business – Page 18 – Pertinent Observations

Air India

There’s something quaint about traveling air India as I just did on my way to Mumbai. The aircraft are old of course and you can see some parts of the seats are broken. Apart from that though it was a rather pleasant flight.

The food was great as usual. Fluffy and creamy omelettes served with bits of zucchini and peppers. Papaya that was route and fresh unlike what jet airways serves. And the same old naayi bun and coffee.

It was a pleasure watching the stewardess through their weight around, though. One could say that their snarkiness was a welcome change from the sugary sweetness of jet and indigo stewardesses. It was rather charming to watch.

Now these stewardesses are from another era, one where air fares were expensive and only people from a certain strata of society flew. Now these people don’t seem too have taken too kindly to the egalitarian shift in passenger profile and have consequently put on a condescending attitude to passengers

As they came around with breakfast they snapped ‘sir don’t you want breakfast’ brusquely waking people up in the process. I happened to ask one of them what was for breakfast and she snapped, ‘we always have omelette for breakfast’ with her tone indicating that I was a philistine who hardly flew. I wanted to tell her that I rarely fly air India but then the creamy omelette beckoned.

The best part of today’s journey, though, was that for perhaps the first time in six months during which I’ve probably taken two dozen flights there was an empty middle seat next to me. A the joys of the old times of 70% passenger load factors!!

Home Equity

I’m looking to purchase a house. However, the amount of cash I have with me will not suffice to completely fund the house. Given that I’m confident of earning that difference amount in the future means that some bank will give me a mortgage, and I will thus finance my house with debt. Question is why I can’t finance the house with equity instead.

Let’s say the house I want to buy costs Rs. 1 Crore and I have with me Rs. 50 lakh. Instead of taking a loan for the balance Rs. 50 lakh, why can’t I sell equity instead? A consortium of investors can be invited to invest the balance Rs. 50 lakh in exchange for a 50% stake in the house. Rather, we set up a company that owns my house of which I own 50%, and every month I pay a rent to this company. As and when I get additional funds I start buying up additional shares in the company that owns my home and soon I’ll own it completely.

So who will be these people that will invest the balance 50% in my house? They are going to be dedicated real estate investment funds and their business will be to invest in minority stakes in properties of different sizes and in different parts of the town and country. This they are going to fund via a bunch of funds that allow ordinary investors to take exposure to real estate.

Currently there is no way I can invest in real estate except for taking on a large mortgage and purchasing a whole house. If I’m saving up money to buy a house some day and want to invest it in a way that will help me partially hedge against increase in real estate prices (something that I’m unable to do today) I simply buy units in one of these real estate funds. On the other hand, if I sense there might be some problems with my property (let’s say it is ripe for acquisition by the government for some road widening purpose, let’s say) I can sell some part of it to some of these real estate firms, thus reducing my risk of ownership.

These real estate funds can offer a variety of funds that invest in different kinds of properties in different proportions (like you can have a fund that invests 50% of its money in housing, 30% in commercial real estate and 10% in farmland, say). This allows ordinary investors to get exposure to real estate without any large down payments or mortgages. And reduce the risk of owning property in a particular place (let’s say I’m concerned that property prices in Bangalore might fall while those in tier 2 cities might go up. I will simply sell stock in my Bangalore house and invest the money in a fund that invests in houses in tier 2 cities, thus hedging myself).

Why is such a structure not popular already? In fact, I don’t think you have such structures anywhere in the world. One problem in India is the massive transaction taxes on real estate which makes the market illiquid. If that goes, is there anything that prevents us into getting into a culture of home equity?

Levers and Pulleys

I’m writing this based on my insights as a management consultant. Apologies in advance if I end up on a global or gyaan-spouting trip

One of the most common ways of ending up in corporate paralysis is to split up a particular target into constituent “levers” and hand over the management of each of these “levers” to a different manager. You construct an elaborate funnel based on several filters, and put a manager in charge of maximizing the efficiency of each of these filters. In the course of time, this manager’s performance will start getting measured on the effectiveness of the filter alone. The filter will get refined, and soon you will have the most perfect filters. And then you find that there is no way forward.

Beyond a point, any filter will stop working. This is because it hits what can be described as its “natural efficiency”. After this point, the only way you will be able to increase the output beyond this particular filter will be to increase the overall input to the filter. However, increasing the overall input will mean that this input will be of a lower quality than the input based on which the filter was perfected. Which means there will be a (at least temporary) loss of performance in this particular filter. Which means that the manager in charge of this filter will see a temporary dip in his own performance, based on the metrics he is currently measured on. It is now easy to see why it is in his interest to block any move to increase the volume of input! Apply this process at all points of the “funnel” and you see that the entire system is at a standstill.

The problem lies in the part of the process where an artificially defined construct, such as a particular efficiency ratio becomes sacrosanct and gets institutionalized as someone’s performance metric. Let me illustrate this with an example.

Business school graduates and followers of corporate brothels will be familiar with the concept of the DuPont analysis. It is basically a combination of three ratios – leverage, asset turnover and profit margin, all of which together gives you to the return on invested capital, which according to the authors of the model, is the holy grail of evaluating a company.

Suppose you believe in this analysis and so put one senior manager in charge of each component of the DuPont analysis. So your finance manager is in charge of leverage, ops manager for asset turnover and one other guy for profit margin. The firm has gone ahead in such a way that each of these managers are now evaluated according to these ratios. All of them are doing great jobs and have optimized their respective silos. Now, you decide that the firm needs to expand further. How do you go about it?

You need to invest in some capital goods. So how do you pay for it? If you take a loan, interest payments will affect your profit margin and the manager in charge of that will object. The other option would be to raise equity capital, but now the leverage is lost and the finance manager is not happy. Let’s say you work out some way to finance the deal. Now in the time it takes for this asset to start “producing”, the asset turnover is going to be depressed so the ops manager is unhappy. So as long as you measure your managers on these “intermediate goals”, the larger objective of business expansion will get compromised.

Khamir Rouge

I spent most of the last weekend at a workshop organized by this not-for-profit called Khamir somewhere near Bhuj in Kutch. It was a rather small-scale festival they had organized called the Desert Art and Music Festival (though the fees were anything but small scale, setting each participant back by seven and a half kilorupees). The art on display were crafts local to the Kutch region, and we were given hands-on training in various crafts by artisans that worked with Khamir. The music, sadly, wasn’t Kutchi, as two rather large bands had been imported from Rajasthan (from Bikaner and Jaisalmer) and local musicians only played the opening acts.

I’m not entirely convinced by Khamir’s business model. Ok that may not be an accurate statement since strictly speaking Khamir isn’t a business, but to put it in another way, I’m not convinced that Khamir’s contribution to the ecosystem of handicraft artisans in Kutch is entirely positive. It may not be possible to make a convincing economic argument right now, but my sense is that they are distorting the market for handicrafts.

Actually it may not even be their fault. In a rare conversation on economics with one of the artisans, I found that it is actually easier to start a not-for-profit than a for-profit. This artisan wanted to train youth in his village and surrounding areas, and had found that there was considerable demand abroad for what he made. When I asked him why he didn’t set up a for-profit company instead, the answer was that it was next to impossible for him to get a bank loan for one such venture. But he had found some means by which he had tied up a rather large no-questions-asked donation from the Government of Gujarat.

Coming back to Khamir, they are in the business (ok it’s impossible for me to think in a non-business sense) of promoting the crafts of Kutch. They have a number of “studios” where local artisans, who have been given raw material, work and they sell the products in their own local shop and also in the US and Canada. Apart from this, they procure stuff from other local artisans and sell it on. In that sense, they are just like any other middlemen – except that they are not for profit.

If you ask why this is a problem, I point you to the Indian airline industry. When one player in the market doesn’t have a strict profit motive (like Air India), they can work on wafer thin (or even negative) margins, a level at which their for-profit competitors cannot really compete. Sooner or later, the for-profit competitors get driven out of business (like Kingfisher Airlines, for example), and soon the market itself has disappeared!

While Khamir itself might be too small (their campus suggests they are rather well funded, but their scale of operations doesn’t seem commensurate), the fact that it is easier to get funding for not-for-profit than to start a for-profit business in this space (as the artisan alluded) raises the sceptre that there could soon be more such not-for-profit middlemen in this business, which might make a real dent in the business of Kutchi crafts.

The story of intermediation in this market is also interesting and deserves to be sold. Both the artisans we spoke to said they don’t prefer to do business with large for-profit middlemen such as FabIndia or Mother Earth since the latter demand a high degree of standardization, which is tough to achieve in a hand-craft environment. Rather than face high rejection rates at such middlemen, the artisans instead find it more profitable to peddle their wares at sundry craft exhibitions all over India, where they are more likely to sell their stuff, though with a higher risk in terms of profits and considerable hardship in terms of travel and sales.

The thing with handicrafts is that the market is rather fragmented and it is only really large-scale players such as FabIndia or Mother Earth who have cracked the model in terms of effective intermediation (the large scale is necessary given the fragmentation of the market). The “illiquidity” in the market means that inventory costs can get rather high, and thus a considerable retail margin needs to be allowed for to enable effective intermediation. In the face of this, organizations such as Khamir who “work to give as much money as possible to artisans” can get rather distortionary.

Two minutes was watching a weaver work at the Khamir facility drove me nuts (it was such a laborious process I wasn’t able to take it any longer). So there is this wooden piece that has to be tossed from one side of the loom to the other each time a thread is passed (and the thread has to be practically hammered in to the rest of the cloth) so even a full day of work by a skilled artisan can only produce a few meters of cloth. Watching the hand loom weavers work even made me wonder if promotion of such arts only serves to keep people poor.

So the problem is that handloom weaving is a rather laborious process, and extremely inefficient economically. The same kind of cloth when produced by a machine results in significantly lower cost, and by that logic, handloom weaving being an ineffective process should probably go extinct. While premium branding for handloom in certain circles has ensured higher prices that could possibly compensate the weavers, it is not unfathomable that machines will be soon able to make (if not already) cloth in a texture similar to what is produced by hand looms.

For someone with a short attention span and ADHD and for someone who is a computer programmer, it was unfathomable that people do a rather laborious task repeatedly through the course of the day, and over several days, to earn their living. We asked an artisan why he continued to make cloth by hand, and he replied that the handloom tag helped him earn a better margin. When I suggested to him that greater volumes would make up for the lesser margins that powered looms would offer, he talked about certain intricate designs that according to him only hand loom could create. I could only think of one thing at that moment – the CNC Lathe.

I find the entire ecosystem disturbing. That it is easier to find funding for a not-for-profit venture than for for-profit. That these funds are being used to keep alive trades that have no business to do business (given their inefficiencies). That these efforts put the artisans into a false lull that there actually exists demand for their produce, and at a level that can compensate for their inefficient processes. Which prevents creative destruction, and holds back innovation. And leads to the not-for-profits painting a rather romanticized picture of poverty and traditional rural crafts to get more funding. The cycle continues.

Given that the festival did not have sponsors, I would assume that a significant portion of the fee I paid would have gone into paying the musicians. For that level of fee, I expected a rather small and intimate concert. Instead what I got was two public concerts (where the general public got to watch for free) where there were more speeches than there was music, and one of which started so late into the night that I drifted off.

In the world of not-for-profits, I suspect that “value for money” is perhaps a dirty phrase.

The Trouble with Management Consulting

While I was pumping iron (I know, I know!!) at the gym on Wednesday evening, I got a call from a client seeking to confirm our meeting yesterday afternoon. “Why don’t you put together a presentation with all the insights you’ve gathered so far?”, he suggested, adding that he was planning to call a few more stakeholders to the meeting and it would be good to give them an insight into what is happening.

Most of my morning yesterday was spent putting together the presentation, and I’m not usually one who bothers that much about the finer details in a presentation. As long as the insights are in place I’m good, I think. I had also worked late into the night on Wednesday trying to refine some algorithms, the result of which were to go into the presentation. In short, the client’s request for the presentation had turned the 18 hours between the phone call and the meeting topsy-turvy.

It is amazing how many people expect you to have a powerpoint (or Keynote) presentation every time you walk into a meeting with them. For someone like me, who doesn’t like to prepare power points unless there are specific things to show, it can get rather irritating. Some presentations are necessary, of course, like the one to the CEO of another client that I made last Thursday. What gets my goat is when people start expecting powerpoints from you even at status update meetings.

Preparing presentations is a rather time-consuming process. You need to be careful about what you present and how you present it. You need to make sure that your visualizations are labeled well and intuitive. You need to sometimes find words to fill slides that would otherwise appear empty. And if you are not me, you will need to spend time with precise and consistent formatting and dotting the is and crossing the Ts (I usually don’t bother about this bit, even in presentation to the CEO. As long as content is there and is presentable I go ahead).

So when you have to make presentations to your clients regularly, and at every status update meeting, you can only imagine how much of your time goes into just preparing the presentations rather than doing real work!

The other resource drain in the consulting business is working from client site. While it is true that you get massive amount of work done when you are actually there and have a much shorter turn around time for your requests, spending all your time there can lead to extreme inefficiency and lack of thought.

When you spend all your time at the client site, it invariably leads to more frequent status updates, and hence more presentations and thus more time spent making presentations rather than doing real work. The real damage, though, is significantly more. When you spend all your time at your client’s site, it is easy to get drawn into what can be called as “client servicing mode”. Since you meet the client often, you will have to update him often, and you are always looking for something to update him every time you need to meet him.

Consequently, you end up putting on yourself a number of short deadlines, and each day, each hour, you strive to simply meet the next short deadline you’ve set for yourself. While this might discipline you in terms of keeping your work going and make sure you deliver the entire package on time, it also results in lack of real thinking time.

Often when you are working on a large project, you need to take a step back and look at the big picture and look at where it is all going. There will be times when you realize that some time invested in simply thinking about a problem and coming up with a “global” solution is going to pay off in the long run. You will want to take some time away from the day-to-day running so that you can work on your “global” solution.

Unfortunately a client servicing environment doesn’t afford you this time. Due to your constant short deadlines, you will always end up on a “greedy” path of chasing the nearest local optimum. There is little chance of any kind of pathbreaking work that can be done in this scenario.

In my work I have taken a conscious decision to not visit my client’s office unless it is absolutely necessary. Of course, there are times when I need to expedite something and think being there will increase my own efficiency also and spend time there. But at other times, when I”m away, here in Bangalore, the fact that there are times when there are no immediate deadlines also means that I get the time to invest on “global” thought and on developing ideas that are long-term optimal.

The long-term productivity that emerges from spending time working off-site never ceases to amaze me!

CEO Presentations and Rocky Movies

As part of my consulting assignment, yesterday I had to make a presentation to the CEO of my client. The process of preparing the presentation reminded me of Rocky (or any other Martial Arts movie). In these movies, before the protagonist can challenge the antagonist, he has to go through a series of underlings. Only after the protagonists has defeated all the underlings does the antagonist accept his challenge to a fight.

The work itself was done in consultation with a mid-level manager who heads the division that follows the process that I was going to recommend. While we had had a few rounds of discussions which led to the recommendations, I had prepared the presentation all by myself, and most of Wednesday was spent with him fixing the presentation.

Next we went to his boss, and repeated the process. Then to the boss’s boss. Then to someone else in the top management who would not be available for the main presentation! The hour before the main presentation was spent with the head of the division in whose realm the processes I was recommending fell. And then I got to the CEO.

Two hours before the meeting with the CEO, a couple of client team members and I were discussing the finer points of seppuku and hara-kiri. An hour before the presentation, the division head and I were discussing the Mahabharata!

The entire hierarchy was present for the meeting with the CEO (the mid-manager I had worked with, his boss, his underling, his boss’s boss and a couple of other people). Still typing away on his iPhone, without looking up, the CEO asked, “are all of you in agreement with what is in this presentation or are these Karthik’s recommendations alone?”

The Rocky Process was worth it, after all!

PS: I’m writing this sitting at the client’s office, in between meetings.

Farmers as businessmen

My association with the Takshashila Institution took me on a field trip today to trace the story of the not-so-humble potato. The journey actually started last night, as we checked out potato prices at retail stores near our respective homes. And we continued the journey this morning, in reverse order as we went first to the APMC Mandi in Bangalore and then to the potato growing areas near Arkalgud, in Hassan district. As an aside, today was the first time I visited (or rather passed through) my mother’s native place Holenarasipura (the H in her initials stood for that).

When we build narratives about farmers in India, we talk about the “humble farmer”, the “poor farmer”, the “farmer dying in Vidarbha”, the farmer exploited by zamindars, and of India itself as a “nation of farmers”. The one part of a farmer’s job that never makes it to the popular narratives is his role as a businessman and entrepreneur. A farmer we met at the APMC yard at Bangalore this morning had delayed his journey from Bettadapura by four days, only to realize a lower price than what he would have got on Tuesday. Another near Arkalgud had grown tobacco late in the season, not knowing the complications that could arise due to rainfall patterns.

Back in school when I studied Hindi, I read a story by Munshi Premchand about a young man who moves to a village because he wants to be a farmer. That story ends with him returning disgruntled to the city, claiming there is more to be done by the farmer in the city than just doing his job as a farmer. That story, which I remember as being beautifully written (though I don’t remember its name), is a good primer into how much of a business farming really is.

Consider the decisions that a farmer has to make, and decide if this is closer to being a businessman or being a tiller. First he has to decide what crop to plant. Next, he has to decide what exact variety to sow, and what variety of seeds to procure. Then comes the rather big decision about the timing of the sowing of the crop, comes as it does with dicey predictions and forecasts of rain which even the Met department can’t get right. That done, the farmer has to decide on the labour he needs to employ for the sowing season, and whether he needs to hire a tractor. Then towards the end of the season, there are decisions about hiring of labour with respect to harvest, decisions on where to sell and most importantly, timing the market right in order to realize the best possible price for his crop. And the farmer is his own salesman also, having to negotiate the price at which he sells.

Commenting on the pittance that the farmer stands to make (in terms of a profit) on what he grows, one of my colleagues on today’s field trip said it was a no-brainer – in the long line of businessmen who stand between a crop and the customer, he said, the farmer is the worst businessman, so it is no surprise that he is the one who gets squeezed the worst.

From a “corporate strategy” standpoint, the amount of management required in the farming profession suggests that it makes eminent sense to separate the roles of the farm manager (who plans inputs , labour hire, sales, crop mix, etc.) and the farmer (who does the day to day job of tending to the farm and looking after the crops). Unfortunately, the fragmented nature of land holdings in India doesn’t allow us this luxury. In fact, there is evidence to suggest that back in the days of unequal (and supposedly unfair) land-holdings, this was perhaps actually the case, with farm managers (zamindars) taking the risk and making the big decisions, while leaving the actual farming job to the specialist farmers. Unfortunately, supposedly pro-farmer initiatives such as the Land Reforms Acts and the “land to the tiller” movement served to defeat this separation of responsibilities.

The other big problem with farming is the amount of risk in the business. At one of the farms, we saw heaps of potatoes which had been cast aside because of blight (wasn’t that the same culprit that caused the Irish potato famine back in the 1800s?). In another farm, lack of timely rain had meant that potatoes hadn’t grown to the size to which they had been expected to grow, thus resulting in much lower realizations in terms of output. Even with the best possible management, exposure to the elements means there is always a significant amount of risk in farming. Current land holdings, though, don’t allow a farmer to diversify his risk by planting more than one crop.

Fragmented land holdings creates a further problem – the produce from one farm is usually way too small to make it viable to take it to the market 200 km away in Bangalore, where an auction at the “mandi” can help the farmer realize the best possible price (more on this auction in another post). Instead, the farmer is forced to sell to local aggregators and simply accept the price the latter is willing to offer (in small centers such as Arkalgud, there isn’t much choice the farmer has in who he sells to). We met a local farmer there with considerably bigger holdings than others in his area, and he told us that he had enough to make a trip to Bangalore viable, and there was no reason he would sell locally.

From a purely business perspective, the logical way forward for farming in India would be consolidation. Consolidation of land holdings would solve several of the problems that I’ve mentioned above, and also make it viable for the farms to appoint specialist managers. One possible way forward I see would be for a bunch of farmers with contiguous farms to get together and form a private limited company (with their respective shares being proportional to their land holdings). The farmers can continue managing their own pieces of farmland, while they appoint a professional manager to do business for them (think of it as being similar to geeks Sergey Brin and Larry Page bringing in professional CEO Eric Schmidt to run Google).

Yes, that paragraph might sound too grand and fantastical, but I don’t see any other way out for Indian farmers to do better. It is time that policymakers recognize the amount of management that goes into farming, and understand that keeping farm sizes small does no good for the lot of the farmer. A comparable example would be the Indian textile industry, where labour laws have served to keep manufacturers tiny, and has resulted in them losing out to larger competitors from the Far East (who have no such constraints, and are thus able to do better business).

So what policy interventions do we need to enable better management of Indian farming? Undoubtedly, the one decision that can potentially go the farthest in this direction is to make purchase and sale of farmland easier. So far, laws that have been designed to keep “evil capitalists” out of the noble farming profession have sought to make farm-holdings illiquid, and hard to purchase or sell (making farm land sales more liquid will also ease land acquisitions for industrial purposes and infrastructure projects). However, the fact of the matter is that there is a significant amount of management skills required to successfully run a farm, and the best way to achieve that would be to be inclusive of “evil capitalists”.

The narrative about the Indian farmer needs to change, and change in a way that recognizes him as being a businessman. The sooner our policymakers recognize the business aspect of farming, the easier it would be in making farming a viable profession in India.

Liquidity

In economic theory, outside of capital markets, “liquidity” is a topic that isn’t spoken about as much as it should. While I’m no academician to set this right in theoretical circles, I’ll make an attempt to help my readers what the fuss is all about.

Well past midnight, when you exit a mall after having just watched the “second show” of a movie, you will find a bunch of auto rickshaw drivers who accost you. Without exception, each of them is likely to quote an exorbitant price to take you home. As the night goes on, there is a reasonable chance that some of these drivers will have to move away from the mall, unable to have found a customer for the night.

Two months back, I was looking to purchase a high end laptop. I walked the high streets of Bangalore, going to every big and small computer store I came across. Each brand had a maximum of one laptop that fit my requirements. I ended up purchasing the laptop I’m typing this post on in the US (got a cousin to bring it in for me).

In London in 2005, a sandwich at Subway cost less than two pounds, while a Masala Dosa at a half-decent restaurant cost at least seven or eight pounds. In Bangalore today, a first rate Masala dosa won’t set you back by more than thirty rupees, while a standard unexceptional “sub of the day” at a subway costs over twice that amount.

All the above cases of pricing anomalies or market failures can be ascribed to “lack of liquidity”. In financial literature, liquidity is defined as an asset‘s ability to be sold without causing a significant movement in the price and with minimum loss of value (source: Wikipedia). From a practitioner’s standpoint, liquidity is positively correlated with the amount of activity that is happening in the market – the more the buyers and sellers for a particular security, the less the “transaction cost” you incur in selling it.

Auto rickshaws in the middle of the night, dosas in London, subs in Bangalore and high end laptops in India – they are all examples of markets that (by the above definition) are highly illiquid. In each of the above markets, the number of buyers and sellers at any point of time is low (relative to other comparable markets – such as auto rickshaws in the evening or dosas in Bangalore). Thanks to that, the “bid ask spread” (my apologies for continuing to use financial jargon. Bid ask spread refers to the price between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept) is high, and consequently, buyers end up paying a high price, or in some cases, sellers end up not realizing a high enough price for their good.

Now, why should this happen? Doesn’t it sound counterintuitive if I say that “there isn’t much demand for subs in Bangalore, hence the price is high”? The fact is that when I say that “there isn’t much demand” I omit saying that there isn’t much supply also. This calls for further explanation.

Let us imagine a world where it is impossible for a buyer and a seller to interact directly to conduct a sale (this sounds like dystopia, but let us imagine a situation like that). In this world, there are a bunch of “specialists” called “market makers”, whose only job is to buy and sell goods. So if you are the seller of a particular good, instead of finding a buyer, you sell it to a market maker, who takes the risk of holding on to your good (carrying cost, possible damage, risk of sudden fall in value of that class of goods, etc.) until he has found a seller. Similarly, if you want to buy something, you only contact a market maker.

When there are a large number of buyers and a large number of sellers for a particular good, the costs of making markets is low. Due to the number of buyers, the average length of time a market maker has to hold on to the good is low, which automatically reduces the risk of making markets in this particular good. Since the cost of making markets in this good is low, more market makers will want to make markets for this particular good. Their competition lowers the bid-ask spread (refer to definition above), and thus both buyers and sellers will realize a price that is close to the true market clearing price.

Now what happens when there are few buyers and sellers for a good? Very few market makers will want to trade in this good, since the risk of holding on to these goods is significantly higher. Consequently, there is less competition among market makers and the bid ask spread remains high (while it is a fact that the cost of market making is also high for these goods, the lack of competition in market makers further pushes up the spread). As a seller, you now have much less choice in terms of buyers for your good, so you end up accepting a rate much lower than true market clearing price. Similarly, as a buyer, you end up paying exorbitant prices.

Now let us get back to the real world where buyers and sellers can actually interact. It can be seen as being similar to the above world, but with the change that buyers and sellers are their own market makers! The cost of making markets comes into play here. As a seller of auto rickshaw services outside a mall past midnight, you know there is a risk of not finding a buyer for your services. You try and price in this risk in the price you quote, and you end up asking for more than the market clearing rate, and there is a good chance there will be no takers for that rate, until you get desperate about finding a customer and quote something below the clearing rate. If you are looking to hail a rickshaw outside a mall past midnight, you are wary of being stranded there without a ride home, so you end up paying much more than the true clearing price.

Several examples of this nature abound. Like how real estate prices are “sticky”, and builders refuse to drop prices in the face of falling demand (note there that real estate brokers are not market makers – they don’t take on the risk of holding on to the asset). Like how I get suboptimal rent for the house that I own in Kathriguppe in Bangalore, only because there aren’t too many people who want to rent a 3BHK independent house. And how apple products are almost a fourth more expensive in India than in the US.

Moving briefly from micro to macro economics, GDP grows when there is more economic activity, or when there is more trade. One way of increasing GDP is to foster trade. However, a large number of goods and services that people need, or that people want to provide, are “illiquid” (that includes Quant consulting – which is what I do. There aren’t too many of my ilk around, and no too many organizations interested in buying these services). One way of fostering internal trade, and thus economic growth, is to reduce the cost of market making. When it comes to goods, VAT, in that sense is a step in the right direction since at each step it is charged only on the marginal value added – and thus the presence of an intermediary doesn’t increase the total cost by too much. Stamp duty on real estate, however, is a bad idea. By charging a full tax on every transaction, it dissuades market makers in the sector, and thus keeps markets illiquid and opaque. The worst of all, though, is Agricultural Marketing, where by law the APMCs have monopoly in making markets in agriculture. Now you know why the farmer continues to suffer even though retail prices of agricultural products have been going through the roof.

Ok I end this post with that digression into macroeconomics. However, I do hope that I’ve been able to explain to you why illiquid products are costlier (if you’re a buyer that is)! Let me know in case you have any questions.

Update

This post came about as a result of a twitter conversation earlier today with Dhiren and Pavan. Giving credit where it’s due

Generalists and specialists

So you have generalists and specialists. Generalists are fundamentally smart people who can do a variety of things. They take a look at a problem, take some time to understand the basics, and then go about solving it. They get bored easily, and move from problem to problem. Generally, they don’t dig deep but are well equipped enough to solve most problems.

Specialists, as the name suggests, dig deep into a particular problem. They are the kings of all they survey within their domain, and know every little trick in the book. However, they are usually unaware of the world outside of their wells, and suffer from the hammer-nail problem (to a man with a hammer, everything looks like a nail). They are also deeply insecure – for if their area of specialization gets invaded by generalists, they are likely to lose their livelihood. So, they are incentivized to build walls, and make it harder for generalists to invade. Generalists don’t have any such problem. Given their nature, if one fort gets invaded, they can soon go ransack another.

The world is dominated by specialists, and they continue to build walls around themselves. Artificial barriers to entry get created (such as “experience requirements”). While this keeps their domains safe, it leads to an increase in transaction costs and overall decrease in efficiency.

Take accounting as an example. In principle, it is not a particularly hard practice. What makes it particularly hard for aspiring accountants is the way you go about becoming an accountant. You need to pass an exam, set by the association of accountants, and then intern under an already qualified accountant (who pays you less than minimum wage) and pass another exam (again set by the association of accountants) in order to practice accounting. The exam and internship are rigorous enough that you need to devote two or more years of your life (full time) in trying to get your charter. All for a profession that is fundamentally fairly intuitive. So that the specialists’ turf is protected (of course the accountants have every incentive to keep the requirements to the charter prohibitively tough – for more chartered accountants would mean more competition and hence less margins).

Another example is in math papers. They are so formula and jargon ridden that it is prohibitively difficult for anyone who is not a full-time mathematician to make much sense of them. While some of the rigour may actually be justified, most of it is for the sake of preserving the mathematicians’ turf. The same applies in general to all peer-reviewed paper publication journals and conferences.

Social scientists are afraid of economists. Financial traders (from a commerce background) are afraid of engineers. In business schools, “marketing students” are afraid of “finance students” (more on this in another post). Their only defence is raising barriers, forming cliques and spewing jargon.

Tear Down The Wall! TEAR DOWN THE WALL!! TEAR DOWN THE WALL!!!

Discharge procedures

Earlier today, I had gone to help out a relative who had been admitted to hospital, and who was getting discharged today. The procedure was bizarre, to say the least.

A little before noon, a nurse walked into the room announcing that the discharge formalities were being put in place, and asked us if we had insurance cover (we didn’t). She reappeared five minutes later in order to remove the thing through which the intravenous drip and medicines had been administered. We thought it was time for us to leave, and informed people at the relative’s home to get lunch ready. What we didn’t know was that the “release” process would take nearly three more hours.

Every few minutes, I would walk up to the nurse station on the floor, and ask them when the discharge would happen. For the first one hour, they would tell that the bill would be ready “in ten minutes”. Finally I lost patience (my loss of patience doesn’t exactly make me an appropriate choice of personnel to manage discharge, I know) and asked them to direct me to the person who was actually preparing the bill. The bill was ready a minute after I appeared in front of that person, and it had been settled in the next five minutes.

A word here about the billing procedures. The relative’s ward was on the fifth floor, and I went down to the basement (“floor minus two”) to the billing section where I got the bill. I had to then take the bill and walk up to the ground floor to the cash section to make the payment, and once again take the receipt back down to the basement to get a printed bill.

Anyway, I thought most of the ordeal was done and proudly announced to the nurses at the nurse station that the bill had been cleared and they should let us go. But the discharge summary remained, and for the next hour or more, they said it would be ready “in the next ten minutes”. And once it was done, a nurse had to run down to the basement (yet again!) to collect it and get the signature of the doctor on duty. And run back up six floors (in another bizarre policy, hospital staff are forbidden from using the elevators!).

Then there was the set of prescriptions that were delivered to us regarding the medicines we had to buy for the following one week (and I’ll write a separate post on drugstores located within hospital premises). This wasn’t the first time I was helping someone get discharged, and this wasn’t the first time the discharge process took this long. From my own anecdotal experience, and from that of other relatives who I was talking to today, this is more the norm than the exception.

This makes me wonder why most hospitals, without fail, have such screwed up discharge procedures? Is this a matter of such low priority that all hospitals can consistently choose to ignore it? It is not like the amount of work that needs to be done is immense, so I wonder what prevents hospitals from streamlining the procedure? Or, like some hotels do, fix a discharge time so that they can batch process the procedures?

The problem, in general, with people in businesses that makes them feel noble, I tell you, is that they are not willing to heed to advice. And are not willing to question themselves enough. The nobility of their profession, they believe, places them too high to deal with mundane trivialities such as time taken to discharge a patient! And I’ll write a separate post soon on people in noble professions.