Thursday, July 26, 2012
Wednesday, July 25, 2012
Helping Social media and Web consultants price better
I know a bunch of people who are consultants to firms, advising them about internet, social media and other marketing inputs. These people are really experts and not the general mass of wannabes who seem to flood the world recently. In my discussion with them I realize they always find themselves not able to price correctly as per the services they deliver. I was thinking about this and it leads me to the think that they essentially have two problems.
First, these consultants are facing classical Porter's bargaining power problem. Their clients have high bargaining power and they are unable to match that. Further, the barriers to entry are super-low. Hence there is a lot of competition in this area which has a wide spectrum of people starting from the top experts I refer to above to plain cheats who don't have a clue about either social or media. The client does not have the expertise or mechanism to separate the wheat from the chaff.
Second, the customers perceive some risk because of which they underpay. One source of risk that is clear to me is lack of skills or understanding to measure performance (what will they do) and deliverables (what will clients gain as a result). Since clients perceive the lack of understanding as risk, they tend to underpay for the product to reduce it. Thus, if a web consultant has diagnosed "clutter" as reason preventing website sales, then she is not perceived to have contributed as much to deserve the payment she seeks.
Naturally the prescriptions must be simply to increase bargaining power and develop measures of performance and delivery. The key question is how? Here are some suggestions:
- Dealing with uncertainty: Like I have said before, the only cure of uncertainty is certainty or disclosure.
- Improving diagnosis: I believe my friends must draw from medical practitioners' business model. The diagnosis is first part of problem and money spent here is almost always never disputed. The diagnosis has to elaborate and chargeable. Without diagnosis, they should not submit their quotations. Quite a many times, some consultants intuitively know the problem just by looking at the website or execution of social media strategy etc. and tend to skip diagnosis. I think the more the stress is laid on diagnosis the better.
- Pricing diagnosis: One problem faced with diagnosis is that clients have low expectations from websites and online sales or its impact on off-line sales. Hence they do not want to spend on diagnostics as much. Here, alliance with diagnostic services providers or technologies should help reduce the price for the consultants.
- Reducing performance uncertainty: Once diagnosis is reasonable then the solutions will have better visibility allowing my friends to explain what they are going to do and why. This should allay the performance uncertainty.
- Dealing with deliverables: Almost all clients these days measure the consultant's input in terms of what happens to their deliverable (say online sales or subscriptions etc). With these in mind, the clients formulate terms of reference for the consulting bids. The part the clients don't understand is that between deliverable and their terms of reference is a huge gap which consultants do not control. The problem is the consultants do not always communicate this to clients clearly. The agreement on deliverables must tie-in with what is controllable for the consultant.
- Take this example (given by one expert friend): If a website creates 10,000 hits, has 10% subscription rate hence creates 1000 subscribers. Further it has 10% conversion rate which makes 100 people buy a product worth (say $100) leading to revenue of $10,000. Further, assume the profit margin is 30% then profits from the website will be $3000. Then, each subscriber is worth $3,000 / 1000(subscribers) = $3. Each hit is worth $3,000/10,000(hits) = 30cents. So what will be your deliverable? Will it be conversions? Will it be subscriptions? Or will it be hits? The answer, as I mentioned earlier, depends on what is controllable for the consultant. If she can control the hits, then she should measure hits. If she can control how many will subscribe then that should be measured.
- Increasing bargaining power: Even when all this is known, the underpay problem will persist. Porter's bargaining power issue looms over this business. Hence these consultants must find a way to increase bargaining power. This needs some brainstorming but few ideas from top of my head:
- Organize into a firm or Agency: A member of the collective group is more likely to have better bargaining power. The internal structure need not be that of a firm. However, it can be a collection of individuals with a common name. (This is more perceptive rather than actual). Having a brand umbrella should help. Tip: Size connects with bargaining power.
- Reputation: Clearly if Guy Kawasaki or Chris Brogan or Robert Scoble is advising the client they will pay more. So reputation will increase bargaining power. Some improve reputation with customer testimonials, others with referrals, others with interacting communities. Tip: Fame or recall = bargaining power
- Sub-branding the knowledge: The diagnostic methodology, the solution, core ideas within the communications need to be branded with scientific backing either as papers presented in conferences or as well-publicized concepts (think pagerank). These could be product-type brands (like pagerank) indicating pre-packaged solutions or service style (like aroma therapy brands) that indicate customized solution and delivery. Tip: Knowledge = bargaining power.
So let me know what you think.
Note: For more discussion on importance of bargaining power and risks as it relates to firms read my book Understanding Firms - A Manager's model of the Firm.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Saturday, July 21, 2012
Free download: Subverting Capitalism and Democracy
My first book Subverting Capitalism and Democracy is available free (kindle edition) on Amazon. Click and download and tell me what do you think. (Free only till Sunday July 22)
You can also buy my next book "Understanding Firms - A Manager's model of the Firm.
Update: It is no longer free but you can email me so I can intimate you when next promotion starts.
Update: It is no longer free but you can email me so I can intimate you when next promotion starts.
Saturday, July 14, 2012
Friday, July 13, 2012
Keynes returning?
Yves Smith has guest post by Paul Davidson author of The Keynes Solution. I generally liked the post and recommend you read it too. Here are some points I would like to make:
- Republicans abhor government but still want to get elected. Sounds like wanting the job you hate doing.
- It is never about taxes it is always about demand, if demand exists taxes are affordable. Don't eliminate taxes make them affordable by getting demand.
- Prudent regulation is good idea. Else it is like a football match without referees and ground markings.
- At 2008, either solution Keynes or otherwise would have worked. Today only alternative is Keynes.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Thursday, July 12, 2012
Combining managerial and economic theory of firm
Understanding Firm - A Manager's model of the Firm presents a new model combining managerial and economic theory of the firm.
Combining Managerial and Economic theory of the Firm
Understanding Firm - A Manager's model of the Firm presents a new model combining managerial and economic theory of the firm.
Understand Firms - A Manager's Model of the Firm
My book "Understanding Firms - A Manager's Model of the Firm has been launched.
Generations ago, the firm was conceived in the image of the army. Since then the army has moved on, but the firm hasn’t. Naturally, we experience severe difficulty while working with firms. Employees are dissatisfied, mergers fail, innovation is impossible, cost cutting is never enough and growth is not always profitable. May be we don’t understand the firm so well.
The book presents a unique model at intersection of economic and managerial theory. The model uses five elements - the concept of transaction chains, Coase transaction cost hypothesis, Porter’s bargaining power theory, a new way of profiling transaction and new types of roles undertaken by employees.
This model provides insights into which mergers will work, how to make them work, how to promote disruptive innovation, how to manage knowledge oriented teams etc. It explains why sometimes our strategy fails, why we are blind to competition and inefficiency. This model provides a new framework for thinking about firms. This framework will help us make firms better.
Tuesday, July 10, 2012
My book: Understanding Firms
My book Understanding Firms - A Manager's Model of the firm is now available.
The book presents a unique model at intersection of economic and managerial theory. The model uses five elements - the concept of transaction chains, Coase transaction cost hypothesis, Porter’s bargaining power theory, a new way of profiling transaction and new types of roles undertaken by employees.
This model provides insights into which mergers will work, how to make them work, how to promote disruptive innovation, how to manage knowledge oriented teams etc. It explains why sometimes our strategy fails, why we are blind to competition and inefficiency. This model provides a new framework for thinking about firms. This framework will help us make firms better.
I say the book is essential read for managers, investors and everyone who works in organizations. The kindle version is available at $5 (£ 3.50 and € 4.00) and print at $8 (£ 5.50 and € 6.50)
Let me know what do you think about ideas presented in the book.
Saturday, July 07, 2012
LIBOR and US Dollar
The ongoing Libor scandal is interesting to watch for other reasons as well.
First, Libor is benchmark against all the debt-risk is priced. Ok, Us treasury yields are the main benchmark, but Libor performs quite similar function. What the scandal tells us is than since last so many years this benchmark was flawed. Therefore, real Libor must be something different and hence the risk linked to it must be adequately readjusted.
Second, how will you readjust the risk without knowing what the benchmark should be. In geometry a similar problem occurs when there is a change of origin. When axes or origin are/is changed the coordinates make no sense unless you know the coordinates of new origin as per the old axis. It creates a hell lot of confusion in the geometry class when this concept is taught. Same confusion can be caused in debt markets as well. Bankers will need to reprice the debt.
Same is true with US Dollar
We really don't know what is the real value of dollar but we know value of all other currencies relative to the dollar. So watch the Libor scandal unravel will point us to important lessons for dollar. So watch carefully!
Wednesday, June 13, 2012
DJIA 1920-1940
A lot of people are drawing parallels between 1930-31 and today. I thought let me post a chart of DJIA over that period to understand what it means for us.
Courtesy: Stockcharts
Tuesday, June 12, 2012
Elinor Ostrom
Elinor Ostrom is no more and economics is poorer today. Her work on management of commons and economics in general was path-breaking. She was the only woman Nobel Laureate in Economics. RIP Ms. Ostrom we will never find someone as capable to carry forward your work.
Rahul
Monday, June 11, 2012
Parallels and differences Germany vs. EU and US vs. China
I would like to draw attention of policy watchers to this interesting parallel - What Germany is to EU, China is to US. I have raised this point earlier as well.
- Germany is the manufacturing powerhouse primed by debt-accumulation across EU just like China is manufacturing powerhouse primed by US debt.
- Both Germany and China hold government bonds in quantities that may break the bond markets and trigger concurrent run on currencies and banks.
- Both want others to follow austerity while trying to keep interest rates low and economy primed at low unemployment.
- In effect, both will have to be architects of bailouts at substantial costs to their respective tax payers. It seems unfair but it is only reasonable way out of the current problem.
Thursday, June 07, 2012
George Soros - remarks on the Euro
Rocking Jude pointed towards a recent George Soros Speech about EU crisis (among other things) via Business Insider, which I believe is a must read. Here are some diverse but important issues:
- Soros highlights "you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it." which I agree with. However, those forcing the governments to austerity may do well to remember that in the end, government enjoy a kind of legitimacy that they don't. So if push comes to shove, the politicians will roast them alive and announce a victory parade while they are at it. One of the solution to a debt crisis is to eliminate the creditor. History bears witness to many such "eliminations" (a few of them quite physical).
- The objective of the economic studies should not be search for Newtonian-like laws but rather seeking engineering objectives of "fail safe" and "factor of safety" into regulation, policy and economic system as a whole. The current risk management system is falling woefully short.
- Two-level currency system: An ideal currency system, I think, may be a two level currency system. A currency at the national level should signal the relative prices of goods and services in the economy. An international currency should signal the confidence in the judgement exercised in national currency. The international currency therefore decides the relative prices of currencies and thus of everything.
- The problem of EU is that at current position it is unsustainable. It has either to go forth (towards complete integration) or go back (break-up). Mustering the political will to forth in such climate is challenging as Soros highlights.
Wednesday, June 06, 2012
Importance of Emerging markets in portfolio
Here are my comments:
- Growth is in EMs: If you use GDP growth in addition to GDP, emerging markets will come out still higher.
- Currency story: The undervalued currencies of EM economies make it good opportunity from currency gains aspect as well.
- Known trajectory: EM economies require product and services, regulations, infrastructure along well established and well understood lines. We have done such things in developed markets before and thus it is less risky.
- Less consumer leverage: One significant difference between other economies and EMs is consumer is not leveraged. In fact there is substantial class of people with good amount of savings and latent demand. Thus, once government policies are on track, you can have growth and not face deleveraging.
- Political risks: Government or political risks, to my mind are same as developed countries. All politicians are jack-asses and we have seen how politicians from any country, developed or emerging, can turn it into a banana republic. Further, some entrenched vested interest may work against developed economies in this case.
Explaining Indian Policy Paralysis
A lot of recent comments, including mine, have pointed out the lack of policy commitment from the government. I believe there is a reason to this policy logjam and it may reverse quite quickly, to surprise of many, making the current time most critical time to invest in the country. To warn this is a conjecture.
- Indian politics has undergone a change of mechanism in financing. A significant (non-trivial) percentage of money deployed in politics comes from stock markets where it remains invested in distributed accounts.
- This implies that the stock markets must have a good peak about a year before the election. Year being the approximate time required to oil the election machinery of the political parties.
- This also implies that there should be a good opportunity to invest around 2 years before the election without which the peak referred above will have no meaning.
- Political money is gained from rent-seeking and corruption and not invested in first three years as it is being collected at that time. It is usually available around 2 years after new government takes office, the bulk being available around 3 years time. (term of government = 5 years in India)
- Insiders inform me that Late Mr. Pramod Mahajan (parliamentarian of BJP) was amongst the pioneers of such strategy around 2002-03. Subsequently ruling party Congress, inducted relevant talent into this strategy. Some say, former finance minister P. Chidambaram, known for his investment sense, may have used this means earlier. Though I have heard conflicting reports that state branches of parties in South using similar means since 1998-99.
- While earlier efforts benefitted from a global bull market, current efforts require ingenuity to create returns in an adverse global macro environment.
- I hear that ruling party has taken an ingenious approach to current problem. The first phase of the strategy is to create policy misdirection, increase rhetoric and in general cause panic and injure investor sentiment (only enough to create a equity market). The second phase is to establish policy direction and build credible reform base that should lead to uptick in equity markets.
- The magnitude of money involved is not small. Even small district magistrates have wealth in excess of INR 50 million. Politicians have access to money in excess of INR 200 million each. There are tons of them. However, substantial amount of this money is in black (cash not accounted or declared) and thus cannot be funneled into the equity markets. However, the numbers are mind-boggling.
Thus, I expect:
- Reform process to gather steam from current levels.
- Increasingly positive policy news of reform and clarity coming from governments.
- In general improving investment climate.
- Proactive and improved response from government to cushion or even counter negative news coming from global economies.
- Government may talk the market up.
Implication for Equities:
- I believe this current level is a bottom for next year or more.
- From this point we will move up is a sustained manner till beyond March of next year (around).
- At that point we may see a sharp correction as money starts being pulled out of the markets.
- So, this is time to be long India and get out by March next year.
- Risk is that if all start working on the same strategy exit needs to be critically examined.
Tuesday, June 05, 2012
Problem of Indian Economy
The problem of Indian Economy needs to be explained better.
Imagine the economy as a car (favourite of economists). The car has an engine of 4 cylinders (say). Then process of policy development adds cylinders to the engine. Thus, with prudent reform and policies the 4-cylinder engine economy can grow to become 6-cylinder engine economy. This is achieved while the 4-cylinder engine is still working and therefore is a complicated process.
First set of problems
Indian Economy is a car with 4 cylinder engine (as against US economy which could be 16 cylinder or China could be 12-cylinder etc). This engine is capable of growing at ~7% steadily. But to grow at 9-10% we need a bigger engine. Sadly, the Indian politician has no inclination to undertake these reforms.
Second set of problems
To add to our woes, the 4-cylinder engine itself is not running to its capacity. Not all cylinders are firing, brakes are engaged slowing the economy and there isn't enough lubrication to transmit all the engine power to the wheels. As a result we are finding it difficult to hold on to 6% GDP growth. Here again the problems are created by political class.
Solutions
In times of global macro-economic distress, one expects politicians to at the very least avoid second set of problems. In corporate lingo, these can be solved by "de-bottlenecking". In other words just simplify the procedure and keep policy clear and simple and you will have solved second set of problems.
Tackling first set of problems is going to be difficult and will need decisive political leadership that sadly is not even available on the far horizon.
Monday, June 04, 2012
Austerity isn't a choice!
If you are already in debt, then you cannot get out of this mess (or hole) by borrowing more. Or can you?
This is oft repeated argument you will hear in current crisis. Well, here is my clarification.
Who is the "you" in that statement?
If you includes everyone then austerity won't help. If, on the other hand, "you" only refers to government then austerity may help.
What do you do when you find yourself in a deep hole?
Frankly, tell me what would you do? Would you say starve yourself that you may become lighter and thus be easy to pull out by some onlooker or, for that matter, rise to top? Or would you gain strength and carve out steps on the side of the hole and try to climb up? I would definitely do the latter. But it involves digging. But I cannot be expected to dig to make the hole deeper.
In other words, we need to dig, just not deeper. We need stimulus. But one that can create competence and help build a path out of this mess. Thus it becomes very critical for government to choose the projects rightly - something not many governments are good at.
Big government vs small governments
Just remember, governments must get bigger when everyone else is getting smaller and vice versa.
Indian Economy: Difference between 2001 and 2012
The difference between Indian Economy of 2001 and 2012 relates to how demand and policy are inter-related.
In 2001, policy certainty (directional certainty) helped drive investments when demand was yet not established. In 2012, demand is well established but it is the lack of policy certainty (again directional) that is preventing investments.
Thus, if India can sort out its politics it can gain quite a bit in a short time. Meaningless ambivalence about policy has condemned India to low growth seen recently. Hopefully the 5.3% quarterly GDP growth may wake the government from its slumber.
In 2001, policy certainty (directional certainty) helped drive investments when demand was yet not established. In 2012, demand is well established but it is the lack of policy certainty (again directional) that is preventing investments.
Thus, if India can sort out its politics it can gain quite a bit in a short time. Meaningless ambivalence about policy has condemned India to low growth seen recently. Hopefully the 5.3% quarterly GDP growth may wake the government from its slumber.
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