Errors of Omission or Commission : A Hobson’s Choice?

Jeff Bezos, the founder of Amazon.com has recently commented:

“We’ve made many errors. People over-focus on errors of commission. Companies over-emphasize how expensive failure’s going to be. Failure’s not that expensive….The big cost that most companies incur is much harder to notice, and those are errors of omission.”

 

The above quote from Jeff Bezos has set me thinking. Are the errors of omission always more costly than the errors of commission? Is it only applicable to high-technology businesses like Amazon’s or is it applicable for all businesses? In high-technology businesses like Internet, the business life-cycle is very short. It is important that the business leaders look for new opportunities constantly. Also, with barriers to entry being low in such businesses, there is always a competitor who can offer a better proposition to the end-customer. Microsoft’s delayed entry in the Internet space has been an error of omission, which it has not been able to make up in spite of all the efforts and investments. It is clear that the high-tech companies can ill-afford errors of omission. The cost of experimentation in Internet based businesses is not very high. Companies like Google are always keeping several products in beta stage, trying to learn about user-preferences and also learning from their own errors of commission. In other businesses, it may not be always true. The pace of change is slow, hence even if you miss being the first mover through an error of omission, there is a chance to catch up. There is lumpiness of investments, which can make errors of commission very costly, sometimes even leading to survival questions.

 

Ratan Tata has openly admitted that Corus and JLR acquisitions are errors of commission, in terms of timing and valuations. Now, both Tata Steel and Tata Motors have to really struggle hard for several years, to correct these errors. Business conservatism is about minimizing errors of commission. Infosys is a shining example of a conservative business in a high-tech business. It evaluates hundreds of acquisition proposals and just lets them go, if they find there is an iota of possibility of an error of commission. Even in the recent case of Axon acquisition, it chose not to compete with HCL Technologies. Only time will tell, it was an error of omission on the part of Infosys or an error of commission for HCL. In most old, large companies, the managers are obsessed with avoiding errors of commission, rather than avoiding errors of omission. Because, errors of commission can be attributable to an individual or a team and responsibility can be fixed. Nobody gets punished for errors of omission.

 

Stretching this discussion to another walk of life - in test cricket, – the captain or the batsman is focused in avoiding errors of commission. A batsman can leave several scoring opportunities but should not play a wrong shot, because he can get out. A captain can avoid an aggressive declaration thereby making an error of omission, because draw is an option. In T20, both errors of omission and errors of commission are punished immediately. In the recent World Cup T20, MS Dhoni by sending Ravinder Jadeja ahead of Yuvraj Singh , made an error of commission. By scoring at just 50 % strike rate in another match, Dhoni made an error of omission. Both got punished by Indian team losing the matches.

 

In career moves, several professionals commit errors of omission when they are either deeply absorbed in their routine work or they are in a cozy comfort zone, by being oblivious to opportunities for change. A few commit errors of commission by landing up into wrong roles or wrong organizations, when they are too desperate for change. In the case of a career, errors of commission are usually costlier than errors of omission.

 

 Warren Buffet while explaining his investing style explained that he normally invests in a business forever. He mentioned that he may let go of several investment opportunities, but the business that he selects he wants to be sure. In other words, he is open to several errors of omission even when he is sitting with huge piles of cash but wants to avoid errors of commission at any cost. He is the second richest man in the world, surely he knows what he is saying. Yet, I wonder can you really avoid making errors of commission, if you do not make errors of commission early on by burning your fingers and learning. Can we generalize that one should not make errors of omission in a growing stage and one should not make errors of commission when you have wealth or reputation to preserve. In the Indian housing market, if someone had not invested in a house or a property before the boom started in 2003, it would have been an error of omission. But if somebody booked a house that too an incomplete project in late 2007 or 2008 it would have been an error of commission. What can you take, an opportunity loss or a real loss? If you do not build physical exercise in your daily routine, it is an error of omission. If you acquire a unhealthy habit like smoking, it is an error of commission. Both can prove costly to a person’s health in the long run.

 

In selection of one’s spouse, which error is more distressing of omission or commission? 

 - G. Mohan

U, V or W- What Shape The Economic Recovery Will Look Like ?

Recession is passé now. So it seems. If one looks at the recovery in the stock markets the world over. It looks like recession was a 2008 event and 2009 is well ready for a recovery. The BSE Sensex in India has moved from 8200 on March 9th to nearly 14500 now. A growth of over 80%. Many stocks have doubled and some have even tripled in this period.  

Does this mean that the bad news is behind us? Is the recession over? Will the real economy go back to the heady days of 2006-07 or early 2008? On that the opinions are varied.

One simple method to predict the shape of the recovery is the shape of the curve based on the shape of the alphabet. The most optimistic of the economists and analysts predict a V-shaped recovery, in which the lowest point can be considered as Nov-Dec 2008. The optimistic analysts prognosticate that there is still pain left; hence the current recovery from March onwards is just a bear-market rally. The markets will go down again and only in 2010 will the real bull market start again, hence the shape shall be a W. The pessimists indicate that the stock markets are out of touch with the real economy and the real economy will revive very gradually over the next 18 months. The shape of the curve is hence a U. The doomsday analysts say there will be no recovery at all for a long-long time like the way the Japanese economy went through in the 90s, hence the shape of the curve will be like an L.

Jamie Dimon, the CEO of J P Morgan in an interview to TOI  says, he is unsure what shape the recovery will be. He says :

“Of course, the world went through a deep recession—call it a Great Recession—and it was much worse in the US or Europe than in China or India. But I think the world is on course to stabilisation. You see it in consumer spending, business plans, confidence levels, inventory balances, purchasing indices. Sectors like housing in the US are still getting worse, but at a much slower pace. So we’re actually seeing a global bottoming out. But I don’t think anyone knows whether the recovery will be V, or U, or W-shaped. I’m not going to spend a lot of time guessing on that.”

Maybe Dimon does not have time to guess the shape of the recovery. Without using any tools or surveys, my instinct tells me that this rally is unreal, but the market and the economies will bounce back. I am betting on a W shaped recovery.

What letter are you betting on?

- G. Mohan

Aditya Puri: A Good Banker, a Not-so-good Boss

 

Little is known about HDFC Bank and the people behind it. It is a highly successful and profitable new generation bank in the private sector. It came alongside ICICI Bank and at several points in time, the market capitalization of HDFC Bank has been higher than that of ICICI Bank and SBI.

 

Since inception Aditya Puri has been the MD of HDFC Bank and has been steering the bank, through times, good and bad, successfully. The bank has been growing 30% year-on-year for the last 15 years and has one of the lowest NPAs in the business. In spite of the absence of home loans ( as it is the preserve of its promoter HDFC Ltd) , the bank has a strong retail business. HDFC Bank and Aditya Puri have got legions of awards for this success.

 

The media is yet to put up the spotlight on  Aditya Puri as a person and his managerial style. Today’s Business Standard carries an interesting piece on him titled ‘ A Lifelong Pursuit of Leisure’ Given below are excerpts from interview, which gives an insight into the persona and the managerial style of Aditya Puri:

 

“The man, who has just been voted India’s best CEO in Finance Asia magazine’s annual poll of investors and analysts, says his management mantra has been inspired by a cartoon he saw in one foreign newspaper. One half of the cartoon showed the boss neck-deep in work while others outside were having a whale of a time. The other half showed the boss taking a nap while others were all glued to their computers.

 

“I am sure you know which half of the cartoon is my favourite,” the HDFC Bank MD and CEO says, ordering a lassi. Puri must be the only CEO in the world who doesn’t carry a mobile or laptop; leaves office at 5:30 pm sharp; doesn’t work on weekends, giving him enough time to grow exotic vegetables & fruits at his Lonavla farmhouse; takes at least one long annual leave; and skips networking dinners to pursue other interests such as listening to music and reading.

He has recently added one more must to his daily routine: Talking non-stop to his 10-month-old grandson whenever he is around. “Both of us understand each other’s language perfectly,” Puri says with a hearty laugh   

He may not carry his laptop or mobile, but he comes across as quite a hands-on man and a control freak.

 

Despite the distance he keeps from back-breaking work, Puri says he knows exactly what is happening at each of the bank’s 1,400-plus branches. “If there is an over-withdrawal of cash at some branch, the information reaches me within an hour — wherever I am. For that, you don’t need cell phones; you only need to put proper systems in place.”

Aditya Puri clearly values his leisure, but not necessarily that of his employees. I have heard from a cousin who used to work for HDFC Bank for several years in the accounts department. He used to have a 12 hour work schedule for large part of his year. Add to that 3 hours of commute in Mumbai and there was no life left at all. During accounts closing every quarter he would not come home for seven days at a stretch. He used to pack off his wife and kid to his in-laws’ house during accounts closing time. He was short of hands in his department and there was a lot of churn also, yet to manage costs, there were never enough people to do the work. If he would crib about this, he was clearly indicated by no less than Aditya Puri that if he was unable to cope, he had the option to leave. After his health got worse with all the stress, he decided to change his employer.

 

Aditya Puri has managed to strike a great work-life balance, but cares little for his people’s work-life balance. Because, if they also have a great work-life balance, then the company performance will suffer and Mr Puri cannot get those awards and rising stock prices. Mr Puri recently indicated in an interview, that he was not averse to getting another five-year term.

 

Contrast this with Jim Goodnight, the CEO of SAS Institute, an US based software company in the data mining and data warehousing business, revered all across the globe. Fast Company describes Mr. Goodnight’s highly successful management style as :

 

“Jim Goodnight is not a guy who notices management fads or worries much about outside criticism. He lives the way he wants his employees to live. He goes home around 5 p.m. (at which point SAS’s automated switchboard starts answering the phone, “Most of SAS Institute is closed at this time . . .”). He refrains from checking email when he’s away from the office.”

 

Both Mr. Puri and Mr. Goodnight value their leisure and understand work-life balance. Yet, the difference cannot be more striking when it comes to their policies for the employees.

 

Mr Puri’s arrogance also shows when he says “Besides, I have reached a stage in life where I don’t have to network any longer; people need to network with me.” Probably here, he is taking a dig at his boss Deepak Parekh who is well-known for his networking skills. I would always have more respect for a person like Deepak Parekh, who uses his network and knowledge to contribute to India (UTI, Satyam etc)  rather than an Aditya Puri, who values his leisure so much and yet wants to hold on to the top job, to enjoy the perks and privileges that come with it.

 

Would you work for a workaholic boss, who does not understand work-life balance and expects his employees to emulate him or would you work for a manager like Aditya Puri who manages his own work-life balance so beautifully, but cares two -hoots for his people’s work-life balance? Both are bad choices, but at least the former boss cannot be accused of double standards.

 

Now tell  me, would you give your best for a boss like Mr. Goodnight or Mr. Puri?

 

-   G. Mohan

TOI is too petty!

 The Times of India (TOI), Hyderabad edition carried the headline on the first page “Team Hyderabad are the Nizams of IPL.” The web-edition of TOI carries the headline “Hyderabad turn IPL upside down with title win .” It is common knowledge, that the team which has won the IPL trophy in 2009 is Deccan Chargers. Yet, TOI never used the word Deccan Chargers anywhere in the news or in the headlines, including the IPL table which it used to publish daily. It is true that Deccan Chargers is Team Hyderabad, just the same Royal Challengers Bangalore is Team Bangalore. Yet, TOI used Royal Challengers Bangalore, but never Deccan Chargers. I presume that TOI decided not to use the correct name, Deccan Chargers for the simple reason that Deccan Chargers is owned by Deccan Chronicle, a rival newspaper of TOI. The short name for Deccan Chargers will be DC, which is the acronym for Deccan Chronicle. In Hyderabad, most recognise the abbreviation DC as Deccan Chronicle. By using the phrase Team Hyderabad instead of DC, TOI did not wish to give any mileage to Deccan Chronicle, even in the news.

Now to me this is pettiness. If TOI really did not wish to cover DC it could have given limited coverage to IPL. It did not. It knew that the young readership of TOI prefers IPL over elections, yet it had to stoop to such levels so as to not give any coverage to a competitor, even obliquely.

- G. Mohan

Quiz Miscellany II

Here are the Questions and Answers to the weekly quiz published by Business Standard  in their Tuesday supplement dated May 5th,2009

Q1.Who said: “I expect the personal computer to become the kind of thing that people carry with them. A companion that takes notes, does accounting, gives reminders, handles 1,000 personal tasks?”  

Ans : Paul Allen, co-founder of Microsoft

Q2 .Name the company and the metric it created that measures research spending divided by gross margins for each new product line. This helps it to focus its resources on innovations that maximise profits. 

Ans : Hewlett Packard and Research Prodcutivity 

Q3. Smilemakers is a division of which company? 

Ans : Staples  

Q4. An Indian company recently introduced a brand positioned as an emergency lemon refresher. Name the brand and the company. 
 

Ans : LMN by Parle Agro

Q5. Which brand claims that it is the world’s largest selling non-Scotch whisky?

Ans : Bagpiper  

Q6. The co-founder of a consumer products company sent one of his products to a lab in New York for analysis and got back a report which said that the product had only .56 per cent of miscellaneous particles. This prompted him to come up with what became a well-known catch phrase for this product. What’s the phrase? 

Ans : Ivory soap is 99.44 % pure, it floats
 

Q7. Mahatma Gandhi called it one of the few useful things ever invented. Name it.

Ans : The Singer Sewing Machine 
 

Q8. In which journal was Parkinson’s Law first published? 

Ans : The Economist 

Q9. The birth of this brand goes back to 1921 when a school teacher and local candy shop owner was inspired by a little boy’s inability to decide between ice cream and a candy bar. Name it. 

Ans : Eskimo Pie
 

 -    G. Mohan

Mobile VAS: The Music of Money

Which is India’s largest music company? Clue : It’s not Saregama India or T-Series. Answer :- It is Music Bharti , the mobile value-added-services wing of Bharti Airtel. Rediff  reports:

” Music Bharti has become the largest music company in India, overtaking Saregama India Ltd  in terms of revenue,” Bharti Airtel’s Deputy CEO Sanjay Kapoor said.

While Kapoor did not disclose the exact revenue earned by Music Bharti, which provides music services like hello tunes, call-back tunes and music on demand, Saregama had a annual revenue of about Rs 150 crore (Rs 1.5 billion) in the fiscal ended March 31, 2008.

A closer look into the advertising messages of major mobile services companies indicate the focus on value-added services. Aircel TVC has MS Dhoni advocating the use of Mobile phone for locating a hotel, making air bookings, cricket information and downloading music. Vodafone through its new TVCs which are being aired frequently during IPL matches is using the newly created characters Zoozoos using the various VAS provided by Vodafone. The latest Airtel TVC also has Madhavan and Vidya Balan on vacation in a tent, subscribing to the astro service, again a VAS.

With India having reached a mobile penetration of over 30% and urban centres reaching saturation level penetrations, all mobile companies, new and old are looking at VAS to differentiate as well as to enhance their ARPUs from the existing customers.

In a related news item in Deccan Chronicle, the size and growth rate of mobile VAS market in India are reported as :

“Mobile VAS industry is expected to generate sales of Rs 11,000 crore. It will achieve a compound annual growth rate (CAGR) of 44 per cent in the next few years. As of today, 60 per cent of the content of mobile VAS comes from the audio downloads.

In his blog, Rajesh Jain, an Internet entrepreneur , who has business interests in providing content and services to cell phone service providers, while giving a detailed breakdown of the market size for various services, makes a key point

” What is touted as a $1+ billion industry (what subscribers pay) is in reality only a $200 million industry from the VAS providers point of view, thanks to the skewed revenue shares between the operators and the VAS players.”

When 3G services are rolled out al over India the market for Mobile VAS would expand and  go beyond the frivolous to more useful services, for which customers would be willing to pay.

- G. Mohan

Is Tata Nano Booking Figure Anything To Crow About ?

Tata Motors has announced the booking figures for Tata Nano which closed on April 25. The company has issued a press release that they received 2.03 lakh bookings. Since the company will issue allotment dates for 1.0 lakh cars only, it can be said that the oversubscription was more than two times.

However, given the hype surrounding the model and the media projecting it as a game-changer, the response received is rather lukewarm. Tata Motors had sold over 6 lakh forms through their various channels, yet only a third of the applications were submitted. Industry analysts had estimated that there will be at least 5 lakh bookings. Even BusinessWeek in a recent story titled “Why Indians are thrilled about Tata Nano” had estimated that the bookings will be over  3.5 lakh. The actual numbers turned out to be far less.

In terms of the models preferred, the most expensive LX model got 50%, 30% for the mid-priced CX model and only 20% for the lowest priced model. Readers may recall, it was the lowest priced model which came close to the Rs 1.0 lakh dream car of Mr. Tata.

Some of the reasons which may have led to the poor response as analysed by TOI is as follows:

It is believed that the high booking amount fixed for the Nano, as well as almost no chance for any customer to test-drive the car, could be among the reasons for this subdued response. Uncertainty among people on whether they would be selected in the draw of lots, considering that Tata Motors will deliver only around 50,000 units in the first year (starting from July) and that too on a scattered basis, could also act as a dampener. The fear associated with buying a new model, that has not yet proved its actual road worthiness, might be another reason.

In addition, to the above reasons, I would like to add the huge uncertianty surrounding the survival of Tata Motors because of its debt overhang may have been weighing in the minds of some of the buyers. Also, the fact that Tata was going to use the booking advance to build the Nano factory did not go down well with some buyers. Tata was acting like a typical real-estate developer, who shows a model flat, takes bookings before even starting construction and then using the booking amount to build the flats using the customer’s money. 

 

The premium LX version getting better response than the base version also indicates that the analysts and Tata himself expecting that millions of two-wheeler owners will aspire for a low-priced car like Nano seems to be a myth. Nano for the present is only snatching away market share from Maruti-800/ Omni and second-hand car buyers and not from the two-wheeler market.

 

When Nano comes on road and the factory starts producing to full-capacity, it will be interesting to watch the market dynamics.

 

- G. Mohan

A HOT NEW VERTICAL FOR THE PLACEMENT INDUSTRY

If appintment pages in the newspapers are anything to go by, I think, i have now a sense of the current  trends in the job market.The number of advertisements is a far cry from the heydays of 2006-07 and most of the advertisers are educational institutions, looking for faculties.

It looks like corporate executives too are being sought after  for faculty jobs in engineering institutes and B-schools, reports DNA :

“ Marcel Parkar, chairman of Bangalore based HR solutions company Ikya Human Capital Solutions, said, “Institutes need good faculty with practical experience to produce quality students.

There are several professionals looking for a change in career as there is not much advancement happening in their current corporate environments. People don’t mind taking lower salaries but they want stability.”

More than the institutes needing the faculty or the executives looking for a career switch into academics, I feel it is the placement consultants, who need a new vertical to combat the slowdown, which has affected their business badly.

The same story mentions that TMI, a leading placement firm, has launched a faculty practice.

“Hyderabad based talent management and talent acquisition company TMI Group has started an initiative called Faculty Practice, which would help engineering and MBA professionals find teaching jobs in private institutes.”

The faculty crunch in B-Schools and engineering colleges is real. The need for experienced professionals to bring in their real life practical knowledge in the class-room is also well accepted. But not all executives are likely to make a smooth transition into a faculty position. Least of all are the corporatewallahs who see an academic job merely as a stop-gap arrangement.

As for the placement firms, who are used to fat commissions of 25-30% annual CTC of the recruit as commission, dealing with the educational institutions may mean bringing in some pricing innovations as most educational institutions are still comfortable following traditional modes of recruitment through print advertisements and referrals.

- G. Mohan

ICICI Bank : No Woman, No Cry

ICICI Bank reported poor results for the Q4-2009. Its Q4 net profit declined by 35.29% to Rs 744 crore versus Rs 1,149.8 crore in the same period of last year.

The bad news at the ICICI Bank doesn’t stop there.

The well developed top team at ICICI Bank seems to be coming apart, as the current CEO, K.V.Kamath retires this April. By choosing Chanda Kochar as his successor, Mr Kamath seems to have set a cat among pigeons.

The two other contenders for the top-post were Shikha Sharma, MD of ICICI Pru-Life and Renuka Ramnath, the MD of ICICI Venture, the private equity arm of ICICI Group. Both of them are slated to leave the  ICICI Group. Ms. Sharma has already been appointed as the CMD of Axis Bank. Ms. Ramnath is rumored to be setting up her own PE firm. Visakha Mulye is tipped to be her successor.

The churn at ICICI has set me thinking about women managers. In a recent INSEAD study, it was reported that

The good news is that in a study of executives, women did better than men on several measures. The bad news is that women fell significantly behind in one key area: vision 

 Apart from the vision problem, it looks like women managers may have great difficulty in working for a woman boss, specially if they had been peers.

 - G. Mohan

Doing an MBA : An Investment Analysis

 

This is that time of the yea when the B-schools send out admission offers to the selected students. The Economic Times (ET) has reported that the leading B-schools have already finalized their lists. Getting selected in a top B-school like an IIM is certainly very difficult and is prestigious too. The extent of competition is so high, that out of 2.40 lakh candidates who took the CAT exam, 0.14% or 315 students made it to IIMA. ET says that 91% of the students selected by IIMA are engineers. 

 

 

Until recently, the decision to do an MBA was a virtual no-brainer. In the last one-year, two things have changed, which makes the decision a difficult one, particularly for an engineer who has a good job. The fees have gone up and average salaries of MBAs have gone down. 

 

 

Firstly, the fees have been increased considerably. IIMA announced last year a steep hike to Rs 11.5 lakh for the PGP and followed it up with another hike of Rs 1 lakh , making it to Rs 12.5 lakh for the two-year course. IIM-B also has increased the rates by Rs1.5 lakh to Rs 11 lakh. IIM- C which had kept it rates significantly lower has also doubled the fees to Rs 9 lakh per student. The other IIMs, L, I and K have also increased the fees. ISB  which has always been the most expensive B-School in India has also increased the fees to Rs 16.5 lakh. The Tier-II schools also have increased the fees. For the purposes of this post, let us take that on average a student needs to spend to Rs 4 lakh per year on fees alone. To this add, living expenses of  Rs 1.5 lakh per annum.

An engineer with 3 years experience in a leading company, ( the preferred candidates in most B-schools), would surely be already earning Rs 4.5 lakh p.a. If the engineer leaves his job, he/she would forgo Rs 10 lakh of income. Assuming, the engineer would have got hike and bonus in the second year.

To this add the expenditure of preparing for an MBA entrance. This is not insignificant. A minimum of Rs 1 lakh. 

 

 

The total investment incurred on the 2 year MBA comes down to Rs 22 lakh, including  Rs 10 lakh in opportunity cost, due to loss of income. In the  past, the difference in salaries between an engineer and a B-school graduate was very high. With the global financial crisis the top-paying jobs have reduced considerably. The average salaries in campus placements, as reported by the IIMs, have fallen by 25-30%. IIM-A has reported that the average “domestic salary in 2009 placement was Rs 12.17 lakh p.a. The average salary reported by IIPM is Rs 4.2 lakh p.a. For the purposes of our estimates, if we take that the average salary at a Tier-II B-School for an Engineer-MBA is Rs 7.5 lakh p.a.. Please note that this is the average, indicating several MBAs who will be hired below the average. Public Sector Banks for e.g pay no more than Rs 4.5 lakhs p.a. 

 

 

Thus, the difference in the salary between an engineer and an average engineer-MBA is just Rs 2 lakh p.a. The engineer if he/she had continued in the good company would have reached Rs 5.5 lakh p.a. By spending two years at the B-school and incurring Rs 22 lakh in costs, the additional income is Rs 2 lakh p.a.

 

 

The payback period for recovering the money invested in a B-school is as high as 11 years. Even if one assumes that the rate of increase is higher for an MBA, the payback is not less than 8 years. If an MBA starts at a below average salary levels it is likely that he/she would never recover the investment made on an MBA.

 

 

 

While the case for joining the top IIMs remains strong, the case for Tier-II schools is beginning to get weak particularly for Engineer-MBAs. My advice:

 

To engineers with experience  -stick to top10 B-schools only.

 

To fresh engineers with a job offer on hand -do not go beyond top 50. B-schools only.

 

To others – use  the time spent at a B-school productively while the job market goes into hibernation and hope that by the time you pass out the economy would return to its full speed.

 

- G. Mohan