KRI, KPI and PI

Remember the Balanced score card and the strategy map? In the strategy map the drivers are the trained and motivated employees who work as per well defined internal and external processes to deliver products or services which result in performance which can be measured by financial metrics like ROCE or ROE.
As per an article I read today, Key Performance Indicators(KPI) cannot be a financial metric and need to be something which management keeps a tab on every day and every hour. Every employee is in some way responsible for the KPI. Example KPIs are late arrival of flight, customer satisfaction etc. Is it possible to monitor financial metrics every hour and is the investment in such a system economical?

An example Key Results Indicators (KRI) can be the Dupont formula or ROE which can be subsequently decomposed into net profit margin, asset turnover and degree of financial leverage( asset/Equity). Performance indicators can be number of employee suggestions etc. The article also downplayed the causality angle or lead (driver)-> lag (result) analysis method and used the metric late arrival of flight to prove the point. Is this metric a lead or lag indicator?

Outliers review

I just finished reading Outliers by Malcolm Gladwell. It is a good read, what struck me was the lack of any reference to east Indians in the book! Only the korean, chinese .. rice growing chinese from pearl valley delta are taken. This makes me wonder if the author has a selection bias in the data.
One of the organizational behaviour inputs was the importance of autonomy and expectancy in a job, yes the Vrooms expectancy model where the motivation is determined by ones perceived chances of achieving valued outcomes. effort->performance expectancies and performance-> outcome instrumentalities influence the degree of effort, which is almost like P(A/B) is a factor of P(B/C) chaining. Also note that during my MBA I could not discriminate between performance and outcome :P, its only in a job that you start realizing the asymmetry of performance and outcome. I started thinking of my wife, who as a doctor certainly has a higher degree of autonomy. One of the advantages of my consulting profession is a high score on the autonomy axis.
Well the core idea of the book is that raising children by middle class is more like cultivation due to time sequencing of learning activities and also making use of the vacation time to build additional skills. I still remember my father giving me algebra homework from Hall & Knight during summer vacations, and all I wanted to do was to devour the next Issac Asimov novel from Haldia IndianOil officers club library. Well I did read the steamy passages from Eric Van Lustbaders novels too :P

The other concept is usage of mitigated speech in a hierarchical setting when speaking to superiors. An example given was the disastrous consequences in a cockpit where the listener does not have the luxury of time to interpret the fine nuance. I started wondering if inter team communication during a short high burn client strategy engagement require mitigated or direct communication? Mitigation of speech and nuances in sentences would be important for global firms which operate in advisory space. Overall a good read 4/5.

Investment value chain by looking downstream

In the last post, I had mentioned about the importance of cash flows. One shouldnt however follow it blindly as I was almost about to sell BEML stock based on
negative operating cash flow of Rs 411 crores(Rs 4.11 Billion). However it was the inventory which increased from Rs 2 Bn to nearly Rs 6.9 Bn. With an inventory turnover ratio slightly greater than one. The gearing has also increased due to increase in working capital and other capex.

Looking at the downstream value chain becomes important as one analyzes as to where are BEML's products being used: for building roads and metro coaches primarily. The Medium term drivers are following:
1. The National highway development plan is going to receive a boost, however I saw mostly kobelco earth moving equipment in Hyderabad while travelling to the airport. So is this a valid correlation cov xy/ sigma x. sigma y
2. Metro is going to come up in Bangalore, DMRC is in for a massive expansion, so rolling stocks requirement is going to increase. That could be a reason for the significant increase in inventory other than a desire to build up inventory when the raw materials are in a negative cycle

In terms of long term drivers:
- Public transport could receive a boost with increasing urbanization and spending power in developing countries while the lobbying power of automakers decreases witht the Detroit bankruptcies.
- Mechanization in building roads is going to increase in India.
- Real estate prices in Bangalore are going to increase and BEML's real estate assets are significantly undervalued.
To end the post let me be a bit humorous, history does repeat itself like I read in russian science fiction in a story where a physicist is about to cross an unmanned railway crossing. BEML price has yo-yoed between 500 and 1700 in the past, so buying opportunities might be there sub Rs 750. Credit Suisse has a target of nearly Rs 1200.

Non recurring items and other income

HDFC Bank: Out of a total income of $1040 Million, other income was nearly 20%, up from 14% in Q1 of 2008. What does this other income constitute of ; unconsolidated subsidiary earnings?
BHEL also had a higher income due to non-recurring item. These are important as analysts are primarily using recurring income from continuing operations to gauge the valuation of company. Will this impact DCF valuations, yes ! as one needs to make sure that the future cash flows are not incremented based on a current bloated cash flow due to one time infrequent /unusual/extra-ordinary item.

Praj Industries foreign investments and numbers

Let me be honest, I invested in Praj after seeing a news item that one of the Menlo Park investors had invested in it. Venture capitalists are more focussed on the business model than on just the numbers which means that they look at cost structure, core capabilities, value configuration, opportunity cost, value proposition, customer relationship, distribution channel, target customer and revenue streams. Let me take a peek at revenue and cost.

To get an appreciation of the magnitude of Praj industries overseas investments and their performance, lets look at their annual report. Revenue was 7719 Mn in FY 2009 up 10% YOY. The Profit after tax was Rs 1297 Mn, down 15.5%. Site expenses and labour charges have increased to Rs 1907 Mn from a base of Rs 496 Mn.
The breakdown of revenue has been almost half and half in rest of world and India.

The subsidiary financials have been consolidated with Praj industries financials based on AS-21.With these figures in perspective, Praj industries has invested Rs 218 Mn in Praj Schneider. Praj owns 60% equity in Bioenergy Europa which has revenues of Rs 705 Mn in FY 09. Unrealized forex gain is Rs 240 Mn.

Beers sales are only expected to rise with the increasing pricing power of fermenting industry in India. Praj is working on both ethanol and bio-diesel technologies. If we take a 10 year horizon, Oil is definitely going to spike again resulting in super normal profits for the alternatives. Governments may further the alternative investments to protect the domestic economies. Clean technologies has been a theme with lot of emotional attractiveness and makes financial sense.

Americans think in months and British plan in days

Look at the date format mm/dd/yy. Annual planning is much easier :). While typing 4/23, the first letter occupied my sphere of concentration and I was able to immediately discriminate with another meeting on 5/7. Hence I conclude that the American date format helps to plan for longer time horizons w.r.t the dd/mm/yy format.

Look at the distance in miles, it is numerically less but actually equal to kilometers.Let me think abou it ..abhi bahut door jaana hai servo extra mile bharo

EMI Demystified and relationship with PVIFA

Excel simply will not scale like code ! So here is the derivation from the fundamentals; Enjoy:
Geometric series 1+x+x^2+x^3+...= 1/1-X if X<1
PVn = A/R - A/[(1+R)^n.R]
e.g. PV3 = PV(infinity) - A/[(1+R)^3.R] where PV(Infinity) = A/R; remember D1/Ke-g
FV=PV(1+R)^N + PMT[(1+R)^N -1]/(1+R)^N*R)
pvn =" A/i" N=" Periods," R="Rate," A =" PMT"

FV="O"
- PMT = PV*R(1+R)^N/((1+R)^N -1)

disc = (1 + coupon) ^ N

payment= Bal * coupon * disc / (disc - 1)

InterestCashFlow(period) = Balance(period - 1) * Coupon / Frequency
PrincipalCashFlow(period) = payment - InterestCashFlow(period)
Balance(period) = Balance(period - 1) - PrincipalCashFlow(period)

The diagrams are simplified and do not denote the complexity of Net Interest Margins of different assets e.g. Senior Notes

Assets are valued by Sellers/Securitizers based on:
1. Interest
2. Default
3. Recovery rates
4. Credit spreads
5. Prepayment rate

Entrepreneurship motivation

The thoughts on top of most peoples minds is the global recession. Similary the driver for most people contemplating self owned business is money! I was thinking if giving employment to tens of people is a valid motivation. The right wing economists will start puking as they believe that profit should be the only motive and corporate social responsibility is not good for corporate health. The owner of business is an extension of the company, so this logic should hold for owner's motivation or driver as well.
The good thing was this thought chain helped clarify the dichotomy between trends and drivers. Trend would be the recession and driver would be something which affects the company postively or negatively like changes in interest rate , currency rate volatility, commodity price change. The visualization I had in mind was a person driving a vehicle, so what would be the primary driver for a company ? People and their intent!! So are drivers more likely to be internal than external like trends? This is like looking behind using the rear view mirror or the side view mirror. Most strategy maps have people as the point of primary focus to drive internal and external scorecards culminating with the financial scorecard.

I had these thoughts speeding through my mind after having a fast drive. There is delicious fatigue in the bones which prevented me from posting as soon as some insights crossed my mind. Now I am struggling hard to recall those nuggets, and hence this build-up.

Economics focus| looking good by doing good

The incentives covered as an introduction to Freakonomics were financial, social and moral. The article examines if the so called moral incentive from contributing to charity is actually a social incentive. The article also examines if it’s possible to give creative financial incentives to boost charity.
Some of the questions which arose as I pored through the article were:
a) Does Individual responsibility have to be publicized? How much of charity is publicized. Statistics from a particular case in point can be misleading e.g. just taking Boston’s Institute of contemporary art(ICA) as a single data point prove that less than 1% of private gifts to charity are anonymous might be erroneous.
b) Is charity increasing in terms of volume figures and actual revenue? A 2001 survey that 89% of Americans gave to charity does point towards charity becoming more broad-based. Actual charity revenue might be totally opposite. Taking inflation into account, the tripling of charity to $306 Billion from a base of $100 Billion in 1965 is no wonder. In real Dollar terms, charity today should be approximately $719.47 Billion to have the same effect it had in 1965. Take a look at the table below. The table below also illustrates the effects of compounding. If there is 7% inflation, then money doubles in 10 years. Coming back to the crux of the article, if the author of the article intended to point out that charity has increased due to associated social incentives; it is not the case at least in real dollar terms. The data points to charity in real dollar terms being half of what it was in the year 1965.

c) Are financial incentives in charity inversely correlated to looking good in the eyes of those whose opinion charity givers really care about (Image motivation)? According to the article behavioral economics might provide the answer, but going by the recent boom bust and catastrophe in the global economy, it seems highly unlikely. In case of blood donation, the hypothesis might be true, but it cannot be expanded to cover all charity and all financial incentives to charity. Tax breaks are a very strong incentive to charity.
In some parts of the world, Charity is a method to launder money from black to white. Educational institutions and religious institutions play a role in this business.

Right wing Economists who have a belief that self interest governs most actions of man are intrigued by charity. They will take solace in the fact that charity has in fact fallen to half of what it was five decades back in real dollar terms. They might miss out the fact that today charity is international wherein aid workers and religious workers reach out to remote places to be noble. The cynic would say that the well-off are reaching out to exorcise the demons within them. If we are less cynical then we would simply look at the good which is resulting from charity.

Incentives that mold behavior in the workplace

Take some time to think about the incentives that mold behavior in the workplace.
The author has defined three types of incentives economic, social and moral. We can approach the workplace incentives from two perspectives. The first perspective is from Frederick Herzberg’s Hygiene factors point of view. Herzberg rationalized that the factors causing satisfaction are different from those causing dissatisfaction. The determination of causality is based on employee interviews.
Following are the Hygiene factors causing dissatisfaction:
1. Salary
2. Work conditions(Cafeteria)
3. Company policy
4. Relations with Boss(Expats)
5. Peer relationships
6. Transport
7. Air conditioning
The following Motivator factors cause satisfaction è
1. Achievement
2. Recognition (WOW you work at xxyy firm)
3. Work (BPO, Coding, Consulting, Client facing work)
4. Responsibility (compared to other Indian firms)
5. Growth(Manager, Sr. Manager, Partner)
Economic Incentives that mold behavior in the workplace are more similar to hygiene factors, the absence of which causes dissatisfaction, but the factors themselves do not provide satisfaction:
1. Salary
2. Bonus
3. Perks
Social Incentives and Moral incentives on the other hand provide psychological gratification and are called motivators in Herzberg’s language. Following are the social incentives:
1. Recognition
2. Dinner with the boss
3. Important assignments
4. Interesting work

The second perspective or Maslow’s Hierarchy of human needs is evolutionary and involves redefinition of most important needs and wants of an employee as the basic needs like food, security and sex get satisfied at different salary thresholds. Somebody introduced purchasing power parity and wrecked the whole thing. The cost of milk is same in United States as in India. India is the land of low cost, so apartments with basic necessities are much cheaper. Electricity is subsidized by the government and so does not add up to the GDP. Even with subsidized electricity, the weather is so good that air conditioning is not a hygiene factor at home, but is a hygiene factor at work. Jumping to an interesting topic, of course the thresholds for sex are different for better looking employees. The threshold for sex is different in closed cultures like India where arranged marriage is the norm.
Moral Incentives like community work allow the employee to claim higher ground and is a win-win for the employer and the employee.
Moral Incentives can be considered to be on the peak of Maslow’s Pyramid:
1. Community work
2. Good Audit leading to greater transparency
3. Helping Clients and Economy do better
4. Recognition of Honesty
5. Evidence of no Dishonesty ( Borrowed from Nassim Taleb’s N.E.D)

It’s a pity that knowledge is not able to root out corruption. Erudite people in the middle belly of India are lacking the workplace incentives to deliver governance. By falsification, the absence of dishonesty or no evidence of dishonesty does not mean Evidence of no dishonesty. It is the lack of a measure or mitigating influence like cameras in public offices which lead to no evidence of dishonesty. The presence of a camera might lead to shifting of graft from office premises and employment of more middlemen.
In a perverse sort of way, the gratification from community work is much more in India, where there is so much work to do, so much poverty to alleviate by primary education and improving governance.

Ratio of R&D to SG&A > 1

I read Nassim Taleb on the first day of 2009 and wondered about the events which will happen. From a risk management perspective one needs to look at how one can bounce back from a multitude of events which are not neccesarily coincident. The investment in risk avoidance can map to 'n' number of events. Nassim is critical of Risk managment( cant have a risk specialist because of the breadth and possibility of a bend/wrap in the fabric of Risk space :P) .
While mapping the risk of companies, one metric I noticed was the ratio of R&D to SG&A expenses. For the more successful companies, the ratio seems to be greater than 1(OH CAUSALITY!). Investing heavily in R&D with an emphasis on the fat tail and serendipity can (Hypothesis) co-relate to risk reduction in areas like economic slowdown, change in industry structure and change in consumer preference. What investment in R&D cannot protect(Again a Hypothesis but of the falsification type / For eminent Catter's "scoring by elimination :D" ) against are risks like Litigation, Employee retention and Accurate Financial reporting.
('N'Assimilated from Nassim's Black swan)

Does a CAT have 9 lives?

Apparently not as per a CAT expert excerpt in Economic times :
“Over the years, there have been candidates who make repeated attempts at CAT and even get right percentile for admission to one of the IIMs. However, such candidates lack the right attitude and IIMs in fact don’t like them. And this year’s pattern reflects this very well,” said a CAT expert.
I wrote CAT twice, the first time I was better prepared but I did not clear it, the second time I got a center at Jyoti nivas college and cracked CAT in a happy go lucky manner. The key thing is to be relaxed. Why did'nt I clear it the first time..Among the reasons which I thought:
1. I was not relaxed
2. I reached the center too early and lost my potential by whiling about in the garden
Blogging on CAT is an Annual ritual :D

saw toothed stock market

The fluctuation of the NSE Nifty today reminded me of saw toothed waveforms which I would look to clip in my electrical engineering days at surathkal. IMO This volatility is a result of uncertain policy measures as US is changing course seeing China's fiscal stimulus move. Today in the hindu columnist patnaik essentially advocated fiscal stimulus versus just doing increasing the M3 money supply. Will the long term cash flows of cashcow companies get effected unless of course the cashcow is not the sacred cow we thought but just a ponzi scheme of routing money from financial services into aircraft turbine and power generation biz? Making the customer leveraged by having a financial arm might be a good idea in good times, but in bad times it can make you sink faster.

Saravanaa bhavan and free movement of people

I am almost scared of posting for fear of horsing around. I had a shock of my life seeing the owner of saravanaa bhavan in chains. Is it a plot by McDonalds to stump the future of fast food from Madras. Saravanaa bhavan is an Oasis in Chennai station with fresh cool and clean air to breathe. Its so miles apart from the smelly station air!!
Saravanaa Bhavan near Mount road is where I would go with my parents on saturday nights to down the delicious Dosas followed by coffee and walk down to our house in Lloyds road. Walking a bit further and turning to left comes the US consulate who filed a complaint for traficking on Saravana Bhavan. Corporate governance becomes important for even SME's! Software companies would be well advised to look at the repurcussions of Visa abuse. It goes against my sense of liberty that the movement of humans should be restricted so that there can be certain oasis which reminds me of Babylon AD. In the movie Babylon AD , the rest of world is shown to be in Chaos while North America enjoys unprecedented peace and prosperity. Shall I accept the view that Visa is not a right and rebel against Darwinism and survival of the fittest. Why should a person who is not a diligent worker be sheltered against a hardworking person from another part of the world?

case studies for business process fraud analysis

After doing a training on business processes for 4 days, I realized that the case study was most insightful. Factoring receivables opens up the same can of worms as CDO's. Lets look at the point of similarity, both of them essentially sell future cash flows at todays prices. Just as asset prices can be inflated or loans foreclosed, how can Accounts Receivable be manipulated?
1. Channel stuffing
2. Changing the credit terms
More ideas from readers?
The other important thing I gleaned from the training was keeping your vendor and customer files clean and excel pivot table definitely helps :>

Economy on steroids(Tax payers money)

The infusion of liquidity by monetary policy is pushing up the price of gold and pulling down the price of oil.
Some interesting conjectures:
1. Gold is a not a luxury/vebelen good based on current trend where the demand has tapered off as price has increased.
2. Commodity prices are cooling off in effect equating liquidity pressures to cooling-off of demand side. By the same logic, easing liquidity should lead to easier lending thereby enabling capital expenditure.
I have been reading a lot on behavioural economics and Moral Hazard pops up everywhere, AIG management has gone on a vacation after bailout. Infusion of public equity(Tax payers money for bailout) into private sector will lead to inefficient allocation of capital. Regulation is a more efficient framework if Regulators listens to leading lights like Nassim Taleb who had criticised VAR methodology in the book fooled by Randomness . Can regulators listen to hedge fund managers like David Einhorn, however diligent they may be?
Risk taking =f(utility, weighing) , Tversky and Kahneman, 1992, suggest that individuals are risk seekers for small-probability gains and large-probability losses, and risk averse for large-probability gains and small-probability losses. The only issue here is whether the traders are cognizant of the large-probability losses!

wikinomics audiocast

Listening to the wikinomics audiocast has opened my eyes to a trend which I used to view as insignificant. Listening to the audiocast was mindblowing enabling me to see myraid opportunities in the web 2.0 space . I see it as an opportunity to build consulting eminence. The example is of a Gold prospecting company which uploaded its geological data to public competition into a 40MB file and thereby increased revenue from $30 million to $9 Billion. Respondents used non traditional techniques from mathematics and operations research to search for new drilling prospects. The prize money has had a reinforcing behaviour on respondents and enabled multi-discipliniary approach.
The advantage of investing time in web 2.0 is to study how collaborative system interacts with the traditional control assurance behaviour of enterprises to bring forth new blueprints of more efficient people and business processes.

Rainfall driving and keeping cool

Roads have been washed away by the rains in Hyderabad. I am faced with two options

1. Inch along for half an hour before reaching the tunnel where four lanes merge into one
Distance = 5 km, Time = 30 min - 2 Hrs Accident risk =Low
2. Drive through a different route where I tend to almost knock over motorcyclists who are overtaking on the left side.
Distance = 14 km, Time = 30-45 minutes Accident risk = Medium

Lets travel to uncle Sam's place. In Texas, I was amazed to learn about road rage. Who would imagine getting shot at by a shotgun for rowdy driving. It is so important to keep cool during driving and not deal with it like its CAT or JEE exam where you have to get ahead of the others. Parents have been drilling this message. Why am I so competitive that I try to stop others from overtaking me?
The solution has been :
1. Not have a target time to reach office
2. Drive in a straight line

convocation

Finally a dream comes to an end. Convocation ran like a well oiled machine and my face was puffed up with pride. There was a lingering sadness in the back of my mind about leaving my K'omrades. It is still ennui before work resumes. When the mind remains idle it makes fantastic conjectures and this is leaning more towards synthesis rather than analysis. I am training my mind to place things in the concrete and abstract quadrants too. Few of my thoughts while lazing on a houseboat in the backwaters

1. Pension schemes should be taken on the wifes name as women live longer. This eliminates the need to take life insurance. The caveat is that this does not cover children.

2. There needs to be incentives for cleanliness in public places. The backwaters are so neat inspite of so many visitors. Kozhikode was not so neat a few years back. It took a sustained grass roots campaign by the district administration to make Kozhikode one of the neatest places. Its important not to throw around plastic. It will be such a lame post if I buy an SUV :(!

3. A short article on Warren Buffet @ Dalal street was enlightening. I liked the part about not spending on brands but on buying what one wants ( shades of no logo) and doing what one really wants to do. Remember its only one life and time in finite. I like watching national geographic and discovery channel if I am not able to travel :).
Why doesnt Dalal street provide FCFF and FCFE? The beta shown in also not complete as without mention of the period, the beta is useless. Dalal street online http://www.dalalstreetjournal.com/ONLINEPREVIEW/tabid/146/Default.aspx

Contagion

Stevia

The other thing I did today was to meet CEO of medicinal herbs company who connects the suppliers to the demand. I had queries on stevia and the response was that bid ask yield has reduced from 90/150 to 60/90 in 2 years. Currently there are no farmers who are cultivating stevia in wayanad. The climatic conditions are cold which cause flowering. Flowering a decreases the yield of stevia leaf. He was able to spare some time for me and showed me a sample of stevia powder of puritan brand imported from US. The label reads nutritional supplement. A very pertinent point as there are political implications to stevia from companies which have poured billion dollar investments into sugar substitutes. The other political problem is the sugarcane lobby.
The insight which he gave me was that the very Institutional voids which we criticize in India can help make stevia a success here. Now the challenge is generating demand. I thought the package might be a problem. If stevia is properly packaged in smaller packets, it can be a hit with juice wallahs. Coke uses Stevia in Japan, so another big market. The biggest market is households as stevia stays stable at high temperatures, even 400 degree centigrade.
To find farmers in wayanad who are cultivating stevia in wayanad, I got the suggestion to contact nurseries in and around kalpetta as growing stevia seedlings requires careful supervision. Good irrigation and hot sun are good enough for stevia to grow.

It has been quite a day for me. Recounting the details might take the juice out of readers who love one genre more than the others.
Among one of the ten magazines I picked up today two things struck me
1. US has a 14 trillion dollar economy , China has about 3.5 trillion dollar economy and India has a 1.1 Trillion dollar economy , looking at the magnitude of difference in size of economies, the decoupling theory does not hold.
2. An article on SIV Structured Investment vehicles , which are nothing but a synthetic of banks , borrow short and invest long. similarly Banks lend long. Now these long investments have to be liquid i.e. tradeable and offer an arbitrage opportunity. SIV are in a spot because liquidity has dried up as subprime CDO's are not generating cash flows.