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)