A factory with 1/4th of the workforce as mentally challenged people!

The Census 2001 has revealed that over 21 million people in India are suffering from one or the other kind of disability. Among the total disabled in the country, 2.2 million people are mentally challenged. In spite of a 3% reservation quota for people with disabilities (PWDs) in government jobs, the implementation has always remained a challenge. However, a few good samaritans have provided employment not only to the physically disabled but also to the mentally-challenged. Mr. Subhash Chuttar, managing partner of Sharayu Precision (Pune) is one such person.

Today, one-fourth (80) of their workforce comprises special persons (mentally challenged and some hearing impaired). This school dropout turned entrepreneur has taught many disabled people how to earn their bread and butter but has never accepted any charity. A generous lady once offered him a donation of Rs. 2 Crores for his work but he politely refused it.

“I knew mentally challenged people will be less efficient than the so-called normal people but I knew they are not lazy. They just don’t understand how to do the work. We need to tell them how to do the work hundred times, sometimes maybe five hundred times! I worked dedicatedly with such people and they started working effectively. Initially, we rotated such people in different departments and tried to identify what mentally challenged people like to (can) do. The biggest advantage of mentally challenged people is that they are extremely disciplined, focused and not easily distracted. They are so motivated that they want to work on holidays too”, Says Chuttar, who himself is the father of a special child.

“Every morning these individuals are engaged in a physical exercise program with the intention to coordinate the brain and body. They just require a little more patience. We have had zero accidents. If you walk onto our shop floors, you won’t be able to distinguish the work of a disabled employee from any other, ” Chuttar adds. He gives the credit of this marvel to his wife who taught him how to work patiently with mentally challenged people.

A UNDP report explains the concept of supplier diversity as an emerging trend where large corporations support smaller vendors from marginalised sections. It illustrates that Mumbai-based Mirakle Couriers (which only hires hearing impaired people) services mega groups like Aditya Birla and Godrej. Likewise, auto-components of AMC are purchased by Tata Motors and Ford. CCD, Lemon Tree Hotel and Aegis (BPO) have enabled a lot of PWDs. While technology company Mindtree creates an inclusive environment by hiring PWDs, Mindtree Foundation also develops assistive technologies for use, such as KAVI (K(C)ommunication Audio-Visual Interface Device, a picture-to-speech software application). Many companies and HR professionals can learn a lot from Mr. Chuttar and follow similar practices.

Many factory owners and HR professionals can learn a lot from Mr. Chuttar and follow similar practices. Every individual contributes to the organization in his own unique manner and that is the advantage of having a diverse employee set. Disabled employees are often found to stay longer in their companies due to a sense of loyalty and lack of similar opportunities. A successful integration of disabled people in the workforce helps the company to build a socially sensitive image in a true sense. It is rightly said that “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.”

Reference- UNDP report, Interview of Mr. Subhash Chuttar and TOI Crest

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Cashless India- Solution to get rid of black money!

Mobile payments are a top investment priority for banks. In fact, the world’s biggest banks continue to focus most of their announced IT initiatives on mobile financial services (including payments) and online banking. Mobile wallet providers are emerging as mini banking institutions and it won’t be surprising if they start providing banking solutions in the near future. E-wallets or M-wallets have been around for some time and their popularity is rising exponentially. A decision to scrap Rs.500 & Rs.1000 denomination notes and a friend of mine who is living ‘cashless’ (in India!) from more than 200 days grabbed my attention towards this topic and I decided to dig more into this phenomenon.

Cost of Using Cash

The median life span of a note across all denominations is about 3.6 years. As a result, roughly one-third of the current currency stock of 83.6 billion pieces gets replaced every year at a huge national cost. In 2014-15, the Reserve Bank reportedly spent ₹38.6 billion to print 23 billion currency notes across all denominations, entailing an average cost of ₹ 1.7 per piece.

printing-costCurrent Situation in Metro Cities

The four metros—Delhi, Mumbai, Kolkata and Chennai—contribute about 60% of the total digital payment gateway market size, followed by Bangalore, Hyderabad, Ahmedabad, Pune which together contributed 25% in 2013. Many companies have started offering their own wallet service, M-wallet companies are doing tie ups with different service providers. Paytm has already partnered with retail chain of Aditya Birla Group, MORE and is planning to partner organized retail chains, local kirana shops and create app-cash points. MobiKwik has also tied up with Big Bazaar and Sagar Ratna franchises enabling mobile payments. Freecharge and Oxigen are also aggressively trying to attract more customers

Types of Wallets

As per the RBI, there are three kinds of e-wallets—closed, semi-closed and open.

  1. Closed wallet-

A closed wallet is one that a company issues to its consumers for in-house goods and services only. Several portals such as Flipkart, Jabong and MakeMyTrip offer such closed wallets. It is basically an account where money gets credited in case of a refund due to cancellation or return.

  1. Semi-closed-

Firms such as MobiKwik, PayU and Paytm offer semi-closed wallets. As per the RBI, a semi-closed wallet can be used for goods and services, including financial services, at select merchant locations or establishments that have a contract with the issuing company to accept these payment instruments. Semi-closed wallets do not permit cash withdrawal or redemption by the holder as well.

  1. Open wallet-

Open wallets can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point of sale terminals that accept cards, and also cash withdrawals at automated teller machines or business correspondents. These kinds of wallets can only be issued by banks.

Utility of Cashless Services in Mass Transit

We can realise the potential of cashless transactions even if we just think about commuters using local trains in Mumbai. Mumbai Suburban Railway carries 7.5 million commuters daily with an approximate annual ridership of 2.64 billion. It’s that anchor solution which can trigger (being an utility item that touches Mumbaikars’ life daily) a cashless wave in Mumbai. Currently, we can buy train tickets using UTS payment gateway but it is a very tedious process. It should be like IRCTC, which allows us to pay through Paytm. Just think of how transformative it will be if the UI-UX is aligned with the current best-in-class apps. It will not just do away with the queue at ticket counter but also save approximately 300 million sheets of paper, leading to a cleaner railway station and contributing a bit to Swachh Bharat Abhiyan (Clean India Mission).

We can learn from some global success stories of Mass Transit Solutions-

  1. Octopus card system: More than 20 million cards in circulation, nearly three times the population of Hong Kong. The cards are used by 95% of the population of Hong Kong aged 16 to 65, generating over 12 million daily transactions worth a total over HK $ 130 million.
  2. Oyster (London): Latest figures (2015) 56.5 million cards issued till date.

Impact on Underground/Black Economy

Digitising payments and moving to a ‘less-cash’ society will bring a lot of benefits to the economy. Estimates of the size of black economy range from 30 % to 75 % of GDP. Just imagine the tax revenue and productive usage this money generated can be submitted. If even 25% ($550 B) of this is brought into the tax net, it has a potential (purely on account of blended tax income of $ 75-80 B) to bring millions above the poverty line. The flagship government schemes like NREGA, NRHM can be funded for over next 10 years by just 1 year of tax revenue generated from this initiative. Getting rid of the black economy will be one of the true manifestations of Swachh Bharat Abhiyan.

6 Thinking Hats

White Hat

(Facts)

-Out of a world population of 7 billion, over 5 billion or 70% have a mobile phone, whereas only 2 billion or 30% have a bank account

-90 Cr people in India are yet to shift from cash to digital

– In India out of 1.2 billion over 800 million have a mobile phone and only 250 million have a bank account. Consumers are increasingly using their mobile phones to make payments

-Wallet payment will bring ease and transparency in transactions

– The market for payments made through digital media has grown at a compounded annual growth rate (CAGR) of 10% between 2010 and 2013

-As per World Bank estimates, only 35% of the Indian population has accounts with financial institutions.

Red Hat

(Feelings)

-It will be interesting to observe how many of independent wallet companies survive when the day to reap benefits of this transition will come.

-Retail kirana merchants have multiple questions to solve before embarking on this journey- Will it increase footfall? Will it increase more consumption from same consumer? What is the tax implication? Are the above benefits good enough to overlook tax cost?

– None of the current digital cash options are cost effective (Cost of Transaction + Cost of Instrument) enough to work with street vendors.

Black Hat

(Cautions)

– Not everything associated with a cashless environment is perfect. For e.g

  1. Oyster card system glitch in London at start of the year 2016. As per BBC, it resulted in 100,000 free rides and GBP 250K revenue loss in just a few hours
  2. EBT System failure in US 2013
  3. Belgium card payment network crash in 2013

-In India, debit and ATM cards are primarily used to withdraw money. RBI data for the year 2013 indicated that the use of debit cards at merchant outlets was less than 5% in terms of value transacted. Even to pay utility bills, the majority still withdraws cash rather than paying through net banking. People still want to hold and pay cash

Some obstacles in making the transactions cashless are-

-Adoption challenge

-Older generation is not quite tech savvy

-Regulatory challenge

-Interoperability challenge

-Poor connectivity

Yellow Hat

(Benefits)

– The latest Moody’s Analytics Report estimates that increased usage of electronic payment methods have added $ 6.08 bn to India’s GDP between 2011-2015, adding 3.36 lakh jobs in the same period

– As per Economic Survey released in Feb 2016, govt. provides approx. ₹ 3.7 lakh cr in subsidy via various programs like fertilizer, food, kerosene, diesel etc. And the survey further builds that a large percentage of this does not go to the beneficiary. This can be arrested if such wallets are linke with Aadhar card.

Cost of Cash: With 76.5 B (2012-13 RBI data) pieces of currency in circulation, the operational cost of managing currency operations (to RBI and banks) is $ 3.5 B. Think of the need to re-issue currency due to wear and tear. However, even bigger is the loss on account of dead cash lying in wallets rather than in an income generating instruments. There is an additional cost in terms of time and effort submitted to withdraw cash. It further places the disproportionate burden on poor due to lack of places to keep and save it securely for future.

Green Hat

(Creativity)

-Linking Aadhar card to bank accounts with such wallets will make things easier

– Strong IT system and support from government to M-wallet startups will help India become cashless economy (or ‘less-cash’ economy)

– Investment in infrastructure and willingness of corporate is required for speedy and uninterrupted internet connection

Blue Hat

(Process)

-Government can offer some tax incentive for consumers to pay digitally and outlets to accept digitally

– Mandating all government departments retail consumer payments using cashless means

-There is need to build segment specific use cases like transit, small business payments, P2P payments and then over the period of time making it Omnibus

 Conclusion

India will require a significant amount of patience, investment and resource commitment to build digital payment use case, in collaboration with the private sector to support initiatives towards development of acceptance network. The belief is that the system will evolve in such a manner that it will have a robust business continuity and consumer grievance redressal plans to ensure that the benefits outweigh the not-so-gilded impacts. The government is already encouraging electronic payments acceptance both at consumer and merchant level as cited in recent white papers on the subject. Considering the pace of technology adoption, I hope that the goal is attained soon.

(Sources– TEDx, The Financial Express, The Hindu Business line, The Hindu, LinkedIn articles, Wikipedia)

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Game theory and Human Resource Management

“When thinking strategically, you have to work extra hard to understand the perspective and interactions of all the other players in the game, including ones who may be silent. That brings us to the last point. You may be thinking you are playing one game, but it is only a part of a larger game. There is always a larger game.” – Dixit & Nalebuff in The Art of Strategy

Companies have gone through a very difficult period that could arguably be likened to a ‘perfect storm’ as many industries struggled to create sustainable growth because of, say, increasing and aggressive labour unrest as well as fractures between unions and labour. HR professionals will need to to sort these issues in unconventional ways and become key players in delivering on primary business objectives. Game theory is an approach which, if used correctly, will lead to better problem-solving approaches and significantly increase the likelihood of success.

Game theory delineates how individual players make decisions when they are aware that their actions affect each other and when each individual has the same realization. Game theory has been applied extensively in the field of economics and many other areas of social sciences, but has made few contributions to the area of human resource management. The games this theory potentially applies to are vast and range from chess to child rearing, from leadership to managing takeovers, developing turnaround strategies or implementing change interventions, and from advertising to politics.

Strategic thinking using game theory in a business or leadership sense starts with an ability to understand the basic principles behind “human nature and behaviour”, and then know how to utilize this knowledge in a manner that influences positive win-win outcomes. Game theory will enable organizations and managers to better comprehend and hence, effectively manage their team members during difficult times. John Nash, who made fundamental contributions to game theory, believed that the best solution is when we consider what is best for the individual (zero-sum), and the group.

How is game theory useful in HR?

Game theory is incredibly effective in analyzing problems, defining the ‘right’ solutions for different contexts (both strategically and tactically), expediting effective decision-making and, importantly, getting things done and getting good ideas implemented.

Game theory is technically a branch of applied mathematics that has been adopted for use in economic analysis. In economics, the central feature of game theory is that it provides a formal modeling approach for decision-makers to explore a variety of interactions among economic agents and their potential outcomes. Such a modeling process can be important for decision makers in HRD for considering their investments and their potential returns.

Game theory is an approach that allows organizations to understand:

  • Causes of problems
  • Manifestation of problems(scenario planning)
  • Which 20% to focus on in order to get the 80% benefit
  • Decisions and solutions to adopt
  • How confident we can be that the reactions from our key stakeholders (employees, labour, shareholders, management, communities and government) will be positive because of our strategic or tactical actions/decisions?

Analysis and Examples:

Firm employee interaction as a dynamic game

Decision of the firm Employee’s Actions
Act Cooperatively Act Opportunistically
Adopt HRD Initiatives 7.5, 7.5 0, 15
Do not adopt HRD Initiatives 5, 0 NA

As an illustration, suppose the firm must invest $5 on an HRD initiative that has the potential of providing $15 in enhanced productivity of the employee. In a cooperative environment, both the employee and the firm may decide to share the excess productivity of $15 evenly making it worthwhile for both. However, with opportunistic behavior, the employee may decide to switch jobs with the potential of appropriating the entire $15 in economic rent for himself or herself, leaving the employer with an expenditure of $5 which brought no returns. Faced with this prospect, the firm may decide to not invest in the HRD initiative and save the $5.

A firm expends resources in HRD initiatives in the hopes of creating a more valuable (productive) work force. Once an employee has decided to participate in an HRD initiative, he or she has the opportunity to behave cooperatively or opportunistically. Cooperative behaviour will manifest in higher productivity from the employee where the economic rents from the HRD investment are shared by the employee and the firm. However, opportunistic behaviour by the employee may result in the employee marketing his or her newly enhanced expertise to other firms who did not make any investment in the HRD initiative. As such, the employee could extol the entire economic rent generated by the firm’s HRD initiative. Of course, the hiring firm may negotiate some of the extra rents away from the employee in the hiring process. In any event, if the employee sees an opportunity to obtain a greater portion of the extra rent generated, he or she may still have an incentive to switch jobs. Such opportunism may reduce the incentive for firms to invest in HRD initiatives in a static environment.

As an employee’s opportunistic behaviour becomes known among potential employers, he or she may be unable to repeat such opportunistic behavior over future iterations. Future employers may insist on safeguards such as bonding agreements before investing in HRD initiatives for such employees. As such, the value of future HRD initiatives may be limited for an employee with questionable reputation, and the added value from switching jobs may eventually disappear. Applying these notions, one may develop a dynamic strategy where in an infinitely repeated game; the dominant strategy may well be co-operation.

Wage bargaining (Collective bargaining):

Say, a labour union declares a strike demanding higher wages. The labour union is unaware of the exact profit made by the company. Hence it is a case of imperfect information. (Even if the firm divulges its profit, there is no reason why the union would believe because the firm has an incentive to understate its profit thereby requesting a lower wage.) In such a situation there are many things that come into play.

1. The firm may not know how long the union can hold its stand. The firm however, knows the cost of replacing the experienced labour force.
2. The union may not know how long the firm can hold its stand before giving into the union’s demand.
3. Is the firm holding out and not settling to pay higher wages an indicator of the fact that the firm cannot afford to pay higher wages (it will result in huge losses for the firm and hence it has nothing to lose in its current stand) or is the firm trying to bluff the union into believing the same? In other words, is the signal valid?
4. Say if there is a condition that when a strike goes unresolved for more than ‘x’ weeks, an arbitrator gets involved. Now, there is at least one more uncertainty – what would the arbitrator do. If the arbitrator’s decision would be favorable to either of the parties, there is an incentive for that party to wait out.

Using all the information that each party believes to be true, it can come up with an acceptable range of wages. If the ranges overlap, a strike can be avoided! Else the game will be a protracted one with more signals and ultimatums.

What underlies game theory principles?

It is important to understand that because the dynamics of human behaviour are relatively well understood, it is possible – with enough information – to predict or anticipate individual responses to interactions or decisions. Some decisions or interactions are clear cut and solutions are relatively easy to identify and implement, but increasingly managers are faced with challenges that are potentially open-ended and not responsive to generic interventions. However, managers are very responsive to interventions that target and positively impact their specific problems. Game theory enables us to identify these in a scientific way.

Game theory principles are also based on the realities of human behaviour, which people won’t express externally, but these do drive decisions and strategies, for example:

  • People aren’t always selfless in their actions and decisions and so will not always do things that are in the best interests of their employees or the organization. It is human nature to act in ways that protect their best interests and drive their own agendas.
  • Over time, any individual typically demonstrates consistent behaviour patterns in response to problems or making decisions. Finding patterns in behaviour, understanding internal political dynamics, and knowing the motivations of an individual/key decision maker will enable you to use foresight in developing responses to scenarios, which scientifically increases the potential for effective collaboration and buy-in to ideas and solutions.

Finally, some of these change management questions with reference to GROW model will be useful in digging deeper-

grow

Limitations

These methodologies are not without their shortcomings which need to be considered during the strategy development process.  Firstly, game theory assumes the players act rationally and in their self-interest.  We know that as humans, this is not always the case.  Secondly, Game Theory assumes that players act strategically and consider the competitive responses of their actions.  Again, our experience tells us that not every manager thinks within a strategic context.  In reality, most companies often do not have enough knowledge of their own payoffs let alone those of their competition. Finally, Game Theory is most effective when managers understand the expected positive and negatives payoffs of each of their actions.

(Sources- Quora, Blogs, HR Pulse, research papers and summary of the book- The art of strategy )

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Labor Law Reforms (India)

Unfavourable laws are one of the main reasons why labour-intensive manufacturing has suffered in India.

Indian policymakers seem to have realized the importance of manufacturing in providing jobs but it is also equally important to realize that the path leading to higher manufacturing employment has to necessarily cross a difficult bridge called labour reforms. Labour laws in India are perceived by trade and industry circles as complex, archaic and not conducive to promoting the interests of the industry. Some of the labour laws are both enacted and enforced by the Centre; in respect of some others, Centre enacts the law while implementation is done by both the centre and the states. Besides, there are labour laws which are enacted by the centre but are administered by the states. This complexity makes any modification of the labour laws a difficult task. Some of the major problems concerning labour laws in India are listed below-

  1. Many laws are old and irrelevant, a few being almost a century old.
  2. Some of the labour laws contain provisions, which are not perceived to be industry- friendly (eg. Section 25(F) of the Industrial Disputes Act 1947). Further, the Trade Unions Act, 1926 allowing the multiplicity of trade unions, stringent panel provisions under the Contract Labour (R&A) Act, 1970 etc. are also not perceived to be industrial friendly. Besides, the foreign investors are critical of the absence of a comprehensive exit policy.
  3. The process of tripartite consultations, which is mandated under the ILO Convention, often results in a breakdown of the consultation process in respect of contentious issues and the resultant delay.
  4. Definitions under different labour laws vary in respect of workman, establishment, appropriate government, etc. The threshold levels for applicability of the Act are also different under different labour laws. This has given rise to a lot of confusion. There is a need for uniform definition and threshold levels to the extent possible.
  5. Separate filing of returns under different labour laws creates difficulties for industries, particularly for the small units.
  6. Small units look down upon frequent inspections as ‘inspector raj’ since this adds to the compliance costs.

The recent emphasis on Make in India and the suggestion for enhancing the share of manufacturing necessitates rationalization and simplification of labour laws.

In order to understand the real impact of labour reforms on employment growth, it is important to move beyond self-selected anecdotes and engage in careful empirical analysis. Fortunately, a number of prominent scholars have taken up this task and produced a wealth of evidence regarding the association between labour reforms and many real outcomes such as employment growth, firm growth, plant productivity, etc. Almost all of them use the data provided by Annual Survey of Industries (ASI) compiled by the ministry of statistics and programme implementation. The survey provides plant-level information pertaining to inputs used and output produced by thousands of factories. More importantly, the survey is conducted every year—allowing the researcher to track the growth of a factory over the years.

labour_law_2433400f.jpg

Professors Timothy Besley and Robin Burgess in their seminal research paper published in the Quarterly Journal of Economics examine if labour regulations hinder economic performance in India. They find that rigid labour laws lead to significant reduction in employment, productivity, and growth. More importantly, they document a strong relationship between labour laws and urban poverty. In other words, rigid labour laws are also associated with increased urban poverty. Researchers conclude that rigid labour laws ultimately end up hurting the very same constituency that they are supposed to protect.

Most of the arguments advanced, both in favour of and against labour reforms, are coloured by the ideological worldview or the economic status of the people making the arguments. Many a time, arguments are driven by passion rather than reason. For example, all those who represent workers or subscribe to a leftist worldview believe that labour reforms are likely to have a detrimental impact on employment and hence oppose even simple procedural reforms in this area. On the other hand, industrialists and those subscribing to rightist worldview call for radical labour reforms without appreciating the plausible political consequences and immediate human costs.

What government wants to do?

The government wants to club around 40 existing labour laws into four or five acts. For example, all wage-related laws will be made part of the wage code and all industrial relations laws included in the respective code. The wage code and the industrial relations code will club nearly 10 existing laws, including The Factories Act, 1948, and The Industrial Disputes Act, 1947, into just two. The Employees Provident Fund and Miscellaneous Provisions (Amendment) Bill seeks to position the National Pension System (NPS) as an alternative to Employees’ Provident Fund (EPF). Similarly, the wage code bill seeks to offer health insurance as an alternative to Employees State Insurance Corp.’s health facilities for industrial workers. Given below are some of the changes happened in recent past-

Minimum Wage

Last month the Union government increased the minimum wage of non-agricultural, unskilled workers in the central sphere from Rs.246 to Rs.350 per day. The wage hike move will benefit more than 10 million workers in sectors such as mines, construction, and sanitation. But the labour unions remain unconvinced and went on strike on 2nd September, to protest against labour reforms, disinvestment in profit-making public sector undertakings and contractualization of workforce, and demand a monthly minimum wage of at least Rs.15,000.

The decision to hike minimum wage does not mandatorily apply to all such workers across the country. Labour issues are a part of the concurrent list of the Constitution, allowing both the Union and state governments to make labour laws. The Union government has the power to declare a national minimum wage floor, discussions for which have been on for the past couple of years.

Model Shops and Establishment Bill

According to a 2015 research paper published by NITI Aayog, the labour force participation rate (LFPR) in India is around 40%, but for females, it is only 22.5%. The gap in male-female labour force participation is such that the LFPR for rural females of the age group over 15 years is only 35.8%, while for rural males it is more than double at 81.3%. The Union government is making efforts to bridge this gap. The Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill, 2016, that the Union cabinet approved last month allows women to work night shifts, albeit with proper safety arrangements. The labour ministry has proposed a similar provision in Factories (Amendment) Bill, 2014, which is pending in Parliament.

Maternity Benefit Act

Rajya Sabha also passed the Maternity Benefit Amendment bill 2016 which raises maternity leave from 12 to 26 weeks. The bill also provides 12 weeks leave for commissioning and adopting mothers. A commissioning mother is one who gets a baby via surrogate mothers. This bill also makes it mandatory for an establishment where the number of workers is 50 and above to provide a creche facility . Beverage maker Coca-Cola India Pvt. Ltd, pharmaceuticals firm Dr. Reddy’s Laboratories Ltd and diversified Hinduja Group are among those firms who have recently taken similar moves. Startups like Jabong and Care24 (Aegis Care Advisors Pvt. Ltd) too has announced a similar policy for women workers.

Factories Act

The cabinet also gave ex-post facto approval for amendment of the Factories Act, 1948 by introducing the Factories (Amendment) Bill, 2016 in Parliament. The amendments relate to increase in overtime hours from the existing 50 hours per quarter to 100 hours (Section 64) and existing 75 hours per quarter to 125 hours (Section 65) in some urgent situations.

Exemption to MSMEs

The ministry has decided to exempt MSMEs from inspections related to key labour laws—including the Contract Labour Act, the Employees State Insurance Act, the Trade Union Act, the Employees Provident Fund and Miscellaneous Provisions Act and Industrial Disputes Act—in a bid to dispel fears and encourage entrepreneurs to help promote manufacturing in the country. The internal circular issued by labour secretary Shankar Aggarwal proposes to simplify the compliance burden of MSMEs in the first three years of establishment.

Some suggestions from FICCI regarding labour reforms are-

  1. To give more economic independence to the State Governments and promote federalism, FICCI strongly pleads for shifting labour to the State list, from existing concurrent list of the constitution.
  2. A uniform definition of terms like ‘industry’ and ‘worker’ is necessary across statutes. For better interpretation and understanding, industry should be termed as ‘enterprise’ and workman should be termed as ‘employee’.
  3. Reduction/ reforms in dispute settlement mechanisms between labour and employers. There are more than 4 levels of dispute settlement which are available after arbitration. These should be reduced to maximum one or two levels on a priority basis.
  4. Almost every Act requires the employer to maintain a set of registers, submit periodic returns and display certain notices near the main entrance of the establishment. The efforts spent to complete these formalities are not commensurate with the utility of such registers, returns, and notices. Besides, there is a lot of duplication and over-lapping.
  5. Laws governing terms and conditions of employment, which may consolidate:

(a) Industrial Disputes Act, 1947

(b) Industrial Employment (Standing Orders) Act, 1946

(c) Trade Unions Act. 1926

Laws governing wages, which may consolidate:

(a) Minimum Wages Act, 1948

(b) Payment of Wages Act, 1936

(c) Payment of Bonus Act, 1965

Laws governing welfare which may consolidate:

(a) Factories Act, 1948

(b) Shops and Establishments Act

(c) Maternity Benefits Act, 1961

(d) Employees’ Compensation Act, 1952 and

(e) Contract Labour (Regulation & Abolition) Act, 1970

Laws governing social security, which may consolidate:

(a) Employees Provident Funds and Miscellaneous Provisions

Act, 1952

(b) Employees State Insurance Act, 1948

(c) Payment of Gratuity Act, 1972

Here some of the questions from the change management perspective are-

  1. The laws framed mainly to cater the manufacturing sector, do not address the problems of the service sector, which today, accounts for 55 per cent of our GDP. How are we going to address problems of such a large workforce?
  2. When the multiplicity of labour laws will end? 44 central and about 100 state laws – present operational problems in implementation and compliances that need to be looked into. Besides, using different terminologies like – employee, workman, worker to denote a worker or wages, basic wages, salary referring to the compensation, yet covering different components in each legislation, have made compliance very cumbersome multiplying litigations.
  3. In the market economy of today, average shelf-life of a product is less than 6 months. Companies are under pressure to innovate, redesign and technologically upgrade the products to suit consumers’ choices which are not possible without restructuring and rightsizing. Chapter V-B of the Industrial Disputes Act, 1947 enacted during emergency puts all these processes under Government purview which has promoted industrial sickness. How can the entrepreneurs avail benefits of Make in India or Skill India in such circumstances?
  4. For the implementation of the Minimum Wages Act, 1948, in 2012 an estimated 3,171 inspectors were expected to cover around 7.70 million establishments in the country, giving a ratio of 2,428 establishments per inspector. Inspection rates, that is, the proportion of registered factories that have been inspected declined from 63 per cent in 1986 to 18 per cent in 2008. Notwithstanding data limitations, this decline is symptomatic of the poor state of inspections. What is the use of stringent acts if the implementation is not happening?
  5. The government is talking of simplifying labour laws but there are no labour laws to cover women who deliver crucial government schemes, such as the Anganwadi Worker and Helper of the ICDS [Integrated Child Development Services] or the Accredited Social Health Activist [ASHA] of the NRHM [National Rural Health Management], the IKP [Indira Kranti Patham] or Grama Deepika workers of the National Rural Livelihood Mission or the various Shiksha Karmis involved in primary education or those involved in the National Child Labour Programme.
  6. What is the action plan of government in the creation of skilled labour? The ITIs need to be modernised but the private sector will not step in to do that. Companies have stepped in to modernise the ITIs with government help before, but it is primarily the responsibility of the government to invest in training.

 (Sources- Multiple articles from LiveMint, ET, Frontline special issues, ILO paper, FICCI report)

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Funding and Startup Valuation Bubble

‘Funding’ and ‘startup valuation’ are buzz-words these days. With funding of millions of dollars, valuations of many newborn companies have crossed the mark of  one billion dollars. Amazon is pumping $3 billion in Amazon India, Alibaba is investing in Paytm and many more startups are getting funded.

A comparison of the valuation of these startups with decade old companies can be very interesting. Flipkart founded in 2007 had a valuation of $15 billion (Rs 100,000 crore) in May 2015. In comparison, the stock market values of Tata Motors founded in 1945 was at Rs 95,000 crore. Hindalco, India’s largest aluminium company has a market valuation of Rs 16,000 crore. Snapdeal, which began trading just six years ago, is valued at Rs 35,000 crore. India’s biggest airline, Jet Airways, with large assets, is valued at Rs 3,800 crore. In stark contrast, asset-light Ola Cabs, the app-based taxi-hailing start-up, is worth Rs 30,000 crore.

Recently Morgan Stanley has marked down start-ups in the US such as Palantir and Dropbox as global investors turn cautious on new ventures with high valuations and no clear path to profitability. The total value of Flipkart has touched a low of $9.4 billion. Fund-raising has also become more challenging for start-ups, both in India and the internationally.

Why and when startups need funding?

Startups need funding to grow faster and avoid valley of death. “Valley of death” is a term referring to the time from when a startup firm receives an initial capital contribution to when it begins generating revenues. During the Death Valley curve, additional financing is usually scarce, leaving the firm vulnerable to cash flow requirements.

StartupFinancingCycle_reg_4.jpg

The early stage investment is called as Angel funding whereas venture capitalists enter a little later. VCs or funding partners aim for potential exit through M&A or probability of the company getting listed as a public limited company. But for an ‘exit’ to happen, someone else has to ‘enter’.

How is valuation calculated?

Companies are valued based on the expectation of future profits. Valuation is mostly about perception and how good a sales pitch the CEO can make. Some of the key factors considered while calculating valuation is-

  1. The potential of the idea/product What is the solution that company is providing? Is it really going to be the next big thing? The ‘hotness’ of the industry attracts more investors. E-commerce, mobile wallets, payment banks, driverless cars – these ‘disruptive’ technologies will transform the way we work, consume, travel and pay. It is this transformation that VCs and PEs are betting on.
  2. Traction What is the existing user base? How fast can a company convince more users? The deals of LinkedIn and Whatsapp were valued at $ 26.2 billion and $19 billion respectively because of their strong user base across the world.
  3. Reputation (founding team) The kind of reputation Elon Musk or Jeff Bezos bring to the table warrant more valuation. A successful startup often has more to do with the founders’ ability to execute rather than starting with a truly brilliant idea. The background of the founders, their previous projects and their exits, influence valuation.
  4. RevenuesRevenues are more important for the B-to-B startups than consumer startups. Valuations always include a bit of mystery, but those more mathematically inclined will appreciate adding revenues to the equation.

Issues with funding and valuation bubble

Most e-commerce sites like Flipkart and Snapdeal focus on gross merchandise value (GMV) to pitch their stories. GMV is misleading for three reasons- First; it reflects the total value of goods and services transacted through the site, not the actual revenue earned by it. The real revenue of e-commerce sites is broadly around five per cent of their GMV. Second, the huge discounts offered are not excluded from GMV. Third, companies can temporarily boost GMV by offering huge discounts on trending products like mobile phones. Such kind of sales are not sustainable but they help in the immediate round of funding and valuation.

No start-up is listed; so scrutiny by financial analysts is limited. Their balance sheets, though, are available on the Registrar of Companies (RoC) website and it’s clear that actual annual revenues are in fractions of the GMVs.

Questions are now being raised: is the hype overcooked? The US offers a glimpse of the future for e-commerce start-ups. Amazon, only recently, announced a quarterly profit after 21 years of being in business but commands a market value of $260 billion, which is more than that of America’s largest retail chain Wal-Mart (market value: $230 billion).

There is no fixed plan to grow and higher importance to time over money. One fine day, they want to target one whole country as a potential market. The next month, they are scaling down operations after burning millions trying to scale up. There will be plans to go ‘app only’ and then there will be a sharp U- turn. (Example: E-Commerce and food delivery startups).

The money spent on customer acquisition is absurd, which is obviously not turning into profits. The willingness to capture more and more market share is dangerous. When the users talk about the cash backs and discounts associated with a product instead of its utility or experience of using it, there is something seriously wrong with the business strategy of the company. Most of the tech startups are acquiring customers by offering discounts, which is justified, given the huge technology-adoption potential in India. However, if a company has to pay users to keep using the product, it is a serious misappropriation of funds.

After some years, three-four resource-rich and efficient players will remain in these business areas. Most of the small players will either experience a painful death or get acquired by big companies if they are lucky. Thus an openly competitive market gets reduced to an oligarchy.

The startup ecosystem, thus will shift to course-correction. We have started seeing this in the case of food delivery and grocery startups. There is an interesting dialogue in the movie Interstellar which makes us ponder- “Will ever such time come when we will need food more than any fancy innovation?”.
And the answer is- yes, it will come when innovations create ‘Redundancies’.

When is a redundancy created? When you already have enough resources to get something done, and yet you get more resources that add no value, while totally missing out on what is essential to keep us going or progress. An insane number of food delivery startups remind me of the same dilemma.

Some other key concerns are wage distribution and volatility of jobs. Silicon Valley employees are commanding ever increasing wages, with reports of $500,000 annual pay packages offered to recent college graduates. Interns are making $7,000 or more a month. Expectations for such sky-high pay have become both inevitable and unsustainable; they’re reminiscent of the $1 million pay packages promised to Wall Street associates in 1999. By 2000, once the party had ended, annual bonuses were being replaced by pink slips!

In the book ‘HR scorecard’,  the authors talk about a very important phenomenon- “Organization has to be a compelling place to work to make the company a compelling place to shop”. This can’t be achieved just by offering attractive pay packages but by having a right strategy.

In a recent article in The New York Times, Katie Benner sounded a warning from the Silicon Valley: “Start-ups that cannot adapt to a world that prizes profit over growth may ultimately be forced to raise money at the same or lower valuation than in the past, something referred to as a ‘down round’. Those can be debilitating: employee stock options usually become less valuable when a firm’s valuation falls, making it harder to retain people”. The concern about valuation bubble is exactly the same in India too, “Of recent, the valuation game has turned into a ‘black magic art’ more than a science,” Ravi Gururaj, the then chairman of India’s National Association of Software and Services Companies (NASSCOM) product council, told Quartz in March 2015.

The way forward

As Warren Buffett put it, “It’s only when the tide goes out that you can see who’s been swimming naked.” Recent reluctance to go public and valuation markdowns suggest we’ve reached high tide — and we’re about to discover who’s most exposed.

So the question arises, will these ‘fancy’ startups (Ola, Flipkart, Paytm, etc) not get funded anymore? The answer is – they will. It’s just that their growth and valuation will go down because we need e-commerce and internet technology startups. The valuation bubble is a global one.

Imagine the Dotcom Burst. The money is there, those who deserve shall get it. According to the research, 92% of the startups fail in first 3 years, but if startups pivot successfully at the right time they might survive and come across a good business model. Wal-Mart takes parking fees, promotional advertising fees. They’ll even service the car we drive there. Does that mean they have failed at selling grocery?

If entrepreneurs ask few questions using approach of 6 thinking hats, it will give them more clarity and stop from falling in trap of startup bubble-

White Hat -What solution will the business provide?

-What are the required and available resources?

-Is this the good time to raise funds? Who will give funding?

-What valuation do we want? How can we make this model profitable?

-Why did startups fail in spite of funding and how to avoid those traps?

-How much equity to dilute for funding?

Red Hat -Hesitation?  Fear of losing? Excitement? Concern?
Black Hat -What are the weak points of the business plan?

-What could go wrong? What is my plan B?

-What will happen if the required funding is not raised?

-What will I learn if something goes wrong?

-What if the startup fails?

Yellow Hat -What are the benefits of this decision?

-How to create a successful business using this decision?

-Where should we make the investment after getting funding?

-What is the plan of action once the financial problem is solved?

-When will the firm achieve breakeven point?

Green Hat -What are the other ways to raise funds?

-Why not operate as a lean startup?

-What are the solutions to arrest probable issues?

-Is expansion at the cost of equity is necessary?

Blue Hat -How and when profitability can be achieved to avoid external support to business?

-How do other employees and stakeholders look at this decision?

Conclusion

Getting a higher valuation in the first round isn’t a victory, maintaining that valuation in future matters the most. There is a huge difference between the valuation of billions of dollars and liquidity. The problem is that start-ups are surviving on VC/PE/angel money, and not on earned profits. When that source eventually dries up, some will go belly-up. Companies with no real business models will die anyway. Startups are also often pressurised by VCs and Private Equity people to scale too fast. In that race to chase growth, a lot is sacrificed.

Entrepreneurs need to focus on creating more value and profit rather than on raising more and more money to boost valuation. Upon going for an IPO, company’s listed price shall not match the company’s valuation at the last round of funding. This is going to cause a major crash where early exits will be lauded & a lot of investors are going to be an unhappy lot. Only those with business models that generate real cash profits will survive and a few thrive.

(Sources- Business Standard, Economic Times, Entrepreneur, Forbes, Yourstory, Wall Street Journal, Inc, Business Insider, Pbs)

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LinkedIn-Microsoft deal- In Short

Alphabet, Oracle, IBM and Salesforce also tried to acquire LinkedIn but finally Microsoft grabbed the deal at $26.2 Bn. It is absolutely essential to have alignment on two things in any M&A: Purpose and structure. On the former, virtually Microsoft and LinkedIn had identical mission statements. For LinkedIn, it was to connect the world’s professionals to make them more productive and successful, and for Microsoft it was to empower every individual and organization in the world to achieve more. Both are trying to do the same thing but coming at it from two different places: For LinkedIn, it’s the professional network, and for Microsoft, the professional cloud. 

Reasons- Technological & Strategic Advantage

The data Microsoft is going to get from LinkedIn can be used for interviews, reference, etc. Integration of services like HRMS, Skype, MS office will enable Microsoft to give unparalleled offerings. In words of Satya Nadella,“This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete”. Microsoft could also enter into bridging gap between job requirements and job seekers by using Lynda.com, recent acquisition of LinkedIn. Talent acquisition business of LinkedIn is strong and it is penetrated only 20% into large organizations. This human capital area is a massive business opportunity and an entirely new one for Microsoft. Marketing and Premium solutions have strong growth opportunities. This gives Microsoft a big technological and strategic advantage. At the same time it is boon for investors of LinkedIn because of company’s growth was slow in last year.

Competition with Facebook and Salesforce.com

Microsoft has dominated the work productivity software market for 30 years. With the acquisition of LinkedIn, the company is looking to add the missing “social angle” to its products. Currently Facebook at work or Enterprise Social Network (ESN) is in beta mode and being used by 450 companies. The social media giant plans to reach out to global working population of three billion. The combination of Microsoft’s work productivity tools with LinkedIn’s professional network could prove to be a tough competitor for Facebook@Work.

LinkedIn gathers detailed information about its users, including their employment history, education and whom they know. These data could prove valuable to Microsoft as it attempts to build offerings for managing relationships with customers and to compete with Salesforce, a firm it tried to buy last year. This deal enhances Microsoft’s transition from a desktop software firm to a cloud computing services provider.

Concerns of Financial Analysts

Though Satya Nadella has been more aggressive about acquisitions than Steve Balmer, industry experts have expressed some concerns about this deal. In February LinkedIn’s share price sank by more than 40% in a day, shedding $11 billion from its market value, after the firm reported that forecasts of revenues for 2016 were lower than expected. LinkedIn had also revealed that it made a net loss of around $165m in 2015, despite revenues of $3 billion, in large part because of excessive stock-based compensation.

History and Operational Challenges

In most of the M&A it is more important to see what company does with M&A rather than which company is being bought. Records of Microsoft with such big deals are poor. Buying aQuantive ($ 6.3 Bn, 2007), Skype ($ 8.5 Bn, 2011) and Nokia’s handset business ($ 7.6 Bn, 2014) didn’t go well. Satya Nadella wants to keep LinkedIn as a separate company might be because he has seen negative side of integrating big companies.

Post Merger Integration and Culture

As per Peter Cohan integration is one of the important tests for successful acquisition. After this deal Jeff Weiner will remain LinkedIn’s CEO and report to Microsoft CEO, Satya Nadella, and join the Senior Leadership Team but there could be a culture clash between the younger LinkedIn thinking and the mature Microsoft way of doing things. In near term there will be no changes in who reports to whom so no reporting relationships at Microsoft will change in that regard. LinkedIn team is expected to focus on driving results while simultaneously partnering on product integration plans with the Office 365 and Dynamics teams. Jeff Weiner in his article ‘changing way world works’ writes, “employees will have the same title, the same manager, and the same role they currently have, the company will have the same mission and vision; same culture and values”. A lot of academic research shows that the odds of making an acquisition work are not high; it will be interesting to see what happens in this deal.

(Sources- article of Jeff Weiner, people matters, Economist, Business Insider, Forbes & ET)

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