Tuesday, October 28, 2008

The art of creative destruction

Creative destruction - there is no better phrase in all of management or for that matter mankind's progress.  Joseph Schumpeter, a famous Austrian economist coined this term to represent the only sure shot strategy for firms to be successful in the long-term.  Various versions of this strategy have been made popular in management folklore by later year gurus, but Schumpeter's legacy remains.

Creative destruction essentially says that continued progress can only be made by destroying works and creating what works better. In this argument, lies the inherent tradeoff between exploitation versus exploration.  Creative destruction is the hallmark for mankind's progress.  However, the sheer uncertainties involved in managing an organizational setting that seeks to pursue this strategy makes it difficult for firms to be successful at every decision node. However, one would expect that by imagining the impossible and by working towards it at least some times firms should be able to exploit the benfits of creative destruction.

But, not with Microsoft, arguably the most successful firm in the software industry.

Microsoft, it seems loves Windows and cannot exist without it.  It is a cash cow and will be so for quite a while.  Yesterday, Microsoft announced its plans for a new brave OS called Azure that would supposedly exploit the power of the network and the desktop. I guess they have been sleeping for over a decade now and are late to the party.  Given that many other firms have been making giant headways into cloud computing, Microsoft wants to crash into the party.  Well, before we give credit to Microsoft for being creative we also need to realize that Windows will still remain the primary platform for this new foray into the web.  What a pity - Schumpeter must be turnign in his grave.

Microsoft does not underatand creative destruction.  It is obsessed with the Windows desktop OS.  A few days ago, I had blogged about smart. small devices and how Linux is becoming the default OS for such devices.  A new internet that leverages the power of cloud computing obviates the need for super smart end-user devices. Although, users are indeed free to use such devices, increasingly efficiencies are becomign clear in the network centric model fo computing.  Microsoft, apparebtly does not get the message.

Additionally, there is something called product preannouncements in software lingo, and Microsoft is notorious for such predatory behavior.  Sometimes these announcements are made with vaporware products (those that don't exist in the pipeline), with no intention of ever launching them. The announcements are merely signlas to competition to stay off the turf. I am not sure to what extent this is happenign with Azure, but it is clear that it has to be someone other than Microsoft to create better things in the computing world.

Till then, I will toil away at my numerous Windows machines and work on my Ubuntu-powered laptop whenever I need a break.

Monday, October 27, 2008

The worst news site ever - GreatAndhra.com

I have been following a website for a few months now: www.greatandhra.com.  The site never ceases to amaze me with the crap that it reports, or maybe I should say it publishes.  Many news items on this website are merely titbits of information, often taken from leading newspapers in Andhra Pradesh. Although the site has separate sections for movies and politics - often these two are so intertwined, given the state of politics in in Andhra Pradesh.

Most published stuff on this site is merely opinion and is often presented as if it were a fact. Very little is of any consequence and the language is so poor that it begs a grammar check from stupid MS word.  What threw me off the cliff was this article filed under the section titled "Special News": Attempting To Understand Religions and Gods!  I don't think I have read anything more banal or nonsensical in my entire life. 

For example, a paragraph begins as follows:

Listening to this the humans understood that there is someone beyond them who is divine. They started adoring the Sun. They understood the feel of adoration. They felt the fear of being controlled. Masters were happy. Their noble mission took an initial step towards the vision of bending the humans towards spirituality.

"they understood the feel of adoration" ?  What in whose name I dare not take, does that mean?

Point taken - everyone has a right in the new brave digital world.  Therefore, I too have a right to criticize a pseudo-news site that is probably up and running because it manages to attract thousands of visitors and thereby makes money.  What amazes me is the banality of news reporting and the very fact that the site has actually managed to get so many online advertisers.  I read it for my everyday share of slapstick reporting. 

Please, if you are in the business of making money off of Chiranjeevi's entry into politics, the upcoming election in Andhra Pradesh, the role of Junior NTR and Illeana in shaping Andhra Pradesh - please stick to that.  You will have your share of idiots visiting your site.  But, please do not pretend that you are a comprehensive news site. If you want to write bull, start a blog and do what millions of aspiring writers have done all over the world, including me. It is my bull and I do not call it news - it is often opinion and yes, it is biased.


Revisiting Infy’s Growth


 

I had blogged about Infy's growth and its prospects about 20 months ago here. My prediction was that Infosys will slow down, no matter what. It is the very model that Infy has used to grow that will bring down its growth – an increased reliance on low-cost solutions to customers. This strategy relies on the premise of low-cost labor markets and Infy's ability to coordinate large-scale workforce. Infy was going at about 45,000 employees and roughly a billion dollars in revenues at that point in time.

An almost linear relationship between number of employees and revenues implies that Infy has not been so successful in earning positive returns to its investments in workforce training or leveraging existing in-house knowledge to attract more business from existing clients. With a bench rate close to mid twenties, Infy has only been adding employees to gain business from new clients without being able to leverage those that are on the bench. One reason could be a slow upgrade process with respect to keeping the bench on its toes. Another could be the buffer needed to meet volatile technology trends in a business dominated by fast-paced changes in the customer environment.


 

Whatever the reasons, Infy has only choked itself by probably neglecting to invest in high-end services (product deployments?) that can stabilize its revenue stream without the deployment of actual work force. I have updated my analysis, and things have only gotten worse for Infy.


 

year        revenues    employees    income

                        

1998        0.771        0.445        0.520

1999        0.674        0.43        2.470

2000        1.003        0.824        0.987

2001        0.314        0.092        0.604

2002        0.413        0.434        0.398

2003        0.409        0.668        0.597

2004        0.498        0.431        0.213

2005        0.351        0.432        0.460

2006        0.425        0.339        0.383

2007        0.190        0.228        0.174


 

The numbers under the columns represent the year on year growth as a percentage of the preceding year's number. Since 2005, Infy seems to have slowed its headcount growth, not surprising given the slower rate at which it is adding clients and also the higher wage rates in India. 2007 was particularly bad for Infy – revenues grew only at 19% and income at 17%. The sharp drop in income indicates a higher cost structure probably due to rise in wages in India. Amazingly, Infy still continues to add new employees with a headcount nearing 75000 and revenues of around 3.3 billion. Inflation adjusted, Infy has been able to earn around 35,000 USD per employee compared to 45,000 USD five years ago.

On Jnauary 19, 2007 Infy's ADR was priced at USD 56.13. As of today it is priced at 25.07 (1.05 USD in dividends over this period).

Markets are embedded in society

Most of us have been appalled at the economic landscape of the past few months.  For those that are not so financially savvy, but carry-on with their every day lives, there is too much wall-street lingo to grasp. However, reality has begun to reshape the ideas of many economists with respect to regulation and the benevolent role of public institutions that might at least prevent future mishaps. It seems like there will be a new age of economic socialism. Based on my limited experience, I have tried to use simple principles to make sense of the anarchy. My intention here is to is merely to reflect on my understanding.

Many fiscal conservatives that I have argued with seem to believe too strongly in a system where firms and individuals magically interact to give rise to efficient markets.  It seems to me that their assumptions are often rooted in an almost folksy role of markets, and the rationality of economic entities that take part in them.

Much of modern economic thought has been dominated by the notion that people and firms are rational, forward looking, and self-interest seeking entities. Nobel prizes have been won on various propositions and ideas that revolve around these principles - often even testing the boundaries of these assumptions. That, society will be better off overall when each entity seeks to maximize its self-interest has been the fundamental principle that has guided many policy makers.  In principle, the assumptions that govern this idea seem to hold under amany situations and hence the markets work the way they seemed to work.

However, economists have also pointed out firms and people are self-interest seeking with guile (notably Oliver Williamson), and that they are only "boundedly" rational (notably Herbert Simon).  As a result, markets are "inefficient" rather than efficient, but maybe still the only effective tool. The notion of "guile" is important as it imposes a reality-attribute on many economic entities. Both firms and individuals seek self-interest through opportunistic behavior (guile), which imposes costs on the the governance of economic activities (transaction costs).  However as these costs cannot be estimated before beginning economic relationships, contracts are put in place as the tools of governance.  Rationality can only be "bounded" because firms and individuals do not have the tools and information to be perfectly rational ( I haven' even included the role of emotions, yet).

Laying out these simple principles, it becomes apparent that most defenders often forget that self-interest seeking and rationality come with the constraints of "guile" and "boundedness".  Wall Street firms esentially ran amuck with other people's money seeking excessive returns that carried excessive risks (they make money at the expense of their customers). - a classic opportunistic behavior that was simply self-interest seeking with guile.  What was found lacking were proper contracts that would impose restrictions on such behavior.  Absent, some degree of oversight, such behavior cannot be checked.  Governing boards have failed miserably to impose the required checks and balances, probably due to their own involvement with the top management teams or maybe because of golf-game buddiness. Managers who are simply agents acting out their own self-interest have little risk-aversion when playing with shareholder's money.  Markets, absent the regulaiton, let such deviant behavior run amuck and facilitated the collapse. 

Yes, markets are self-correcting.  However, the process is often very slow and when fear dominates greed, ordinary people (not merely investors) face the music.  It is in the self-interest of the tax-payer to impose certain costs on economic entities that have come to cause such pain and suffering to them. Market cannot exist in a rational, self-interest seeking world - but rooted in reality of tha taxpayer's oversight. Not because it is the most efficient way to oversee them, but the most effective. 

Free-market thinkers have had their share of history - their Newtonian world with its limitations has worked with some friction, but reasonable well so far. However, the frame of reference is rapidly changing and it is clear that a new Einsteinian reality is taking hold.  Free-market thought has to learn to operate within this new reference frame, till a new theoretical argument replaces the one that is shaping up now.  The role of the broader society in governing economic activity.  I see it not as socialism but as economic socialism - that all economic activity is embedded in a much broader social context, a notion that has been around for quite some time, but has been ignored so much (see Karl Marx, Mark Granovetter )