Sunday, February 22, 2009

My favorite Buffettisms

I won the ‘Ovarian Lottery’: Buffett says: When I was a kid, I got all kinds of good things. I had the advantage of a home where people talked about interesting things, and I had intelligent parents and I went to decent schools. I don’t think I could have been raised with a better pair of parents. That was enormously important. I didn’t get money from my parents, and I really didn’t want it. But I was born at the right time and place. I won the ‘Ovarian Lottery’. Buffett felt this all the more when he visited China in 1994 along with Bill and Melinda Gates and saw manual laborers from a close distance.

My wife ran away with my best friend and I still miss him a lot: Buffett uses this country song as a metaphor to explain how investment in a bad business like Hoschild-Kohn retail which he eventually dumped without making any money felt like. In this metaphor “best friend” is money while “wife” is the business you buy (marry) and eventually sell (divorce).

I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few: Buffett uses this country song metaphor to describe what too often happens with acquisitions. He says in 2007 letter to shareholders: To date, Dexter (a shoe company) is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that. This line from Bobby Bare’s country song explains what too often happens with acquisitions.

In the short-run, the market is a voting-machine, in the long run the market is a weighing machine: Buffett likes this metaphor originally from his guru Ben Graham. It says that in the short term market fluctuations are governed by votes which depend upon fear, euphoria and greed. However, in the long run it reflects the intrinsic value of the economy.

In business, quality of boat matters a lot more than effectiveness of rowing: Buffet says: My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

Note: Source for these Buffettism is either his biography Snowball or his Letters to shareholders.

Richard Rumelt’s 9-point hard-times survival guide

I like Richard Rumelt. I wrote about his “predatory leap” metaphor earlier. I am convinced of his wisdom: “Being in the right industry does matter, but being good at what you do matters a lot more, no matter what industry you’re in.” In a recent article in McKinsey Quarterly (registration required and is free), Richard gives a 9-point survival guide for the hard-times. You may find it useful:

1. If you can’t survive hard times, sell out early. Once you are in financial distress, you will have not bargaining power at all.

2. In hard times, save the core at the expense of the periphery. When times improve, recapture the periphery if it is still worthwhile.

3. Any stable source of good profits – any competitive advantage – attracts overhead, clutter, and cross-subsidies in good times. You can survive this kind of waste in such times. In hard times, you can’t and must cut it.

4. If hard times have a good side, it’s the pressure to cut expenses and find new efficiencies. Cuts and charges that raised interpersonal hackles in good time can be made in hard ones.

5. Use hard times to concentrate on and strengthen your competitive advantage. If you are confused about this concept, hard times will clarify it. Competitive advantage has two branches, both growing from the same root. You have a competitive advantage when you can take business away from another company at a profit and when your cash costs of doing business are low enough that you can survive in hard times.

6. Take advantage of hard times to buy the assets of distressed competitors at bargain-basement prices. The best assets are competitive advantages unwisely encumbered with debt and clutter.

7. In hard times, many suppliers are willing to renegotiate terms. Don’t be shy.

8. In hard times, your buyers will want better terms. They might settle for rapid, reliable payments.

9. Focus on employees and communities you will keep through the hard times. Good relations with people you have retained and helped will be repaid many times over when good times return.

Dr. G. N. Shrinivas on Solution Architect role, ITAC certification and future of Technical Career Path (TCP)

Forum mall in Bangalore is not the best place to have any kind of serious dialogue and Café Coffee Day does not make things any quieter. However, it was the most convenient place for three of us, I, my friends Sanjeev Krishnan and Dr. G. N. Shrinivas (called Gun) from IIT Bombay to reconnect on the topic of technical career path and role of solution architect. Gun is currently an Enterprise Architect at a large MNC IT company. He has a Ph.D. from Oxford University in Mathematical Sciences. Views expressed here are his personal views. Sanjeev is the founder of Magic Lamp Software a technology firm providing products and services related to quality audit of Java based software. Before starting his own venture; Sanjeev was a Senior Staff Engineer (a technical ladder position) in Sun Microsystems specializing in J2EE platform. Sanjeev has a PhD in Computer Science from University of Illinois Urbana-Champaign.

Vinay: Can you tell us what does a solution architect role involve?

Gun: Solution architects (especially seen from a IT_Service_Provider_in_India_perspective) is a catalyst for successful service delivery. This role spans the entire lifecycle of a project, especially the initial phases of the project, (during pursuit and the requirements gathering phases). Requirements are only as perfect as the person who gathers them and documents them. The challenge is that there usually is a very large amount of contextual assumptions which are built into requirements when they are specified by the customer (users). Solution architects at that time play the role of voice of customer in clarifying these assumptions to the delivery team. It involves asking questions like: “Are you making right kind of tool choices?”, “Are you making right product choices?”, “Are some of the proposal assumptions too narrow?” etc. Another aspect of the role involves assisting sales proposal making / deal making etc. (also called pre-sales). A third aspect often seen in customer relationships in multi-year contracts, involves being an advisor to the customer. In this role, the Solution Architect helps the customer identify, understand and plan for external impetus to the technology landscape! E.g. new features from some of the upcoming releases of platforms which might be of interest to the client (like Oracle). While doing all the above, the Solution Architect is often called upon to help build competency within the organization through various initiatives like knowledge sharing, technology conference and certifications.

Vinay: Can you tell us about your ITAC certification experience?

Gun: ITAC stands for IT Architecture Certification. It is managed by The Open Group and it has three levels of certifications (level-1, 2 and 3). Level-1 is a junior architect who can contribute into an architecture team (i.e. needs to be managed). Level-2 is called a Master Architect and he/she can take independent responsibility of delivery of a system or solution. At Level-3, one should have demonstrated significant breadth and depth of impact on business or the architecture community by applying IT architecture.

From a process standpoint, I had to fill in a form from The Open Group, and by the time I was finished, it was a 50 page document. The form requires you to document (exhaustively) how you have performed various architectural activities, and wants you to demonstrate that this has been a consistent feature in your career (not a flash in the pan). This submission was reviewed by an independent committee by way of a board review / interview.
I can see two kinds of benefits from this certification. One, it held a mirror to me to see whether I was doing the right things in my career from an Architecture standpoint. The second side of to benefits from certifications (as yet unproven) is whether certified architects can charge a premium for architectural consulting skills.

See the complete interview here.

Friday, February 20, 2009

Becoming a successful technical leader: 1-day workshop

Dr. Sreedharan was one of the recipients of the Economic Times awards for corporate excellence this year (2009). He said in his talk, “The hardest knock I received in my career spanning 50 years of professional life was the decision of Government of India to choose Broad Gauge for the Delhi Metro instead of the internationally favored Standard Gauge which I felt was the appropriate technology. At that time I even contemplated resigning as the managing director of the Delhi Metro Rail Corporation since I felt I should not be party to what I believed was the wrong technical decision. However, I subsequently changed my mind since the completion of the Delhi Metro project was essential for the benefit of the city of Delhi. DMRC had to adopt a very positive outlook towards this decision of the Government and we were able to complete Phase-I of the project 2 years and 9 months ahead of the schedule and within projected cost. Subsequently, the decision on what gauge should be adopted by Metro Systems has been left to the decision of the respective state governments and today three of the Delhi Metro rail lines including the modern hi-speed Airport Metro connection will be on Standard Gauge. All other cities which are planning Metros like Chennai, Bangalore and Cochin are also adopting Standard Gauge.

This story depicts the essence of technical leadership and its 3 key attributes: (1) independent decision making (2) Influencing (3) Leading initiatives (what I refer to as 3-I model). Dr. Sreedharan had a strong view about the technical decision pertaining gauge. He had the ability to influence decisions on subsequent Metro rail projects and he lead the DMRC project successfully in spite of technical challenges. If you want to assess yourself as a technical leader, ask yourself (1) When was the last time I felt strongly about a technical decision? (2) Which key technical decisions am I influencing? (3) What technology initiative did I lead recently?

I have been facilitating a 1-day workshop on “Becoming a successful technical leader” for the past 2 years and the workshop is now 25+ sessions, 25+ organizations and 400+ participants old. During the workshop, we explore various aspects of technical leadership through case studies especially in the context of IT industry in India. At the end, participants prepare an action plan (what I call Systematic Investment Plan - SIP) for themselves. See the slides below.

I will be facilitating an open program on 25th March 2009 in Hotel Royal Orchid Park Plaza in Bangalore. You can download the registration form (yes, there is an early bird discount). You may want to see a consolidated list of my articles on technical leadership.

Saturday, February 7, 2009

Chance favors prepared mind: Pasteur’s first law of innovation

Pasteur’s first law of innovation: My wife, Gauri, teaches Physics from grade 9 to 12. These days she downloads youtube videos which effectively communicate various concepts like Doppler effect. It also makes lessons more re-usable and more teacher-independent. However, many of the fundamental laws of Physics haven’t changed much for most of the last century. Every batch of students studies Newton’s first, second and third law.

Unfortunately, Innovation does not have such first-second-third laws like Physics, at least not yet. However, I feel that Louis Pasteur’s “Chance favors prepared mind” is a strong contender for such a fundamental law of innovation. Let’s call it: Pasteur’s first law of innovation. This law emphasizes two fundamental elements associated with every innovation: (a) role of chance (b) role of prepared mind. Let’s start with the role of chance.

Story of bird poop: In 1965 two radio astronomers at Bell Labs, New Jersey, were bothered by a background noise while mounting a large antenna. The sound was like, a hiss, like the static you hear when you have bad reception. The scientists thought it was the bird poop. But the noise did not go away even after they cleaned the bird droppings out of the dish. It took a while for them to figure out that what they were hearing was the trace of the birth of the universe, the cosmic background microwave radiation. This discovery revived the big bang theory, a languishing idea that was posited by earlier researchers. (source: Black Swan by Nassim Taleb)

Classical model of discovery: You search for what you know (bird poop) and find something you didn’t know (cosmic microwave radiation).

Beauty of the first law of innovation: What I like about Pasteur’s first law of innovation is that it gives due respect to the role of chance. It is tempting to say that I got to where I am because I am so intelligent and hardworking. While I may very well be intelligent and hardworking, it just undermines the fact that I also got so damn lucky. But the beauty of this law is that it does not have an “unbiased coin” which gives heads 50% of the time no matter what. It says that the coin favors prepared mind. After all, when you hear a hiss, you need to (a) Go looking for bird poop – a hypothesis from the land of “known” (b) When the hypothesis fails, be open to other possibilities, especially from the land of “unknown” (such as cosmic radiation). A prepared mind is does (a) and (b) tirelessly without falling in love with the bird poop (i.e. the hypothesis).

Tuesday, February 3, 2009

Do ideas float in the air?

Insight at the Grand River: In 1874 Alexander Graham Bell spent the summer with his parents in Brantford, Ontario. He was twenty-seven, employed as a speech therapist in Boston and had been passionately experimenting with “harmonic telegraph” problem. One day he went for a walk on a cliff overlooking the Grand River, near his parents’ house. Far from the bustle of Boston and the pressure of competition from other eager inventors, he mulled over everything he had discovered about sound. In that moment, Bell knew the answer to the “harmonic telegraph” problem. Bell created a talking device and demonstrated it in World’s Fair in Philadelphia in June 1876. And the rest, as they say, is history. (source: In the air: Who says big ideas are rare? by Malcolm Gladwell – Tipping Point-Blink fame)

Imagining world without Bell: Now let’s ask the question: where would the world be today if Bell hadn’t gone for a walk near the Grand River? Telephone is such an integral part of one's life today that it is difficult to imagine a world without a phone. Malcolm Gladwell begs to differ. In his New Yorker article, he says: World may not have looked very different. If it weren’t Bell then it would have been Gray who would have been known as the inventor of the telephone. In fact, it was Gray who presented his idea at the Philadelphia exhibition before Bell. The two filed notice with the Patent Office in Washington D. C. on the same day, Feb 14, 1876.

What does it mean? Now, one of the three things must be true:
  1. Either Bell or Gray stole the other’s idea
  2. It was a freak accident of simultaneous discovery
  3. It wasn’t a freak accident. Simultaneous discoveries happen routinely.
Simultaneous discoveries: Malcolm Gladwell subscribes to option (3). In fact, science historians have studied this phenomenon of “simultaneous discovery” (what they call “multiples”) extensively. One of the first comprehensive lists of multiples was put together by William Ogburn and Dorothy Thomas in 1922 and they found a hundred and forty-eight major scientific discoveries that fit multiple pattern. List includes calculus (Newton, Leibniz), Evolution (Darwin, Wallace), decimal fractions, Oxygen, Color photography and so on.

Ideas are in the air: Insights like the one Bell had on the banks of Grand River are accidents. However, environment is usually pregnant with the idea and metaphorically ideas are floating in the air like clouds. Those who connect with the cloud and many times multiple people do connect; end up discovering them simultaneously. So for “systematic innovation” we should be focused on creating such charged clouds and leave “connections with the cloud” to the serendipitous moments.

When growth chokes your business: lessons from Subhiksha retail

Growth is sexy: Every day we are bombarded with Q-on-Q, Year-on-Year growth numbers (both positive and negative) such as revenue, profits, GDP, headcount. Is growth really that important as it is portrayed? Can you grow too fast? Let’s look at what happened to Subhiksha a discount retailer in India.

Subhiksha: Subhiksha started in 1997 as value focused retailer when organized retailing was only for the elite in India. It had 150 stores in 2006 which grew to 1,600 stores by September 2008 i.e. 10x in 2 years! Its revenue grew from Rs.330 Cr in FY06 to Rs. 833 Cr in FY07 to Rs.2,305 Cr in FY08. That means revenue grew by 7x in 2 years. Great! Retail is a growth sector in India and Subhiksha seems to be in the right place at the right time. There is only one catch. Subhiksha is has run out of oxygen (cash) and currently on ventilator support. TOI has reported it hasn’t paid salaries to its 15,000 employees for some time. With empty shelves and deserted showrooms, Subhiksha is sinking.

Cash is king: Time and again history has shown that our addiction for sales growth blinds us from seeing the draining cash. It also makes us vulnerable for a black swan like this recession. Dell faced similar growing pains in 1993 where its growth came at the expense of cash. Michael Dell says, “The company’s cash reserves were down to $20 million at one point. We could have used that up in a day or two. For a company of our size, that was ridiculous”. It is no surprise that Ram Charan identifies cash is the topmost priority (the other two being margin and velocity) in his article Basics of Moneymaking. I am glad I got my top priority right for my business in the beginning of this financial year.

Is retail inherently difficult? Warren Buffett’s partner Charlie Munger says, “Retail is a very tough business. Practically every great chain-store operation that has been around long enough eventually gets into trouble and is hard to fix.” (source: Snowball by Alice Schroeder). If you look at the picture below, you will see that in retail sector only 39% companies have a moat (sustainable competitive advantage) as compared to 58% in software sector and 83% in media. (source: Little book that builds wealth, by Pat Dorsey). Looks like some businesses make it harder for mediocre to survive. Subhiksha is perhaps just the beginning.

Applying I-squared-P definition of innovation

What is an innovation? If you visit wikipedia page on innovation, you will see at least a dozen definitions. For most people that is far too many. I like working definitions which are (a) simple to understand (b) practical to use and (c) robust enough to fit multiple scenarios. In this article I would like to present two of such definitions of innovation and show how we can apply them to find out whether something is an innovation.

I-squared-P (Definition-1): For a for-profit-organization, innovation is implementation of an idea resulting in profit i.e. idea + implementation + profit hence I-squared-P. This definition is a slight variation of the definition given by A G Lafley and Ram Charan in Game-Changer.

I-squared-P (Definition-2): For a system, innovation is implementation of an idea resulting in improved performance of the system (idea + implementation + performance improvement). System here could mean a company, not-for-profit organization, a business unit, a community, a city, a nation etc. Performance could mean revenue, profit, health, GDP, harmony, literacy etc. This definition is a slight variation of definition given by Peter Drucker.

Applying the definitions:
Patent filing: John, a researcher in ABC Shoe Company, files a patent for a shoe design which charges a mobile phone battery via energy generated from walking (hypothetical). This is an idea that is can be implemented. It is not clear whether it was implemented and whether it resulted in profit. Hence, we can’t say whether it is an innovation.

Satyam scam: Accounts are manipulated for several years to show increased profits. This is an idea and it is implemented. It also resulted in increased profits in the books. So it fits the definition, at least superficially. Question is, should we consider “profits in books” or “real profits”? If we take profits to mean “real profits” then it is not an innovation.

Air Deccan: Air Deccan introduced low cost airline service in India and created a new industry. This is certainly an idea that is implemented. Did it make profit? Cumulatively, until it was sold, it had negative returns (losses) on invested capital. So it is not an innovation as per definition-1. How about applying definition-2 with Indian society as the “system”? It has certainly benefited the society by creating a low cost airline industry. Hence, Air Deccan is a social innovation (definition-2).

26/11 Mumbai attack: Mumbai attack made things worse for India. But how about looking at it from terrorist organizations perspective? It must have improved the credibility of the organization that masterminded the attack several-fold among all terrorist organizations. Hence, it is an innovation as per definition-2 for the attacking organization.

Monday, February 2, 2009

4 levers of systematic experimentation: Story of Wright brothers

“Oh, it was just an experiment” is a typical response we get when we talk about a failed project. And that shows that we don’t understand what systematic experimentation means. Let’s see the story of one of the classic experiments in the history of mankind in brief (for details: check out Wright brothers national memorial).

1. First trip to Kitty Hawk 1900: Wright brothers selected Kitty Hawk, an island in North Carolina, for their experiments because (a) It had steady winds – giving better control (b) It had a handful of houses and lots of sand – less chance of damage (c) Not very far from Dayton, Ohio, their hometown – saving cost. During their first visit in October 1900 they first flew her as a kite and subsequently performed 12 glides. Their learnings were: (1) Their machine picked up speed while keeping the same distance above the side of the hill. This meant she could glide on a slope that need not be so steep; (2) The brothers had hit the ground without harm to themselves or the glider (3) All the controls: the rudder, warping wires, front-to-back balance and side-to-side balance, worked fine.

2. Second trip July 1901: During this visit the brothers came across a strange phenomenon where one in fifty flights the machine came to an almost dead stop. It was concluded that their air pressure tables were wrong. That means they would have to build them from scratch. Back in Dayton they build a wind tunnel and created the tables.

3. Third trip 1902: During this trip, the machine did much better. However, it came nose-diving once in fifty flights, which they called “well-digging”. This led to the insight of movable tail. During the last ten days they made more flights than in all earlier years. In last two days alone they made 250 glides.

4. Final trip 1903: During this trip the brothers added an engine to the machine. They could not find an engine with right weight and horsepower in the market. So they designed a four-cylinder engine themselves weighing less than 150 pounds. December 14, 1903 is when they had their first successful flight at Kitty Hawk.

4 levers of a systematic experiment: Prof. Stephan Thomke articulates 4 critical levers of a systematic experiment in Managing product and service development: (1) fidelity – how closely does the setup resemble the actual (2) cost – the lesser the better (3) signal-to-noise ratio - how do you control other noisy variables (4) speed of experimentation. We can see that Wright brothers managed all four levers beautifully in their experiments. They had a handicap on the fourth one (speed) due to wind speed.

Outcome from a systematic experiment are learnings which tell us: What works in what context AND equally important, what doesn’t work in what context. As Prof. Thomke points out, “An experiment resulting in failure is not a failed experiment unless you don’t learn anything from it.”

Ask yourself, “What systematic experiments are we doing in our organization?”