China meets his match -- Reliance de-merger demystified.

Wafers had a cup of Cappuccino in one hand and a piece of roasted papad in the other. “Terrible combination” thought the captain, but decided to keep his counsel. As the clock chimed six, China walked in. “Hey, Wafers, tell me what is price-discovery”? He said that without even so much as a “Good evening.” Wafers bit the bait. It was her one opportunity to carry coal to New Castle. “Look, price discovery is the process by which you find the fair price of a stock through the interaction of buyers and sellers dealing in the stock market.” Sipping cappuccino, Wafers remarked, “But China why do you ask”?

“I read that the NSE and the BSE held a special one-hour session on 18th January 2006 exclusively for the trading of the Reliance stock to enable ‘price discovery’. That got me curious” explained China. “Don’t the stock exchanges make a living out of continuously discovering prices? Why did they need a special session?” It was Wafers’s second opportunity to carry coal to New Castle.

Mopping her hair up she said, “You see, Reliance Industries Ltd (RIL) is de-merging leading to four new companies apart from Reliance. Now, RIL has the highest weight on the Sensex and the second highest weight on the Nifty. Upon de-merger some of the assets of the company will be given to the four resulting companies which would mean that for the investor the value of the Reliance stock would come down. And, while RIL will continue to be on the Index the resulting companies will not form part of the Index. That would mean that the Index too would fall. Hence the opening level of the indices for 18th Jan had to be determined”, demystified Wafers.

“Well, that explains it,” remarked China. And wondered, “But I can’t understand one thing. The dispute was between bade miyan and chote miyan. So, why is the de-merger yielding 5 companies?” Ha, here was another opportunity for Wafers to play Ms. Know All. She explained, “True. Apart from RIL there are four other, what we technically call, ‘resulting companies’ namely Reliance Communication Ventures Ltd, Reliance Energy Ventures Ltd, Reliance Capital Ventures Ltd and Reliance Natural Resources Ltd. Now, RIL was not only an integrated petrochemical business but was also well diversified. It had exposure to Power business, Finance and Investment, Natural Resources and Telecom. The de-merger was an opportunity to restructure the group into companies handling vertical businesses.”

“Oh! I see,” remarked China.

“Well, to make matters even more intriguing, two of the resulting companies will soon merge with the companies that they hold”, added Wafers. “Reliance Energy Ventures Limited and Reliance Capital Ventures Limited will be merged with Reliance Energy Limited and Reliance Capital Limited respectively which are actually the principal shareholders in the amalgamating company!” China nodded. Wafers was sure that if she told him about holding companies and special purpose vehicles he would see stars.
“Now what are the tax implications?" asked China. He had over time invested in 1,000 shares of RIL at an average cost of Rs 550 and was wondering whether the de-merger would lead to taxes at his hands. Wafers ordered two more burgers. She was beaming. For, It wasn’t every other day that she had the opportunity of educating China. “For every share in RIL you get one share each in each of the four companies”. China thought, “So four thousand new shares for me on the whole.” And asked, “Do I pay capital gains tax now.” Wafers explained, “Nope. At this point there is no capital gains because the issuing of shares under a de-merger is not a transfer” Someone hissed “Section 47?” Wafers turned around stunned but could see no one.

“Of-course there would be capital gains when the shares of RIL or the resulting companies are sold?” asked China. “Yup” said Wafers. And added, “at that point the date of acquisition will become important in deciding whether the gains are long term or short term. That date will be the date on which you acquired RIL”. Wafers heard someone hiss Sec 2 (42A). She turned around but found no one.

“So if I had bought RIL six months ago and sold Reliance Capital Ventures seven months later, the total holding period of Reliance Capital Ventures will be construed as 13?” asked China. Wafers wasn’t surprised that her friend was quick on the uptake. “Yes” she said. And added, “In that case the gain will be long term capital gains and will be tax free. If the total holding period is less than 12 months it would count as short term capital gains and will attract 10% tax. “Section 111 A.” “Was she hearing voices?” wondered Wafers.

“Okay!” exclaimed China. “In that case the cost of acquisition becomes important. And how do I compute it?” he asked. Wafers was ready with her answer. She reeled out the Section that she had crammed into her head. Section 49 (2C). “The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the de-merged company the same proportion as the net book value of the assets transferred in a de-merger bears to the net worth of the de-merged company immediately before such de-merger” China almost spilled his cappuccino. “But from where do I pick those numbers” from he asked. “RIL has issued a guidance on 16th Jan” guided Wafers. “Lay your hands on one.”

China wasn’t through as yet. “You said two of the resulting companies would be merged with two other companies. What is the tax position in that case?” asked China. “Same as is the position with de-merger” remarked Wafers. China pointed out, “The scheme of de-merger and the subsequent amalgamation plans are tax-efficient.” Wafers couldn’t help but caution, “Whether they turn out to be strategically sound for the legacy of Dhirubhai remains to be seen.”

“I am impressed,” said China. “With Reliance’s planning or my erudition?” asked Wafers. And on a sudden idea, she added, “How come you did not know any of this?” China smiled. “Of course I knew it all. I was just checking if you knew it! See, you have to crack May 06.” Wafers almost threw the cappuccino on China’s face.

Volcker Report

When the Volcker report hit headlines in October 2005, Wafers’ heart skipped a beat. 20 years ago, in April 1986, her dad had gone through similar pangs when the Bofors story broke out. She wasn’t too sure whether she understood Volcker just as her dad had understood precious little of Bofors. So, she decided to chat up with her friend China.
Wafers did some quick homework. She learnt that in 1990, following the Gulf War, the United Nations (UN) had imposed economic sanctions on Iraq. This had hurt the civilian population. The law of “unintended consequences” of which her professor had once explained had been at work! To mitigate the hardship, in 1995, the UN conceived the “Oil for Food Program” (OFFP). Under this program the UN allowed Iraq to sell its oil and use the revenues to buy relief supplies. The sale was to be at a UN decided “fair market price” and the proceeds were to be deposited to a UN-controlled escrow account from out of which relief supplies were to be bought. At no time did Saddam Hussein have access to these funds. In November 2003 the program was phased out.
China made a quite entry to the cafe. Sipping into her coffee, Wafers asked, “Did this scandal blow up on our face overnight?” The walking encyclopedia responded. “No. It is a two years old story. In early 2004, an Iraqi newspaper named UN officials, politicians and companies who may have profited from the illegal sale of Iraqi oil during the OFFP. It alleged that Saddam Hussein had embezzled millions of dollars through under-priced oil sales and over-priced purchases.” To Wafers, it rang a bell. Her auditing guru had talked about how one should scout for over-billing and under-invoicing while conducting management audits. Ha, a practical application indeed.
“Now if I have understood this right” said Wafers, “The Volcker committee was constituted by the UN itself and Paul A Volcker had impeccable credentials”. The captain at the table, overhearing the conversation said, “That’s right.” Wafers asked, “What were the principal findings?”
“Kofi Annan, Cotecna and Kojo Annan” remarked China. And then explained. “The UN Secretary General, Kofi Annan’s son, Kojo Annan, is a former employee of Cotecna, one of the companies that contracted with the OFFP. Cotecna’s contract with the UN, signed on December 31, 1998, enlisted the company in the authentication of imported humanitarian goods as part of the OFFP. Kojo was employed with Cotecna till 1998 i.e. before the contract was signed but was still being paid by Cotecna as a ‘consultant’ till 2004”. Wafers was aghast. “Don’t tell me that a contract cannot be awarded to a professional company because an employee happens to be dad’s son!” The captain smiled and said, “That’s the price you pay for being the son of an illustrious father.” China snorted, “Caesar’s wife should be above suspicion”.
Wafers wondered, “Did Volcker nail Kofi?” Reading her mind, China responded, “The Volcker committee investigated the possibility that Kojo Annan used his UN contacts to secure the award of the contract for Cotecna. But it did not find any evidence”.
“I guess the main plot is how Saddam Hussein, the butcher of Baghdad, had manipulated the OFFP” said Wafers. “Volcker reported that about 2,200 companies including 129 Indian companies had paid kickbacks to Saddam Hussein’s government, right?” she asked. “Yup” said China, a shade surprised that Wafers was also aware of life outside chartered accountancy! “But how did it work?” Wafers wondered aloud. It was her signal to others that they had better brief her.
A smiling China responded, “The Iraqi government handed over oil sale contracts to individuals, organizations and political parties considered to be ‘friends’ of Iraq; in particular, to permanent members of the Security Council who were in a position to ease sanctions”. The captain chipped in. “The oil allotments were made at UN approved prices to nominees of these political beneficiaries. Iraq negotiated with the nominees and asked them to pay a surcharge into bank accounts that were in the name of Iraq’s State Oil Marketing Organisation. The nominees then made their profits by selling the oil at market prices to oil companies. A part of the profits went to the beneficiary”.
China added, “In the case of imports, ‘after-sales service provisions’ and ‘inland transportation fees’ were incorporated in the invoices to inflate prices. This helped contractors to recover from the UN escrow account, amounts that they had paid to Iraq as kickbacks. The balance was pocketed by Saddam”. Wafers was beginning to get a sniff of the scandal.

“What about the Indian connection?” she asked. China explained, “Mr. Natwar Singh, the former foreign minister, the Congress party, Mr. Bhim Singh of the Panthers party and Reliance Petroleum have been named as non-contractual beneficiaries. Masefield AG, a Switzerland-based oil trading company, lifted the allocations made to the Congress and Natwar Singh. The intermediary nominee in this case allegedly was Andy Sehgal and his company Hamdan Exports”. Wafers interrupted; “but Andy has gone on record saying that he hasn’t “touched a barrel of oil in his life.” China winked, “Viola, you don’t have to touch a barrel to deal in one!” The captain said, “Bhim Singh did not lift the oil while the allotments to Reliance were lifted by Alcon Petroleum Ltd”. And then added, “The non-contractual beneficiaries have been so called because they have not actually traded in oil on their own.”

Wafers was ready to offer a judgment. She now felt that she had cracked the Volcker puzzle. Her judgment came courtesy a series of questions. “Why are we barking up the Congress and the politicians? Why have we spared the companies that were named? What is this nonsense about pocketing the difference between actual market price and fair market price? How can the fair market price be fair if it is below the actual market price? Is this not a commercial transaction where two parties have the right to decide on the terms of sale?”

“Finally, these allegations are based on the documents of the Iraq government that fell into the US hands after the Iraq invasion. There has been no corroborative evidence. A mere name in a document cannot be proof of wrong- doing. If that were so, then leading politicians named in the Jain diary (famous Jain hawala case) should be behind bars.
China smiled. “Wafers, there are some things that may look legally right but which are morally wrong.” The captain said, “It is time to pull down the shutters”. Wafers wondered, “On the Volcker scandal or the coffee shop”, as she walked out with China into the long night.

Where is the Law?

“Did you know that the Supreme Court of India works for 185 days and the High Courts work for 210 days in a year?” asked China. Wafers did some quick arithmetic and said, “That means India’s apex court is on a holiday 50% of the time and the high courts take off 40% of the days in a year”. China smiled. He looked smart, thought Wafers. “Hey, tone down. You could be hauled up for contempt of court” said Rinku stuffing in another bite of pasta. It was all that China could do to keep his cool.

“My foot,” he bawled. The gang was stumped. The yuppie engineer-to-be from IIT had studied at one of India’s top residential schools and was known to be sober. Clearly something must have upset him. Said China, “Look I peeped into the Internet and found that as of March 2004 there were 22,000 cases before the Supreme Court, 33 lakh cases before the High courts (of which 41% were overdue by five years) and 228 lakh cases were hanging fire in subordinate courts (of which 30% were pending for more than five years).” Wafers recalled her senior who in audit was ever preoccupied preparing an ageing schedule of debtors!
Rinku (to Wafers’ anguish he was now sporting a John Abraham hairdo) sipping his coffee remarked, “According to the Guinness Book the most protracted lawsuit took place in India. A `temple keeper (a k a Mahant) filed a suit in Pune in 1205 A.D., and the case was decided a full 766 years later, in 1966!” As Wafers laughed, Rinku chided, “This is not the average time taken by the Indian courts for deciding cases. Normally a case takes between seven to fifteen years to be decided”. Wafers remembered the Bofors story that had broken out in 1986 tarnishing the fair image of Rajiv Gandhi. Nothing had come of it even after 20 long years.
“How are things elsewhere in the world?” she asked. The captain brought in potato chips that China loved. Munching one China said “Let me give you an example from the capital market”. Wafers sat up. The Sensex had crossed 8400 and she was interested. China was saying, “Back in 1995, the derivative trader Nick Leesson brought the 150 years old Barings bank to its knees through his reckless trade in the derivatives market. Today he has not only completed serving his prison term; last heard of he had written a book on the subject which was made into a movie”. Wafers could not miss the irony. In India the cases relating to the 1992 scam were still on. It was another matter that the principal protogonist Harshad Mehta was no more!
Rinku, although appreciative of contempt of court, decided to recount a first hand experience. A few months back he had to frequently visit a lower court in connection with a criminal case in which a close friend was falsely implicated. “In most of the hearings, the main agenda is to fix the date of the next hearing. If at all they serve any purpose, it is to identify the hidden athletic talent in the country!” Wafers sat up interested. “As soon as one’s name is called out by the court clerk, in the most disrespectful way imaginable, one has to push through the milling crowds which block the entrance and make a fifty meters dash to stand in front of the judge. Any delay would result in a severe reprimand! And having folded his hands in front of the magistrate, one is told when to come for the next hearing”!

China smiled popping another potato chip into his mouth. And said, “When trials take place, one can make out very little of what is going on. Lawyers speak in hushed tones. The magistrate’s voice cannot be heard. Worse still when there is so much backlog pending in the courts, our courts do not even put in a decent eight hours of work a day. Cases keep dragging forever. But the lawyers do not seem unhappy”.

Wafers asked, “Why is this so?” China responded. “Perhaps it has, in part, to do with the way the fee is structured in India. Unlike in the US where lawyers work on an incentive based system, here, they collect fees per document generated or per court hearing”. Wafers thought, “Oh piece rate workers.” Rinku remarked, “So the more the number of hearings, the more the fees they can collect”. Wafers murmured, “For the client, a variable cost”. China closed out, “Did you know that the lawyers in Tamil Nadu went on strike during the summer of 2002 to protest against government moves to dispose of cases speedily?”

Wafers agreed that the lawyers were a privileged lot. After all they were the only professionals who didn’t have to pay service tax. Or may be like the lawyer turned politician, P Chidambaram had once wisely remarked, “they are not required to pay service tax because they do not render any service.”

China turned to Wafers and asked “What would you suggest?” Wafers didn’t think for long. “Judges must be paid handsomely. There must be incentives for judges to finish cases. We don’t want kangaroo courts but cases must be expeditiously dispensed with. The courts must work in two shifts”. Rinku who had done some research on the subject said, “A national Commission has recommended that there should be 50 judges for every 10 lakh citizens. But we have only 10 judges for every 10 lakh citizens.” Wafers nodded. Her professor had once said, “In modern society, speedy and efficient legal processes are very important. Without a sound legal system, it would be difficult to safeguard property rights, impossible for businesses to function, tough for the innocent to defend themselves and difficult for the guilty to be taken to task. Unfortunately, our outmoded legal system is a major stumbling block in the reform process. The guilty can prolong cases taking advantage of loopholes in the system”.

China said, “Despite its lacunae the legal system has stood up in India. But the law must not only work. It should also be seen to be working. You cannot progress as a nation unless the populace has the fear of law in its mind.”

Yeh, bonus ka mamla hai

“Hey, that’s sexy” cooed Wafers. China was reminded of his “ragging” days at IIT. A senior had asked him to define sexy. China had blanched. And was promptly pulled up for having a dirty mind. Someone explained, “It is ‘1/Cos C’ my dear.” China almost puked.

“Look WIPRO has announced a 1:1 bonus” said Wafers. “So what’s sexy about it?” asked China. “You see, for every one share held I get one free. I have 50 shares; I will now have 100” she said. That statement took Rinku’s breath away. He worked for a pink paper and was shocked that someone doing her CA final could lay such an egg.

“Hey, the 50 shares aren’t free money” he said. “I know” cracked Wafers. How could she forget. Her professor had once famously explained why bonus does not increase wealth. He had said, “A bonus cannot create wealth. All that happens is that reserves are transferred to equity account. If wealth can be created by an accounting entry then companies do not have to produce goods and sell them. They just have to engage accountants to keep capitalizing Reserves!”

“Okay, tell us what is it that you know?” Rinku asked Wafers. Wafers was hurt, but she didn’t show it. “A bonus issue doesn’t change the wealth of the firm. With the numerator (market capitalization) remaining unchanged and the denominator (number of shares) going up, the price per share will fall. Theoretically a 1:1 bonus would bring share price down by half”. China chimed, “You mean what you gain on the old share you lose on the new.” Bravo.

“That being so why would anyone be excited by a bonus” wondered China. Wafers was thrilled at the prospects of carrying coal to Newcastle. “See, there are many reasons. Like, the share price falls and brings it within the comfort zone of the investor”. Rinku chipped in. “She means that an investor is happier buying two shares at 360 each than one share at 720. Right?”

Wafers’ professor had called the phenomena mental accounting. He had narrated a story. “Jeanne had gone to a casino in Katmandu and had staked Rs 100/-. She won Rs 200. She then staked the Rs 200 as well and saw it double. She kept winning until she had won Rs 5,00,000. Then the tide turned and in one shot she lost it all.” The professor had asked, “How much did Jeanne lose?” The class roared “Rs 100”. The professor had sworn that they would make great accountants. “The accountant thinks he has lost Rs 100 because that’s the money he would debit the gambling account!”

Somebody had hissed, “The economist would know that Jeanne had lost Rs 500,000”. While agreeing with it, the professor had tongue firmly in cheek remarked, “An economist is one who when he sees a Rs 100 note on the road says that this cannot be a Rs 100 note because if it had been one someone would have picked it up.” The class had roared in approval.

China asked, “Price fall apart, what else is it about bonus that would excite an investor Wafers explained. “When the share price falls, investors move in to buy shares. They read a positive signal in the bonus. A company would not declare bonus unless they are sure of servicing it in the future. So the demand for shares goes up and the price too goes up.” China echoed, “The law of demand and supply in operation.” Right.

“Hey, that’s sexy” cooed Wafers a second time. “Look ITC has announced a 10:1 stock split in addition to a 1:2 bonus” she said. “So what’s sexy about it” asked China. “You see for every two shares that I hold I get one share free. And then these three Rs 10 shares are taken away from me and I get 30 shares of Re 1 each. So from holding 2 shares I now hold 30. It was now China’s turn to be stunned. “Now doesn’t the stock split look frighteningly similar to that of a bonus?” he asked.

“Yup”, said Wafers. “But there is a difference. In accounting speak, we don’t have to transfer money from reserves account to equity account” she purred. This time around she was glad carrying lignite to Neyveli! China remarked, “From what you said, the Rs 1800 share will start quoting around Rs 120.” [(1800X2)/30]. Wafers wasn’t surprised. China wouldn’t be China if he wasn’t that quick on the uptake. “Yeah, you are right” she said. “And for the same reasons that I explained in the case of bonus, demand will begin to build and the price will climb up.”

Rinku stepped in. “See bonus and stock split can actually work the other way too. In the case of ITC, an investor having 100 shares would as per your computations now have 1500 shares. He could step in to sell some. As pressure builds up and supply outstrips demand prices could actually fall.” China said, “So all bonuses and all splits aren’t necessarily good.” Wafers agreed. In the end it depends on what the market perceives. “Yes, the price could go up or it could come down.”

China complimented Wafers for speaking like a true analyst! He remembered an analyst who when once asked by a scribe as to which way the market was headed in the short term had said, “The market might either go up or might come down!” Bravo. The journalist had then rubbed in. “Mr. Analyst the market could also move sideways”. A distinct touché indeed. Or was it a PJ (poor joke in IIT lingo?)

“So economics apart, it is all a mind game”, said Wafers unmindful of the jibe.

Corporate Governance kya hai.

Wafers sat under the moonlight looking at the stars. It was the weekend and she had had a tough week at office. She let her mind run, very unlike Wafers! She was thinking of how fashions have changed. Hey, no; she wasn’t thinking about dresses. She was thinking about jobs. Once jobs in the information technology sector were hot. Then came the craze over business process outsourcing. And now Sox. She smiled. She was reminded of Chuin’s (her kid brother) socks. He rarely washed it. Her mom was a doctor and he prided himself saying his socks would provide anesthesia to any patient.

China, her bosom pal, dropped in. She decided that she would check out with him about working on Sox, in particular in areas relating to corporate governance. She would be a CA come May 2006 and was already weighing her career options. She felt that the noise over corporate governance was misplaced. For, in her mind, corporate governance was like “quality”. You cannot show case it as a unique selling proposition (USP) since it was a bare necessity for any good corporate citizen. She wasn’t surprised that both Infosys and the Tatas were at the top of the pecking order in a recent national survey on corporate governance.

“Hey, tell me why this fuss over governance?” she asked China. “Simple”, remarked the IITian. “Corporate governance is concerned with the interface between directors, senior managers and shareholders of companies.” Wafers yawned. A legalese? Where had she read this? China ignored the jibe. “Most shareholders do not have the time or the inclination to monitor the functioning of a company. So they leave it to the board of directors. In recent times, in view of the spectacular collapse of companies like Enron, the subject of corporate governance has been receiving great attention”.

Oh how could Wafers forget Enron! Her dad had told her about how reams of newspaper columns were spent by the BJP pulling up the Congress for doing business with Enron and then when it came to power the BJP itself had inked the deal! Very funny, she thought. China, sipping his third mug of coffee (if he sips at this rate he will grey before he turns 30 thought Wafers) was saying, “Among the issues being discussed are who should be on the board, what should be the checks and balances on senior managers, what kind of incentives must be given to align the aspirations of senior managers with the objectives of the company, and the kind of disclosures which the management must make to investors from time to time. Several committees had submitted reports on measures for improvements and many of these reports have been widely publicized and intensely debated. In the US, the Sarbanes Oxley Act (Sox) has been introduced to impose greater accountability on CEOs.”

Wafers wasn’t willing to buy it. “I think in all these reports on corporate governance we are mistaking the woods for the trees” she said. And added, “Many of the US companies which ran into trouble had all the corporate governance mechanisms in place, at least on paper”. “Explain” said China. “For example, the Enron board was a model board. When Enron went kaput, it was in full compliance with the governance provisions of the much publicized Sarbanes-Oxley Act, with the exception of loans to some corporate officers. Enron also had a truly independent board. Only Ken Lay and Jeff Skilling were insiders in a board of 14 directors”. China nodded. “Many of the directors were highly qualified. Some were heads of major corporate or non-profit organizations. Others had significant governmental and regulatory experience. All the audit committee members were independent. In 2002, the Enron board was judged as one of the five best boards in the country by the Chief Executive magazine”. Wafers was flowing like a torrent and China liked that.

“Hey, I couldn’t agree with you more” he said. “Actually, according to William Niskanen, Chairman of the prestigious Cato Institute there is no evidence that a company’s performance is related to the proportion of independent directors. Over the past 20 years, many studies have tested this relationship and have reached that conclusion. Audit committees, compensation committees and codes of ethics, have been of little use in preventing corporate governance failures.”

Wafers remembered what her professor who taught CLSP had told the class. “In India several committees have been set up to improve corporate governance. But talk to people who sit on boards and they will admit that nothing much has changed. More high profile people may have been added to the board. Sitting fees might have gone up. But the real challenges remain. Most Board meetings are superficial and held to satisfy compliance requirements. In many cases, agenda papers are not circulated in advance. Far too much time is spent discussing trivia, important points are taken up for discussion towards the end of the meeting when the concentration of the board members has started to sag”.

Wafers wondered whether the rules could cover certain matters of the heart when it came to governance. China recalled what Jeffrey A Sonnenfield had written in the Harvard Business Review. “We’ll be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing need -– to be strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues.” China remarked, “The most important step is to create a climate of trust and candor. Directors must develop alternative scenarios to evaluate strategic decisions. They must be involved in the management of the company’s affairs”.

“So does this mean that Sox is hogwash” asked Wafers. “Not really” said China. “In the 20th century shareholder activists, accountants, lawyers, and analysts had highlighted the importance of independent directors, audit committees, ethical guidelines, and other structural elements that can help ensure that a board does its job. They’re necessary but not sufficient conditions for good corporate governance”. Wafers nodded. And then added, “If a board is to truly fulfill its mission to monitor performance, advise the CEO, and facilitate effective stakeholder management, it must become a robust team whose members have complete trust in each other”.

Wafers’ mobile rang. Her mom was on line. She had to return home.

He, who moves first, moves fastest.

The legendary professor Service Sam was teaching Strategy. “The early bird catches the worm”, he said in his trademark style that peppered lectures with quotes, jokes and examples. He was explaining “First mover advantage.”

Battery (he wore powerful (!) glasses) yawned. “Sir, these proverbs are meaningless.” The class was shocked. Gosh! That sort of lingo was taboo. But Battery was on a roll. “You see, an English proverb says, ‘Look, before you leap.’ And another crows, ‘He who hesitates falls.’” As the class roared in approval Sam smiled.

“If you want jargon, you shall get jargon” said Debbie. She spotted a new hairdo. Someone hissed, “Wow”. Debbie ignored the jibe and said “First mover advantage (FMA) is a firm's ability to get ahead of its competitors by being the first to market a new product category”. Phew. Flowers liked Debbie but he didn’t buy this idea of FMA. He said, “Today anyone can copy your product in six months flat. That’s all the head start you can have”. And asked rhetorically, “Then, where is the first mover advantage?”

Complimenting Flowers for his very original thinking, Sam said, “There are three reasons as to why you can create FMA. One, if you start early you will have that much more time to accumulate technical knowledge. You can then use that knowledge to beat the competition. Two, you can preempt the competition’s access to scarce assets. For example in the software industry by offering attractive pay packs and ESOPs you can stop the competition from poaching your most important asset, manpower. And finally by building an early base of customers and offering classy service you can create high switching costs”.

Debbie decided to borrow a leaf from Battery’s book. “So, it is no longer ‘he who laughs last, laughs longest’. It is he who moves first, moves fastest’? Huh”. It was all that Battery could do to keep his cool. His first mover advantage had gone! He said, “I agree with both Flowers and Sam.!” Debbie blinked. Somewhere she had read that to hold two diametrically opposite views in one’s mind and yet retain one’s sanity was the hallmark of a genius. And she knew that Battery was no genius. Mr. Power Glasses was saying, “Whether you can enjoy first mover advantage would depend on two things. The first is the pace at which the technology is evolving. And the second is the pace at which the market is expanding”.

A backbencher screamed, “Explain please.” Battery was only too happy to do that. “Technological advancements can take place at different rates. For instance, in the glass industry (which dates back to 3500 BC) the technology hasn’t changed much. In contrast, the change has been dramatic in the computer industry”. Debbie jutted in, “The faster the change the lesser is the first mover advantage”.

Battery hated interruptions. Even as he stared at her, Debbie was busy elaborating on the second point namely market: “The pace of market evolution varies from industry to industry. For instance, the market for fixed telephones developed more slowly than the market for mobiles. Landlines needed 50 years to reach a household penetration of 70%. Cell phones have cracked it within one decade. There was first mover advantage in the former (Slow market) and none in the latter (Fast market).

The professor summarized. “Gradual evolution in both technology and markets create the best conditions for generating first mover advantage. If the technology changes slowly new entrants aren’t able to differentiate their products from that of the first mover. But if the technology changes rapidly, the product itself becomes obsolete quickly. Often such products are overtaken by versions from new entrants, who are not burdened with the innovator’s dilemma, i.e., fear of cannibalizing prior investments”. As Sam paused for a sip of water, Battery whispered a translation of a local quote. “No mom likes to kill her kid!”

Sam continued. “Similarly if the market grows slowly, the first mover gets time to cultivate new market segments. The Great Depression was kind to 3M’s Scotch Tape on both fronts, namely market and technology. At first, 3M thought the product would be used in factories to seal cellophane wrapped around baked goods. Instead, it was purchased by the middle class for repairing items that in more affluent times they might have discarded! The gradual growth of Scotch Tape's appeal gave 3M the time to organize production and distribution. Technological change was also modest, enabling 3M to prevent later entrants from introducing superior versions. Scotch Tape so dominated its category that it became a generic name”.

The class heard in pin drop silence. “Sometimes, the market leads and technology follows. The Walkman, pioneered by Sony in 1979, used prevailing technologies. The basic design remained unchanged for a decade. But its market simply exploded. Yet Sony's market share was 48% even ten years after the Walkman's launch. Perhaps Sony’s superior design skills, marketing muscle and strong brand helped. Contrast this with the sewing machines industry. Elias Howe introduced the first commercial sewing machine in the late 1840s, but the machines made by Isaac Singer, a later entrant with greater resources, found more customers”.

When the technology leads and the market follows, early entrants face many years of flat sales. The furious pace of technological revolution attracts new competitors, who think their improvements will draw customers away from the incumbent. Only a company with very deep pockets can survive such a market.

Sam then asked the class, “What happens when both technology and markets change rapidly”. Battery responded, “Then first movers become vulnerable. Netscape, despite its early start, was overtaken by Microsoft”. Flowers remarked, “Hey, but look at a different example. Intel. By putting all its technical and marketing muscle behind its product development and being "paranoid" about competition, Intel dominated in its product category.” Debbie thought, “Intel inside, idiot outside.”
Service Sam was suitably impressed. He summed up: “Ultimately, let’s remember that firms should not make the first move simply for the sake of doing so. After all, first-mover advantage occurs not when a company enters a market, but when it starts making real money in it.”

From Donkey to Datsun to Donkey

Wafers adored her dad. She often wondered whether a father could be any better. Now the CEO of a manufacturing major, he had handled factory operations when Wafers was a kid. She remembered the night when he took her to the factory to see how the plant worked. That night Wafers decided that she would never work in a factory! Nights are meant to be slept and not worked was her argument. “No night shifts for me”, she told herself. And hence she decided to do CA! Some original thinking indeed.

To Wafers the name Raman Roy spelt sheer magic. He, the father of Business Process Outsourcing (BPO) in India, was her new icon. To her he was the Tendulkar of business. She had read somewhere that the BPO industry was to the 21st century what the information technology industry had been to the 20th. It was offering mind-boggling job opportunities and had placed India in the global spotlight.

In a different context her professor had once told the class that geographical boundaries had begun to collapse. That the new world in which they would make a mark would belong to transnational organizations. Companies where production would be carried in one part of the world, marketing in another, design and development in a third, money would be raised in a fourth, the organization itself would be headquartered in a fifth and all routine accounting and other back office operations would be carried out in a sixth part of the world! Wow. Part six, she later learnt, was BPO.

Come July 06 when she would be a CA, should she join a BPO she wondered?
That evening as she sat with the gang at the coffee pub she poured her heart out to China. He said, “My friend works in a BPO and handles their South African operations.” “Wow,” said Wafers. “Where is he placed? Johannesburg or Antwerp?” she asked all excited. “Neither place” said Rinku, the journalist. “In fact, he works next door! Sitting in India he does the accounting work of South African clients”. China explained, “He works when it is daytime for South Africa. Between 4 pm and 12 midnight, Indian Standard Time. And there is this girl who works in their US operations. Works when it is day time for America. Between 9 pm and 9 am, Indian Standard Time”.

“Night shift” screamed Wafers. “I thought only factory workers worked night shift.”

China decided to rub Wafers. “When the outsourcing concept broke out years ago, they first outsourced transport, then security, later water service. And now Accounting! Your profession is in illustrious company.” Wafers ignored the jibe. “Its not that,” she said. “Thanks to C K Prahalad, companies are simply focusing on their areas of competence and outsourcing the rest. HR, investment banking, back office operations and IT too are being outsourced,” she added remembering what she had read the other day. And closed out saying, “The arrival of the Internet and the availability of cheap and abundant telecom bandwidth are hastening the process”. China jibed, “wisdom from the mouth of babes.”

Rinku decided to add his two bit. His dad, when he started his chartered accounting practice in the mid seventies, had gone around scouting for clients. A senior professional had then told him: “Whatever you do, do not get into maintaining books of accounts for clients! That’s a donkey’s job! You must do high end jobs; of the Datsun variety.” To Rinku, the irony was palpable. Today companies, big and small, were vying with each other to set up BPOs that essentially offered accounting services!

Wafers asked, “Do you think that a slot in a BPO company can be my first job? Will the work experience in a BPO count?” Under different circumstances Rinku would have loved to pull Wafers’ legs. Not now. “There are divided views on the subject”, he said. “One view is that a stint with a solid manufacturing company could give the right kind of grounding. After all, accounting is a staff function. An accountant should sit where the heart of the business operations, the line function, takes place.”

China supplied the other view. “Working in a BPO you get to learn how to set the right processes. Moreover, you are offering the service to global companies. So you become familiar with global benchmarks. You will probably get to know more about international accounting standards than what your course might have taught you.”

Wafers was concerned. But what about making job switches? A HR consultant had once told her, “Your first job is crucial for your career. Choosing your first job is like marriage. Marry in haste and repent at leisure. In either case there is a need for sure thought and sound knowledge.” Would she be able to later switch from BPO to say banking or manufacturing?

Rinku said, “Over time it is possible to switch from BPO to manufacturing and vice versa. In today’s world you need man management skills much more than technical skills. Moreover, in an IT driven world, skills in handling automated processes are invaluable. A BPO experience can come in handy”. China remarked, “In any case with many well managed companies trying to focus on design, brand management and other high value adding jobs and moving out of manufacturing, the traditional argument that you must work in a manufacturing company is slowly but surely losing weight”.

Wafers who wanted to work abroad because that experience would provide her the necessary fire in the belly wondered whether there would be global mobility in a BPO career. China provided the ultimate answer. “Every job is like the curator’s egg. It comes in a package – with the good, the bad and the ugly all rolled in one. You must pick up the good and learn from it”.

When they walked out of the coffee pub Wafers remembered what she had read in a magazine. That in fiscal 2004 India's BPO industry had recorded a sales of $3.6 billion and that by 2008 the figure would touch $24 billion. So far only American and British firms had outsourced work to low-cost economies, but other rich economies such as France, Germany, Italy and Japan would soon follow suit. So global mobility seemed to be very much on she told herself.

Walking into the sunset

It had happened seven years ago. The year: 1998. It was an April night that Wafers would not forget in a hurry. India’s one-man army of many years, Sachin Tendulkar, had done the impossible. At Sharjah, he had lifted India from a morass to upstage the world beating Aussies. Watching Sachin bat like a genius and seeing Mark Mascaranhas physically lift the Bombay bomber in elation, Wafer had tears of joy in her eyes. That night she told herself that one day she would become as great as her hero in whatever activity she chose to do.

Today, watching Sachin fighting injury and hearing loose cannons from sundry experts about whether or not the little master should hang his bat she wondered why he had let this happen to him. Should he not have walked into the sunset at a time when people asked “Why” and not when they were asking “Why not”? Even today if he were to give it all up he would find himself a place amongst the pantheons of greats she told herself. Shouldn’t he do it? Hadn’t he already earned enough to last a few generations she wondered aloud? Or was his passion for the game so over powering?

But then, Wafers realized, that history was replete with examples of how men and women, used to the constant media glare, had found it difficult to quietly call it quits. Wafers had read of the greatest boxer of them all Mohammed Ali (of the fly- like-a-butterfly-and-sting-like-a-bee fame) who kept coming back again and again from retirement so that he could quit as the reigning champion. Of course that didn’t happen and he had to give up in disgrace. In more recent times there was Mike Tyson returning to the ring only to be hounded out by a rank outsider.

Surely Wafers would like to remember Sachin as the fighting cricketer of Sharjah than the man fighting injuries to keep a place in the team. But for every Sachin, every Ali and every Tyson there was a Martina Navratilova who had proved them all wrong she told herself.

For over two decades, beginning 1975, the grandma of world tennis had ruled the game like a colossus. When she gave it up circa 1995 she had the world at her feet. Then, some eight years later, in 2003, at age 47 she came out of retirement to compete at the professional circuit. Not surprisingly she had to eat crow losing in the early rounds making people wonder why the she was making an exhibition of herself. In the end it was she who had the last laugh. Teaming up with our very own Leander Paes she won the Australian Open. In a game where girls, half her age, retire. Wow.

Wafers’ mind wandered to politics. She had always looked upon the BJP as a party of rabble-rousers. But of Atal Vajpayee she had the highest regard. In many ways one of India’s finest prime ministers, Vajpayee, she believed, had made the cardinal sin of leading the BJP in the 2004 hustings. For an octogenarian that would mean he would be prime minister till 86. By any stretch of imagination that was a fairly advanced age to be in power. When the Congress surprisingly won the national elections and his party bayed for Sonia Gandhi’s blood (saying she should not become prime minister) he kept his own counsel letting the aura around him diminish. And when the Italian born who has made India her home gave up the chance to become prime minister it showed up our politicians as ageing men eager to have another dash at power. How nice it would have been if he had retired after his innings as prime minister thought Wafers. Oh would it not have enhanced his position as a statesman?

Of-course, Wafers thought, it is not easy to give things up. After all, there is so much of money and so much of power at stake. If you have been in the midst of public glare, it is hard to walk into the sunset. And sometimes like in the case of Navratilova it pays to come back! What a dilemma. What a dilemma.

She thought of another Navratilova, this time from the world of movies, the Big B. A brand in his own right, he gets all hearts, from the seven year-old’s to the septuagenarian’s, skip a beat. The 60 plus former angry young man has now launched into a classic second innings. Coming out of the brink of bankruptcy he had magically rebuilt his career, in a field where you are considered an oldie at forty. But for every Amitabh, Wafers remembered there were several actors and actresses with a glorious past who came out of retirement only to be consigned into the dustbins of history.

From sports, politics and movies Wafers’ mind wandered to the corporate world. There is nothing wrong in being ambitious but an attempt at an over arching reach can be killing. She thought of Jack Welch the famous CEO of GE who set out project “Next Guy” to find his successor. To her it looked like the succession would take some time in the coming. What if the legendary Welch were to slip up somewhere, thought Wafers. Should he not quit at a time when people ask “Why” and not when they start asking “Why not”, asked Wafers to no one in particular?

In stark contrast stood India’s most famous corporate czar, N R Narayana Murthy. He had handed over the baton to his chosen heir Nandan Nilekani to become Mentor and has now said that he would quit completely when he turns 60. So it is possible to quit. That is if you make up your mind.

But should you quit or not? Should you quietly walk into the sunset or not? Wafers thought she would draw up a two by two matrix, “Quits” on one axis and “Success” on the other. It would throw up four quadrants. Men who refused to quit and who bit the dust. Men who refused to quit and who hit the jackpot. Men who made successful comebacks. And men who came back only to make a fool of themselves. Ha, she realized succession planning was a tough call to take. She was still searching for answers when she realized that it was time to go to office.

Will the housing bubble burst?

“Is there a Ponzi here?” wondered Wafers. She was alarmed at the housing market becoming suddenly hyper active. Property prices were piercing through the roof. There was a renewed rush for real estate. Was this for real? The one person, who could sort out here doubts, China, was busy with his semester exams. Oh, if she called him he would definitely come down to the coffee pub for a chat. The two were chums from their early school days. But she felt that it would be better if she first researched before speaking to the walking encyclopedia called China.
Wafers logged on to the net for answers. And what a veritable storehouse of information the Internet turned out to be. She learnt that in the last three years the total value of residential property in developed economies had increased by $20 trillion, to touch $60 trillion. Wow! The smart CA intern that she was Wafers quickly realized that it was a 50% increase. In contrast, global share values had risen by only $10 trillion. She noted down the first question that she should ask China “Is this housing boom sustainable? Or will it turn out to be the biggest financial bubble in history?” And more importantly, what would be the ramifications in India.
If the macro picture had stunned her, there was more of it to come in the micro scene. She learnt that it in the year 2004 prices in South Africa rose by 35%. And that in Hong Kong they jumped up by 31%. Among developed countries, Spain saw a rise of 17%, followed by France at 15% and US at 13%. Prices had jumped up at double-digit rates in half of all American states. In India too there had been a big real estate boom after a long spell of lull. Only in a few countries like Australia and Britain, house prices were now falling. Wafers scribbled Question No 2 for China: “Why do house prices shoot that way in some countries and not in a few others?”
Wafers dad had always told her to read the Economist. Today she did that and lo there were a few pointers. An article in that magazine suggested that taking the average “ratio of house prices to incomes” in 1975-2000 as a baseline, American house prices are today overvalued by almost 30%. A companion piece indicated that structural changes in an economy could justify higher real estate prices in relation to incomes. For example, real interest rates in Ireland and Spain came down sharply when they became members of the Euro zone. But lower interest rates cannot explain all of the surge in house prices crowed another article. For Wafers things were beginning to get a bit hazy!
She clicked the mouse and landed on an information goldmine. A blogger had written, “The current global housing boom is unusual. Never before have so many countries had housing booms at the same time”. The World Economic Outlook had the IMF playing Dr. Doom. It carried a warning that just as the upswing in house prices was global, so would the downturn. The IMF offered some statistics to back its claim. It seems that between 1991 and 2004 the Japanese property prices had dropped every year by a total of 35% from their peak in 1991. Yet the 36% rise in real house prices in Japan in the seven years between 1984 to 1991 was less than the increase over the past seven years (1997-2004) in most of the countries that are seeing a boom today. Even Wafers with her flair for numbers was finding this numbing. She admired these statisticians. Her professor had once famously told the class that “A statistician is a person who when he has one foot on a hot stove and another on ice cold water concludes that on an average he is comfortable.”
Even as her thoughts wandered along those lines she remembered her professor speak highly of a certain Alan Greenspan. Ha, the big boss of US treasury. And here he was quoted on the Internet giving a spin different from that of the IMF. Greenspan claimed that the growing concerns about an American housing bubble are exaggerated. His argument was that the housing market is less prone to bubbles than the stock market, because home owners cannot buy and sell their houses as easily as speculators can buy and sell shares. People have to live somewhere and large transaction costs discourage trading in houses. Nice argument, Wafers told herself; but she wasn’t exactly convinced.
She wondered, “How would China respond to Greenspan’s point?” Ha, the answer lay in Economics. Greenspan or no Greenspan bubbles can develop in housing markets, as well she told herself. That’s because of imperfect information. Her argument was simple: “No two houses are alike. There is no central exchange where property prices are determined every second by the forces of demand and supply. (Ha, “the two blades of the scissors”, her Economics teacher had sounded out.) And there is no short-selling in the real estate market. When bullish investors push stock prices up, the price rise might get moderated by other investors selling short in the hope of buying more cheaply later. Nothing like that happens in real estate. Buyers' expectations about future house prices tend to be based on recent trends. So a rise in prices will boost demand further. Banks also unwittingly encourage bubbles as they have an incentive to lend heavily when property prices rise. This pushes prices even higher. But when prices fall, banks pull out, amplifying the fall”. She patted herself and told that even China would be impressed by her logic.
Wafers believed that in India house prices were getting unrealistic. She remembered her friend from Hyderabad. He had said that a flat which fetched a monthly rent of Rs. 7000 costs Rs. 25 lakh. The EMI (Equated Monthly Installment) on a 15 year loan of Rs. 20 lakh for that flat worked out to Rs. 18,000. Surely it made more sense to rent than to buy a house. Many people were buying property, in the hope of capital appreciation. Her friend had argued that people were looking at housing less as a place to live in and more as an investment. If selling pressures increased as investors tried to book profits, the bubble might well and truly burst. If that happened, the consequences can be catastrophic. Wafers knew that once China’s exams were over she would have to invite him for a cup of tea to get more answers to these issue

The Flat tax

The B-School had invited a star tax practitioner to talk to the Class of 2006 on the basics of taxation. It was an opportunity which the CA grabbed with alacrity. He had always believed that the syllabi and students at the B-Schools had “style but no substance”. He would show them up for how shallow they were. As he walked into the class looking extremely prosperous, all suited and booted, the class rose up in awe of the man the nation called TP. No one really knew where the name came from; but it had stuck.

Fifteen minutes into the class as TP spoke to a spell bound audience, the first crack in his armour began to show up. He was speaking on “entry level”, “maximum marginal rate” and the “incidence of tax” with a healthy sprinkling of wit and wisdom. He told them that as good citizens we must pay our taxes. It was then that Boka set the cat amongst the pigeons. “Sir, Taxation in India has become far too complicated for the average Indian; yet tax is too important a subject to be left exclusively in the hands of the tax experts.” TP smiled. All his life he had made his money thanks to India’s complex tax system. And here was a rookie who wanted to change all that.

“Why can’t we have a single tax slab? Say, tax everyone at 20%? Why should we have three slabs 10%, 20% and 30%” asked Debbie, the baby faced lass, who loved simplicity. “Not to speak of a surcharge that adds insult to injury” remarked Goggles. “You mean have proportional tax and not graduated or progressive tax?” asked Flowers. Seeing a few eyebrows raised, Flowers took it upon himself to elaborate. “A flat tax, (a k a proportional tax) is a system that taxes everyone at the same rate viz a proportion of income. In contrast, under progressive income tax citizens with higher incomes pay tax at a higher rate than those with lower incomes”. A tax is an involuntary fee paid by individuals or businesses to a state, or to functional equivalents of a state, including tribes, secessionist movements or revolutionary movements. ... Citizenship is membership in a political community (originally a city but now a state), and carries with it rights to political participation; a person having such membership is a citizen. ... A corporation is a legal entity (distinct from a natural person) that often has similar rights in law to those of a Civil law systems may refer to corporations as moral persons; they may also go by the name AS (anonymous society) or something similar, depending on language (see below). ... A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ... Income tax is a direct tax which is levied on the income of private individuals. ... A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ...

Debbie remembered someone speak at a debate saying that there was a time in India when the maximum marginal rate was 97.5% and that in addition you had to pay a wealth tax of 5%! That is, for every rupee that you earned beyond a point you paid approximately 98 paisa as tax. And of whatever little was left you paid wealth tax. God why would one want to earn, the speaker had thundered.

“Sir, does any country adopt flat tax” asked Debbie. Before TP could open up, Flowers was quickly off the block. “Eleven years ago, in 1994, Estonia became the first European country to introduce a “flat tax” with a uniform rate of 26%. Latvia (25%), Lithuania, Russia (13%) Slovakia (19%), Ukraine (13%), Serbia (14%), Georgia (12%) and Romania (16%) soon followed suit”. Boka offered an explanation. “The flat-tax movement has hit off in the erstwhile communist countries because these countries were starting from scratch in choosing a tax code and they opted for the one that was simple and efficient”. TP was beginning to have second thoughts over his “all style and no substance” argument.

“Why would you think that flat tax is convenient,” asked TP. His tone may have conveyed annoyance but it was a put-on to get the best out of the group. Goggles said, “I read somewhere that in the US the cost of administering progressive taxation is about 10% to 20% of revenue collected”. Boka offered him support. “Flat tax is an administrator’s joy. As every Rupee is taxed at the same rate, the taxman is not bothered about who is being paid how many rupees. He can simply withhold 20% of a company's payroll, without being concerned about individual pay packs.” Debbie closed out, “But if a second rate of tax is added, the tax collector has to find out how much money is going to whom before he can be sure of collecting the right amount from the right person!”

“Any specific examples” asked TP. Ah, he hadn’t counted on his wards’ wide ranging reading habits. “Flat tax can yield good results,” said Flowers. “When in 1994 Estonia repealed its high tax rate on the rich it did not hurt the tax base. Actually that year the revenues rose to 40% of GDP. Ditto in 2002. The country now plans to cut its flat rate from 26% to 20% by 2007”. Debbie remarked, “Sir, in Russia in the year 2001, the government combined its 12%, 20% and 30% personal income tax bands into a single 13% rate. A year later tax collections were up by 26%”. “Flat and up” closed out Flowers.

Boka decided to offer his spin to the Russian experience. He said, “Flat tax is simple. The government's revenues surged not because the Russians suddenly started working hard, but because tax administration and compliance became easier. So if flat tax is to be introduced in a country, the idea should be sold on the simplicity plank.”

“Well, what is wrong with progressive taxation” asked TP. “Is it not wiser to make the rich give up a bigger share of their disposable incomes? Doesn’t a flat tax violate this principle?” he asked rhetorically. “No”, said Debbie. “A flat tax usually combines a threshold (that is, an exempt amount) with a single rate above it. The system can be made progressive by playing around with these two variables”. Wow! Goggles drove another nail, “A flat tax increases the incentive to work, unlike a progressive tax, which discourages extra effort from society's best-paid members. Sir, a graduated income tax is graduated robbery.”

Neta, the guy with political ambitions, decided to stand up and be counted in the dying moments of the class. “In India we need radical tax reforms. So far we have been playing at the fringes. Our Income Tax Act needs to be cut down by half. A flat tax will provide the answer. Okay, the leftists might make noise but the tax’s sheer convenience and ease of administration hold out the promise of a clean and transparent system, which India badly needs”.

The only thing that the class hadn’t mouthed was Adam Smith’s canons of taxation thought TP. As he got ready to respond to their arguments, the gong went.

Of flannelled fools and other games.

“Cricket must be banned,” said China. He was biting his pasta and flipping through the latest copy of the Outlook magazine. Wafers, whose love for cricket was second only to her love for CA, almost dropped her glass of coke. “Why?” she screamed. She knew that China wasn’t a guy given to eccentrics. And she wanted to hear out his reasoning for she felt was an absurd statement.

“Indians are crazy about cricket and cricketers. Ditto with movies and movie stars,” China purred. “So what’s your problem?” asked Wafers. His eyes still on the Outlook article, China said, “The silly game has become an industry and the Board of Control for Cricket in India (BCCI) is awash with money”. Wafers blood pressure rose. “So?” she asked. China simply said, “It is not good for India”. Stupid engineer, thought Wafers. He gets subsidized education at IIT, plans to work abroad at a fancy pay package and now talks about what is good for India.

China could read her mind but refrained from being drawn into that debate. Instead he said, “You understand economics. So let me explain in the language of the economist”. Big deal, thought Wafers. She didn’t like grand standing. “Economics,” said China, “talks about negative externalities and market failure. The market economy tends to overproduce goods and services that have external costs. Cricket falls in this category. While the BCCI and the Indian cricketers are laughing their way to the banks, they are imposing costs on society”. Wafers couldn’t digest anyone rubbishing her favourite game. And so asked, “How?”

Stuffing another piece of pasta into his mouth China said, “Look. Work suffers in many offices while matches are being played. In cities like Calcutta work comes to a standstill. Worse still, far too much time is wasted on highlights and post mortems by self styled analysts. The amount of output lost clearly exceeds the value created by the game!” Wafers couldn’t help saying, “Boy, this is a democratic country. We do what pleases us. You can’t play the big brother.” The captain at the table joined the debate. “He pumped for China. There are other issues as well. Today, everyone talks about the need to be globally competitive. But, cricket is neither a global game nor is the Indian team truly competitive!”

“Crap” said Wafers. “Are we not proud of a marauding Tendulkar? Does our sense of patriotism not shoot up when India wins a match?” she asked. China smiled. An angry Wafers was always a treat to watch. “In the developing countries where cricket is played, it is some form of diversion from the more pressing problems of life. When Sri Lanka won the World Cup it was to them a great escape from the socio-economic problems that was ravaging their nation”. The captain nodded and said, “In the few developed countries which play cricket like Australia, New Zealand and England, cricket is not the national game”. China rubbed in. “So, terms like ‘world champions’ are a misnomer when it comes to cricket. Olympic winners are the real world champions. For, they compete against the best in the world”.

China wasn’t through yet. “Why do people play sports? Because it promotes physical fitness. But cricket does no such thing. How many of our test cricketers can really run fast? And the game isn’t strenuous. Only the wicket keeper’s job is physically demanding. That job alone is comparable with that of an athlete”. The captain bringing in a pack of French fries for Wafers said, “And it is not a coincidence that we have failed to produce a good wicket keeper in the last 15 years!” Wafers couldn’t help thinking, “Strangely enough, people responsible for cricket in India have decided that a specialist wicket keeper is not necessary”.

Wafers was beginning to feel converted. She couldn’t help recall what her kid brother had said the other day. “If India keeps winning consistently the way Australia has done in the past many years, it would be great”. Yes, India is some 8th in the test rankings with only the minnows behind it, Wafers remembered. And also that when India finished runner up in the World Cup it had been walloped by a huge margin by Australia. As China had then remarked, “We finished a distant second.”

Wafers couldn’t let down her heroes. She thundered, “You guys are jealous that the cricketers make money. As if you folks don’t like the smell of currency.” Why grudge them? China responded. “Look that isn’t the issue. Cricket is diverting scarce resources away from games which are more appropriate for our country. Take hockey. Many developed countries play hockey. So winning the Olympic gold in hockey is an achievement. Further, hockey is played for about 90 minutes in the evenings. It does not disrupt office work. And it demands tremendous physical fitness.

Once world beaters in hockey, today we are the whipping boys. Reason: Lack of incentives. While our cricketers fly around the world with their wives and drive in imported sports cars (on which customs duty is waived off), our hockey players travel by rail in second class compartments”. The captain at the table said, “Recently, I saw a former Olympics hockey player who had come to inaugurate the sports days at a school. I was pained to see the kind of respect given to him. If he had been a test cricketer, he would have been pampered beyond imagination”.

Wafers was beginning to feel that the China and the captain might have a point. China drove the final nail saying, “If the Indian cricket team were a listed stock, no one would touch it with a barge pole. Reason: The theory of valuation suggests that the value of a stock is the present value of the future cash flows. And neither the Indian cricket team’s present performance nor anticipated future performance is anything to write home about”.

Wafers was stumped. She remembered a Bernard Shaw quote, “Cricket is a game played by 11 flannelled fools and watched by 11,000 fools.” She decided to have her sip and give a quick slip. Disgusted. Disappointed. And as usual confused.

Qayamat se qayamat thak

Wafers had a problem with her Accounting Standards. She decided to surf the net to find a solution. And lo, she ran into the arresting story of Charles Ponzi. The dapper Italian immigrant had landed in the US in 1903 and in the years ahead had become enormously famous for the wrong reasons!
The story ran thus: Ponzi launched an export magazine and, among others, invited a person in Spain to subscribe to it. The subscriber sent Ponzi an international postal reply coupon. This coupon could be exchanged at the American post office for the American stamps that were needed to dispatch the magazine to Spain. The coupon in Spain cost the equivalent of one American cent. In America when Ponzi exchanged the coupon, he got six cents worth of stamps! Sensing a huge arbitrage opportunity, Ponzi decided to float his scheme in 1919.
The scheme promised to double investors’ money in 90 days flat. Little wonder, money started pouring in. Ponzi’s plan was to raise American dollars, convert them into foreign currency, buy international postal reply coupons from various countries including Spain, convert them into American stamps and sell them for a windfall. So far so good. But on 10th Aug 1920, Ponzi defaulted and most investors lost their shirt. Investigations revealed that only two stamps had been purchased! The early investors had profited -– but that was because money brought in by the new investors was used to pay off the earlier investors!
Wafers was very excited when the following day she met China at the coffee pub. She knew that for once she would score over him. “Have you heard of Ponzi?” she asked. “You mean Charles Ponzi?” replied China, stumping Wafers for the nth time. “Does this guy know everything?” wondered Wafers. China interrupted her thoughts saying, “You see, there are many Ponzi schemes in India. Actually, there is one which is now circulating that gives you an opportunity to make Rs 149 lakh on an investment of Rs 10,000! Here’s how”.
“You become a member of ‘the club’ by buying a membership form for Rs 10,000. To recover this Rs 10,000 you canvass to enroll four new members to the club. Let us call them Patron A, Patron B, Patron C and Patron D. Each of the patrons will buy a club membership form for Rs 10,000. The Rs. 10,000 is paid through a demand draft in the following manner. Rs 2,500 to the person who canvassed to enroll their patron member. Rs 750 to the club. Rs 500, Rs 750, Rs 1000, Rs 1250 and Rs 3250 to the person whose name appears in Rung 5, Rung 4, Rung 3, Rung 2 and Rung 1 of the club membership form respectively”. The smart CA trainee that she was, Wafers took in all the numbers in one go. She wasn’t foxed.
China continued, “The moment you enroll the four Patrons you have recovered your Rs 10,000. Patron A (so will Patrons B, C and D), to recover his Rs 10,000, will canvass to enroll four new members. Let's call these new members as Layer 1 members. When these Layer I members (there will be 4 X 4 = 16 of them) receive the club enrollment form they will make the payment in the manner indicated above. Your name will appear in Rung 5 in their form. That is, they pay Rs 2,500 to Patron A (Patron B, C or D as the case may be), Rs. 750 to the club, Rs 500 to you and the other indicated sums to the persons whose name appear in Rungs 4,3,2, and 1 of the form. When Layer 1 members canvass to enroll four new members each, it generates 64 Layer 2 members. Your name moves up to Rung 4 in the club membership form which the Layer 2 members receive. And you will receive Rs 750 from each of the Layer 2 members”.
Quick on the uptake, Wafers realized what was on. She said, “Layer 2 members now canvass to enroll 4 new members. This generates a total of 256 (64 X 4) Layer 3 members. When Layer 3 members buy the club application form, my name would have moved up to Rung 3. And I would receive Rs 1,000 from each of these members. Layer 3 members then enroll four new members each and thus generate 1,024 new members. And when these 1,024 Layer 4 members buy the forms my name moves up to Rung 2. I receive Rs 1,250 from each of them. Similarly, when the Layer 4 members canvass four new members each, it generates 4,096 Layer 5 members and my name moves atop the rung and I collect a cool amount Rs 3250 from each of these Layer 5 members”.
China was impressed. “Bravo, Wafers”, he said. And added, “After this you cease to be a member. If all the members, from Patron to the Layer 5 members, could enroll 4 new members you stand to pick up a cool Rs 149 lakh. This is how it goes. From Patrons (4 @ Rs 2,500 each) Rs. 10,000/-. From Layer 1 members (16 @ Rs 500 each) Rs. 8,000 /-. From Layer 2 members (64 @ Rs 750 each) Rs. 48,000/-. From Layer 3 members (256 @ Rs 1,000 each) Rs. 256,000/-. From Layer 4 members (1024 @ Rs 1,250 each) Rs. 12,80,000. From Layer 5 members (4,096 @ Rs 3,250 each) 133,12,000/- Total Rs. 149,14,000”.
Suddenly Wafers looked suitably confused. “Look, I do not lose money as long as I enroll just 4 new members. Isn’t that right? So what’s Ponzi in the scheme?” she asked. “Well, that’s the Ponzi,” said China, tongue firmly in cheek. “As the number of members snowball, those who join late may find it increasingly difficult to collect 4 new members and could hence lose out. Remember close to 90 per cent of your Rs.149 lakh is brought in by the Layer 5 members. Or, if the club, which makes nearly Rs. 41 lakh on every full circle closes shop, all those who are yet to enroll their quota of new members lose out”.
It hit Wafers like a lightening. “So, the success of Ponzi schemes lie in the fact that they appear to be a genuine investment opportunity?” she asked. China replied, “Yes. People running Ponzi schemes understand human psychology. They know that the public wants to live up to the Joneses. Because their neighbour made money on a Ponzi these guys too want to. When the rest of the world is going mad, the investors must imitate them to some extent!” For once, Wafers matched China word for word. “There are other reasons as well, I suppose. I think everyone wants to become rich. The rich want to become richer. Even the richest people are at Level I of Maslow’s hierarchy!” China remarked, “First there is greed. Then there is the individual’s belief that no one can defraud him. Over confidence and over optimism together fuel Ponzi Schemes”.
Wafers had the last word. “A Ponzi scheme can keep running only till the money entering the scheme is more than the money leaving it. At some point the bubble bursts. Then the money flow dries up. And presto the scheme folds up”.
The captain at the table overhearing the conversation said, “So from 1921 to date investors have elected to be robbed! Qayamat se qayamat thak”.

Improving responsiveness to Supply chains

Wafers had attended the morning class on “Just in time” (JIT) management. The good professor had sounded out that the world had long ago moved out of the EOQ model and was today dating JIT. Wafers wasn’t willing to buy that argument. Her logic was simple: In JIT, the manufacturer was merely pushing his problem on to the supplier who in turn was pushing it on to his supplier. The buck had to stop somewhere. Wafers did not have the heart to voice her concerns to the professor because the class was too busy cracking some quantitative problem on JIT.

That evening as the gang met up at the Chennai Coffee Pub, she aired her concerns to China, her smart pal who studied at IIT. “Oh, you mean the crisis on the supply chain front,” he cracked. “Wow! These guys can give fancy names to mundane stuff” thought Wafers. She did not know what she was getting into. At the end she would realize that she hadn’t really bargained for what was to follow. China explained, “You are right. A supply chain must be very responsive to changes in market demand. Otherwise companies can be left with unsold inventory which may severely dent the bottom line.” China had read Wafers’ mind. It stumped her no end.

Rinku, the journalist, looking disheveled after chasing a breaking story, quoted the case of a global company famous for its supply chain management. “In April 2005, the company had surprised the world, when it wrote off a whopping $4 billion dollars of surplus raw materials. It was amazing that the global major had misread demand by such a mile.

China explained how the trouble had arisen: “The problem lay in the behavior of the supply chain partners. The company out-sources a massive part of the production activity to contract manufacturers. Before the crisis erupted, the contractors had piled semi-finished products because demand for the company’s products had always exceeded supply. Remember, the company rewarded the contractors for prompt delivery. So the contractors had an incentive to build buffer stocks. Many contractors did bulk purchases from component suppliers to pick volume discount and thereby increase their profits. Therefore, both the contractors and component makers had everything to gain by building excess inventory.”

When demand slowed in 2005, the problem which had remained hidden so long, now surfaced. Most contractors simply assumed that the company would buy everything they could produce. Since the company had not stipulated the responsibilities of its contractors and component suppliers, much of the excess inventory ended up in the company’s warehouses. The company landed in trouble because its partners acted in ways that were not in the best interests of the supply chain.

Rinku took over to explain the lessons. “While building supply chains to deliver goods to consumers, one must understand the behavior of the various firms in the chain. Every firm seeks to maximize its own interests thus undermining the functioning of the entire supply chain. The risks, costs and rewards of doing business must be distributed fairly across the network. Misaligned rewards cause excess inventory, stock-outs, incorrect forecasts, inadequate sales efforts and sometimes poor customer service.”

China explained that incentive-related issues arose in supply chains arose mainly because incentive schemes were also badly designed. He then decided to illustrate with an example.

“There is this ferroalloy exporter operating from Visakhapatnam port. The ferroalloy is manufactured at a factory 150 km away from the port. Movement of the ferroalloy takes place by truck. This job is outsourced to a transporter who hires trucks. The transportation contract is fixed on a per ton basis which would be unaltered for a year. The transporter, however, goes into the market daily and hires trucks based on the prevailing market rate. If the rate is not lucrative, he doesn’t hire any truck. Because of the inability to move cargo, shipments get delayed. So it makes sense for the exporter to pay the transporter on the basis of a spot rate plus mark up”.

“But truck contracts are never structured this way because there is lack of trust. Like, there are difficulties in verifying the rate at which the transporter places the truck. So managers want to play it safe and offer long term contracts.” As China sipped into his 4th cup of coffee, Rinku took over. “A second point is that since transporters are paid on a per ton basis, they have no incentive to place a truck if there is a part load. This is because the truck owner (the third one in the supply chain) will charge for a full truck even if it is only partially loaded. So the transporter doesn’t carry out the customer’s instruction to hire trucks immediately. Rather, he would wait for a few days to ensure that enough stock has accumulated.”

Wafers asked, “How does one crack the conundrum?” China replied, “Firstly companies must acknowledge that there is misalignment in incentives. They must then redesign incentives to obtain the behaviour they desire from their partners. Only managers who understand the motivations of other companies in their supply chain can tackle incentive-related issues. Since alignment also requires an understanding of functions such as marketing, manufacturing, logistics, and finance, senior managers must get involved in the process”.

Wafers wasn’t convinced: “But how do you think alignment of incentives is possible?” Rinku responded, “Contracts can be framed that reward or penalize partners based on outcomes. Thus transporters can be penalized heavily if they do not place trucks on time and rewarded handsomely if they do so.”

Wafers wasn’t sure whether she was any the wiser but realized that there was a lot more to business than what her CA program had taught her.

What makes a good decision?

“What are the different types of decisions?” asked Service Sam, stunning the class. Sam never asked inane direct questions. But then he was the boss and the boss has the right to handle sessions the way he chooses!

Goggles offered a frill free answer. “Decisions can be classified into strategic, tactical and operational, depending on the type of impact they make. Strategic decisions are irreversible and have long term implications. These decisions must be made with the active involvement of the top management. Tactical decisions have medium-term implications. They convert strategy into action. Operational decisions have a short term impact and can be reversed with ease. Such decisions do not need the involvement of top management. In fact top management should be freed of this burden, so that they can spend more time on strategic matters”.

“But, Sam, the ground realities are different” said Debbie, the baby faced, pony tailed, topper. “In Indian companies the involvement of senior management in decision making defies Goggles’ logic. In one organization, in which my cousin worked, buying a management book costing Rs. 800 needed the approval of a senior manager. But a junior officer could place a Rs. 5 lakh order on a transporter to move cargo from the factory to the port”. The class smiled.

Flowers, with three years of work experience behind him said, “In the company where I worked, going on a tour which cost Rs. 30,000 was considered operational; but getting a nomination for a training program which cost Rs. 5,000 was viewed to be strategic”. Sam agreed, “There are no black and white rules while categorizing decisions”.

Sam then decided to take the discussion to the next level. He quoted Peter F Drucker. “The time and effort spent on a decision should be proportional to its importance. Important decisions should consume more time compared to unimportant ones”. Drucker might have been a management guru but the class felt that he was off the mark when it came to Indian companies.

Debbie chirped, “In most Indian organizations, the way decisions are taken has little to do with their importance. When taking decisions, the real concern of managers is how they will be perceived by their bosses. Managers want to take decisions in such a way that they do not have to assume much risk”.

Flowers said, “When middle managers have to take decisions on matters which do not go through a serious vetting process, they are fast. But when the decision has to be approved by the boss and a strong business case has to be prepared, they go slow. They are apprehensive whether they will be able to sell the decision to their bosses. They feel that any proposal which is rejected by the boss will diminish their career prospects”. Boka added, “Managers spend a lot of time doing things which make them happy and virtually no time on those which cause stress and discomfort. In the process, they turn decision making into a complete farce. Without actually taking decisions, they fool themselves into believing that they are doing so”.

“Unfortunately, all good decisions are inherently risky. And they involve a lot of effort and discomfort”, said Goggles. “Illustrate” screamed the class. “I hate personal examples, but I shall make an exception this time.” It was Boka playing to the gallery. “Years ago, when Chittaranjan Locomotive Works (CLW) was in its formative years, Telco (now called Tata Motors) was a major equipment supplier. CLW always sent its engineers for inspection to the Telco factory before taking delivery of the equipment. Once there was a crack in one of the equipments and the CLW engineer promptly rejected it.”

“When the Tata management expressed their concern to CLW, CLW decided to send my late grandfather, (then a Railway engineer on deputation to CLW) to inspect the machinery. Grandpa quickly realized that rejecting the equipment was a safe decision that did not call for any effort or risk. But effectively, it was no decision. The real decision was in telling Telco engineers how to rectify the defect so that both CLW and Telco would benefit. Such a decision involved risk. If something went wrong, grandpa would be held accountable. But, if the decision proved right, he would not gain in any way, in a system where there were no incentives for high performers. But my grandfather decided to go ahead with what he felt was right. An expert in welding, he quickly specified the kind of welding to be done to repair the crack. Working with the Telco engineers, grandpa ensured that the equipment was made fit for delivery. Telco’s top management was so impressed with him that they promptly made him a job offer. But the committed railway man that he was, my grandpa promptly refused the offer. That, however, is beside the point”.

Sam nodded his head in appreciation. “What Boka’s story indicates is that in most business situations, managers can take two decisions, one which is riskless and effortless and the other which is risky and effort intensive. Dropping a new investment proposal is an easy decision but making the investment and taking the proposal forward is a tough one. Promoting a young, bright manager is a difficult decision but denying him promotion on the basis of seniority is an easy decision”.

Flowers remarked, “In well managed organizations, managers do what they think should be done without worrying about how they as individuals will be perceived. The top management tolerates failures as long as the reasons for the failure are beyond the control of the managers”.

Realizing that the gong was about to go, Sam decided to close out. “To encourage better decision making, top management must lead by personal example. They must walk the talk. They must encourage people to take decisions unmindful of possible failure”. He then asked, “You guys love cricket, don’t you?” “Yes”, screamed the class. Sam said, “Who can ever forget Kapil Dev running across the field at Lord’s to take Viv Richards’ catch. That catch, which looked impossible when Kapil started running, effectively won India the 1983 World Cup. A mediocre fielder would never have attempted it. And no one would have really faulted him!”

“To encourage managers to spend more time on the ‘right’ issues, experimentation must be encouraged. Failures should be punished only if they have been made due to avoidable negligence or bad planning. Employees who stick their neck out, and walk the extra mile, must be rewarded handsomely”. The gong went.

Principal-Agent conundrum

Chatshow was handling one of the final sessions on corporate finance. He was explaining to the class the principal-agent tiff. While textbooks talked about the principal agent relationship in their opening chapter, the mercurial professor had intentionally held it back till the end because he ardently believed that all introductions should come at the end! His take was simple: only after the students had appreciated the gravity of finance would they be able to appreciate what finance deals with. Some original thinking indeed!

Walking up and down the aisle, (the class called it Chatshow’s catwalk!), Chatshow said, “Agents, often pursue goals which are different from those of the principal. So, agents have to be enticed to act in the best interests of the principal.” Boka jumped the gun and asked, “Sir, any examples?” Chatshow turned silent and looked at the class – an indication that they must respond to Boka’s query.

Flowers’ hand went up immediately. “The share holder of a bank is a principal; the managers are the agents. The goal of the bank’s shareholder (principal) is to maximize the bank's profit. But the bank's profit depends on the actions of its managers (agents) who have their own goals. A manager may take a customer to dinner on the pre­tense that he is building a relationship with him, when in fact he might simply be having a ball”. A backbencher whispered, “Hey anyone here whose dad is a banker?”

Even as giggles broke out, Goggles chipped in, “In relation to the teller, the manager acts as the principal. He would like the customer to have a minimum queuing time whereas the teller (agent) might like to spend more time with the customer to have his problems resolved”. Flowers’ felt that these weren’t the savviest of examples. Nevertheless the discussion had gathered momentum.

Chatshow stepped in: “The principal-agent conundrum lies at the heart of corporate governance. The interests of the shareholders and managers do not converge.” Boka who had done some work on corporate governance for his summers said, “The agency problem is complex. Just giving orders and attempting to make employees obey them won’t do. In many cases, it is not possible for the shareholders to monitor the managers or even for the managers to monitor the employees”. Flowers, who fought for grades with Boka, nodded. And then added, “To achieve their goal, the firm's owners (principals) must induce the managers (agents) to work in the company’s interests. And in turn the man­agers (principals) must induce the other employees (agents) to work efficiently”. Well said; but how was it to be done.

Chatshow offered some perspective. “Each principal attempts to get things done by creating incentives that induce each agent to work in the interests of the principal. Behavioral scientists call this goal congruence. The goals of different stakeholders like employees, managers and owners must be aligned”. He then asked, “Folks, how do you think this can be done?”

The class had read about CEOs drawing fancy salaries. And of how the previous batch had drawn an average salary of one million INR. They understood the language of money. Goggles, whose dad was a hotshot CEO, said, “We can issue stock options. By giving employees a stake in the business, it is possible to imbibe in them a feeling of ownership. This would lead to better performance on the job, leading to higher profits and hopefully greater market capitalization.”

The girl in the middle row (she always sat there and was so dubbed GITMR) pointed out, “We should look at incentive based pay for everybody. For exam­ple, managers can share in a firm's profits for meet­ing profit targets, and employees may be given bonuses for meet­ing production or sales targets. This will motivate them to maximize output and sales.” The baby-faced topper Debbie interjected: “Another option is for principals to appoint a group to monitor the actions of agents more closely. For example, shareholders, despite being owners, do not have the time or the competence to monitor the functioning of the company. They therefore appoint the board of directors to act as trustees and impose checks and balances on the managers.” Chatshow was impressed at the simple solution.

It was at this point that Boka brought in a dissenting view. “But will these measures really solve the problem?” he asked. “Managers may manipulate profits. They may window dress the financial statements. They may not invest sufficiently in long gestation projects, which will deliver profits only in the long run. They may drive the plant too hard to maximize production without investing in maintenance” he offered by way of elaboration. GITMR saw the point and said, “With profits going up, their incentives will go up. The stock price may move up temporarily, as the markets will not be privy to the private information managers have about the exact state of affairs in the company. This will enable managers to encash their stock options. But in the long run, the shareholders of the company will be put to disadvantage.” Flowers remembered what he had heard from his seniors. That the B-School’s placement officers when given the option of placing one graduate at Rs 9 lakhs per annum and two at Rs 5 lakhs each had plumbed for the latter because their incentive pay was based, among other things, on how many students were placed!

Neta who aspired to be a politician, pointed out: “Both in India and abroad the agency problem looks intractable. See what has happened at Hewlett Packard (HP). HP’s CEO, Carly Fiorina, merged HP with Compaq to create an empire that would rival IBM in size. She forgot the cultural differences between the two companies. She greatly exaggerated the synergies. And while trying to achieve them, she questioned many of the core values of HP, thus rubbing several employees on the wrong side. Many good employees left HP. Consequently, the merger bombed.” Debbie who had read that piece added, “Recently, Fiorina was sacked by the board for failing to reward shareholders. But going by press reports it would seem that the lady has lost little. She was given an attractive severance package of about $21 million and is now in contention for the post of World Bank president!”

The gong went. And Chatshow was happy at not just igniting a discussion but in once again realizing that his wards had their finger on global events.

Cut, Copy and Paste.

“If you copy from one source, you are guilty of plagiarism. If you copy from several sources you are lionized for researching.” As the class smiled, at his borrowed witticism, Service Sam added, “Ladies and Gentlemen, I want neither”. Did he want neither ladies nor gentlemen to be present in the class or was he wanting neither plagiarism nor research wondered Debbie, the baby faced topper.

It was then that the professor dropped his bombshell. “Folks, your summer project reports must be hand written, not word processed!” Sam was known to go bonkers but Boka felt that the professor had exceeded even his known levels of eccentric behavior. “I dislike cut-paste jobs,” said Sam, offering it as some kind of explanation for his bizarre requirement. At the B School everyone understands cut-paste. Professors equate it to copying. When a new book appears in the market, people are known to remark, “It is a cut paste effort”. When someone turns out to be a prolific writer, people mention that he is good at doing a ‘cut paste’ job.

Sam went on to mention that if the option to “cut-paste” existed, the credit had to go to Microsoft, the global software giant. When working with Microsoft applications, one could ‘cut’ a portion and ‘paste’ it wherever required, in the same file in the same folder, in a different file in the same folder or in a different file in a different folder. While working on a LAN, one could cut paste entire folders from one address to another. But today, the term has negative connotations. Phew.

Boka felt that Sam was throwing the baby along with the bath water. Not just that. He felt that there wasn’t anything really wrong with cutting and pasting. And that, down the ages, people had been rewarded for this play. “Sam, I disagree with you. Look, even innovation isn’t invention”. The class sat up. Boka taking on any professor was always a treat to watch. “Come again,” said Sam, a shade irritated.

Flowers (because he always wore a flowered shirt) decided to join the slanging match. “Sam, innovation is less of serendipity and more of systematic hard work,” he said. A backbencher sounded out, “Genius is 1% inspiration and 99% perspiration”. Goggles (because he always wore Goggles outside the class) had an engineering background and quoted Louis Pasteur, “In the field of observation, only chance favours the prepared mind.” Debbie jumped in, “Innovation is usually not about radical breakthroughs. In fact, it is often about lifting an idea from one context and applying it in another”. Boka supported her: “Innovation is about taking a tried and trusted technology to a new market or bringing a new technology to the existing market. It is about applying what has worked in one industry, in another”. Flowers closed out, “in short, the basic approach to innovation consists essentially of “cutting and pasting.” Even the great Thomas Alva Edison did exactly this”.

“Proof,” said Sam. He believed in facts and examples rather than pompous arguments. The class of 2006 was ready for it.
Goggles added, “Sam, serious research work in management takes place by “cutting” an existing methodology in one context and “pasting” it in another. It can also happen by “cutting and pasting” a new methodology on an existing database. Event studies developed by the great scholar in the area of finance, Eugene Fama, have been “cut and pasted” in several applications of management. Similarly, game theory has been “cut and pasted” in several research studies.” Sam wasn’t pleased. “Specifics, specifics” he said.

Flowers mentioned, “Edison's inventions were not entirely original. They were extensions and blends of existing knowledge. Edison’s team used its knowledge of electro-magnetic power from the telegraph industry, where they first worked, to transfer old ideas that were new to the lighting, telephone, phonograph, railway, and mining industries. The phonograph blended old ideas from products that these engineers had developed for the telegraph, telephone, and electric motor industries. Edison’s laboratory’s work on telegraph cables later helped its engineers transform the telephone from a scratchy-sounding novelty into a commercial success”. Sam had to agree reluctantly. After all, it was he who had in a different context applauded Edison for delivering on his promise of “a minor invention every ten days and a big thing every six months or so.” In six years of operation, Edison’s team had generated more than 400 patents.

Debbie stepped in. “The steam engine was used in mines for 75 years before Robert Fulton wondered how it could be used to propel boats, and developed the first commercial steamboat. Nobody had done what Fulton had with that rather local, specific knowledge. He was the first to apply it to the altogether different problem of powering boats”. Boy, was Service Sam stumped.

A backbencher decided to bring the discussion closer home. “The essence of case writing”, he said, is all about ‘cutting and pasting.’ A case writer, “cuts and pastes” information from different sources”. Boka, an ardent case writer, rose in defense. “If the data and information are skillfully regrouped, such rewriting can lead to something very original. Indeed, leave alone violating copyrights, it can create new intellectual property. Consider an article in a well-known magazine consisting of 20 sentences. These sentences can be rearranged in 20! Or 2432,902,008,176,640,000 ways without changing one word of the article! Not all of these rearrangements will make sense. But if someone can do the rearranging intelligently, it can lead to a new article that will look and feel far different from the original piece and convey a very different message. And imagine the endless possibilities that exist if we combine different articles and books!” Debbie added. “Cut-paste can be a creative tool for those wanting to apply ideas from one context in another. Only when we resort to blatant copying, do problems arise. But let us not blame the technique. Let us blame the users”. The class screamed, “Long live cut-paste. Long live Microsoft”.

It was then that someone delivered the knock out punch. That, Abraham Lincoln’s famous “for the people, of the people, by the people” definition of democracy had its source in a different context in the Bible! As the gong went, Sam walked out a puzzled man. Hey, where had he gone wrong?