similarly this flexibility should also have value. Call options price is found using Black Scholes option pricing formula:-

c= s*f(d1) –xe-rt f(d2)
d1={log(s/x) + (r + v2 /2)t}/v*sqrt(t)
d2 = d1 – v*sqrt(t)

where ,
s= price of underlying
x= strike price
r= risk free rate of interest
t= time duration for expiration of option
v = volatility for stock
f= standard normal cumulative distribution function.

We can use same formula to find value of the flexibility to make more informed decision since the concept is same. In our case

c= value of the flexibility provided
s= return on implementation of auction feature
x = cost of implementation of auction feature
t = 1 year here i.e. time available to avail the flexibility
v= volatility of industry can be used to predict volatility of business and hence technology usage.

So using this above option we can find value of this flexibility and that value can be deducted from option B to make it comparable with option A. This would enable better decision making for CIO than obvious methods that are used today. Further it provides him an opportunity to deliberate on future features that might be required and may facilitate him to provide more objective explanation to CFO for budgetary approval of flexible IT solution that may help business in longer term.
I know you may question lot of assumption like that of volatility and usage of normal distribution and most important the assumption made by Black-Scholes in pricing model etc. But this post is meant to bring to your knowledge entire new dimension of using the financial knowledge in IT decision making. We can always debate out the viewpoint and criticize the shortcoming of any model but at same time I think we should appreciate the new perspective.

This thing struck me especially after I myself started working on risk management. I had taken extra course on compensation management much to surprise of most of my friends. One of the important take away from the course was the importance of tying of compensation with performance. In nutshell, right performance must be rewarded with right (desired) compensation technique. Thus performance management is tightly coupled with compensation management and can have far reaching impact on employee’s satisfaction. You may be wondering why am I writing this “gyaan “but this has to do with the current debate regarding executive compensation and its role in financial crisis.

To measure the performance for any role we must first define the metrics and the process for the same. Revenue generated, number of customer added etc are various metrics used to measure the performance of sales personnel. So what could be metrics for risk manager just try to think? It should be how well company performs or withstand during the adverse business conditions. But now consider how you would have appraised risk managers during 2003-05 when global economy was booming and nothing wrong or unexpected was happening. The companies earning were growing year on year basis. At this time imagine particular risk manager not allowing banks to give out loans for housing, asking to maintain high liquidity and not taking exposure to CDO and other complex instruments since he recognized they were dangerous. At same time all its competitor were doing exactly opposite and thus were able to grow at twice the rate of the other bank. How would have that risk manager been appraised at end of 2003? He would have been criticized for being risk averse and would have lost his job in year or two to other set of risk managers. This is because metrics to measure risk manager performance is not that clear. During that period there were no crisis so how you measure their performance. In absence of the adverse conditions everyone were able to “so called withstand” the year but some made more profits than the others so people tend to appraise the other risk manager with better grade and hence better compensation. Even the sophisticated technique like balance scorecard would fail to measure the performance of risk manger. Since here we would look from all perspective so on revenue and profit front the risk manager would score low. I know someone fresh out of MBA would like to use some business terms and explain me that performance should be in how well risk has been managed with respect to defined risk appetite of the company. I agree to this but who defines the risk appetite? If it is board or CEO then if risk manager followed that then why are they being condemned for their action today? It was in line with the goals set for them.

So then how should we appraise risk manager? What should be metrics and process? All human resource manager needs to work this out. I believe that we should now look at long term for appraisal and compensation management for risk managers. But then what should be this long term? I have no answer to this. The question is open for all of you to answer. Maybe someone can point to honorable Robert Kaplan to work out special metrics for risk manager or throw some light on this area. What say guys?

This is my first hand experience in area of risk management. Risk management has been researched and practiced by companies in American and European countries. Even after putting in various processes and mitigation techniques financial crisis could not be avoided. At same time even though Indian companies do not have formal enterprise risk management practice in place, they are not in that trouble. So does that mean risk management is of no use and entire work done in that area has no value? Is it mere exhibition of mathematical supremacy of some geeks? Are those models part of problem or solution to today’s problems?

The answer I found when I started working for developing risk model for my company. After few days at work I was taken aback when there were no formal strategies in place nor any guidance or processes in area I was working. To start my work I decided to talk to various stakeholders and quickly realized that how could they manage without knowledge of risk involved and still earned profit. The answer lies in first blog post of mine. We Indians by nature are risk averse. In initial part of my career when I was involved in software development I had to estimate the effort for the development. I always use to pad it up by 20-30% to ensure timely delivery. But when my lead forwarded that estimates she would further pad it up by other 10% and so on till entire estimates gets padded up by almost 200%. Then client would negotiate and we would end up having at least 100% padded estimate. Though we did not have formal project risk management practice in place we ensure timely delivery. The same is true with most of Indian companies. They have mostly hierarchical organization structure rather than flat one and further at each level each one of them adds its own estimate of risk premium which ensures sufficient buffer, in fact more than required. Thus they have been able to withstand any deviation from expected.

Risk management is thus very important for Indian companies since it would free up lot of capital (or bring down estimates to appropriate level) and would help them to be more competitive. It would help them to improve their estimation. So unlike western countries where risk management increases capital requirement, eastern countries it might have opposite impact. But the fact remains risk management would certainly be of importance to both of them.

I had gained similar learning from my experience with startup. They were quite successful growing at almost 20-30% a year. They also did not risk management practice in place and neither believed in that. After detailed study of their company for a year or so I realized the risk aversion and management was inherently in culture and style of the entrepreneurs. All that I could suggest as part of process was indirectly implemented by them as part of their business.