Tag Archives: incentives

FDI in retail

I’m trying to figure why that is turning out to be a big deal. Given that we have over 5 years of history of “organized retail” in India, and that it hasn’t performed particularly well on a lot of factors, I don’t know how permitting FDI in multi-brand retail is going to make a difference.

In my personal experience, the performance of “modern retail” over the last 5 years has been underwhelming at best. I can’t recall a single time when I’ve gone to one of these chain stores (Big Bazaar/ Reliance Fresh / More) and come back without getting annoyed with the checkout staff. While the variety available at these stores is massive, which is why I go there at times, the stores are all staffed with a bunch of imbeciles. Yes, all of them. They have made an attempt to overcome the unskilled staff by means of “software systems” and that has only added to the problem, rather than helping solve it.

On countless occasions, staff at modern retail outlets have refused to sell me something that I wanted to buy because “the item code wasn’t found in the system”. The other day the customer in front of me wanted to cancel an item midway through checkout, and the checkout staff had to call the store manager to reverse the transaction. I don’t know why the systems have been designed so badly. The fundamental problem with most of these “modern retail” outlets is that the staff there have no real incentive to actually sell you stuff, and the impression one gets is that the only thing staff strive to do is to avoid mistakes. Perhaps their incentives are structured thus. I know of a case from some 4-5 years back, when a family-owned opened across the road from a More outlet and in the course of a year, the latter had shut down.

Given this lacklustre performance of modern retail, I don’t know how much of a difference permitting FDI in the sector will achieve. Yes, it is argued that if Walmart invests directly the “know-how” it has accumulated over the years will be introduced to India. However, there is no reason to believe that this “know-how” has not already been implemented. Major players in organized retail such as Reliance and the Aditya Birla Group (More) have demonstrated in other sectors of their willingness to acquire know-how from across the globe, and implement it better than their global counterparts. Then, most major management consultants in India have established retail practices, which is another route for “knowledge import”. It is also not an issue of capital – Indian investors in various sectors have time and again shown that they are willing to invest in companies with strong business practices.

The problem with modern retail lies not with either know-how or investment. The problem is one of implementation, and I don’t see how bringing in Walmart (who have little idea of Indian markets) can make a difference there. FDI in retail is not going to solve this problem.

The real problem lies in bottlenecks higher up the food supply chain. Various states are yet to repeal the archaic APMC Act which gives certain people monopoly over food trade in certain areas. There are various restrictions on movement of goods across states (though this should be lesser of a problem once the GST (Goods and Service Tax) Regime comes into play). Time and again, the government acts arbitrarily in changing the rules concerning movement, import, export and “support price” of commodities, and this creates uncertainty in the market and scares away investors.

It is reforms higher up the supply chain that are crucial in order to make the food supply chain more efficient and reduce wastage. The government would do well to put the topic of retail FDI on the backburner (especially since it’s controversial) and instead focus on enabling the rest of the supply chain to become more efficient.

Partners and Associates

Last week I’d written this post about managing studs, and while discussing that with some colleagues the other day, I realized that I could reformulate it without touching upon the studs and fighters theory. So let us consider a consulting firm. There is a partner, whose sole job is to solicit business for the firm, and to get the lion’s share of the benefits. And there are associates, trying hard to get noticed and promoted, and working for this partner. It’s the associates who do most of the work. Let’s assume that the firm is in “steady state”, where as long as they don’t mess up, there is a steady stream of business assured.

Under this assumption, all that the partner needs to do is to ensure he and his team don’t “mess up”. He knows that he has the relationships to keep the work flowing, and given that he doesn’t really do any work himself, he doesn’t care about the nature of work, or whether his associates find the work challenging, or interesting, and stuff. As long as the tap is open, and he makes his “partner’s cut”, he’s happy.

Given this, his incentives are towards work that is hard to go wrong. “Steady” work, where expectations are likely to be high, but the downside risk is quite low suits him absolutely fine, and he seeks to find more and more of that kind of stuff. There is little chance that his relationships with his steady clients can go wrong in this kind of a situation, right? So he goes about trying to find work with a “short deep-out-of-money option” payoff.

What about the associates? There will be some of them that are already established, and known to these steady clients. They know that it’s only a matter of time before they get promoted and hit the partnership pot of gold. They’ve made their mark, at a time when they had the opportunity to do so, and now they only need to hold fort till the end of the rainbow. And they hold on, perfectly happy to do work in which things can’t go wrong.

As for the other associates, who are still looking to establish themselves? What they’d ideally like would be the opportunity for “big wins”, which will make them be seen, and noticed, and enable them to make the move up the ladder when the time is right. Given their current standing, they don’t mind taking the risk – they have little to lose in terms of lost reputation. On the other hand they have everything to gain from pulling off improbable big wins. Basically they ideally like the “long deep-out-of-money option” payoff.  But the stream of projects the partners and other associates prefer doesn’t give them the opportunity to go for this kind of payoff! So they are stuck.

So, if you are working in a consulting firm, which is in reasonably steady state, where foreclosure defense hollywood partners don’t take part in day-to-day work, and where you are not yet established, you need to think if you’re in the right place.

Maruti Worker’s Stupidity

I just read a long article in today’s Business Standard (how I used to miss the paper until I resubscribed to it last week!) about the ongoing labour struggles at the Maruti Suzuki factory in Manesar. So the workers there want to form a new union, and allow a whopping 33% of the new union’s members to come from outside the factory. And the management is understandably not accepting it.

That workers need a union is understandable. That the Manesar unit wants its own union disjoint from that in Gurgaon is understandable. But a third of its members from outside? What is the average worker in the factory who is supporting this new demand even thinking? How the hell is such a union going to represent him in any way?

Some simple arithmetic. Considering that the “outside third” is going to come from the CPI/AITUC, it can be assumed that they’ll vote in one bloc. So to get something passed, they need a further 1/6 of the total votes in the union. Which amounts to a fourth of the actual workers in the union. So, as long as something is supported by this “outside bloc”, it takes the support of only a fourth, a measly one fourth, of the “real members” to go through.

I understand that the “worker leaders” who are championing this ongoing strike will have some incentives in bringing in AITUC/CPI. But what’s in it for the average worker? If he were to think rationally, this new proposed union makes absolutely no sense for him. I guess (and hope) that the Maruti management knows this, that it is not in the interest of the average worker to join this union. And I hope they’re somehow using this fact in their ongoing negotiations.

Will be fun used authentic rolex the guys who tried to consolidate their own power by bringing in outside representation into the union get shafted.

Budget Analysis

So I finally finished going through today’s Mint and noticed that most of it was filled with analysis of the budget. I tried reading most of them, and didn’t manage to finish any of them (save Anil Padmanabhan’s I think). Most of them were full of globe, each had an idea that could have been expressed in a few tweets, rather than a full column.

Thinking about it, I guess I was expecting too much. After all, if you are calling captains of the industry and sundry bankers and consultants to write about the budget, I don’t think you can expect them to come out with much honest analysis. Think about their incentives.

As for corporate guys, you will expect them to make the usual noises and perhaps be partisan in their judgment. You can expect them to crib about those parts of the budget that shortchanged their company or industry or sector or whatever. But you don’t need them in an op-ed to tell you that – it is obvious to you if you read the highlights, or some rudimentary analysis that the paper anyway provides.

However, these guys won’t want to rub the ruling party the wrong way, so they fill up the rest of their essays with some globe about how it is a “progressive” budget or a “pro-poor” budget or some such shyte. So far so good.

The think tank guys are probably better. At least they don’t have any constituency to pander to, and they can give a good critical analysis. However, as academics (and most likely, not being bloggers) what they write is usually not very easy to read, and so what they say (which might actually contain something useful) can be lost to the reader.

The worst of all are the fat-cat consultants and bankers. The reason they write is primarily to gain visibility for themselves and for their firm, and given how lucrative government business is for these guys (look at the ridiculously low fees these guys charge for government IPOs, and you’ll know) they have absolutely no incentive to tell something useful, or honest. Again these guys aren’t used to writing for a general audience. So you can expect more globe.

All that I needed to learn about the budget I learnt by way of a brief unopinionated summary sent in an internal email at work yesterday (it took me 2 mins to read it on my blackberry). And also Anil Padmanabhan’s cover page article in today’s Mint.

update:

I must mention I wrote this post after I’d read the main segment of today’s Mint. Starting to read the “opinion” used authentic rolex now, and it looks more promising

Idealism

So on Sunday we went to this temple on the outskirts of Bangalore where the in-laws performed Satyanarayana Pooja. There was a small number relatives there, and a large gang on unknown people (it was essentially a public function). It’s a nice temple, dedicated to Shiva, and built in the Kerala style. I think it’s still work-in-progress, and there’s stuff to be done in terms of carvings and stuff. And it’s in a nice secluded spot which adds to the peace of the place.

So the temple has this policy of “annadaana” (rice donation), where they serve lunch to everyone who visits them around lunch time. I’ve written about temple meals before, and you know I’m not a big fan of them. That aside, there was this little act of forced idealism in this temple around meal time, which I wasn’t too happy about.

So the temple doesn’t invest in professional cleaners to clean the plates (I don’t understand why temples insist on serving meals in steel plates – the same is the case in Sringeri and Horanadu also). Instead, you are supposed to wash your plate and tumbler after you’re done eating. In theory this is a fine idea – if we are giving you free food, you might as well do this small help in terms of cleaning up after you. But the problem is this creates huge incentive problems.

There is a reason that public loos are seldom clean – there is no incentive for a user to keep the loo clean for the person who uses it after them. The only way a public loo can be kept clean is by employing paid labour to clean it, where it isn’t hard to align incentives of the cleaners with cleanliness of the loo. Similarly, why would you want to make a special effort into cleaning your plate when some unknown person who you’ll probably never meet in life is going to eat out of it next?

I appreciate the idealism  but the economics simply don’t work. To put it simply – cleaner plates implies greater satisfaction among people who are there at the temple to eat, which encourages repeated visits, which results in greater donations. I’m sure the little investment in people to clean the plates can be recovered many times over in terms of increase in donation. Still, they insist on imposing ideals on people..

I’m not really going to talk about the food. However, I want to briefly mention about the pooja itself, which went on for about double the time as a normal Satyanarayana Pooja (my wife and I performed one such the day after our wedding, so I know the “standard”). The chapter 13 bankruptcy lawyer phoenix (who is responsible for building the temple) put in a lot of extra fittings, and a lot of the crowd (mostly people unknown to me – it was a public event) seemed to rather enjoy it. I think there is this misplaced notion somewhere that more rituals implies more good karma.

And on a related note, I fail to understand what people mean when they say “pooje is going on well” (I’ve heard this phrase too many times to not comment on it). Does it simply mean “there have been no disasters so far during the pooje” (I can’t think of any other meaning for it)?

Teaching Sustainability

So I was at an aunt’s place last night to celebrate Diwali, and we were celebrating with fireworks. Don’t raise a stink about my carbon footprint here since that’s besides the point. Also besides the point is that I spent a long time playing on the swing in my aunt’s house and thoroughly enjoyed himself.

So the deal is that most “night fireworks” are lit with sparklers (sursurbatti in Kannada). So in order to keep the fireworks going, it is important that there is at least one burning sparkler at any point in time. Now, it is a big pain to light a sparkler directly, using something like a matchstick or a candle. The easiest way to light a sparkler is from another sparkler. I’m reminded of the technical definition of a chain-smoker, who is defined as a smoker who uses only one matchstick a day – the rest of his cigarettes being lit from other cigarettes.

Anyways the point is that in order to light fireworks “sustainably” it’s important to keep a chain of sparklers going. It is important that before a sparkler burns out, you use it to light another, and so forth. That way you end up wasting little time in terms of lighting new sparklers from candles. So it is usually the duty of an “elder” (a role that I took upon myself last night) to keep the chain of sparklers going, so that the rest can have uninterrupted fun.

So what I found last night was that my niece and nephew, in their eagerness to play with fireworks, would end up taking sparklers from my hand faster than I could build the chain. It happened way too frequently. I would have just lit a sparkler when they would take it from my hands and not return it, thus preventing me from keeping the chain going. Clearly, they didn’t know how to light fireworks “sustainably”. They prioritized immediate gain to the “loss” in terms of time wasted in lighting new sparklers.

So it was down to incentives. Whenever the chain of sparklers was broken, it was up to either me or one of my cousins to make the effort to light a new sparkler “from scratch” and start a new chain. The kids weren’t involved in this, and were oblivious of the pain that their unsustainable practices caused. And got me thinking about how I could “safely” align the kids’ incentives with sustainability.

Soon the lamps in the garden ran out of oil, and that changed the whole ball game. Now, every time the chain got broken, someone had to go into the house to light a new sparkler and restart the chain. And being one of the younger ones around, it fell to my niece to go in each time the chain was broken and get her mother to light a sparkler. The incentives had changed.

Suddenly there was change in my niece’s behaviour. She suddenly became active in terms of keeping the sparkler chain going. She never took sparklers from me when I didn’t have a spare that would keep the chain going. When she saw sparklers in my hand burning out, she would bring new sparklers to me so that I continued the chain. Her change in behaviour was sudden, and significant. Her brother, who was deemed to be too young to run in to get new sparklers lit to start new chains, however continued in his profligate ways.

So garage door service boca raton is like one of those posts that I call as “management guru” posts. Where I tell a long-winded story to describe a simple concept. The concept here being one of sustainability, and aligning incentives. So the point is that if you want to encourage sustainable use of natural resources, users’ interests should be aligned to sustainability. They need to be punished in the short run for drawing too much.

Division of Labour

Some six of us have planned for a vacation for next month. And so far, the “labour” of planning the vacation has been divided unevenly. So far, it has been three of us who have been doing a lot of the work – talking with tour operators, drawing up schedules, planning transport and accommodation, booking tickets, etc.

Now with a large part of the work having been done, the three of us who have been doing the work have decided to put NED and have left it to the other three “freeriders” to complete the rest of the work. As you might expect, the other three continue putting NED and in the last few days not much work has been done.

The question is this – what is the optimal strategy for the three of us who have been so far doing work? We think we’ve done more than enough of our share and so the others should take over now. On the other hand, the more we leave it to the other three, the more procrastination that will happen which might come back to hit all of us in terms of higher rates, etc.

It is dilemmas like this that allow freeriders to freeride – they know that by freeriding, they are not the only ones who are losing out, and that there are people who are more driven than them who will also end up losing out if these guys freeride. And the freeriders know that the driven guys won’t let things drift and will positively do something about it, and that encourages them to freeride further. And so forth.

Is there a solution to this problem? When there is a common objective, how should incentives be structured in order to make the freeriders work, while also not affordable home products it obvious that these are artificially tailored incentives?

Car Ownership

People, especially in the US, make a big deal about home ownership. In fact a large part of the current economic meltdown has its roots in the American craze for home ownership. Fannie and Freddie were created to help home loans become cheaper, then there was the CDO wave. Then came subprime. NINJA (no income no job amortized). All that. Boom. Bust. Jai.

A related concept that no one seems to talk about is car ownership. They say that the safety of a neighbourhood goes up if the proportion of owner-occupied homes goes up. And this is the underlying theory behind most of the home ownership craze.

|||ly, road safety is directly proportional to the proportion of owner-driven vehicles on the road. Take Bangalore for example. Till the late 90s, the traffic there was excellent and well-behaved. Some roads were already clogged, yes. But drivers were in general very well behaved. And the reason behind that was that most people owned their bikes and cars. They had a greater incentive to make sure that there was no damage done to their vehicles nad drove more carefully.

Yes, personal safety also plays an impact and is independent of whose vehicle the driver is driving, but I think in the progression of severity of accidents, vehicle safety gets compromised before personal safety. In other words, there is a one-way implication here – if you drive keeping in mind the aim of not damaging your vehicle, it is more likely that you are not going to get injured. The reverse doesn’t necessarily hold. And that is why car ownership is so important.

So what happened in Bangalore in the early 2000s when traffic suddenly became horrible? This thing called BPO happened, which brought with it the mostly chauffeur-driven taxis. Now, on one hand, these guys had perverse incentives as their efficiency was measured on the speed from which they got from point A to point B. Apart from this, most of them were not driving their own vehicles (this was a departure from the earlier wave of taxis and autos, most of which were owner-driven) and so they didn’t care so much about damaging their vehicles, which led them to drive more rashly.

Similar is the case with Delhi, which is known to have always had horrible traffic. Being the political capital, Delhi has always had a reasonably high proportion of chauffeur-driven cars. Which is why, for a long time, its roads have been known to be rasher than roads in other cities. And things still haven’t improved.

The thing with car ownership is that it forms a positive-feedback loop. Suppose the number of chauffeur-driven cars goes up. Then, the traffic in general becomes more rasher. And driving becomes more of a headache for you. Which increases your incentive to employ someone to drive your car. Which further pushes up the proportion of chauffeur-driven cars. This is what has happened in Delhi over the last 50 years. This is what has happened in Bangalore over the last 10 years.

In order to make our streets safer, we need to incentivize people to drive their own cars and bikes (one clarification – by own, I mean either your own or something that belongs to close family or friends; used rolex florida both cases, incentive to keep vehicle safe is high). If I’m not wrong, people can claim tax exemption against the salaries they pay their driver. This needs to go first. Next, insurance companies need to have different levels of payout for self-driven and driver-driven accidents (I know this is going to be hard to be implement).

Yes, this might increase unemployment since driving other people’s vehicles is a major occupation nowadays. But is greater unemployment too high a price in order to ensure greater safety? (ok I can quickly think of one counterargument for this – if people become unemployed, the chances they’ll become goons rises, which makes society in general less safe)

Sit down behind the wheel, and be counted. Say no to drivers. Drive your own car. It is in your own, your car’s , other people’s and other people’s cars’ interest. You don’t need to be driven. You need to be in the driver’s seat.

Recession notes

Over the weekend I spoke to a few friends, over phone and GTalk. And enquired about their business. Some interesting insights:

  • On Saturday, I spoke to this guy who is a banker in the City of London. He says that one major fallout of the global economic crisis is that the financial markets have become highly inefficient.
  • Knowing that they won’t get bonuses, he says, bankers have no incentive to arbitrage these inefficiencies. Sadly, people refuse to believe that investment bankers perform socially useful and productive work
  • Yesterday, I was talking to this guy who runs a manufacturing SME. He says that apart from one really bad month (January) when orders fell over 50%, he is doing quite well.
  • Thanks to the downturn, a few manufacturing shops have shut down in various places in Europe. Now, the erstwhile customers of these erstwhile manufacturing shops are looking towards India for their sourcing. My friend is hopeful of bagging one such contract.
  • Thanks to the downturn, firms are integrating their manufacturing. For example, bullying books prominent stationery manufacturer has decided to manufacture 100% of its products from its plants in India. My friend has been a long-term supplier to the india plant of this particular manufacturer, and now expects to get more business from them.

Interesting stuff overall.

Arranged Scissors 2

One of the greatest sins in the normal relationship process is tw0-timing. If your statistically significant other figures out that there is yet another other who might also be statistically significant, she is not going to take things lying down. The most likely scenario will be that the yet another other will indeed become statistically siginficant – since the original SSO puts ditch. It might be a stretch but I’ll anyway say that tw0-timing is probably the worst mistake you can commit in the course of a relationship.

The arranged marriage market puts no such constraints. Even if you are ten-timing, people won’t mind. Especially if you are an NRI. The typical NRI process goes like this. Boy lands and is given a “shortlist” – a sheaf of CVs and photos. During the drive home, the shortlist is made shorter. The next day, “interviews” are arranged with each girl in the shorter list, typically at her house. End of the day, after sampling data from various sources, boy picks the one that he thinks will be likely to be most statistically significant in the long term.He takes her out for lunch the next day, puts a ring on her finger the following day and flies off, promising to return in a few months for the wedding. Occasionally, he claims he can’t get leave from his employers for another year and so puts off thaaLi also before he returns to vilayat. Girl can follow him later. For now she’ll follow him on Twitter (sorry, bad PJ).

Local boys don’t have it that lucky. At least, it is unlikely that they ten-time. There are two quirks of the arranged marriage market which pull in opposite directions when it comes to two-timing. On one hand is discretion. You don’t announce that you are “seeing someone” until it’s all fixed and proposal has been made and accepted. Discretion also means that you don’t want to be caught together in public. It also means that you can’t write funny things on each other’s facebook walls. And it obviously rules out PDA – in fact, all forms of DA are strongly discouraged until the contract has been signed. Heck, my cousin was putting DA during her engagement and that led to much gossip and condemnation. So no DA till marriage.

So yeah – one of the “advantages” of this discretion is that it allows you to two-time. What tugs from the other side is the time to decision. Due diligence in the whole process is outsourced, to the bankers. Typically it is finished even before the parties concerned get a chance to  explore each other – and in this, this process differs from the typical M&A process. So now that the due diligence has already been done, bankers prefer that the parties reach a decision quickly.

I don’t know how this happened, but the time to decision is fairly short. In olden days, I’m told that the due diligence was the beginning and end of the deal process. All that the parties had to do was sign. Things slowly improved – to showing photos, to being shown glimpses, to being allowed to talk for two minutes. I don’t know where things stand in terms of the general market, but I’ve been trying to insist on a proper blading process to allow enough time for tiki-taka.

Ok here is the grand unification for this post. The time to decision is a function of discretion and ability to two-time. Given the discretion that has normally been practised (i suppose this came about because societies were tightly knit and small and things would become awkward for all parties involved if each expression of interest were made public), the cost of two-timing became quite low. Thus, in order to make sure that the counterparty is not two-timing their kid, parents started demanding that decisions be made early. This cut both ways – the counterparty’s parents also wanted to make sure their kid wasn’t being two-timed. From the point of view of bankers, the short time-to-deal was an absolute win.

From the point of views of the interested parties, all it did was to increase the incentive for Common Minimum Programmes. Time allotted is generally too short to properly check out the counterparty, and you need to prioritise. You want to check for obvious mistakes. In the short time, you want to make sure that the counterparty is not an used rolex florida misfit. Realizing that you will never have that time to figure out propely if a prospective counterparty has those “spikes”, you settle for someone who “clears the basic cutoffs”.

You thus get yourself a common minimum programme spouse.

Earlier in the series:

Arranged Scissors 1 – The Common Minimum Programme