Tuesday, December 25, 2007

Figuring out subprime for you

This is friggin’ cool. Watch this short, hilarious video that describes subprime mess in layman terms. I loved it. Especially the part where they explain the thought process that goes into naming hedge funds....

Anchor to George Parr (playing investment banker) : Ok. Let’s talk about moral hazards.
GP : Sorry, I understand hazard. What’s the other part?
Anchor : Ok. Never mind. I don’t want to sound insulting. But I think you haven’t learnt anything from this crisis.
GP : On the contrary, we’ve learnt a lot.
Anchor : And what’s that…?
GP : When you know you’re going to make a cock-up, make an enormous cock-up so that the Governments will come and bail you out.

Watch it live... It's a laugh riot.


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Monday, December 24, 2007

CEO democracies

So, non-industry candidates chosen to lead software companies grow. Here’s the latest from Dan Farber. When former Delta Airlines chief operating officer James Whitehurst takes over as CEO of Red Hat (vendors of Open source software/servers) on New Year’s Day he’ll face the worst kind of doubters–the quiet ones. At least, No analyst is going to question the Whitehurst move amid a great third quarter.

But Farber believes Whitehurst could very well take Red Hat to the next level. He quotes the example of Lou Gerstner. “Before we pooh pooh Whitehurst we should remember Lou Gerstner. Remember him? Oh yeah, he’s the guy that transformed IBM into a services juggernaut. The funny part of the story: Before IBM Gerstner was CEO of RJR Nabisco. Before RJR, Gerstner was at American Express. What did Gerstner know about mainframes? Probably nothing, this was the point of the hire in the first place.”

Well, that’s fine. But here’s Red Hat’s outgoing CEO Matthew J. Szulik on why he thinks Whitehurst has a geek streak - “In my first meeting with Jim Whitehurst, we discussed the four Linux distributions that he was running on his home personal network. He was running Fedora Core 6 and Fedora Core 7 at home. He was running Slackware at home and he was an experienced software developer up until the time that he was at BCG (Boston Consulting Group). So we are getting a technically savvy executive who happens to have strong operational, financial, and strategic skills and it was in my view that in comparison to his peers that were finalists for the job, that he stood head and shoulders above, in light of all of the qualities that we were looking for in my successor.”

I just hope he is right. Let Whitehurst lead Red Hat to greater glories. All the very best. Why should anyone worry?

I am just glad it’s not the other way round. Imagine Delta picking up Matt Szulik to fly its plane because he’s flown some kites during his school days…:)

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Thursday, December 13, 2007

IQ v. Intelligence

The debate “Does IQ measure Intelligence” keeps coming back. I have never paid much attention to it, but I sometimes wonder whether IQ, a quotient abstracted from answers to a set of test questions devised by human intelligence can measure the very intelligence that created it. If so, how accurate can it be? I wasn’t convinced.

Then I find (magazine>>special features>>July-August 2007>>Psychology: Cutting Edge of innovation – Decoding Genius) that even the numbers concerning genius are temperamental. While IQ tests have traditionally been used to measure intelligence, figures don't always tell the tale. According to the Stanford Binet scale, average human IQ is between 85 and 115. A genius is someone who scores 145 to 165 on the scale and a so called high genius falls between 166 and 180. Only one percent of people have an IQ of over 135. Einstein is said to have had an IQ of 160 and renowned physicist Richard Feynman just 122. The highest IQ score ever recorded was that of Marilyn vos Savant. She scored 228 but gave the world only a question-and-answer column which she wrote for Parade magazine.

So does it tilt the scales against the fairness of IQ indices? May be, may be not, since we haven’t got another measure to upend it.

But I presume Genius is, of course, inevitably characterized by prodigious productivity. It is said that Thomas Edison assigned himself an invention quota that consisted of one minor invention every 10 days and a major one every six months. The intellectual demands he placed on himself were certainly effective for he holds the record, still unbroken, of 1,093 patents. Mozart composed more than 600 pieces of music, and Picasso and Dali both created a vast body of work.

Serendipity is often used to explain creative accidents. Yet the true genius is one whose antenna is able to pick out those fortuitous occurrences. Alexander Fleming noticed the mold formed on an exposed culture, an observation that led to the discovery of penicillin. Thomas Edison got the idea of the carbon filament when playing with a piece of putty and went on to create history.

So what do you think…? Can we use the same scales to measure scientific and artistic genius? Can Pablo Picasso and Albert Einstein be compared based on IQ levels? Mozart and Gregory Mendel? Tiger Woods and Rickie Ponting?


Sunday, December 09, 2007

Beating the odds of US recession

How will IT services fare in the coming US recession? Basab Pradhan asks here. He also refers to Infosys CEO Kris Gopalakrishnan’s statement at some conference as an update that I allude here. Kris says “so far the impact of the US slowdown is muted”.

Some day one of us can ask Kris Gopalakrishnan’s cardiologist about how many heart beats he may have missed while putting a brave face like that up. I am sure he hears about many fresh billion $$ write downs and CEO ejections as much as I do. All of these were kept off balance sheets (and investors) and the traffic is only getting busier. Bravo, Kris….

Points taken, Basab. But I ask - "why only IT? Can other businesses fare much better?"

Can the global economy afford to let its largest consumer slip into recession mode without committing economic hara-kiri? Is there another economy that can replace the US? I see none. Can the world business, especially IT services scale down their size of operations if US stops consuming? Europe ? No way.

That would be a catastrophe. In comparison, fixing US recession before it fully arrives seems a song. It is for global economies to be mature enough to rally around the US and get it out of trouble, if they have to stay in shape themselves. My hope is built around that (self-centered) altruism that fits very well with a flat world.

That said, IT services can certainly throw a few life boats in that ocean of US trouble, by

a) Toning down high margins (that gouge 25-30% post tax returns) to keep its US client afloat. The value it loses out in the short term will be more than made up by long term gains in brand perception and loyalty.

b) Working towards greater value adds. I would even say that bad credit appraisals that the US banks espoused that led to the current crisis were to some extent avoidable if quite a few Indian BPOs that processed the proposals blew the whistle. The workstation executive need not, but her top management certainly can build in risk-flagging protocol, in that it ensures the longevity of many a well paying client.

c) Allowing people to evolve from transactional, keep-the-lights-on activities to more challenging, innovation areas. And don’t start billing them until it’s proven.

d) Indian IT vendors can extend their relevance only if they truly partner in innovation by taking greater risks in the real sense, not just spray paint or rustle up something at the last minute by using some fit-all templates. Their R&D spends that look like rounding errors are mostly marketing efforts e.g. a lab set up to support a particular proposal or a "solution" center where small teams prototype and train on new solutions. They are usually just a training class ahead of client teams on new technologies. Can they not graduate to be rounded LOB solutions players ever?

e) Improving in areas which require deep vertical knowledge, complex program management skills, change and governance management, Data center management etc. In ERP practice, I see Indian IT vendors active only in “post-live” stage. They should deepen their spheres of influence if they have to seem relevant.

The central banks around the world can help US as follows, in their own interests.

f) Countries with artificially depressed currencies (you know who) will have to yield. Most global manufacturers that have built up huge scales counting on American consumer will choke to death if they don’t show up. For if they don’t, the global vendors – with China standing right up front - will be in trouble deep.

g) Build a central supervisory protocol to detect and control excesses in credit and money markets before they get out of hand. Today, the irony is that the huge foreign currency reserves of China are denominated in dollars and it isn’t easy to switch to a new denominator without pushing the yields further down. China is already facing criticism in its home turf for weak treasury management. Obviously it can’t dump its dollar reserves in the pacific to avoid inflation either. The trouble is, no other banking system has the appetite (or would even want) to mop up those huge reserves. So the dollar has to go up even by Chinese interests, be it at the cost of letting Yuan appreciate.

Do anything. Drive economies, value add, scale up, squeeze margins, innovate, sell cheap, offer free – help U.S.clients hold their heads above water. Relying on untested European market is like letting go the proverbial bird in hand seeing two in the bush. Europe is full of (not just linguistic) prejudices and isn’t as origin agnostic as U.S, and in between the time taken to schmooze and adapt, the fixed maintenance costs of large scale build-outs could kill you.

I go unless there is a competing market with the consumption levels close to that of US, world economies can’t put up with a moribund US markets for long. Every one feeds off it and it tastes nice. It’s impossible to conceive another market like that, not the least in IT services. Some day, others may achieve its size on the supply side(?), but demand side metrics will be hard to replicate. That sustains the imperative - Help U.S get its act together, fast. If US doesn’t survive, others won’t fare much better either.

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Thursday, December 06, 2007

No more googleplexes ; Google just needs data centers

“Like ice gradually melting into the oceans in the Arctic regions, enterprises want to slowly migrate to the cloud, or utility, computing model, with services delivered by massive-scale data centers. But, the tech industry will have its own global warming, pushing companies to move faster to the cloud to stay competitive” - say Dan Farber and Larry Dignan.

The company is spending over several billion dollars to build data centers collectively housing hundreds of thousands of servers running massively parallel computations in power-friendly locations in Iowa, Oklahoma, Oregon and North and South Carolina, and that’s just in the U.S – to deliver fast and accurate search results besides creating entry barrier for others.

Here I wrote about Google’s data center outside US – in Siberia. You might as well spell it as “Cyberia”, now that Google has trained its guns.

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Wednesday, December 05, 2007

Blatant cover-up

Earlier this year, for example, Merrill Lynch, Citigroup and Bank of America gave almost no indication that one particularly toxic debt product -- CDOs, or collateralized debt obligations -- could be the source of billions of dollars in losses. The major banks have already reported billions in unexpected losses from complex investment vehicles known as CDOs. Now they face big risks from other corners of the debt markets -- but don't expect them to warn investors anytime soon.

One likely new trouble spot: Conduits, the opaque structures banks set up to provide debt funding to borrowers. Often, the debt issued by the conduits is collateralized with assets, like mortgages. If the borrower fails to pay up, it’s the bank’s obligation to pay the bondholder.

Conduits typically aren't consolidated on a bank's balance sheet. But banks are often on the hook to fund them if investors stop buying the debt they've issued. When that happens, a lot of risk can get moved onto the balance sheet.

How well do you know your bank, as an investor? Learn about some blatant cover-up here.

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