A to Z of Subprime Crisis

This article was also published in Gulf News, UAE's leading news paper.

***************************************

Clarence Nathan was a man with three part-time jobs who earned about $45,000 a year, and yet a bank loaned him $540,000. The bank never checked his income.

What happened that diluted the most basic rules of lending? What happened that made the banks open their coffers without bothering to even consider the risks? What were the brokers and bankers that made all this possible thinking while showing their generosity to those least deserving of the loans?

When we first heard about the subprime crisis we would’ve thought it had to do with the housing industry. However, it had less to do with that and more to do with financial services industry – and the people who were financing those houses.

The crisis really starts with what some researchers have started calling ‘The Global Pool of Money.’ This is the entire world’s investments: pension funds investing for people’s retirements, insurance companies investing our premiums, governments’ central banks investing their nation’s wealth. This global pool is estimated to be about 70 trillion dollars. This amount is more than entire money spent by everyone – individuals, companies, governments - all over the world in a year. So, this global pool of money is a huge amount of money.

We also have a group of people called the investment bankers whose job is to watch over that money. They have a twofold task to perform: not to lose a penny from the pool and to also make it grow. For a long time, they made this pool grow by investing in very safe bets like US treasury and municipal bonds. But right before the actual story starts, something happened – something really big. This global pool of money got too big too fast. In fact, it doubled between the year 2000 and 2006. The scale of this proliferation could be gauged by the fact that this global pool took centuries to reach 35 trillion dollars and just six years to double up. The major reason for this humungous growth was the sudden growth in the wealth of many historically poor countries like India, China, Brazil, Gulf countries, etc. These countries banked their profits and looked around the world for ways to invest them. So, suddenly there was twice as much money in the pool waiting for investment. However, the world wasn’t ready, simply because there weren’t twice as many good investment options. Another parallel development was Alan Greenspan’s move to reduce the US Fed interest rate to one percent, thus making US Treasury bonds – the then darling of investors - not so lucrative for the international investors. So this global pool looked around for options and found one in the US housing market and a special bond created by the Wall Street. This bond just couldn’t produce enough profits to keep all the investors happy and the pressure of generating ‘good’ profit figures just kept building up. More and more international investors wanted those bonds than the investment firms like Morgan Stanley, Bear Stearns, Lehman Brothers etc. could actually produce.

This is how the investment banks produced the financial magic of turning mortgages into bonds. They buy up all the housing mortgages – thousands of them – and pool them all together. That way, they had this constant stream of mortgage EMI payments coming to them every month. They would then sell shares in that stream to global investors. That is how you create mortgage backed security or mortgage backed bond. Now, between 2003 and 2006, US housing market was growing so fast that all the global investors were itching to get a piece of that action. But there was a problem. The problem was that to make a mortgage backed security, you need a mortgage – and there weren’t enough mortgages. By 2003, with very low interest rates, all the people with a steady income who could afford mortgages – and were considered safe borrowers - had already taken those bonds. They didn’t want to take any more bonds. But this global pool of money was hungrier than ever for these mortgage backed bonds. So Wall Street started lowering its standards for offering such loans.

It used to be that to get a mortgage, you had to prove that you made enough money, that you had a steady job, that you had some assets in banks. But starting around 2003 onwards, Wall Street started to loosen up a bit every month. One month, banks would say that buyers don’t have to prove how much they make, they can just state how much they make and we’ll trust them. The next one was a No Income Verified asset; so you don’t have to tell the people what you do for a living or how much money you make – all you have to do is state that you have a certain amount of money in the bank and we’ll trust you. Then the next one that came was No Income No Asset (NINO) loan wherein you don’t have to state anything; you just need a credit score and prove that you’re living. Even the latter was optional in some cases like those in Ohio where 23 dead people were issued mortgage loans. This NINO loan is now retrospectively infamous as ‘The Liar’s Loan.’ Within the banks, there were people getting sick to their stomach at giving such loans. They fought tooth and nail with their sales force and bosses to stop offering such loans. But all they got were cold shoulder replies like ‘Others are offering it, we’ve to offer it too. The global investor has some loose cash and if we don’t use it, somebody else will. We’ll get more market share this way. House prices are booming and everything is going to be fine.’ All of this was happening under the assumption that US house prices would always appreciate. So even in the worst case if someone defaulted, the impounded house would be a bigger asset with the bank. That assumption proved very costly.

In the old days, such mortgage companies would’ve held on to these loans for years - until they were sure that the mortgagee would be able to pay - before selling these mortgages to Wall Street. In the new system, they held them for a month or two and then sold it to Wall Street – all that risk was Wall Street’s problem. Even Wall Street wasn’t too concerned because it just passed the risk to the global pool of money – all the global investors. The irony, however, is that Wall Street also wasn’t particularly cheating on these global investors. They had complex computational models that were constantly monitoring the data to assess the risks of the bonds. That data told them not to bother since mortgage foreclosure rate was one or two percent and the models were designed to perform well even on a foreclosure rate of ten to twelve percent. But this conclusion was way off because all the data they were looking at in 2005-06 for the loan repayment was years old –and was positive because the old bonds were issued to qualified people who were duly paying them back. Then there were companies like Dynamic Credit that bought and re-packaged those bonds into a complex financial product called Collateralized Debt Obligations(CDOs) and sold them to these global investors.

This finishes the chain which now looks like “Individuals taking mortgage -> broker -> small bank -> Investment Bank (Wall Street) -> thousands of mortgages in one big pool -> shares of monthly income called mortgage backed security -> repackaged into CDO -> global investors”


When it all came down at once, these pools started showing a foreclosure rate of around 15 to 50%. Therefore, such bonds then started losing money – taking with it, everyone involved. Four million Americans facing the foreclosure, hundreds of mortgage companies are now bankrupt, hundreds of thousands of people have lost their jobs. IMF has estimated that banks and investors could lose around a trillion dollars.

But everyone involved was not exactly foolhardy. Companies like Dynamic Credit refused to buy the bonds that were outright risky. They thought they were being conservative – yet they lost millions, even billions. Almost everyone involved in this knew that something weird was going on. The deals they struck did not feel right. But none of them really questioned things. Why would they? Everyone involved was making an awful lot of money.

The nosediving of all the share markets the world over is just the symptom of a disease. The disease is imprudent financials practice of flouting the basic pragmatic rules. As David Moore, CEO Moore Investment & Holding, Inc, wrote, “Our efforts will all be for naught until two things happen:
1. investment banking and mortgage lending institutions follow strict, conservative and prudent regulations regarding investments and lending and
2. the American people are not allowed to obligate themselves to loans they cannot afford. It would be nice to get people to conduct themselves with their own financial interests in mind, but we must regulate the areas that we can and not give financial access to people who cannot prove a reasonable probability that they can repay loans, and we must regulate business so they don't engage in these unsound lending practices for personal and institutional greed ever again.”

Main Sources : http://hbswk.hbs.edu/item/6035.html

and http://www.npr.org/

Is customer really the king?

“Customer is the king” – is a cliché used ad nauseam in business circles. With the kind of buying options available today in every walk of life, even a casual glance at the market only corroborates this claim. Why then do we need to question the apparent truth? That is because it’s only the casual glance at the market place that brings about this belief. The cliché is derived through a static perspective wherein we observe only the market-place instead of people. To question this cliché, we need a dynamic perspective that entails we follow customers through their day to day lives.

This apparent truth would’ve been the absolute truth if customers and vendors were a mutually exclusive lot. This, however, is not the case. In this complex society, any given person is a customer to someone and a vendor to someone at the same time. The increase in options makes the customer more demanding while every increased demand means someone somewhere has to slog at work. The vicious circle ensures that almost everyone works harder, as a vendor, to meet those never ending deadlines. The bigger ‘King’ a customer becomes, the more slavish every vendor in that industry becomes. The circle ensures that the monarchy of the customer, however, is short-lived as he soon assumes the role of the vendor.

An example might help elucidate the point. Consider the hospitality industry. A man is on vacation with his family in a five star luxury hotel. The man expects top class service from the hotel. He ‘demands’ continuous Wi-Fi access, spic and clean rooms, gyms, spas, pickup & drop, travel advisories, smart attendants on their toes and not a semblance of discomfort. Anything less and he threatens never to come back to the hotel. So the hotel makes receptionists, cleaners, waiters, drivers, accountants, IT technicians and many others work overnight in shifts. For every such customer, vendors across many such verticals and/or horizontals are kept on tenterhooks. The hotel wakes up an IT techie at 3 a.m. to fix the Wi-Fi for this esteemed customer having problems watching ‘online streaming videos’. The IT person’s family is frequently troubled with such support calls at night. Often, the family can’t sleep properly, affecting their daytime activities. This IT person is generally competent but badly overworked and this support call is the last straw that breaks the camel’s back. He is not able to come and fix the Wi-Fi. The customer on holiday is pissed off, creates a scene and books a room in a rival hotel. The first hotel chain, having lost its ‘kingly’ customer, cancels the contract with the IT vendor providing the support people. The IT vendor that had a contract of exclusivity for the hotel chain in the entire country loses its major customer and takes a bad hit. The news spreads the next day and its shares nosedive. This company is an IT venture of a famous business house of the country. The parent company calls an urgent meeting with all the CXOs to address this exigency. Coincidentally, the hotel guest in question gets a call from his company informing him of cancellation of his vacation and asking him to report immediately. He rues his predicament, not knowing what in the world went wrong to have his vacation curtailed. He is the CFO of the parent company.

In the real world, the circle may not be so small or the strings of events may not be so fortuitous but what cannot be argued is the fact that you begin the trail that ultimately leads back to you. In other words, there is nothing that is not your business. As Justin Timberlake said, “What goes around, comes around.”

So the next time you feel like ditching a vendor for a small lapse of service, think twice: you might be creating a world that ruins your own holiday.

Redefining Success of MBA

Recently I finished my MBA. As I landed myself a job during the placement week at my college, I guess I didn’t do badly by the conventional Indian definition of success at B-Schools. But is getting the job at the end of the term the only criteria for success in MBA? My experience says that getting a job is just one of the important parameters, especially in the Indian context. But then, is there more to MBA than getting the job? Yes, there is. MBA as a course is an experience worth going through. A course that teaches you valuable lessons in teamwork and interpersonal skills – something other courses cannot boast of. Having gone through this experience before the multitude of you all aspirants of MBA, I technically become your senior. Seniors are like classics – the books that everyone appreciates but no one reads. We seniors are like those priests who preach what they themselves don’t practice. Let me share with you some such gyan atleast some of which I could not exercise but on the hindsight, I wish I had.

Soft skills courses are important - We need to change our smug ‘know-all’ attitude towards soft-skills courses and those that deal with Human Relations. The problem, according to me, is that we perceive them to be synonymous to Communication Skills. And isn’t our selection into one of the premiere B-Schools of India proof enough of our good communication skills? But it is this very haughty attitude which is our undoing, especially because communication skill is just a part of the whole and not the be-all and end-all of it.

Groups – There are two ways a group can be formed: either college decides your group or students decide their own groups. This second group is more coherent since people generally handpick the ‘apparently’ better students of the lot. But such a selection has two problems the first of which is a proverbial aphorism – “Don’t judge a book by its cover.” The second problem is that people tend to choose only those they are comfortable and friendly with. So, the friendly, humourous and fun-to-be-with people get picked up faster while those perceived as nagging, inquisitive or overly-studious recluses are left out. This precept sometimes falls flat on its face because of the second rule, “The most sincere and knowledgeable people are not often the best people to hangout with.” Students realize their fallacy when they find that people who are pompously fun-to-be-with are not the best assets in a team. Flamboyance, in most cases, ends up being antagonistic to sincerity since the people who actually work in a group are rarely high profile. It is here that the group formed from the “left-overs” who were partners more out of compulsion than choice do a better job by working silently and sincerely, as is their wont. You need truckloads of serendipity to end up with a good group where almost everyone contributes. However, it’s only human to have a black-sheep in a group of six. So think twice before forming the group. The reserved, boring, next door nerd, & not the Mr. Flamboyant, might just be the right guy who’ll save your project.

Love blooms – It is only natural that clouds part, flowers blossom, angels sing and bells ring when a guy meets a gal. Please apportion a buffer for such an eventuality. God save the groups whose members fall in love with one of the batch-mates. No amount of coaxing, rebuking or imploring can get them out of their self-imposed honeymoon for they prefer to stay in that self-denial state of romantic hangover. After some initial altercations, you’ll learn to ignore and not expect from them. The faster your accept and adapt to this change, the better for you.

I want to Top – Our Indian education system has so deeply entrenched in us the association of self-worth with the marks and ensuing recognition that we almost forget that MBA is a different ball game altogether. You’ll find people who’re crazy after marks and those who just don’t give a damn. I would say, it is dangerous to stay in either of the camp. Going too much after marks would force you to stop looking for what you like and what would you make a career from. Your view of success would simply be a short-sighted rank. We have in our batch some commendable people who’ve been toppers all through their lives. But they say, they’re here not for rank. They’re here to discover what they want out of MBA. That should be your aim. At the same time, it is dangerous to lurk at the bottom of the pyramid. You need to ensure that you don’t let your ‘lack of concern for marks’ trickle you down to the bottom. Only a fine line separates being not concerned and being careless. Make sure you don’t cross that line. Staying somewhere in the middle should keep you in good stead and help you focus on what you want to do.

Teamwork - The Indian schools and undergraduate Institutions are partly to be blamed for laying no emphasis on teamwork. We need to inculcate the importance of teamwork in children at an impressionable age. In their quest for ‘individual’ marks and grades, Indian students have forgotten to work for the holistic good. It is amazing what you can achieve if you don’t care who gets the credit. But in the corporate world, your progress depends on your visibility. So how effectively you balance the two contradictions will decide how far you go. We still need to ensure that we communicate to our teams that while claiming credit for something is welcome, plagiarism is not. Soft-skills, ironically, have a very important role to play here.

Presentations – No matter how tempting it is, don’t get into a quid pro quo arrangement with the class to avoid challenging questions post presentations. It is important to learn to answer critical queries without getting defensive. You should be able to achieve this easily if your focus shifts away from marks.

Zero in - Zero in on what you want to do post MBA. Every subject being taught here is a potential career for you. Find out which subject appeals to you most, irrespective of your specialization. Don’t worry if you don’t know what role to get into post mba. Most people don’t and you’ve a huge company here. But look at every subject with an eye for picking your career out of it. You may choose to focus more on the subject of your interest and delve deeper into it.

Competitions - Without fail, take part in the B-school competitions. They’re not just important for you as a person, student, businessman or a manager but also for your college. These competitions will improve the scope of your thought process if not anything else.

Hope all the future MBAs can learn from my experiences and mistakes. I note this down on my blog so the future batches of MBAs have a different set of mistakes to commit and learn from them rather than reinvent the wheel themselves.

The Spirituality of Business

“Never talk to me about profit, Jeh, it is a dirty word,” snapped Jawaharlal Nehru, India’s first Prime Minister, at JRD Tata, India’s premier business Tycoon of the yesteryears, when the latter tried to explain that Indian public sector needed to make profits.

Business and ‘profit-making’ ideology have been the favourite ‘whipping boys’ of our society since time immemorial. While philanthropy was always admired as an epitome of altruistic virtues, business was relegated as a nadir of selfish vices.

In ‘The Wealth of Nations,’ Adam Smith, regarded as the father of Economics, says something to indirectly corroborate this thought of the society: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

A deeper dissection of any person’s actions would reveal that the final purpose of every human action or inaction is to find happiness for himself or herself. Why does a kind hearted person help others? Why does a selfish man help himself? Why does a crook cheat? Why does a lazy person believe in inaction? Why do people fall in love? Why do people run after money? Why do businessmen hanker for profits? Whatever be the intermediate motive in the above actions or inactions, their final aim is happiness. It is in this final purpose of any action that the difference between philanthropy and business starts to dissolve.

The glaring and obvious difference between business and charity is that the overt beneficiaries of business are the owners while the same for charity is the society at large. But what misses our eyes is that for business the covert beneficiary is our society. Since happiness is the common denominator and the final aim of every action of every human being, a philanthropist becomes as much a covert beneficiary of his own act of charity as community becomes for business. And so - when both are working for their own happiness - why should a businessman be denounced and a philanthropist be eulogized? What society as a whole has failed to realize is that business and charity are not antagonistic but complementary to each other. Whether explicit or implicit, both cater to the betterment of our society in totally ‘antagonistic’ ways. Businesses directly impact the “employable” workforce through which the benefits trickle down to their families. But businesses don’t bother about the downtrodden. Charity and non-profit organizations pick them up and make them employable, from where some businesses absorb them. Consequently, both business and charity are the obverse side of the same coin. They’re like two brothers where one is ruthless in execution while the other is mild hearted and caring. But the contribution of one over the other towards the betterment of society cannot and should not be underplayed. Interesting it is to note that ‘Corporate Social Responsibility’ (CSR) is gradually blurring this difference between business and charity at the intermediate level as well.

Thomas Edison invented the electric bulb. However, had it not been for the business interest of someone, the society would not have found an efficient way of distributing it to the larger mass. History is abound with scientific inventions that changed the face of mankind. But without the able support of businessmen, inventions would never have become commodities we have so gotten used to. Ironic as it may sound, the beauty of business is its ruthlessness. If markets are left by themselves, only the most efficient and the most effective businesses – barring a few exceptions like monopoly or unscrupulous practices where government regulations become antidotes - would survive; and efficiency introduced in business processes leads to a betterment of human society in the longer run. This is where businesses start touching the spiritual chord of philanthropy: “Service to mankind is service to God.”

Philanthropy and spirituality believe in serving people irrespective of their caste, religion, race or any other form of discrimination. Business precept also commands serving the customer by turning a blind eye to any of these discriminatory factors. The essential idea behind Globalization is that businesses don’t recognize the political boundaries and divisions that countries form. A business will go and spread its roots to countries where it sees an opportunity - political rivalries notwithstanding. For example, when Nato was bombing Serbia in 1999 both sides could eat at McDonald’s during the breaks. A business knows no divides.

McKinsey’s Eric Beinhocker in a brilliant, thought-provoking book, ‘The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics,’ states that “The economy is a marvel of complexity, yet no one designed it and no one runs it.” ‘For any living creature,’ he adds ‘the evolutional game involves obtaining resources to live long enough to procreate and rear its young. Business is humanity’s successful effort at obtaining those resources.’

Abraham Maslow’s hierarchy of Needs proposed in his 1943 paper ‘A Theory of Human Motivation’ contends that as humans satisfy basic needs, they seek to satisfy successively higher needs that occupy a set hierarchy depicted here as a pyramid consisting of five levels. The basic concept is that the higher needs in this hierarchy come into focus once all or most of the lower level needs are satisfied. As mankind satisfies higher needs, it’ll find a need for self-actualization which is the essence of spirituality.

So successful have businesses been that much of humanity no longer has to focus on staying alive. Thanks to business, our basic existential needs are satisfied and we’re moving towards higher needs leading up to self-realization. Business is hence an indispensable cog in the wheel of human ascension up the spiritual journey.

Marketing Gap

This article lists my learning from Prof. Ram Kumar’s Marketing sessions and my thought extrapolations on the same. The professor left us with a few ideas and hints to provoke our thinking. This article is an attempt to finish the thought that he kindled.

Scenario 1: How much does an average middle class person spend for the trousers and jeans he wears? Say Rs. 800 to 1000

How much does the same person spend for a shirt, T-shirt or a top? Say Rs. 500 to 700.

And how much does he/she spend on the undergarments? Hardly Rs 30.

The discrepancy is for all to see. People spend 70% of their life in their undergarments. Some people spend even more time in them; they take them off only during ablution and defecation. The undergarments are essential for our comfort and hence make the foremost contribution towards making us confident. If you doubt the confidence part then try wearing a misfit. Also, wearing a good quality undergarment prevents you from so many disorders. And yet we spend so less on them than the outer clothing we wear.

My take:
Isn’t this ‘individuality’ and ‘healthful living’ a marketing gap that undergarments companies should try to tap? Shouldn’t these companies appeal to every individual’s ‘dormant’ desire of living the life for himself or herself for a change?

Scenario 2:
On a normal day, how much time do we spend in the
washroom? 15-30 mins.
drawing room? Max 1.5 to 2 hours
Kitchen? Gender specific but say max 3-4 hours
Bedroom? Assuming a normal person sleeps for 8 hours, we spend atleast 9 hours there.

Now the critical question: which part of our house do we spend maximum on?

Undoubtedly it is the drawing room, right? We spend the most on that part of the house where we don't even spend our maximum time. Compare the money we spend on the drawing room sofa sets and their smooth velvet cushions with the amount you spend on the bedroom mattresses and pillows. Guests come and sit in the drawing room. That is the place that needs to be at its best then. Why should we spend on our bedroom where we go only to sleep? Isn’t it a stark contrast that speaks volumes of the neglect we subject ourselves to? Don’t we pay the price of this through stiff neck at best and spondylosis at worst? Isn’t this the kind of gap that furniture and mattress companies like Ikea need to tap?

My take:
As a society, we’ve evolved giving too much importance to others. We grew up getting conditioned to doing what our parents recommended and not doing what they forbid us from doing. Parents learnt those lessons from their parents and so on. But the essential basis of all those dos and don’ts has been the perspective of others towards our actions. People in our society have evolved wondering what other person in the society would think if they do this and not that. This overbearing importance given to others has forced us to undermine the importance we ideally should’ve given to ourselves. Somewhere, the huge disparity in our spending on our personal comfort through undergarments vis-à-vis the outer clothing or on our personal feel-good factor through bedroom spendings vis-à-vis those on drawing rooms is a fallout of this societal psychosis.

Scenario 3:
How much would the following people cost per month?

A good cook: Rs. 1000
A washerman: Rs. 800
A 24*7 house cleaner: Rs. 2000
A sex worker: Rs 10000
A Personal Relation manager: Rs 10,000
A 24*7 nanny: Rs 7000
A secretary to remind you of your important appointments and deadlines: Rs 6000

Now compare and contrast all these against the cost of a housewife.

My take:
Ergo, can the contribution of a housewife be considered as the sum total of all the above costs that you save? What about the intangible gain of peace of mind that comes from not having to worry about these scores of daily chores which helps you focus better on your core competence which is to become an efficient bread-winner for the family. Pardon me for the crudity of the comparison. While comparing the monetary value of house-wife is the last thing one should do, this comparison nevertheless brings out the stark contrast like none other. If only we could realize the qualitative value that a house-wife brings to our life, we would start looking up to her and give her her due rather than relegating her to a position of nonentity. The housewives themselves need to realize what they’re to the family. That would help them value their self-worth and respect what they do.

Marketing helps change people’s outlook. Certain things were never meant to be a certain way. But societal dynamics force people to make rules out of exceptions and vice-versa. There are always some innate human desires curbed under societal forces. Companies that identify such rules that conflict with the innate human spirit need to bring out and emancipate those souls hankering to break the shackle by attacking that dormant, implicit need. Companies need not go too far to innovate in terms of new products that generate newer needs. There are enough dormant needs that are curbed under the societal forces. The sooner the companies target them, the happier the society at large would be.

The irony of Soft-Skills

Our 2006-07 batch of SP Jain is halfway through the designated one year Global MBA program. We’re done with our stint in Dubai and are taking a much needed break in India before we move on to Singapore for the second and last part of the program. Our last term was grueling to say the least and going by what our Dean Dr. Vijay Sethi says, our stay at Singapore is to beat Dubai stint by miles, for now we’ll be robbed of even the weekends that gave us a little bit of a breather in Dubai.

And what a learning it has been! Just yesterday, I was discussing with my brother, a commerce graduate, the Macroeconomic nuances of pegged and floating currency. While that might just be a fraction of the ocean that Macroeconomics is, the discussion was something I couldn’t have done without undergoing the Dubai SPJCM experience. It has been a whirlpool worth being sucked into.

However, was there anything we could’ve done differently? Was there anything that we students as a batch could’ve handled better? The answer is an unequivocal ‘yes.’ We need to change our smug ‘know-all’ attitude towards soft-skills courses and those that deal with Human Relations. The problem, according to me, is that we perceive them to be synonymous to Communication Skills. And isn’t our selection into one of the premiere B-Schools of India proof enough of our good communication skills? After-all, didn't we all take exams like CAT, GMAT, wrote case-studies and essays, underwent Group Discussions and Personal Interviews to get selected for this program? A pretty comprehensive selection procedure I’m sure all would agree. May Hell unleash its fury now on the imprudent soul that still doubts our communication skill. But it is this very haughty attitude which is our undoing, especially because communication skill is just a part of the whole and not the be-all and end-all of it.

Our program at SPJCM entails us to work in three different groups for different purposes. The first one is a special project group for which we have the liberty to choose our team within the first couple of weeks of the commencement of the program while the other two groups are preselected for us. This group is more coherent since people generally handpick the ‘apparently’ better students of the lot. But such a selection has two problems the first of which is a proverbial aphorism – “Don’t judge a book by its cover.” The second problem is that people tend to choose only those they are comfortable and friendly with. So, the friendly, humourous and fun-to-be-with people get picked up faster while those perceived to be nagging, inquisitive or overly-studious are left out. This precept sometimes falls flat on its face because of the second rule, “The most sincere and knowledgeable people are not often the best people to hangout with.” Students realize their fallacy when they find that people who are pompously fun-to-be-with are not the best assets in a team. Flamboyance, in most cases, ends up being antagonistic to sincerity since the people who actually work in a group are rarely high profile. It is here that the group formed from the “left-overs” who were partners more out of compulsion than choice do a better job by working silently and sincerely, as is their wont. The other two groups are pre-selected and hence more heterogeneous, both in terms of experience and attitude. You need truckloads of serendipity to end up with a good group where almost everyone contributes. However, it’s only human to have a black-sheep in a group of six.

All these above groups work on various assignments that have atleast one deadline per day. Every choice is a trade-off here. You can’t choose to work with one group without antagonizing another. You can’t please one without relegating the other. You can’t continue neglecting one for long lest you be seen as a worthless moron. Life, in the middle of all this, is a huge management game in itself. It is here that the Soft-Skill and Organization Behaviour courses pitch in. Every time a team member chooses to work for a different group, there is a conflict. Motivating them to work for you is no mean task. God save the groups whose members fall in love with one of the batch-mates. No amount of coaxing, rebuking or imploring can get them out of their self-imposed honeymoon for they prefer to stay in that self-denial state of romantic hangover. Then there are some who just don’t want to work. Then there are some credit-mongers who join the group when it’s time to stand on the podium. So what do you do for them? How do you get them to work for you, especially when you’re only his peer and not his boss?

These are the very issues of conflict and motivation that you face in corporate life. The B-school environment is a fantastic learning ground for such things. But in our self-righteous myth of omniscience for soft-skills, we fail to gauge its importance. Consequently, not a single group succeeded in motivating the Non-Performing Assets (famously called NPAs) of the teams. There, according to me, lies the single biggest scope of improvement for the batch.

The Indian schools and Undergraduate Institutions are partly to be blamed for laying no emphasis on teamwork. We need to inculcate the importance of teamwork in children at an impressionable age. In their quest for ‘individual’ marks and grades, Indian students have forgotten to work for the holistic good. It is amazing what you can achieve if you don’t care who gets the credit. But in the corporate world, your progress depends on your visibility. So how effectively you balance the two contradictions will decide how far you go. We still need to ensure that we communicate to our teams that while claiming credit for something is welcome, plagiarism is not. Soft-skills, ironically, have a very important role to play here.

Thinking like a Manager

The Indian IT companies may have made the world wake up and notice India but within the company circles there is mass sarcasm that does the rounds. The IT firms have made the word ‘bench’ a byword for ridicule and frustration among the employees. To a victim, it might cast his employer in bad light for lack of projects and demoralize him, making him doubt his own abilities and credentials. Is there a better way of tackling this problem? Is it possible to ameliorate the way a ‘benched’ employee might look at himself and the company? My attempt through this article is to answer this question in the affirmative.

Mr. M Hariharan, our brilliant Cost Accounting professor, discussed a consulting assignment he once worked on. The company in question was a paint manufacturing company. The business model of the company was to produce paints of different colours in bulk and then sell it to wholesalers. The manufacturer wouldn’t sell the paint to anyone needing anything less than 250 kgs of any colour. Shifting production from one colour to another needed a large setup time for cleaning the vessels, removing stains, drying them etc. So he would actually incur some cost in shifting production from one colour to another. So he chose to produce large quantities of a colour in one go rather than shift frequently from one to another.

Think of the problems with this strategy.
• It was cost centric and not customer centric
• Except for wholesalers, not many needed that huge quantity of any single colour
• This stretched inventory turnover as the stocks piled up waiting for a big order
• He lost out on a large number of smaller orders
• Piled up inventory would slowly entail reduced production
• Inflexibility delayed delivery to customer if the colour was not already available

All his problems were solved when he - following our professor’s advice – became more customer centric. He now produced lesser quantities of paints in one go, regularly shifted to different colours and bore the setup cost.

Think of the advantages of this model.
• There was always some amount of any given colour available for sale
• Even if it wasn’t, flexibility ensured that customers’ requirements were met
• Customer was now charged a premium for faster delivery which helped cover setup cost
• The size of the order didn’t matter so he could address all customers’ needs thus increasing his market size
• Inventory turnover was reduced as he was ready to take even the smaller orders

Inventory, as we just saw, is a necessary evil. It gives a cushion of serving an unexpected customer readily and yet becomes a liability once it exceeds a threshold. Crudely put, inventory is to manufacturing what human capital is to IT. The Indian IT companies have always been following a costing model of keeping a safety stock on ‘bench’ and charging the customers for this through overhead costs. Just like the safety stock, the employees on ‘bench’ are very critical to any IT company to overcome any unforeseen exigency. Consider the attrition in the Indian IT companies and this problem would appear even more bothersome. The shadow resource or ‘benched’ employee is thus a conscious choice not only of the vendor but also of the client.

Not many people could’ve taught us Marketing better than Professor Ram kumar did. An IIM Ahmedabad alumnus, he stretched the limit of our thought processes. He made us play a short game while explaining a principle in marketing. He asked us (about 65 of us) to close our eyes and then count from one to twenty individually with only one person speaking at a time. No one was allowed to speak two consecutive numbers. We’d restart if any two students spoke at the same time. With everyone’s eyes closed, no one knew who would speak next; you always felt like speaking next but something would hold you and you would keep quiet and then somebody would speak out the next number after some time. The game was very interesting and after a few days practice we could reach a score of twenty, to our own surprise, amidst cheers of disbelief. So what was the takeaway from this game? Two. First learning has nothing to do with this article and yet is a valuable learning - human beings communicate at the subconscious level. When our goal became the same and grew stronger with every failure, our collective subconsciousness inhibited all but any one person from speaking until we reached our goal. Second learning was a statement that the professor repeated every time we bungled and had to restart the counting. He used to say, “Let us start again. Be patient. Remember that those who are not speaking are contributing equally to our cause.” This was the statement that hit me hard and gave me goose bumps all through this game. I never spoke for the entire game just to experience the thrill of contributing through silence.

So what has that got to do with employees on bench? This game conveys the idea that even without a tangible contribution to the company’s cause, such employees’ contribution is no less than those making a tangible contribution.

Dr. Viktor Frankl, a psychiatrist and founder of Logotherapy and Existential Analysis, in his book “Man’s Search for Meaning,” talks of finding a meaning in any state of life, even in the most sordid ones, to help one live a better life. In the book, he cites an incident where unemployed youth who feel dejected, demoralized and worthless due to their inability to land a job are asked to volunteer for social service until they get a job. After realizing the worth of their voluntary work, these youth realize the meaning of their existence and feel a growing sense of self-worthiness which leads to happiness at best and reduction of inferiority complex at worst.

This is precisely where IT companies have failed. They’ve have failed, not because they keep employees on bench, but because they’ve not effectively communicated the ‘benched’ employee’s worth to the victim himself. This becomes all the more important when, as shown by above examples, an employee’s output is directly related to his sense of self-worthiness, which in turn is associated to the meaning he associates to any state he is in, be it productive or buffer. Keeping the employees motivated is a titanic task for Human Resource Department of any company. They can ill-afford to ignore a threat to motivation which is as glaring as keeping them on 'bench'. This idea should hence be drilled in their minds during the new joinee's orientation to make their state of mind and self-esteem impervious to 'bench.'

Who am I?

I am Kamlesh Acharya. Simple, isn’t it? But am I really the name the world knows me with? I guess not. So? Am I the physical body that moves around various places on earth? Not quite. I think I’m something deeper than the body. Am I the mind? Well, may be. But at times my mind works even when I sleep; do I then say that I’m working? I guess I’m not the mind then. So am I the soul? Well, may be; may be not. While these questions always rustle in my monologues, I don’t quite know how to answer them.

On 4th Aug 2006, Prof Debasis Chatterjee from IIM Lucknow visited SP Jain and took a guest lecture on leadership. While his leadership talk was inspiring, what grabbed the students’ attention most was the high Spiritual Quotient of his speech. He spoke fluently as if reading from a book; being an author of a few books would’ve definitely helped clarify his thought process. He delivered the lecture from his heart and brought the crowd to a mesmerizing introspection through his true words, insightful speech and a high SQ’ed visage to corroborate. Throngs of students just swarmed him after the lecture got over - something I had never seen in any of the previous lectures even when the guests were equally impressive and scholarly in their domain. I believe the difference here was that Prof. Chatterjee managed to touch a chord of our dormant self somewhere and the swarm supported this thought of mine. I was a part of that crowd and a mute spectator. I saw fellow students talking to him, barely able to control tears of joy in their eyes as others simply observed him and gathered the pearls of wisdom that fell from his mouth. I was pleasantly surprised to see so many people impressed with him. Like an avid businessman looking for an opportunity, I realized that the iron is hot and waiting to be struck. So, Dhruv Patel, Kush Bohra and I invited our batch-mates to form an esoteric group of people ready to introspect and look within for answers.

A digression of thought is warranted here. Be it in business or otherwise, isn’t MBA all about finding opportunities for what you want to do and executing your plan when it yields the most?

We roped in Prof. Mala Kapadia - our Human Resource Management professor – to lend authenticity and discipline to the group by forming some ground rules. She was more than happy to oblige. She took our first session and forced us to think deeper and introspect harder. She left us wonderstruck with her simple logical flow of thoughts.

After that session, we’ve had three session conducted by us – the students. We’ve discussed topics like ‘Demystifying God’, ‘True Knowledge’ and ‘Learnings from the Bhagwad Gita on Work.’

Through this group and our meetings, we might not know ‘who we are.’ But by sharing the knowledge with each other, we end up learning a lot from others’ thoughts. Through these sessions, we might not reach the core of true knowledge but we’ve started gnawing at its peripheries for sure.

An interesting incident to end with.

I offered to take the first session of “Who am I?” after Prof. Mala. I called my session “Demystifying God” and sent a mail across to the group. An eager beaver I met thereafter told me that he found the topic really interesting and wondered what I’m going to talk about. I told him to wait and watch. The impatient guy that he was, he told he would search for it. Before I reveal my reply, a small digression to surprise you is not uncalled for.

Our Marketing Management professor Mr. Ramkumar told us some statistical facts released by Google.

From within India, the most searched word on Google last year was ‘S**.’
From within the US, the most searched word on Google last year was ‘God.’

I told the edgy friend, ‘You can’t search God on Google.’

*************************************

P.S. One of the subjects that is setting tongues wagging at Harvard Business School is also on the same lines. Isn't it wonderful that what is taught by professors there at Harvard is a student initiative here at SP Jain? Check out.

First Week at SP Jain Dubai

When dreams turn to reality, the first reaction is of disbelief. Then comes the realization that you’re experiencing what you’d always dreamt of. And yet, the feeling is mixed. The ecstasy is overruled by fear; a fear that you somehow don’t belong to the place – a fear of failure; what if you don’t prove yourself from hereon?

It’s a proud feeling to be chosen to represent some of the brighter brains and smarter people of the lot. And yet, it is a humbling feeling; humbling - for no matter how smart you’re - you always have someone smarter than you here. No matter how intelligent you’re, there is always someone more intelligent than you here. Every brain has a better half here. Every pride meets its vanquisher here. Every wit has a repartee here.

I had always dreamt of doing an MBA from a premier B-school. After quite a few years of toil and unsuccessful attempts at entrance exams, I made it to SP Jain Dubai. Having worked with IT industry for a few years, I had seen IT industry from close quarters. Through projects, products and consulting, I had seen IT vertical at the micro level. I now wanted to work at the macro level. I was sick and tired of being directed by the organization; I now wanted to direct the way the organization went.

I left my home in India on my birthday. That might not seem too emotional a farewell until you know that I was spending my first birthday in ten years with my family. As fate would have it, I just couldn’t have left a day later – or earlier – as the session was starting soon thereafter.

So here I was in Dubai; dreaming, like everyone else, and visualizing how it all is going to turn out. The next day, Sudeep Jain, my batch mate, took me to the college and then to the hostel which actually is a villa.

Then started the real nightmare. I was the first person to arrive in the by-now-infamous ‘blue’ villa. The villa was being readied for the students who were to arrive that night and the preparation were running late even for them; I arrived that afternoon. I entered the premises of the villa to a shocking sight of carpenters and labourers going about their business. If it were not for the girls accompanying me to show me the way to the villa, my entry would not have surprised many and I would’ve been mistaken for another labourer at best or would’ve had to share their load at worst. I felt like a chief guest who arrived for the function before time. After a few hours of moving around like a zombie, I got some water to drink and freshen up. By late evening a group of about forty guys arrived in the villa and it suddenly was not a bad place to be in.

But that by no means was the end of villa ‘blues’. For more than a week we had a torrid time in the restrooms. I once had to ask my roommate to pass me drinking water bottles so I could wash the soap foam after the shower had so dramatically stopped when I needed it most. Restrooms were never the reason we prayed so hard. Luckily the prayers were answered and water never played truant when I was on the closet. The sale of deodorants in the adjoining grocery had suddenly seen a spurt. But thanks to our woes, I learnt some early lessons in economics – outside of my class: The increase in sale of a commodity may not always be due to excellent strategies of companies but due to unexpected exigencies of totally unrelated societal dynamics.

Our dean Mr. Vijay Sethi had, on our first orientation day, told us – perhaps very intentionally – to look at the bigger picture and ignore the teething problems. This advice stood us in good stead, for the administration issues put a shoddy picture in the initial week but the professors at the same time were excellent to say the least. I didn’t get worked up for I wondered what my condition would be had it been the other way round.

The professors at SP Jain Dubai need a mention here. They are sincerity and commitment personified. This stands true atleast for those we’ve seen in this short span. I was talking to an alumna the day I arrived at SP Jain and she told me that the best thing about this place are the professors. And I thanked heavens. A man of knowledge is of no use if he doesn’t know how to impart knowledge. The assignments, tests and group works ensure that we keep awake till late in the night. We have pre-session tests that ensure we read our stuff so there is a better class participation. But that also means, we’re kept on tenterhooks.

The other day I asked my roommate, “How many days we’ve been together?”
We both were shocked to realize that it had been only three days since the classes started. And it looked like we hadn't slept for ages.

I was to learn another management lesson the hard way. My earlier stint here in Dubai got me in touch with a few good caterers. I approached one of them to deliver food in the campus. He charged a very reasonable Dhs 5 a meal. It so turned out that he delivered so much in one meal that we ended up sharing the meal. There was such a downpour of people taking the meal that a lot of those who paid had no meal left for them. I started supervising the distribution but to no avail. I did not take lunch for two days so others who had paid could eat. It took me three days to realize the discrepancy and solve the problem. Now the students eat a meal at Dhs 2.5 which by all means is cheaper than what we get in India. I struck a golden deal for them; the flip side of this achievement was that I became so famous for food management that I was hand-picked for food committee instead of the ones I would’ve loved to be a part of.

Just as I’m writing this article, I get a mail asking the food committee to meet. My feet just can’t get ready to move on. And I plod away wondering at my predicament…

I take refuge in the thought that God doesn’t always give you what you want, but He sure gives you what you need; and I be happy - as is my wont…

Free Lunch – The Review

Ever tried reading a business page of a newspaper without a proper grounding in economics? Or reading an annual budget analysis in core jargons of economics? Felt dizzy at the downpour of jargons as comprehensible as Greek or Latin would be to a Metric fail from the outskirts of Delhi? How often you turned those pages to read politics, sports or entertainment? Did you always think that economics was the obverse side of entertainment?

Don’t give up just yet if you are starving to build a foundation in economics - sans the complexities - even though you haven’t formally studied the subject. Help is not far. “Free Lunch” is just the right sumptuous banquet to fill your belly to your satisfaction.

Introduction to economics had never been so simple and interesting. Those who couldn’t read more than a paragraph or two of core economic articles have read the whole book and released a burp of never-before-seen satisfaction after reading “Free Lunch”. Economics, suddenly, was no rocket science to them.

David Smith not only copied the second name from Adam Smith – the man who introduced the world to microeconomics - but also bettered him in teaching economics to novices in a lot simpler manner. He, very skillfully, cuts through the intimidating jargons that surround the modern economics. He simplifies the explanation to near layman language and provides very relatable instances to make the complexities look surmountable.

Why do house prices rise and stock markets fall? How does it affect us when interest rates go up, and why? What is a lesser evil – Inflation or Deflation? Does a budget deficit matter? Suddenly people, after reading Free Lunch, won’t be so indifferent to the economic jargons.

Just like any normal human being, I was always disappointed at the seeing so much poverty, hunger and sickness around me. Other than wondering at the divine plan for such inequalities, I would always search for an economic solution – to whatever extent my mortal knowledge of the subject would allow – towards resolving the problem. One solution I always thought, obviously out of my naiveté, was to distribute cash to all the poor so they could spend their way out of poverty and hunger and at the same time the society could trudge its way out of inequality and suffering.

I smugly marveled at my solution and wondered why nobody on the planet ever thought of such a solution to this problem. That was until I read Free Lunch.

David Smith, in this book, takes help of innumerable such hypothetical instances, then suggests some solution, which to a layman might look like a perfect antidote at first, and then systematically dissects the solution to show how the solution would lead to another set of problems.

Economics, as you learn through this book, is not about finding perfect solutions to grave economic problems; it is about finding a solution that would lead to least number of subsequent problems or more subsequent problems that might not warrant immediate attention.

Using one such hypothetical scenario described in the book and the incremental knowledge I gained from lapping it up, I could, all by myself, prove that my solution was not a solution at all.

An attempt at emulating Smith’s style of explaining is in order. Assume for a moment that there are only ten people in an economy. Two of them are very rich, five are middle class and three are beggars. Assume just one commodity – Rice, which is needed by all to survive. The demand for rice is generated only by the first two sections (rich and middle class) of the society as the beggars eat only what is leftover. The quantity of rice is constant and just enough to meet the demand.

Now what happens if we distribute enough cash among the beggars so they could buy their share of rice? The demand for rice suddenly jumps from seven to ten while its supply is still the same; just enough to meet the demand of seven. Now we don’t need to be a connoisseur of economics to realize that the excess demand would cause the price of rice to rise. But the price hike would be just enough to bring rice beyond the reach of beggars once again and to not dissuade the middle class from buying it. The great thing about the market is the way it brings this equilibrium. So, the sudden availability of cash would breed sudden inflation, which would leave the intended beneficiaries deprived of those very benefits.

While there might be flaws in my conclusion or the means to this end, I still have come a long way in interpreting the way market works; a far cry from where I was before I read this book.

All is not that rosy though. The author is British and an overwhelming majority of the historical examples he cites, to explain his theories, are on Britain’s economy. At times, the reader is left groping for the background of the events in question. For a book intended to be as globally relevant as this one is, “Free Lunch” makes an unfair assumption, though not always, that readers know what it is talking about. A slightly detailed background of some vintage events would do a world of good to beginners in their quest of conquering economics.

Except for this, ‘Free Lunch’ is a big leap towards making economics an enjoyable read. I realize that there is indeed no such thing as 'Free Lunch.'