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Wednesday, July 23, 2014

Employee Costs of firms Firms, Free Agents and Talent Market Exchange that could be LinkedIn

Thomas Piketty's book "Capital in twenty-first century" talks about increasing income polarisation. One of the reasons for this has been the dumbing down of jobs available in the market. There is also a lot of debate about whether robots will take over our jobs. These debates deal with two forces acting on the firm. First is constant need to reduce employee costs and their need to engage with highly skilled talent. The confluence of these two forces can be extrapolated into robots taking over our jobs, polarised incomes or in a utopian view an era of free-agents. But that era has not yet arrived. So what keeps us away from realising an era of free agents? Well let us look at it from our firm model view.

Over the past 250 years we have moved from fairly simple, independent value chains to highly interconnected complex value chains. This means that expertise developed in one value chain has diverse applicability and therefore higher value across multiple value chains. However, from the view point of the firm, their value is limited. Consequently the employee groups developing these capabilities feel underpaid and switch jobs frequently. While there is a marked rise in their pay, I think this is miniscule compared to the value they can potentially create. I believe it makes sense to organise these individual clusters of competencies into tradable units - either as mini suppliers to various value chains or as free agents' agglomeration. 

The agglomerations will need efficient markets wherein you can know, hire and enter into contracts with these entities. In LinkedIn I see a potential market quite similar to equity markets where the buyers are firms and sellers are these micro-agglomerations or even individuals. 

A market where each person is like a listed entity seems ominous. Yet, it is not one market. Specific skills by themselves are a market. So LinkedIn needs to create multiple markets within their entire database. The parallels with equity markets and supplier discovery engines are ever more relevant. The amount of energy LinkedIn spends in validating their "listed entities" is nowhere close to the energy spent in the equity markets and supplier discovery engines. LinkedIn will have to create algorithm based bots to do that effort so that these bots can make the markets relevant to the buyers and sellers.

The responsibility of creating such a market is not simply that of LinkedIn or some such other job site. But it is responsibility of every individual, teams and also of HR departments wanting to leverage their human resources to maximum extent.

The outcome of such developments can unleash substantial benefits in rising pays and lead to healthy development of free-agent marketplace. The ancillary benefits could be substantial development in ideas that these free-agents focus on which may receive a boost because of focussed effort. Lastly, it will lead us to enriched lives of people.

Note: I have used value chain as it is generic word, but readers of the book "Understanding Firms" can appreciate this concept better with Resource Transformation Chains which is explained in the book.

Thursday, July 10, 2014

Welfare v/s Austerity - India's issue

Many people including some experts, attribute Indian growth of about 5% to the welfare schemes of the UPA government. Their honest belief is that UPA government's welfare schemes helped alleviate some of the harshness of the global economic slowdown. They also point to Chinese stimulus as something to emulate. Thereby they believe Modi's promised subsidy rationalisation (euphemism for reducing welfare) is not a good idea. I disagree. 

First, there is a difference between global issues and Indian condition. Global economic engines have stalled, while India's remain switched off for want of fuel (investment and clarity in policy making). 

Second, fixing the engines requires fuel which is currently diverted to subsidies. Thus, if there were an ideal subsidy level, current burden is most likely higher than this level. Therefore, naturally, to bring sanity back this will have to be rolled back. 

Finally, what is required is to push-start the engines is additional effort which will eat away more subsidy than generally required. Thus, push-starting this engine will cause subsidy to dip below this ideal levels. The blame for this does not lie with present government but with UPA which killed the engine long time ago.

Fix the engines and Indian engines can hum along for quite a while creating economic growth and surplus necessary to smoothen the income disparity in later years. Acche din aane wale hain!

Reducing Importance of the budget

The first budget of the new Indian government is scheduled to be announced in a few hours. However, I believe budget announcement has outlived its excitement value.

I would rather see the past expenditure analysis session and a strategic planning session replace what is currently made into a single event. 

There is absolutely no discussion about effectiveness of past expenditure as against their objectives. I don't want to see how welfare expenditures have contributed to the economy as it would be too premature to so such analysis making the budget useless. I would rather see how effectively were the cash transfers were made, what was the loss, what was the cost required to transfer that cash, etc. I also want to know that how fiscal deficit target was achieved using cash accounting jugglery by simply delaying payments. 

Similarly, we do not have a strategic planning session. The presidential address to both houses intends to do that but is hardly ever used that way. The election manifesto is the strategic plan we look to. I think that is inadequate. However given the level of understanding in the houses of the strategic issues, one wonders if it is better to not let the parliament do strategic planning. Most of the MPs are "knowledge proof" as the popular adjective goes. 

In sum in a few hours you will see much hula boo about a non event. Let us hope Arun Jaitley breaks another norm.