The Age of Turbulence - Some anecdotes to laugh about

I was reading Age of Turbulence by Alan Greenspan. I found some really interesting quotes to laugh about....(as such it is tough enough dealing with head-less chickens and heady-chickens and everything in between to add to the miseries of life ;-), why not have a good humour to it)....


Ronald Reagan defending his error on wrong economic speech whereby he used the word "Depression" instead of "recession" during his presidential campaign criticizing the incumbent Jimmy carters economic policies. Carters campaign managers criticized Reagan by saying he does know the definition of the words:

"If it's a definition he wants, I'll give him one," Reagan would continue. "A recession is when your neighbor loses his job. A depression is when you lose yours. And recoveryis when Jimmy Carter loses his!"

Anothe comment by Reagan stating the excesses of the Government policies on the lives of people. Basically, hwe was alluding to the wrong policies of carter that resulted in Inflation:

"Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves."

Another exerpt from Alan Greenspans book about his interaction with Ronald Reagan that captures Reagans view of economists:

".....He told one on the airplane that seemed particularly meant for me. It started with Leonid Brezhnev on the reviewing stand at Lenin's Tomb, surrounded by underlings, watching the May Day parade. The Soviet Union's full military might is there on display. First come battalions of elite troops, impressive soldiers, all six foot two; marching in absolute lockstep. Right behind them are phalanxes of stateof-the-art artillery and tanks. Then come the nuclear missiles—it's an awesome show of strength. But after the missiles comes a straggle of six or seven civilians, unkempt, shabbily dressed, utterly out of place. An aide rushes up to Brezhnev and begs forgiveness. "Comrade Secretary, my apologies, I do not know who these people are or how they've come into our parade."
"Do not be concerned, Comrade," replies Brezhnev. "I am responsible for them. They are our economists, and you have no idea how much damage they can do."
"

Opportunity Engineering Does it really help plugging the downside without affecting the upside?

I recently read the book review of "Unlocking Opportunities for Growth" By Alexander B. van Putten and Ian C MacMillan and surmised if opportunity engineering methods and tools can really help in plugging the downside. The author argues that Opportunity engineering can help in breaking the typical symmetry on the downside of the opportunity. If for a moment we assume a normal opportunity return curve as illustrated in Fig 1 below where the mean is the break-even point for an opportunity, the author mentions that opportunity engineering can help in breaking the symmetry of the curve by eliminating the likelihood of an opportunity outcome falling on the left side of the curve. This effectively means we have an asymmetric curve (that is a curve with different functional drivers; obviously the whole curve is no longer normal then!)... Please note the author never mentions that the opportunity is a normal curve, all he mentions is that there is a symmetry between the risk and reward. These are typical stochastic models. i've used a normal curve to help illustrate the gaps that I see in what is proposed by the author. Now note that at the time of planning or forecasting for an opportunity we usually use DCF and NPV to make crucial business decisions, however in reality the actual outcome is influenced by several real-life factors and parameters. This means at any point in time we may land up anywhere in the green rectangular box at any point in time in reality assuming we fore casted and planned for a normal-curved based returns for an opportunity.... Now there are underlying assumptions in the argument the author makes that can be challenged:

 

1. The existence of symmetric relationship or equal likelihood nature of opportunity return curves. This is seldom a case where we have equal likelihoods on either side of a break-even point for an opportunity curve....there are countless product curves and innovations curves that can be plotted with products in the market that have a asymmetric opportunity return curves...

2. Assumption that any propensity to reduce the risk will impact only the left side of the opportunity return curve without having a holistic impact on the right side of the return curve...look at this this way have we ever seen a car or a computer that meets every customer need out there....if that is the case then we would not have various product categories and customer segments :-).... 

 

 

Having noted 2 such fallacies, let us also look at what are all the options or scenarios we can generate at the time of forecasting to ensure that we are in a position to manage the outcome always on the right side of the normal curve. (For a moment I've now assumed the normal curve remains and the authors inherent assumptions of changing the curve only for the left side to break symmetry is not feasible in real-life!). Let us assume that we are simplifying the forecasting model for business decision by only factoring a finite set of known parameters or factors that could affect an opportunity (Making that assumption is theoretical it is never practically feasible...I'm just attributing a zero probability for the occurrence of a  "force majure" event during a planning horizon!). Lets now look at 3 ideal scenarios:

 

1.  "Conservative Scenario": Reducing the skew or variance of an opportunity outcome (Fig 2) . In this scenario we make certain choices for the opportunity that limits the failure points at the same time also limits the success. Classic example is that of Nokia Mobile phones, they keep releasing model after model with incremental feature having now got a base mobile phone ecosystem right, they just add a camera, stereo phone, touch screens etc. as added feature on mobile phone. So every new model that Nokia makes can now leverage the evolutionary scenario forecast model. This model usually works in oligopolistic markets with few competitors: Microsoft, Nokia, etc. The have shaped their market as oligopolistic through differentiated strategy and reached where they are over the years by decimating competition. Basically what this means is that the opportunity curve for every model they release in the market have an equal likelihood of success and failure!

2. "Normal Scenario": ": Increasing the expected return for the opportunity curve while reducing the loss (Fig 3). This is just shifting the normal opportunity curve (Fig 1) by increasing the expected value of returns on positive side. Most businesses try to make sure that their forecasted model always has yields a positive return and reduces the likelihood of failure i.e. falling into the left side of the expected value. To achieve this forecast model look at an opportunity holistically from different functional perspectives: Engineering, Design, production, Sales, and  marketing. There are tactical strategies and lobbying made at conception stage of the opportunity to make it successful. Typically we see this in commoditized market where opportunities are shaped to meet a specific customer need. The customer need is well understood through market research. Good examples of such products are in the Consumer goods industry: Colgate tooth paste with salt. J…

3. "Aggressive scenario": Increasing the expected return for the opportunity curve while reducing the loss at the same time increasing the likelihood of the outcome falling within the forecasted opportunity curve (Fig 4). This is not just about shifting the curve by its mean and reducing risk, but also about increasing the likelihood that the outcome will fall within the opportunity curve that is forecasted. Good example of this model is that of an iPhone, iPod, etc, here Apple has done something magical in reducing the returns from the opportunity curve through innovative design to create an successful market for its product, while at the same time limiting the left side by offering complementary services such as iTunes, tie up with telecom operators who are ready to offer 3G services, and so on. They may not have necessarily addressed the immediate customer need, but created a new customer need. These products are revolutionary in its nature and it is often difficult to forecast such model without tipping off competition about such an entry into the market. There are few companies that can create such opportunities.

 

Having discussed all this, we cannot say with certainty that our forecasted model will always predict a positive outcome or we have a mind and hand of God to plug the downside of an opportunity without commensurately impacting the upside!

 

But we can definitely analyze scenarios based on range of possible outcome to satisfy ourselves at the time of making business decision!

 

 

Contractual options to manage IT Outsourcing risks and the paradox therein for Fixed price projects...

I heard a very interesting presentation by Late Peter Bernsteing knownt to be an expert in managing risks...he made very interesting remark about risks and gave some real-life examples from the finance industry where options are effectively used to manage risks...He had this very interesting articulation of the idea of risk through few anecdotes that sparked my imagination and led to some very interesting insights about IT outsourcing industry....Lets see some of the anecdotes he used and how they relate to our IT industry...

1. Finace industry always revolves around making decisions based on incomplete information. This leads to us taking risks and an expectation to be rewarded commensurate to the risks (the whole idea of CAPM by Modiglani and millers, the Betas our ability to quantitatively assess our risks).
In IT outsourcing contracts, we do similarly solution and price a fixed price deal based on incomplete information (estimates, scope of work, etc.). This is a risk that we undertake for which our rewards are the margins that client pay us. Now unlike financila industry there is no standard quantitative model we use to assess risks and can expect to get rewards commensurate to the risks we take....So the question arose within me why do we bid for fixed price projects when we do not have complete information? (It is a completely different topic to define what completeness in information mean...we will discuss this hopefully in some post in the future)
2. When we buy shares of a company we have a passive control over the decisions of the company and the decisons we make as passive investor is reversible. On the contrary if we look at the Executive or management has active control and make more decisions on behalf of the company but their decisions are irreversible. The do take equal amount of risks for making decisions as we do and their rewards are obviously paid in stock options and % commissions (maybe Obama thinks that CEOs of funded companies shouldnt be paid at all....:-))..Now in IT outsourcing contracts when we do a fixed price 3-5 year deals the client and service provider do make an irreversible decision for a fixed duration. Their decisions are irreversible and are actively involved, and seem to control the engagement through extensive management. Now paradoxically we do sign lot of Fixed price projects knowing fully well risks-rewards dont match, besides we make irreversible decisions which we presume to control when we dont/cant...(well there are other contract T&C to put a boundary around these changes but then what the heck the change management always are active and manage the heck a lot of change out of clients)
3. In finance industry we have instruments such as Futures, derivatives and Options that gives us the right but not the obligations to manage the risks with at a manageeable (Only for those who know how these markets operate and also note i'm not sayin small) price... So what it effectively gives a passive investor is the ability to make further choices in reversability of decisions but ofcourse at the cost of not being able to control the decisions of companies that has bearing on the outcome...Now lets turn to our IT industry the fixed price contract are risks with unknow outcomes, uncontrollable and active decisions require to manage a contract and finally has no instruments (forget the Change managers) to manage the reversability of decisions when we bid with limited information....

Given all the above tenets, why do we do fixed price contracts at all....Doesnt it make us stick out our ostritch neck to be chopped off by a predator, or sticking out a thumb that invariably turns sour....

Whats driving us to Fixed price projects that are based on limited information other then the seemingly predictable revenues that we fool ourselves to be getting out of these deals :-)....

Now why cant all the deals where we have incomplete information be contracted using the real options model that is prevelant in the Finance industry...come to think of it, this will lead us to consider all engagemetns where we are bidding with limited information to statrt off as T&M deals.. we can build a real option (:-)...if I can use the term here) to convert this to a fixed price engagement maybe 6 months to 9 months into the delivring on the deal...during this time we will definitely have lot of data and complete information to know what is the risk we will be underwriting through a fixed price contract...now to get the benefit of defering the decision of making an engagement with incomplete information to fixed price we need to compromise on the fact that the deal may not materialize for us at all at the end of 6 months or 9 months....we give client that right (but not the obligation to convert this to a fixed price deal), so it is like the client buying the call option if you will from us to convert it to a fixed price model...so what do we do as a firm selling the fixed price option to cover our cost for lost opportunity if the deal does not materialize...we will expect client to pay us for the T&M project in the interim of 6 months to 9 months and the cost of reversing this decision still exist with client and with the service provider......ofcourse imagine if we also have an exchange where different service proividers can trade this...we can in effect trade these options with several supplier out there in the market..and ofcourse the underlying resources need to move with this too that are serving the client....

Looks like this idea is too raw and i'm almost at the boundary of being called insane...but nevertheless a good topic to explore further....What is your thought here...pls share your thoughts on my jabber....

What lies on the other side of Economic Event Horizon for IT Outsourcing industry?

The economic event of meltdown and slowing growth that we are witnessing today is unprecendeted in its nature in terms of the following:

1. The scope of coverage (includes all the industries)
2. The scale (effects felt globally) unlike the prior Japanese, Argentinian currency crisis, Russian bond market initiated crash or the East Asian BoP crisis
3. The intensity/depth of effect it has had on the industry
4. The speed at which it propogated; virtually in 6-9 months timeframe it had affected the scope and scale


What lies on the other side of the unprecedented economic event horizon...No brownies for guessing it for the Financial industry as almost every one has seen and will see in terms of regulation, infusion and bailouts by governments, recapitalization, more stringent monitoring of risk exposure...read more of it in RGE Monitor an article written by NY Stern school of business. Lets look at our IT outsourcing market alone for a moment. I just happened to come out of a leadership meeting at work and was quiet amazed that every one claiming that the other side of the event horizon will be fundamentally different from what we have witnessed in the past...But no one knew what exactly what it really means :-)...either they thought we may not understand it or they themselves were not so sure.... I for one believe that they might've thought we would not understand it.

The IT outsourcing industry has witnessed just one such downturn in Year 2000 & 2001 (Popularly called DotCom Crash) when the Telecom & Technology industry led downturn had immense impact on us (we will compare and contrast this in a separate post) . Having seen through that downturn and journeying through several organizations and roles, here are my insights:

1. Client will demand more value (one can define it in many ways) to be delivered by Suppliers at lower cost.
2. Client would demand transformation of their IT services/model/organizations leading to higher efficiency and effectiveness of IT support function at lower cost.
3. Client would expect suppliers to bring innovations to life through IT services to businesses earlier, and faster than their competitors at lower cost.
4. Higher performance/productivity levels (enforced through stringent SLAs) for thier businesses than before at lower cost.
5. Better resources (may I call them Super-humans: higher talent, highly flexible, having shorter learning curves, working longer, etc.) at lower cost.

Now if you do not understand whats and how of lower cost, it is immaterial you are best in any other tenet. Remember you still cant get a dime for your organization and find yourself running around amidst headless chickens or Heady humans ;-)...

What has been your experience regarding these heads and your predictions on the other side of this event horizon?

Success for Mature firms in difficult times.....

Is it that matured IT and Consulting firms often loose track during difficult times?

Probably yes.

To understand this lets define what qualifies Maturity:
1. Differentiated Services to client - Creating multiple offering in the continum between Fixed Price deals Vs T&M deals
2. Sound business practicies: Sales, Financial, Contract/legal and economic factors....
3. Strong culture: Behaviors and attitudes deeply ingrained in its employees..

A mature firm exhibits some of the above qualities stretched to the extreme that has defined their success in good times. (It reminds of the book Good to Great by Jim collins that I referred to see if there are anyother tenets we can include for the same, but lets keep it simple for discussion purposes as too many people critize a good work of Jim collins anyways saying it has a very high statistical bias......).

The whole premise that they did well and matured to a certain level in providing goods and services in the past itself become their nemesis...they tend to stretch the qualities even in bad times when the context in which they operate has changed. Take for instance what we are going through under current economic conditions, everything: Inflation, Forex, COLA, employment, etc has become so volatile that for a large MNS/TNC it is almost impossible to meet their forecast with any reasonable probability....

One very interesting insight I had too, is that some of these firms carry around the business with the same best practices even in circumstances like this without realizing how complicated their ways and means to profitability have become...This goes to an extent that they forget their past journeys on how simple, nimble and flexible their operations have been in the past....When the current environment requires them to really go back to the basics they had almost forgotten them or despise them as old habits that they believe are irrelevant! In the process they also become irrelevant in the market and forget what the customer/client really wants...

One can Live through this nightmarish experience to understand the frustrations or learn from others insights...what has been your experiences?

Will democratising of Innovation lead to futility of Patents & copyrights?

There is the amazing trend of democratizing innovation carried out by Open Source Software..remember a blog I had written on the same topic fome time back....it seems the abstraction of the thoughts there has finally leading me to understanding the idea of democratizing innovation...thanks to great open source book by Eric Von Hippel and the book by MS Krishnan and CK Prahalad in their book "New age of Innovation"...


Interestingly, we are seeing more user initiated innovations shared freely and openly off late. It seems the key motivation for sharing the innovationa re:
1. The purpose of sharing innovation to benefit the society... Great example generics in the market by developing countries like India...I know pahramaceutical companies will hate this, but who cares! other example include wikepedia
2. The value of getting back refinements to the innovative idea by user community that leaves the product or service richer than it would have been otherwise..Great example is Linux...other example include the custom Semiconductor development kits by Xylinx
3. The motivation one gets by merely sharing their learning experiences to wider audience out there....Great example Innovation community portals (i've written about these earlier)

Now lets look at it from the financial angle:
we know that innovation leads to sunken cost for the innovator...there can be the direct costs or several proxies to these costs such as invested time, effort, and so on...We all know from our business experience that sunken costs are always unavoidable and unrecoverable unless some greedy accountant out there capitalizes it and amortizes it over the the life of the innovated product/service so he can avoid paying additional taxes ;-)...so whats the big deal in not being too obsessed with recoverability of the cost...the benefits of sharing openly that I listed above far exceeds the sunken cost for some....

So now lets come to the entire idea of having patent and copyright laws preventing/limiting the wider commercial benefit of an innovation...what it really means for the commercial benefit is to exploit the common need of the large community of users by the manufacturer/service provider to make money...in the process what really happens is the innovative product/service focus is to not only recover the sunken cost but also to generate more benefit to satisfy the greed of the organizations....The product/service meeting mass-market needs is not good enough for some users of it, who have either found better use for it by innovating more on the product...good example here is the surf board holders innovated by surfers to enable them jump over waves pointed in the book by Eric von Hippel...or alternate uses for the product :-) Benadryl used as a good substitute for chep intoxicating agent....

Atleast in the 21st century of consumerism we will see more users and the communities will start creating more innovation on the product making the product more of a commodity....the patents and copyrights then naturally becomes futile either by filing new patent over the base and completely altering it...well some of the TRIZ fans would love this.....Net-net what it will do is displace the manufacturer from the Product-Development/Engineering and Service development domains. They may only survive in the realm of Manufacturing or Service execution spaces purely due to the benefits that can accrue due to scale economies...

So what does it really mean....i've really argued (may not be a very erudite one) for futility of patents and copyrights and favoring the open source innovation as long as I'm not a manufacturer of the service provider with huge sunken costs :-)....Whats your view...

Cloud Computing & SOA - Hype and Hoopla

There is so much hype and hoopla about Cloud computing and Service Oriented architecture....as I had earlier mentioned in my earler article that these are going through the peak of Inflated expectation (thanks Gartner for this nice terminology other than the Magic Quadrant)....

If you have been long enough in the IT career say 10-15 years you can see through it nothing differently than Inflated expectations...

Remember the great hype and Hoopla created at every phase of an Innovation:
a. Midrange computers challenging the Mainframes: The SUN & HP of thw world giving the IBMs of the world the run for their money...it all seemed to be a great hype on midrange as Intel based servers today are giving the midranges run for their money...
b. RDBMS challenging the Network and Hierarchical DBMS: Remember the Oracle/Ingres/Sybase/Informix/DB2s of the world giving the DEC and IBMs databases run for their money...we also brefly saw Object oriented Databases momentarily sending sparks and fizzling out
c. Client server architecture challenging the Mainframe screens/C cursors/the Windows SDK fat clients: Remeber Oracle, Powerbuilders of thw world giving the gargantuan and complex Windows SDKs run for their money...all to be challenged again by the internet thin client frameworks...we saw a full circle here...

What is a pattern we see in all the above...it seemed that they are really reinventing the wheel or coming a full circle...I'm unable to articulate this much better, but let me try and give this simple analogy...its like the earht going around the Sun year after year in a clocks precision...I dont really see the Cloud computing any different from retracing the Mainframe era....and the SoA going back to the very fundamentals of what the technologies and methodologies exit for to run a business with what you have rather than buying new technology to support the existing business....

So whats so great about the SoA and Cloud Computing...not coz' i', not chasing them this time...it all seems to be a good marketing gimmick...what has to be innovated in the technology space has really been innovated and it is just about putting the old wine in a new bottle or just plain message in a bottle ;-).... it seems its all about the context and not really the core....

What do you think? Just a hype and Hoopla around cloud computing and SOA...Whata the big deal?