Book Release

So my book Between the buyer and the seller is now available on Amazon, in both print and kindle versions. You can go here to buy. Thanks to Amazon’s print on demand service, it’s available worldwide.

It’s been a long time coming. I completed the first draft way back in April 2016. Writing it was no easy task, but was definitely helped by the presence of one awesome coffee shop close to where I was staying in Barcelona.

Having written one draft, I went around finding publishers. It wasn’t a trivial process. In the process, I found out enough about the publishing industry to get a new prologue for the book (I guess that should be part of the Kindle sample).

And then in the course of the backs and forths with the publishers I found a lot of what I’d written to be absolute shit, and so revised the book two times. Then in December last year, the Takshashila Institution decided to publish it.

And then they sent it to some experts for expert opinion. Said opinion came back positive but with some suggestions. So I revised the book yet another time and implemented these suggestions. Then there was the copy editing process and yet another revision. Then the book design (if not anything, doesn’t it at least look good?) and typesetting and stuff. And formatting.

In the meantime, Shashi Tharoor and Bibek Debroy wrote some nice blurbs for the book – they’re printed at the back of the book now. And then some more hoops and procedures and printing and publishing and fighting with Amazon and the book is now out! For you to purchase.

I want to put out a special word of thanks to Anupam Manur, who has effectively “produced” the book, managing the entire process on Takshashila’s behalf. He’s been patient with my periodic abuses, and diligently got work done. The night before his wedding, he was up fixing some stuff on Amazon for the book.

Anyway, enough of my story. Now go buy the book and read it. Let me, and others, know what you think of the book. And spread the word!

Oh, and I want to thank all of you, my patient blog readers, for the encouragement through the last 13 years. It’s your collective effort and support that has made me a better writer, and resulted in this book coming out!

 

The nature of the professional services firm

This is yet another rejected section from my soon-t0-be-published book Between the buyer and the seller


In 2006, having just graduated from business school, I started my career working for a leading management consulting firm. This firm had been one of the most sought after employers for students at my school, and the salary they offered to pay me was among the highest offers for India-based jobs in my school in my year of graduation.

The elation of being paid better than my peers didn’t last too long, though. In what was my second or third week at the firm, I was asked to help a partner prepare a “pitch deck” – a document trying to convince a potential client to hire my firm for a piece of work. A standard feature in any pitch deck is costing, and the cost sheet of the document I was working on told me that the rate my firm was planning to bill its client for my services was a healthy multiple of what I was being paid.

While I left the job a few months later (for reasons that had nothing to do with my pay), I would return to the management consulting industry in 2012. This time, however, I didn’t join a firm – I chose to freelance instead. Once again I had to prepare pitch decks to win businesses, and quote a professional fee as part of it. This time, though, the entire billing went straight to my personal top line, barring some odd administrative expenses.

The idea that firms exist in order to take advantage of saving in transaction costs was first proposed by Ronald Coase in what has come to be a seminal paper in 1937. In “The Nature of the Firm”, Coase writes:?

The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of ‘organising’ production through the price mechanism is that of discovering what the relevant prices are.

In other words, if an employer and employee or two divisions of a firm were to negotiate each time the price of goods or services being exchanged, the cost of such negotiations (the transaction cost) would far outstrip the benefit of using the price mechanism in such a case. Coase’s paper goes on to develop a framework to explain why firms aren’t larger than they were. He says,

Naturally, a point must be reached where the costs of organising an extra transaction within the firm are equal to the costs involved in carrying out the transaction in the open market.

While Coase’s theories have since been widely studied and quoted, and apply to all kinds of firms, it is still worth asking the question as to why professional services firms such as the management consulting firm I used to work for are as ubiquitous as they are. It is also worth asking why such firms manage to charge from their clients fees that are far in excess of what they pay their own employees, thus making a fat spread.

The defining feature of professional services firms is that they are mostly formed by the coming together of a large number of employees all of whom do similar work for an external client. While sometimes some of these employees might work in teams, there is seldom any service in such firms (barring administrative tasks) that are delivered to someone within the firm – most services are delivered to an external client. Examples of such firms include law firms, accounting firms and management consulting firms such as the one I used to work for (it is tempting to include information technology services firms under this banner but they tend to work in larger teams implying a higher contribution from teamwork).

One of my main challenges as a freelance consultant is to manage my so-called “pipeline”. Given that I’m a lone consultant, there is a limit on the amount of work I can take on at any point in time, affecting my marketing. I have had to, on multiple occasions, respectfully decline assignments because I was already tied up delivering another assignment at the same point in time. On the other hand, there have been times (sometimes lasting months together) where I’ve had little billable work, resulting in low revenues for those times.

If I were to form a partnership or join a larger professional services firm (with other professionals similar to me), both my work and my cash flows would be structured quite differently. Given that the firm would have a reasonable number of professionals working together, it would be easier to manage the pipeline – the chances of all professionals being occupied at any point in time is low, and the incoming work could be assigned to one of the free professionals. The same process would also mean that gaps in workflow would be low – if my marketing is going bad, marketing of one of my busy colleagues might result in work I might end up doing.

What is more interesting is the way in which cash flows would change. I would no longer have to wait for the periods when I was doing billable work in order to get paid – my firm would instead pay me a regular salary. On the other hand, when I did win business and get paid, the proceeds would entirely go to my firm. The fees that my firm would charge its clients would be significantly higher than what the firm paid me, like it happened with my employer in 2006.

There would be multiple reasons for this discrepancy in fees, the most straightforward being administrative costs (though that is unlikely to account for too much of the fee gap). There would be a further discount on account of the firm paying me a regular salary while I only worked intermittently. That, too, would be insufficient to explain the difference. Most of the difference would be explained by the economic value that the firm would add by means of its structure.

The problem with being a freelance professional is that times when potential clients might demand your services need not coincide with the times when you are willing to provide such services. Looking at it another way, the amount of services you supply at any point in time might not match the amount of services demanded at that point in time, with deviations going either way (sometimes you might be willing to supply much more than what is demanded, and vice versa).

Freelance professionals have another problem finding clients – as individual professionals, it is hard for them to advertise and let all possible potential clients know about their existence and the kind of services they may provide. Potential clients have the same problem too – when they want a piece of work done by a freelance professional, it is hard for them to identify and contact all possible professionals who might be able and willing to carry out that piece of work. In other words, the market for services of freelance professionals is highly illiquid.

Professional services firms help solve this illiquidity problem through a series of measures. Firstly, they acquire the time of professionals by promising to pay them a regular income. Secondly, as a firm, they are able to advertise and market the services of these professionals to potential clients. When these potential clients respond in the affirmative, the professional services firms sell them the time of professionals that they had earlier acquired.

These activities suggest that professional services firms can be considered to be market makers in the market for professional services. Firstly, they satisfy the conditions for market making – they actually buy and take on to their books the time of the professionals they hire, giving them a virtual “inventory” which they try to sign on. Secondly, they match demand and supply that might occur at different points in time – recruitment of employees occurs asynchronously with the sale of business to clients. In other words, they take both sides of the market – buying employees’ time from employees and selling this employees’ time to clients! Apart from this, firms also use their marketing and promotional activities that their size affords them to attract both employees and clients, thus improving liquidity in the market.

And like good market makers, firms make their money on the spread between what clients pay them and what they pay their employees. Earlier on in this chapter, we had mentioned that market making is risky business thanks to its inventory led model. It is clear to see that professional services firms are also risky operations, given that it is possible that they may either not be able to find professionals to execute on contracts won from clients, or not be able to find enough clients to provide sufficient work for all their employees.

In other words, when a professional joins a professional services firm, the spread they are letting go of (between what clients of their firms pay the firms, and what professionals draw as salaries) can be largely explained in terms of market making fees. It is the same case for a client who has pays a firm much more than what could have been paid had the professional been engaged directly – the extra fees is for the market making services that the firm is providing.

From the point of view of a professional, joining a firm might result in lower average long-term income compared to being freelance, but that more than compensates for the non-monetary volatility of not being able to find business in an otherwise illiquid market. For a potential client of such services also, the premium paid to the firm is a monetisation of the risk of being unable to find a professional in an illiquid market.

You might wonder, then, as to why I continue to be a freelance professional rather than taking a discount for my risks and joining a firm. For the answer, we have to turn back to Coase – I consider the costs of transacting in the open market, including the risk and uncertainty of transactions, far lower than the cost of entering into a long-term transaction with a firm!

Old preface

So my book will be released on the 8th of September. You can pre-order here. In the next 10 days leading up to the book’s release I thought I’ll publish some bootleg stuff here. This is basically chapters or sections that were in one of the earlier drafts but didn’t make it to the final cut.

What this means, of course, is that in the eyes of me and my publishers, what I’ll be putting here is inferior to what has actually gone into the book. So this post (and the ones I’ll put in subsequent days) put a floor on the quality of my book.

We’ll start with what was supposed to be the preface of my book. This was written back in November 2014, when I had little clue of what would finally go into the book. But I sat down one chilly evening on the outskirts of Bangalore and wrote this off in one stretch. Pasting it here verbatim without editing.


Continue reading “Old preface”

Football transfer markets

So the 2017 “summer transfer window” is going to close in three days’ time. It’s been an unusual market, with oddly inflated valuations – such as Neymar going for ~ €200 million from Barcelona to PSG, and Manchester City paying in excess of £50 million each for a pair of full backs (Kyle Walker and Benjamin Mendy).

Meanwhile, transfers are on in the NBA as well. Given that American sporting leagues have a rather socialist structure, there is no money exchanged. Instead, you have complicated structures such as this one between the Cleveland Cavaliers and Boston Celtics:

 by trading Kyrie Irving (pictured, left), their star point guard, to the Boston Celtics. In exchange, Mr Altman received a package of three players headlined by Isaiah Thomas (right), plus a pick in the 2018 entry draft

A week back, renowned blogger Amit Varma interviewed me for his The Seen and the unseen podcast. The topic was football transfers, something that I talk about in the first chapter of my soon-to-be-published book. In that, he asked me what the football transfer market might look like in the absence of price. And I mentioned that PSG might have had to give up their entire team in order to buy Neymar in that situation.

Anyway, listen to the entire podcast episode here.

Oh, and I don’t know if I mentioned it here before, but my book is ready now and will be released on the 8th of September. It’s being published by the Takshashila Institution.

You can pre-order the book on Amazon. For some reason, the Kindle India store doesn’t have a facility to pre-order, so if you live in India and want to read the book on Kindle, you’ll have to wait until the 8th of September. Kindle stores elsewhere already allow you to pre-order. Follow the link above.

Once upon a time

Thanks to gifts from various sources (including the National Health Service, where we’d gone for a checkup), Berry has a few books now. Most of them have lots of pictures (the only book we’ve bought for her is simply a collection of animal pictures). Some have text as well. And it is that that is rather underwhelming.

I don’t know the target age group for most of these books, but the stories seem damn lame to Pinky and me. In my opinion, a good children’s book (or show) should not only be interesting for the child, but also for the parents – it is not often that the child uses the book or show alone. And from that perspective, a lot of these books Berry has got don’t pass the muster.

The books I had when I was a kid may not have been particularly optimised for a child. The illustrations weren’t great. The paper quality was underwhelming as well (one thing Berry can’t do with her books is to tear them! A useful quality for sure for children’s books). But the stories were fantastic. And things that I still remember.

Most of these stories came from the Panchatantra, which is a collection that “evolved” over time. This memetic evolution means that the stories that have come till today are “fit”, and fantastic. It’s similar with Aesop’s Fables – their age means that stories have evolved sufficiently to become damn interesting. And of course, this applies to the Ramayana and Mahabharata as well (and NOT to Christian myth, which didn’t get time to evolve and is thus rather boring).

Speaking of myth, I recently read Neil Gaiman’s book on Norse Mythology.  It’s a good book, and I’ll make Berry read it before she is five. But the stories themselves were all rather underwhelming and devoid of complexity. Considering it’s an ancient myth, which had sufficient time to evolve being written down, the simplicity of plots is rather surprising. Or maybe it’s the way Gaiman told the story.

I’m reminded of this “one Shloka Ramayana” that I’d been made to mug up as a kid (I still remember it “by heart”. Maybe Gaiman’s book is the Norse equivalent of this?

Poorvam Rama Thapovanadhi Gamanam
Hatva Mrigam Kanchanam
Vaidehi Haranam, Jataayu Maranam
Sugreeva Sambhashanam

Bali Nigrahanam, Samudra Tharanam
Lankapuri Dahanam,
Paschath Ravana Kumbhakarna Madanam
Ethat Ithi Ramayanam

In any case, considering the lack of plots in “modern” children’s books, we’re seriously exploring the idea of bringing back truckloads of Amar Chitra Katha when we visit India later this year.

Flash Boys, Ramanand Sagar’s Ramayana and the bias in the narrative

I just finished reading Michael Lewis’s Flash Boys. It seems like a nice book on financial markets and high frequency trading (HFT), and how HFT makes money. And as is the case with Lewis, the story is very well told.

However, having worked in HFT in the past, and having written a book on market design (which will be out next month), there was one thing about the book that left a massive sour taste – that it makes a value judgment.

Fairly early on in the book, Lewis makes it clear that HFT doesn’t actually add value to the market, and in fact extracts value. And from then on, HFT and hedge funds who practice it are the “bad guys” of the book, and Brad Katsuyama and the rest of the IEX guys are the “good guys”.

If this were to be considered a journalistic account, it would be horrible due to the fact that there is not even an attempt to present the view of the opposite side – of the real flash boys (people working on HFT), and how HFT might actually be beneficial. It also fails to document whatever might be the shortcomings of IEX.

As the Ramanand Sagar retelling of the Ramayana has showed us, when you reduce a story to a story of “good against evil”, the story is robbed of all nuance, and what you get is a rather simplistic version. Any facts in the story that run contrary to this simplistic version tend to be glossed over (or reduced in importance). And what the reader gets is a wholly one sided view which may not actually be correct.

HFT is so fascinating (apart from the money it makes for its practitioners) that there exists scope to write a great value-neutral book about it (and someone who writes as well as Lewis is very well placed to write that). It is thus disappointing that Lewis has eschewed that and has instead written what effectively looks like PR for IEX.

In any case, reading the book gave me one valuable piece of input. In my book (that will be out next month), I’m starting each chapter with a quote. And the quote to the introduction of the book has been supplied by Flash Boys. It goes, ‘”Liquidity” was one of those words Wall Street people threw around when they wanted the conversation to end, and for brains to go dead, and for all questioning to cease’.

Perhaps, the quote suffices to tell you all that is wrong with the book (Flash Boys)!

Half an Indian Girl

So my first attempt in twelve years to read pulp fiction ended midway, as I gave up reading Chetan Bhagat’s One Indian Girl after around 130 pages (~40% into the book).

My main problem with the book is that it uses too many words for what it has to convey. There are shades of good writing sprinkled through the part of the book that I read, but at least once every ten pages you start wondering where the story is going, and wondering if so many more pages are worth reading.

Based on the plot that I gathered through my reading of the book, it seems written with a Bollywood script in mind. And while it might make for good screenplay, the quality of writing means that the amount of effort and patience required in ingesting and finishing the book is way too high.

In a way, the book reminded me of a short story by Mulk Raj Anand (ok outragers can start outraging now) called Old Bapu that I’d read a few years back as part of some course at IIT Madras. That story begins with the observation that in the split-second before death, one’s entire life flashes in one’s mind.

And so you have this book, set at the protagonist’s wedding, where she looks back at her life and relationships so far, and that I think is a fine premise. The protagonist’s character is also fairly well chosen and most of the events in the part of the story I read seem fairly realistic.

And then, as they say in Bollywoodese, there are some kahaani mein twists and for someone who had largely appreciated the book for what it was thus far, it can be a bit throwing off. And then when you see that after these twists you have a further 160 pages to go, you end up losing all motivation.

So I shut the book, and turned to my wife who had finished reading through it (albeit after some struggles) a week back. She narrated the rest of the story in her own way, a hundred and sixty pages compressed into two minutes of speech. And having heard this narration, I’m glad I didn’t waste time reading those pages.

A long time back I’d blogged about whether the length of a book is a bug or a feature, and suggested that in fiction one would look at extra words as a benefit, since it’s likely to keep you entertained. I revise that observation now, to say that extra words in a book of fiction (or any book) are fine if and only if they add to the story.

This book, in my opinion, has too many of those extra words, which makes it damn easy to get bored as you read it, and very soon you can’t stop wanting the book to end soon!

The Bollywoody plot aside, I could think of this book being written in 100 pages, which would have made it far far better! I don’t know when I’ll attempt reading pulp fiction next!

Also read my analysis on why Half Girlfriend, Chetan Bhagat’s earlier book, failed at living up to its potential.