Thursday, January 25, 2007

How Private Equity Scores over Listed Capital



A recent report on “Executive Pay” in The Economist (20th January 2007) summarized how private equity scores over listed capital.

The boards are staffed by knowledgeable directors.
Directors are intensely involved. Their bonuses depend on company’s performance.
The focus is on a medium term goal of listing or selling a company that will fetch a good price.
The long-term cannot be used as an excuse for postponing tough action.
Managerial pay in private equity is attractive. But it is aligned with success or failure.

No wonder, there are thousands of private equity firms today managing billions of dollars of capital. The action is now spreading all over the world. Citigoup has announced it will set up a new $200 million fund dedicated to Africa. Many of the bigger players plan to increase their commitment to emerging markets in the next five years.

Saturday, January 20, 2007

The Nationalization of the Suez Canal


[1]

My old interest in History was revived by a very insightful article which appeared in the Economist dt July 29, 2006. The article explained how the Suez canal was nationalized and the resultant fallouts.

On July 26th 1956, Gamal Abdul Nasser, president of Egypt, addressed a huge crowd in the city of Alexandria and instigated them against Britain. The colonial power had ruled Egypt from 1882 to 1922, when it gained independence, and continued to influence Egyptian affairs for several years till the monarchy was finally overthrown by Nasser in 1952.

During his speech, Nasser mentioned the name of the Frenchman who had built the canal, Ferdinand de Lesseps, several times. "De Lesseps", it turned out, later was the signal to the Egyptian army to start the seizure of the canal.
The Suez crisis resulted in a major humiliation for Britain and France. As America's supremacy over its Western allies became evident, European countries came together to create what is now the European Union. The crisis promoted pan-Arab nationalism and effectively transformed the Israeli-Palestinian dispute into an Israeli-Arab one.
Background Note
Britain had become such an unwanted guest in Egypt that by the early 1950s, Winston Churchill, (who had returned as prime minister in 1951) felt he could no longer resist the tide of nationalism. By June 1956, the last of the British soldiers had left. Yet Anglo-Egyptian relations did not improve.
Meanwhile, Nasser was also enraged by America's withdrawal of its offer of loans to help pay for the building of a dam on the Nile at Aswan. This project was central to his ambitions to modernize Egypt. But John Foster Dulles, the American secretary of state, thought the dam would place too much strain on the resources of newly independent Egypt. At the same time, the British, mistrustful of Nasser were also ready to withdraw their loan offer. Under the circumstances, Dulles thought the Russians would finally step in and assist Egypt. But in a surprising turn of events, Nasser nationalized the canal.
Britain and France reacted strongly, by getting ready for a military invasion of Egypt and a reoccupation of the canal zone. But they faced resistance from US President Eisenhower, who from the beginning was against the use of force by his two main allies. One concern for Eisenhower was the presidential election due that November, which he was contesting on the "peace" plank. Eisenhower was also motivated by anti-imperialist sentiments that had made the Americans break free from the British empire. Eisenhower also feared that, any bullying of Egypt by Western powers would alienate the Arabs and drive them towards the Russian camp.
In another turn of events, Israel provided a way out. Israel offered to invade Egypt and reach the canal. The French and British could then intervene, posing as peacekeepers to separate the two sides, and occupy the canal, ostensibly to guarantee the free passage of shipping. The details were finalized at a secret meeting near Paris.
On October 29th, Israeli paratroopers were dropped into Sinai to begin the invasion. The British and French promptly issued an ultimatum to both sides to cease fire. When the Egyptians did not budge, British planes started bombing the Egyptian air force on the ground. On November 5th, Anglo-French troops went ashore to invade the canal.
Eisenhower, who felt utterly betrayed by his erstwhile allies, was determined to put an end to the war. Presumably, at his instance, America refused to allow the IMF to give emergency loans to Britain unless it called off the invasion. Faced by imminent financial collapse, on November 7th, Britain surrendered to American demands and stopped the operation. The French were furious, but had to fall in line as their troops were under British command.
America also swung things in its favor at the UN. On 2nd November an American resolution demanding a ceasefire was passed by a majority of 64 to five. The Russians voted with the United States. As they say, circumstances make strange bedfellows! And to sidestep Anglo-French vetoes at the Security Council, the General Assembly met in emergency session and decided to assemble an international emergency force (a suggestion made by Canada) to go to the canal and monitor the ceasefire. Eisenhower won his election in America.
Implications
The French and soon the Germans realizing they were too small individually to deal with the Americans, took the lead in setting up the six-country European common market, which later became the European Union. The founding Treaty of Rome was signed the very next year, in 1957. The French kept the British out of it until 1973. France had by then made itself truly independent of American military power by building its own nuclear deterrent from scratch. In 1966, France also left NATO's integrated command structure. Meanwhile, the British decided to be content playing second fiddle to America unlike the French, who wanted to lead Europe.

The crisis affirmed America’s new status as the global superpower, challenged only by the Soviet Union. As Eisenhower had feared, the Russians moved into the Middle East to fill the gap left by the disorderly retreat of the British. So the Americans felt compelled to get in as well. Thus the cold war spread to North Africa and Egypt and Israel became ever more closely tied to the United States.

Before 1956, Israel had been morally and politically unassailable beyond the Arab world. The Israeli occupation of 1956 changed this perception, marking the country’s first expansion beyond its original borders. In 1956, the Israelis were quickly forced to withdraw by American (and Russian) pressure. But this was the last time an American president would speak out so forcefully against Israel.

Nasser emerged a clear winner in the short term. Before the crisis, he had faced opposition in Egypt, not only from the former ruling class but also from communists and radical Islamists. Encouraged by his success, Nasser launched misguided adventures such as a short-lived political union with Syria and nationalization of Egyptian industry. Nasser also triggered off a wave of pan-Arab nationalism across much of the Arab world. Though Nasser was largely discredited by Israel's crushing victory in the 1967 war, the institutions of Nasserism still lived on, in Egypt and elsewhere, as effective ways of maintaining political control and perpetuating autocratic regimes. Saddam Hussein also drew inspiration from Nasser.

References

1. “An affair to remember,” The Economist, 29th July 2006, pp 23-25.
[1] This article draws heavily from an article in The Economist, “An Affair to remember,” 29th July 2006, pp 23-25.

Mergers & Acquisitions in 2006

The pace of deal-making across the world has accelerated in recent months. Most M&As fail to create value for the acquirer's shareholders. However, today a growing body of evidence suggests that the continuing appetite for M&A can make sense. Not every deal will succeed but the probability of predicting which kind of deals will create value, has increased.

Deal-making has picked up momentum in Europe. In the United States, industries such as telecommunications and defence have already been consolidated and now contain only a few enormous companies. In Europe, only now is cross-border integration happening to the extent anticipated at the birth of the euro.
Private-equity firms seem to have understood the building blocks of a successful acquisition. Companies like Cisco and General Electric have also demonstrated that it is possible to add value through acquisitions by identifying targets carefully and planning the integration of each new acquisition well in advance.
GE spends billions of dollars a year buying companies. About 230 people work full-time in the team, roughly a quarter of them at head office and the remaining in GE's six main business units. GE has a systematic process for handling acquisitions. Regular reviews compare the performance of past acquisitions with the targets they were set. CEO Jeff Immelt is personally involved. No deal of more than $3m[1] is done without Immelt's approval. Deals are evaluated using both quantitative and qualitative criteria. GE plans the detailed integration of the target acquisition even as it is doing due diligence. When an acquisition fails, GE spends a lot of time trying to understand the reasons for the failure.

There are various signals by which one can judge whether a merger is going to add value. If the acquirer is paying in cash not shares, it shows more confidence. Paying with cash also puts pressure to produce results. Quite a few deals in the early part of 2006 were in cash. It is partly this use of cash that has raised expectations that these transactions will add value. Deals that facilitate global industry consolidation such as Mittal Steel's hostile $24 billion[2] bid for Arcelor, another steelmaker, also seem to have the potential to add value. On the other hand, grand mergers that promise synergies from combining unrelated businesses often fail to add value.
The circumstances make the current takeover boom appear more solid than at comparable times in the late 1990s. Companies in America and Europe have been through a long period of cost-cutting in the past 5 years. This has helped improve significantly both profits and cash flows, which can be used for either capital expenditure or acquisitions. Takeover premiums also have been modest. The difference between an offer price and the target company's previous share price is averaging around 20%, compared with 35-40% at the height of previous merger waves. Another reason for optimism is the cheap, plentiful debt that companies are able to use for deals, thereby lowering the cost of capital and increasing earnings per share.
Despite all this optimism, however, companies would do well to be careful before going ahead with a merger. The risks involved in a merger should never be underestimated.

References

“Learn as you churn,” The Economist, 8th April 2006, p72.
“Riding a wave,” The Economist, 8th April 2006, pp 18-19.
“Once more unto the breach, dear clients, once more,” The Economist, 8th April 2006, pp 71-72,

[1] “Learn as you churn,” The Economist, 8th April 2006, p72.

[2] “Riding a wave,” The Economist, 8th April 2006, pp 18-19.

Hedge Funds in 2006


The hedge fund business has attracted a lot of attention in recent months. There are about 8,000 hedge funds today[1], with more than $1 trillion of assets under management. Most of these funds are clustered around a few centers like Connecticut and London.

What exactly is a hedge fund? According to Wikipedia, the term "Hedge Fund" is used to distinguish lightly regulated funds generally open to only a limited number of investors, from retail investment funds or Mutual funds, which are widely available to the general public. Because of limits on investor numbers or minimum investment amounts, hedge funds are normally open only to professional / institutional investors or high net worth individuals.

Mutual Funds typically go "long" the market and may not have much exposure to derivative contracts. But, hedge funds may be long or short the market and may use various derivative contracts. Thus, hedge funds pursue more complex investment strategies when compared to mutual funds.

But in recent times, the complexion of the hedge funds industry has been changing. Regulators are looking more closely at the sector than in the past due to the changing investor mix. Until recently, hedge funds mostly attracted the rich and super-wealthy. Today's hedge funds are increasingly monitored by professional managers at pension funds, endowments, foundations and even central banks. New investors are more demanding and, curiously enough risk-averse. This is forcing some hedge funds to change their investment style. A decade ago, investors wanted 30-50% returns. Now pension funds will settle for 8-10% returns[2], but want less volatility. Competition is also growing, as more traditional fund managers try to imitate the strategies of hedge funds.

It is estimated that 50-60%[3] of hedge-fund assets today come from institutions. Diversification is one reason motivating institutions to invest in hedge funds. Hedge funds have low correlations with other investments. Other advantages cited by institutions are the low volatility of hedge funds, their lack of correlation with economic cycles, and their greater risk taking predispostition.

Meanwhile, as hedge funds get bigger, the worry is that managers will become less entrepreneurial and more cautious. The distinction between mutual and hedge funds is also less clear than before. Mutual funds are acquiring hedge funds and pusuing some of their strategies, such as the use of leverage, short-selling and derivatives. For example, early in 2006, Schroders, an old British institution, decided to pursue a more aggressive investment style when it agreed to buy NewFinance Capital, a London fund of hedge funds[4]. Other big fund managers, including State Street Global Advisors and Goldman Sachs Asset Management, have also been trying to increase returns by using short-selling techniques. They are developing funds that will enable them to short-sell exposure to companies they do not like in an index. Both institutions would limit short-selling[5] to around 30% of a global portfolio, while keeping 130% long-only.

As short selling becomes more common, the distinction between mutual funds and hedge funds will get further blurred. In the US, mutual funds can sell short with some restrictions. In the European Union, recent changes in regulation allow fund managers to take short positions by using derivative instruments. As a result of all these changes, some traditional asset managers are planning to charge hedge fund-like fees to manage hedge fund-like products. Others charge like a hedge fund only when they beat their benchmarks. Because of all these options for investors, there is likely to be a paradigm shift. The exact impact of this shift, however, will be known only with time.

References

“The long and the short of it,” The Economist, 25th February 2006, pp 77-78.
“Growing pains,” The Economist, 4th March 2006, pp 63-66.
www.wikipedia.org
[1] “Growing pains,” The Economist, 4th March 2006, pp 63-66.

[2] “Growing pains,” The Economist, 4th March 2006, pp 63-66.

[3] “Growing pains,” The Economist, 4th March 2006, pp 63-66.

[4] “The long and the short of it,” The Economist, 25th February 2006, pp 77-78.

[5] “The long and the short of it,” The Economist, 25th February 2006, pp 77-78.

Monday, January 15, 2007

The real estate bubble, Why the government should burst it

The real estate craze has crossed all reasonable limits. Irrational exuberance has driven people crazy and taken home prices to ridiculous levels. These days, it is quite normal to talk of a couple of crores of rupees for a small duplex bungalow or a three bedroom apartment in Hyderabad. What this means is that places like US and Australia have become more attractive places to invest!
Surely, we are heading for a big shakeout. I mean these purchases are obviously funded by loans. And if people are going to take a home loan of Rs 80 lakhs say, they will have to shell out close to Rs 80,000 per month. How many can afford that?
Too much is being made out of the IT industry boom. These people make up only a miniscule portion of the population. And not all people in the IT industry are earning the huge salaries that can support such big loan repayments. And if the industry slows down a little as it happened in 2001, there could be major social upheavals.
People also seem to be smug in their belief that real estate prices can only go one way, ie up. This is a completely wrong assumption. What goes up can come down. Real estate is no exception. Today demand is more in relation to supply. But as smaller towns grow in stature and the demand supply equation in today's metros changes, real estate prices will fall.
But the government should not stand a passive spectator. It should jump in quickly, raise interest rates and cool down the real estate market. Better regulations are also needed. Residential areas should be kept away for the office districts to insulate home prices from avoidable shocks. Too often we have heard in the recent past, an IT company announcing the establishment of a development centre and land prices in the area immediately shoot up.By building good roads and reducing commuting time, people will be encouraged to travel longer distances. In places like the US, this is quite common. You don't find people owning homes in business districts.
A strong public debate is also needed. Ultimately, a house is not about investing and making money. It is about creating a shelter for our old age. If people think that real estate is the best investment oppportunity going around, there is something seriously wrong. For real estate does not add any value for the economy as a whole. It is essentially a zero sum game. It only redistributes income. By bringing back interest rates to the levels of the mid-1990s, the government can ensure that pensioners of the earlier (my father's) generation will benefit even as home prices come down. These people toiled their whole lives for their organisation without being driven by greed. If something good happens to them, I am all for it. And I think the society too would be happy . Only a few real estate speculators may not like it. But who cares?

The Medici Effect

I recently attended a highly absorbing workshop. We played the Medici game on innovation facilitated by Waltraut Ritter, a reputed international consultant and Director of Knowledge Enterprise, Hong Kong.

The Medici game is based on the best selling book The Medici Effect by Frans Johansson. The book is titled after the Medicis, a group of businessmen in Italy who funded various innovative ventures that helped in triggering off the Renaissance, a period of great innovation and a watershed event in human civilization. Thanks to the Medicis, sculptors, scientists, poets, philosophers, painters and architects converged upon the city of Florence. There they learned from one another and broke barriers between disciplines and cultures. They unleashed a wave of innovation which would impress even today’s Silicon Valley.

Johansson has drawn a distinction between Directional (Incremental) innovation and Intersectional (Radical) innovation in his book.

As many would know, incremental innovation involves making minor changes over time to sustain the growth of a company without making sweeping changes to products or looking at totally new markets. On the other hand, radical/breakthrough innovation is about launching a totally new product, process or service. This kind of innovation requires bringing together divergent ideas from different fields. For radical innovations to happen, people need to have a broad knowledge in different areas in addition to deep specialization in their domain area.

Johanson argues that the basic understanding of individual disciplines has progressed so much that any further improvement is possible only at the intersection of two or more disciplines. He makes the crucial point that the pay offs from innovation capital will be greater by linking up seemingly unconnected ideas than by trying to develop deeper and deeper expertise in any one discipline.

The characteristics of intersectional innovations are –
a) They are surprising and fascinating
b) They take leaps in new direction
c) They open up entirely new fields
d) They create space (a concept called Blue Ocean Strategy by Chan Kim and Renee Mauborgne)
e) They allow a new entrant to become market leader overnight

According to Johanson, the three drivers of intersectional innovation (facilitated by globalization and advances in information technology and communication) are
a) Movement of people
b) Mingling of cultures
c) Rise of computing power which enables us to do things faster and try out different things in a cost effective way


The workshop helped in exploding various commonly held myths related to innovation.

For more information, please read the book, The Medici Effect, or visit the website www.themedicieffect.com

You may also read " How breakthroughs happen" (Harvard Business School press, 2003)by Andrew Hargadon who has covered similar ideas in this book.

Friday, January 12, 2007

Environments that Support Organizational Learning

A conducive environment supports organizational learning. Companies must :

Encourage divergent opinions
Give timely, accurate feedback
Invite new ideas
Tolerate errors and mistakes
Encourage risk taking

Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.

Learning Disabilities

Various challenges are involved in organizational learning. These learning disabilities must be carefully understood and addressed:

a) Biased Information: Blind spots, filtering, lack of information. People fail to observe or notice the significance of some information or filter it out. They also fail to spread it across the organization.
b) Flawed Interpretation: Information interpretation is often flawed because it involves judgment and guesswork that are not completely guided by logic and reason. Stereotypes, wrong correlations and wrong attributions are examples.
c) Little Action: Routines are often difficult to change. People tend to persist with what happened in the past. They also tend to be risk averse and may not be willing to experiment.

Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.

The Learning Process



Acquiring information: The key challenge is separating out relevant from irrelevant information, signals from noise. Managers tend to receive information selectively.

Interpreting information: People tend to interpret information based on various assumptions about markets, customers, competitors, technology, the organization’s goals and competencies. The validity of these assumptions must be checked from time to time.

Applying information: The company must modify its behavior to reflect new knowledge and insights. Managers must send clear signals and offer opportunities to practise new behaviors. Unnecessary and outdated tasks must be eliminated even as new ones are added.

Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.

Litmus tests of a Learning Organization



According to Harvard Business School Professor, “David A Garvin,” in his book “Learning in Action,” to qualify as a learning organization, a company should pass the following litmus tests:

a) The organization must have a learning agenda. It must be clear about what knowledge it needs and have a strategy in place to gain that knowledge.
b) The organization must be open to bad news. It must not have the “shoot-the messenger” syndrome.
c) The company should be able to avoid past mistakes by reflecting on past experience, distilling into useful lessons and sharing the knowledge across the organization.
d) The company should not be vulnerable to the risk of losing knowledge when talented people leave. These companies have mechanisms to institutionalize the tacit, unarticulated knowledge of such people. Learning organizations find ways to embed such knowledge within the company’s systems, processes and values.
e) Learning organizations believe in getting into action mode. They take advantage of their new knowledge and adapt their behavior accordingly.

The Three Questions Learning Organizations know how to address

What are our most pressing business challenges and greatest business opportunities?

What do we need to learn to meet the challenges and take advantage of the opportunities?

How should the necessary knowledge and skills be acquired?

Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.

What is a Learning Organization?


According to Harvard Business School professor, David Garvin, “A learning organization is an organization skilled at creating, acquiring, interpreting, transferring and retaining knowledge and at purposefully modifying its behavior to reflect new knowledge and insights.”

A learning organisation

Knows how to improve its actions and decision making processes through better knowledge.
Knows how to build on past knowledge and experience. It is good at detecting and correcting errors
Is good at learning new things and acting upon this knowledge. It knows how to change people’s behavior according to the needs of the business environment.
Knows how to institutionalize the knowledge of individuals. It keeps increasing its capacity to take effective action.



Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.

Monday, January 08, 2007

The growing importance of KM

The growing importance of KM
As the foundation of today’s global economy moves away from natural resources to intellectual assets, knowledge is increasingly becoming the only basis for sustainable competitive advantage. Knowledge Management (KM) is being embraced by more and more companies. KM is becoming an integral part of corporate strategy for the following reasons:

· The market capitalization of companies today largely depends on their intangible, physical assets.
· Unlike technology, knowledge cannot be easily copied.
· KM delivers increasing returns, unlike any physical asset.
· KM helps avoid unnecessary work duplication, expensive reinvention and repletion of mistakes.
· KM minimizes the impact of talented people leaving the firms.
· KM improves the agility of the firm.
· KM can compress delivery schedules and reduce cycle time.



The economics of knowledge is different from that of other assets. The cost of producing knowledge is little affected by how many people eventually use it.

Knowledge also provides increasing returns. Unlike traditional physical goods that are consumed as they are used (providing decreasing returns over time), knowledge provides increasing returns as it is used. The more it is used, the more valuable it becomes, creating a self reinforcing cycle.

Unlike other assets, knowledge is difficult to replicate. Knowledge—especially context-specific, tacit knowledge embedded in complex organizational routines and developed from experience—tends to be unique and difficult to imitate. Unlike many traditional resources, it cannot be easily purchased in the marketplace.

Knowledge-based competitive advantage is also sustainable because a firm that already knows, is better placed to learn. Sustainability also results when an organization already knows something that uniquely complements newly acquired knowledge. Then the new knowledge can be integrated with existing knowledge to develop unique insights and create even more valuable knowledge.

The starting point in KM is framing a knowledge strategy. Knowledge strategy, effectively means identifying and developing the knowledge required for providing products or services to customers, more effectively than competitors. Identifying which knowledge based resources and capabilities are valuable, unique, and inimitable as well as how those resources and capabilities support the firm's competitive position form the core of a knowledge strategy. The strategic choices that the company makes, regarding technologies, products, services, markets and processes decide what kind of knowledge is required to compete and excel in an industry. On the other band, what a firm does know, limits the ways in which it can actually compete.

World class organizations like McKinsey drive KM by having what is called a knowledge agenda which identifies knowledge gaps and how they must be dealt with. But pinpointing the knowledge that an organization must build is not easy. There are no simple answers regarding what a firm must know to be competitive. Indeed, if the answers were so easy, knowledge would not yield a sustainable advantage. The trick is to stay in touch with customers and also understand what competitors are doing. In addition, the company should have a broad vision of how the business environment is likely to evolve in the long run and the kind of knowledge capabilities that might be required.

The 2005 MAKE(Most Admired Knowledge Enterprises) survey (For more details, visit the website of the Know network) identified the following Indian companies as leaders for their innovative & pioneering work:

· Infosys for developing knowledge workers through senior management leadership (1st place), and transforming enterprise knowledge into share holder value .
· Eureka Forbes for creating a corporate knowledge-driven culture developing knowledge workers through senior management leadership, and creating an environment for collaborative knowledge sharing.

· Tata Consultancy Services for maximizing the firm’s enterprise intellectual capital and delivering value based on customer knowledge

· Satyam Computer Services for creating a learning organization, and transforming enterprise knowledge into shareholder value.

· Tata Steel for creating an environment for collaborative knowledge and organizational learning .

· i-flex solutions for creating a corporate knowledge-driven culture, and delivering knowledge-based products / services / solutions .

The survey reports that a majority of the Asian (mainly Japanese) MAKE leaders began to implement their corporate knowledge strategies much earlier during the late-1990s. Despite the late start, the 2005 Indian MAKE Winners have reached parity with Asia’s knowledge-driven leaders on many dimensions.

One area where Indian MAKE leaders trail their Asian counterparts is in managing customer knowledge. Although the MAKE leaders from India state that they are intellectual capital (IC) driven organizations, most of them do not have in place strategies, methods and processes for actively managing, measuring and reporting their enterprise IC. They lag behind the global leaders. Indian MAKE Winners also trail in the areas of innovation, managing customer knowledge, and transforming enterprise knowledge into shareholder wealth.

India’s knowledge leaders are also concentrated in one business sector, IT. Five of the seven Indian MAKE Winners are IT companies. There is a significant gap (in the total composite score) between the seven Indian MAKE Winners and five other Finalists (Mahindra & Mahindra, ranked in 8thposition, is 8.5 points behind 7th place i-flex solutions). The result is a two-tier Indian knowledge leadership ranking table. In other words, the Indian MAKE Winners have knowledge processes which match those of MAKE leaders from around the world. On the other hand, the remaining Indian MAKE Finalists and nominees are still in the early stages of implementing KM.

But whatever be the scenario, there is little doubt that managing enterprise knowledge pays! – This year’s Indian MAKE Winners’ Return on Assets and Return on Revenues were 8.8 and 4.1 times, respectively, that of the Fortune Global 500 company median. Whether it is market capitalization, return on assets, return on revenues, or a host of ‘soft’ metrics, the 2005 Indian MAKE Winners and Finalists clearly demonstrate that adopting enterprise knowledge-driven strategies pay off – not only in the short term, but more importantly over the longer term!

Building Domain competency in the software industry

Building domain competency


Indian software services companies are well aware of the need to develop strong domain competency. What does domain competency mean for a software services company ?

Software companies are in the business of providing information technology based solutions for business problems. So associates must understand the client’s business and how it is positioned against that of competitiors.That in turn calls for a good understanding of the industry trends, the rules of the game, how value is being created, the basis for competition, and the strengths and weaknesses of the major players in the client’s industry.

But ultimately, the skill of a software consultant will not lie in posing as an intellectual expert who can predict long term industry trends as a management guru like CK Prahalad might, but as someone who can smell where IT can be meaningfully used to achieve one of the three objectives: increase efficiency or cut costs, improve effectiveness and facilitate innovation. IT can typically be used where there is scope for streamlining and automating structured, transaction intensive processes. Areas which involve considerable human ingenuity and are unstructured as well as one time activities are less amenable to IT intervention. Thus in merchant banking, the real IT opportunity lies in settling trades, not in deal making.

In short, building domain competency involves developing:
a) A broad understanding of the industry structure and trends
b) A detailed understanding of the company’s business model
c) A good understanding of the industry value chain and the segment occupied by the client
d) Clarity on where to use information technology to improve business processes.

Clearly, the competitive advantage of Indian software companies will increasingly lie in marrying industry knowledge and technological enterprise, and the ability to work at the intersection of the two. Raising three questions as a matter of habit can go a long way in making our techies true consultants. What is the business problem that the client is trying to solve? Is it amenable to IT intervention? What kind of technology will provide the most value to the client? Coding should succeed, not precede these questions.

Thought Leadership in the Indian software industry

Thought Leadership

For the Indian software companies thought leadership is the need of the hour. Thought leadership is about originating and promoting ideas and building a profitable consulting practice around them. For most clients, ideas are important for increasing efficiency, improving effectiveness and facilitating innovation. The essence of thought leadership is conceptualizing, packaging and presenting ideas to clients.

Most seemingly new ideas are not all that new. They have some relatively new components and some classical wisdom. Thus in CRM, the idea of knowing and understanding the customer is an age old concept but the use of Information Technology is new. Similarly, in case of Knowledge Management, the importance of knowledge has been widely accepted since time immemorial but the ability to leverage the power of Information Technology to facilitate knowledge sharing is a more recent development.

Thought leadership is all about assembling, packaging and disseminating business ideas. Thought leadership needs a combination of three capabilities: developing practical insights through hands on doing or consulting, reflecting on these insights and writing and presenting these ideas at meetings and conferences.

How can we nurture thought leadership ? Clearly the biggest advantage of our softare professionals , especially when compared to academics (to whom thought leadership comes more naturally) is that they have plenty of hands on experience. What they need to do is to reflect on their experiences, put their thoughts together on a piece of paper, expand them, write about them in journals and present them at seminars and conferences. In short, what they need are abstraction, conceptualization and presentation skills.

How do we build these skills? Let us take conceptualization first. Associates need to develop the ability to cull out the important learning lessons from each engagement or project and capture them as insights.

The term insight can be defined in different ways. But the most practical way of viewing an insight is as something that is not known to most people, something novel, a revelation. An insight must also be applicable across situations. That is it must be somewhat conceptual and not completely context specific. At the same time it must not be so general that it can be dismissed as theory or common knowledge.

When we say that a good advertisement should be able to communicate effectively the benefit(s) to customers, it is theory. When we say that an advertisement on a hoarding should convey the benefit in not more than 3-4 words, we are conveying an insight. It is an insight because theory has been applied to a context. The practical experiences of different companies with hoardings have been distilled into a simple principle that has great practical implications.

Presentation skills include the ability to communicate both orally and in writing. Most software professionals especially at the senior levels are reasonably articulate. But when it comes to putting thoughts on a piece of paper, there is scope to improve. Like any skill, writing improves with practice. Writing is about both style and substance. The more we write, the better we become. We can also improve our writing skills by reading great articles written by celebrated thought leaders. That will tell us how they introduce a new concept; explain it with examples and the kind of writing style they employ.

The need for Thought leadership is well accepted today. It is up to associates in the software companies to go ahead and do it.

Saturday, January 06, 2007

The Resurgence of Private Equity

The Resurgence of Private Equity



Private equity (PE) and venture capital (VC) investors brought $4.4 billion into India between January 2003 and December 2005. They poured $2.3 billion[1] into India in 2005 and $3 billion in the first six months of 2006. The first nine months[2] of 2006 have witnessed eight buyouts by PE investors, compared with six during the whole of 2005 and just two in 2004. Clearly PE seems headed for a big boom in the country.

In India, PE investors are generally striking deals with large business houses which want to exit some of their non-core businesses and companies where some members of the promoter family want to move out. Take the case of Nilgiris, the country's oldest supermarket chain. Actis, a PE firm pumped in $65 million to buy out a section of the promoter group.

The Indian PE investors can be divided into two groups — incumbents and new entrants. The first category consists of players who have been investing since pre-2000. Most of the big exits in the last couple of years have come from this camp. The major players include Warburg Pincus, Actis, CVC, ICICI Venture and ChrysCapital. The second group consists of players like Temasek, Blackstone, General Atlantic, Carlyle, Kotak Mahindra and IDFC.

The PE boom in India only reflects what is happening globally in general and the US in particular. While the US which accounts for more than 60% of the world’s private equity market, remains the most preferred investment destination, the action is now spreading across the world. According to a survey, 20 per cent[3] of the 545 investors plan to expand globally over the next five years, with China and India being the top emerging destinations.
In 2000, at the height of the Internet boom, PE activity in the US touched its peak, $180.5 billion was raised that year alone by a total of 795 funds. Following the dotcom bust in 2001, 9/11 and the US economic slowdown, PE activity declined dramatically. India was also hit hard, with more than 90 per cent of the country’s private equity money coming from the US. Leading firms like ChrysCapital (then known as Chrysalis Capital), Draper International, eVentures India and ConnectCapital burnt their fingers. ChrysCapital wrote off nearly 40 per cent of its Internet portfolio. It was in 2003 that PE started recovering. By early 2004, fundraising in the US had begun to stabilize. Now PE investors are back in the limelight. And in India, too the momentum has been building.
In the last couple of years, global heavyweights like Blackstone, Carlyle, Kohlberg Kravis Roberts (KKR), Temasek, Actis, General Atlantic and Warburg Pincus fought for deals with domestic firms like Kotak Mahindra PE, IDFC PE and ICICI Venture. Some large corporate houses (Bennett, Coleman & Co and Reliance Capital) have also got into the fray. Some entrepreneurs have preferred PE to traditional sources of capital. These include, Mahindra & Mahindra, L&T, Kinetic, Gujarat Ambuja, Punjab Tractors and Shriram Group, to name a few. As a result, PE has made inroads into infrastructure, financial services, manufacturing, energy and utilities, healthcare, media and engineering. Investors have also experimented with deal types — KKR pulled off India’s first leveraged buyout with the $900-million acquisition of Flextronics Corporation’s Indian IT assets. On a smaller scale, ICICI Venture signed up a $56-million R&D deal with Dr. Reddy’s.

Global investors have taken a different approach in India and built up a diversified portfolio. ChrysCapital’s portfolio ranges from early-stage deals to growth and expansion deals. PE funds have also been prepared to look at new businesses. Warburg has invested $38 million in Gujarat Ambuja, its only cement investment globally.

The need for flexibility has made PE players in India look seriously at PIPEs (private investment in public equity) which constitute nearly 40 per cent of deal-flow (it is less than 10 per cent in the US). In a PIPE transaction, investors buy securities directly from a publicly-traded company through a private placement. A PIPE transaction can either be done at a premium or at a discount in relation to the market price of the company’s stock. Typically, such transactions are done by secondary market investors like financial institutions and mutual funds.

Some of the PE deals have delivered spectacular returns. In August, Oracle acquired Citigroup Ventures’ (CVC) 41per cent stake in Mumbai-based i-flex Solutions for $593 million. CVC’s original investment in 1992 was $0.4 million. Then, in September, Pune-based wind energy manufacturer Suzlon entered the public markets with a $340-million (Rs 1,496-crore) offer. Investors Citicorp and ChrysCapital who had entered Suzlon at Rs 21.6 a share and Rs 27.1 a share for 9.6 per cent and 7.1 per cent stakes, respectively, made a killing when Suzlon made its debut on the bourses at Rs 510 per share. Warburg Pincus sold its remaining 5.65 per cent stake in Bharti Tele-Ventures to Vodafone for $847.5 million. Warburg had invested $300 million in 1999.


Much of the PE action in India has happened in case of early stage deals. PE investors have come in after angel investors have got the start up going. But PE can also be used in case of established firms. PE in case of early stage buyouts goes often by the name of venture capital. In case of established firms, it is called Leveraged Buy Outs (LBOs).

PE funds often attract media attention because of the spectacular returns they generate. But PE is not merely about deal making, financial engineering or smart investment. Indeed, the big contribution of PC is the discipline and focus which comes into the bought out firm. There are management strategies and techniques that PE firms use to produce remarkable results that most publicly traded companies and private companies under conventional ownership cannot match. A recent Fortune article by Ram Charan and Geoffrey Colvin provides rich insights in this regard.

PE investors typically buy companies for their portfolio, fix them, grow them, and sell them to a company in the industry, another PE firm, or the public. The holding period may range from less than a year to as long as ten years. But always the goal from the inception is to sell the company at a profit. Executives quickly realize that they gain nothing by resisting change.

Pay is a wholly different concept in PE-owned companies. While public companies talk a lot about aligning executive pay with performance, they typically award stock options and restricted stock on top of already substantial pay packages, giving executives lots to gain but little to lose. In PE firms, the stakes are much higher for the managers.

PE investors often prefer to buy a company with strong management in place. But if they choose, they can attract talented outside managers using highly attractive pay packages. Here, they hold a valuable advantage over public companies. They are not under compulsion to make any disclosures.

Acting quickly often produces volatile quarterly earnings, which stock markets and analysts do not like. Many public companies hesitate to take drastic actions such as making a big new investment or taking a write-off for a plant closing. PE-owned firms don't have to worry about it. They spend little time trying to placate the capital markets, unlike public firms which spend a lot of time communicating to shareholders, analysts, and the media. In a PE-owned firm, those distractions disappear, and the CEO can spend virtually 100% of his time focused on the business.
PE-owned companies also bring in the necessary business focus. Several of these companies were initially parts of much larger outfits where they did not get adequate attention. After the PE deal, the spun off company gets the required attention and resources.
PE-owned companies also get excellent support from their board. Compared to listed companies, the board of a PE company is typically smaller and consists only of representatives of the PE fund plus industry experts whose explicit job is to help management formulate and implement strategy. Many directors fulfill both roles.
PE-owned companies have no confusion about the role of the board, who's ultimately in charge and the eventual goal. They are especially disciplined about how to reach their cash flow targets.
In short, PE firms have figured out how to attract and keep talented managers, provide strong incentives, free them from distractions, give them necessary support and let them free to complete the tasks at hand, while keeping them focused on quick results. No wonder these companies tend to be outstanding performers.

A fundamental question analysts are asking is, why can't public companies do all these things themselves? In theory, they can. Indeed, PE’s success is built on advantages that public firms just haven't figured out how to adopt yet. But markets have a rewards and punishment mechanism that forces public companies to learn over a period of time, if not immediately. When they do, their returns should rise, slowly eroding the advantage PE enjoys today. But that would certainly augur well for the economy. For what better news can there be for any economy, than the efficient use of capital?

References
“The New World of Private Equity” Businessworld, 14th August 2006, pp 30-32.
“The India Opportunity – I” Businessworld, 14th August 2006, pp 36-39.
Colvin, Geoffrey, Charan, Ram, “PRIVATE LIVES,” Fortune 27th November 2006, pp 80-88.
“Private Equity Funds Catching up in India” Business Standard, 9-10th December 2006.


[1] “The India Opportunity – I” Businessworld, 14th August 2006, pp 36-39.

[2] According to Venture Intelligence, a research service focused on private equity (PE) and venture capital activity.
[3] Survey done by Deloitte & Touche and the US National Venture Capital Association (NVCA), in June 2005.

India and China in 2007

India and China in 2007
Comparisons between India and China and the relations between the two countries are once again in the spotlight following the recent visit to India by the Chinese President, Hu Jintao. Compared to the expectations, the visit has not produced any major breakthroughs. The goal of doubling bilateral trade in the next four years, translates into an annual growth rate of only about 20 per cent, which is less than the rate at which India's total external trade has been growing in recent years. On the border issue, China maintains its stubborn stand while India has not mobilized adequate political support that will facilitate any territorial concessions. A number of agreements have been signed, like the setting up of a working group on river waters. The two countries will open consulates in Kolkata and Guangzhou. There will be bilateral investment promotion and protection and protection of intellectual property rights. Agreements have also been signed with regard to commodity futures regulation and phyto-sanitary requirements for exporting rice from India. The two countries plan to open new routes to Kailash-Mansarovar and also encourage bilateral tourism.
Even as India and China look for ways to strengthen bilateral relations, they continue to attract the global media attention. China accounts for two-thirds of all the shoes produced in the world, two-fifth of personal computers and 85%[1] of the world’s toys. Shanghai attracts global manufacturing giants like General Motors, ABB and Agilent Technologies. The Indian offshore IT and ITES sector employs around one million people[2]. This number is expected to go up to 2.3 million[3] by 2010. Bangalore is emerging as an innovation hub for tech companies like Google, Hewlett-Packard and Motorola.
Bilateral relations between the two countries are also attracting media attention. Where do the two countries stand today? Trade between the two nations hit $18.7 billion in 2005-06, jumping 38%[4] year-on-year. While imports from China are diversified and dominated by value-added products like electronic goods, India’s exports generally consist of low-cost inputs like, iron ore, primary steel, plastics and minerals. Achievements on the investment front are also not very impressive. In the last 13 years, the Indian government has cleared $67.15 billion[5] of foreign direct investments (FDI). China’s share is a minuscule $231.7 million (0.3%). Again, during the same period, India granted 7,878 technical collaboration approvals to different countries with China accounting for just 70.
Lack of trust between the two countries continues to act as a big impediment to trade, investment and more bilateral cooperation. India’s suspicions are fuelled not only by the border problem but also China's traditionally cozy friendship with Pakistan, and its support for that country’s nuclear-weapons programme. India is also watching with apprehension, China's military ties with India's other neighbors in South Asia, including Bangladesh, Sri Lanka, Nepal and Myanmar.
Meanwhile, the Chinese have been put off by India’s bureaucracy. The Chinese are complaining that Indian approval for Chinese investments can take between six months and a year, requiring the endorsement of various layers of the bureaucracy. In contrast, investments from most other countries are being approved much faster. Chinese businessmen operating in India are also grumbling about the difficulty of getting visas for Chinese workers even as Indian IT companies are scaling up effortlessly in China.
Not surprisingly, the Indians are finding it difficult to swallow Chinese criticism. According to seasoned journalist and Business Standard editor, T N Ninan[6], Indian’s defensive reasoning reflects the full range of emotions and attitudes that can be expected from the junior partner. At one end, there is plain fear ("we will get swamped by Chinese products"), the past legacy (defeat in the 1962 border war), and suspicion ("they are encircling us"). Simultaneously, there is a state of denial ("China's growth numbers are exaggerated"), a combination of defiance and bravado ("we are no less than them"), and euphoria (eg. Goldman Sachs' forecast that Indian growth rates will eclipse China's in 15 years).
As Ninan correctly mentions, it is wrong to belittle China. The Chinese civilization has traditionally enjoyed a special place in world history. As Chinese society has greater homogeneity (unlike India where caste and religious tensions are common) there are less social tensions. China is on its way to becoming a global power, its views being taken far more seriously than India’s in the global arena. China is a permanent member of the UN Security Council and of the Nuclear Five, whereas India is still trying to gain entry into these clubs.
Specifically looking at their economies, China is clearly ahead. Its economy is thrice the size of India’s. India’s labor laws remain far more rigid compared to those of China where workers can be hired and fired at will. Power in China costs just Rs.2 per unit against Rs.4.50 to Rs.5 in India. A trucker can do a 600 km stretch in China in 10 hours, while in India it takes nearly 30 hours. In 2005, Chinese textile exports stood at nearly $113 billion, contributing to nearly 22%[7] of the global trade, compared to India’s $17 billion, or less than 4% share. In 2004, when India exported $2.4 billion[8] worth of leather and leather products, comprising 2.44%[9] of global trade, China’s share was $21.5 billion, or nearly 22% of the global trade.

The Economist[10], recently reported that in the year to the second quarter, India's GDP grew by an impressive 8.9% while China's grew at an even more breathtaking growth of 10.4% in the year to the third quarter. But China's double-digit growth looks more sustainable. Inflation is only 1.4%. China has a widening current-account surplus, a clear indication that there are no serious supply side bottlenecks. Average house prices have risen by less than 6% in the past 12 months, while, share prices have risen by only 42% in the past four years.

In contrast, in India, consumer-price inflation has risen to almost 7%, well above Asia's average rate of 2.5%. Many firms seem to be operating close to or above their optimal levels of capacity utilization. There is a serious shortage of skilled labor and wages are rocketing. The RBI has raised interest rates over the past two years, but inflation has risen by more. So real interest rates have fallen and are historically low. Meanwhile, the government is putting pressure on RBI not to raise interest rates. An asset price bubble is also a major concern. India's share prices are almost four times their level in early 2003. The price/earnings ratio of 20 is well above the average of 14 for all Asian emerging markets. House prices have gone through the roof.
The problem with India seems to be its lower investment rate, particularly in infrastructure. The latest government figures, for the year ending in March 2005, put total investment at 30% of GDP, compared with over 45% officially reported in China. Considering that India is focusing on knowledge intensive industries, there is also a shortage of skilled labor.
Indian supporters argue that China’s inefficient use of investment will drag down the future growth rate. They feel that there has been over-investment in some sectors such as cars, steel and property and that some of the projects will prove unprofitable. China’s banking system is also burdened with non-performing loans (Some say it’s close to 50%[11] of the country’s GDP). China’s is also a more rapidly ageing society compared to India’s.

Meanwhile, India seems to be more in tune with the demands of globalization than China, thanks to a more open and rules based system. If India can demonstrate political will and determination and graduate from “reforms by stealth” to “reforms by conviction”, the country can give China a run for its money.

Meanwhile, some small steps can improve the situation significantly. The two countries can open up their markets to each other. There are still only six direct flights a week from Delhi to Beijing. More business and tourist travel will help dispel the lingering suspicions.

Instead of viewing themselves as competitors, the two countries must look at opportunities to collaborate, as they did during the multilateral trade talks in Doha 2001. At the level of companies too, there is scope for cooperation. In October 2005, China National Overseas Oil Corporation (CNOOC) outbid Oil and Natural Gas Corporation (ONGC) in Angola[12]. India also lost out to China in Kazakhastan and the Akpo field in Nigeria. But when ONGC and CNOOC joined hands to bid for Petro Canada’s stakes in the Al-Furat Petroleum Company in Syria, they won hands down.

So far, few Indian companies have chosen to think positively and look at China as a great opportunity. But the situation is now changing. Bajaj Electricals and Bharati are making China a sourcing base for low-cost electrical appliances and telephone instruments. J K Tyres is using China as a base for exporting tyres to Southeast Asia and West Asia, while Videocon is manufacturing Internet TVs. Meanwhile, Chinese companies like Haier, Bird and Huawei are looking to scale up their Indian operations. Hopefully, these companies will change the current mindset from competition to coopetition if not collaboration.

References
Gupta, Ashish, “The Asian Century – India & China,” Outlook Business, 5th June 2006, pp15-20.
Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.
Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.
“Slow Dance with China,” Business Standard, 23rd November 2006.
“Clarity, not emotion,” Business Standard, 25th November 2006. T N Ninan
“Still treading on India's toes,” The Economist, 18th November 2006, pp 43-44.
“Too hot to handle,” The Economist, 25th November 2006, pp 73-74.

[1] Gupta, Ashish, “The Asian Century – India & China,” Outlook Business, 5th June 2006, pp15-20.

[2] March 2006.
[3] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[4] Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.

[5] Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.

[6] “Clarity, not emotion,” Business Standard, 25th November 2006. T N Ninan

[7] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[8] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[9] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[10] “Too hot to handle,” The Economist, 25th November 2006, pp73-74.

[11] Gupta, Ashish, “The Asian Century – India & China,” Outlook Business, 5th June 2006, pp15-20.

[12] Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.

Milton Friedman: The death of an icon

Milton Friedman: The death of an icon

The death of Milton Friedman, my favorite economist, on 16th November 2006 marks a watershed event in economics. Clearly the most influential economist of the second half of the 20th century (Keynes who dominated the first half, died in 1946) and possibly of all of it, Friedman brought about profound changes in the way economists, politicians and the general public approached economics. Friedman pointed out that without economic freedom; there could be no political freedom. Governments, he argued, should do little more than maintain law and order, enforce contracts, promote competition and provide a monetary framework. Friedman was as much a gifted communicator as he was an insightful economist.

Friedman was a complete contrast to Keynes in his approach and thinking. Keynes concluded from the great depression that the free market had failed. Friedman concluded, instead, that the Federal Reserve had failed. Keynes wanted discretion for intellectuals like himself. Friedman believed governments should be bound by tight rules. Keynes thought that capitalism needed to be controlled. Friedman thought capitalists should be left alone.

Friedman’s laissez-faire philosophy came to be popularly known as monetarism. Friedman argued that the best thing the government can do is supply the economy with the money it needs and stand aside. Friedman blamed inflation on tinkering by governments and central banks. Along with Edmund Phelps of Columbia University, who won the 2006 Nobel Prize, Friedman showed that central banks cannot trade off lower unemployment for higher inflation.
Born on July 31, 1912, in Brooklyn, New York, Friedman received his bachelor's degree from Rutgers University. He studied economics at the University of Chicago, and got his PhD from Columbia University. Friedman spent most of his academic career in Chicago, and then became a senior research fellow at the Hoover Institution at Stanford University. In the 1970s, he and his wife created a documentary series called Free to Choose, which later became a book. Friedman was a member of President Reagan's Economic Policy Advisory Board and received from Reagan the Presidential Medal of Freedom. In his final years, he and his wife established the Milton & Rose D. Friedman Foundation, devoted to promoting parental choice in schooling through vouchers.
Friedman did pioneering work on inflation. In A Monetary History of the United States, 1963, co-authored with Anna Schwartz, he emphasized that a stable relationship existed between money supply and nominal demand. In his famous presidential address to the American Economic Association in 1968 he advanced the “natural rate of unemployment”, also known as the “non-accelerating inflation rate and output” implied by the then-fashionable “Phillips Curve”, introduced by William Phillips. Phillips had shown that when unemployment is low, wage inflation is high and high when inflation is low. Policymakers therefore faced a grand, macroeconomic trade-off. Friedman pointed out that this was an illusion. Pumping up demand pushed down unemployment only by fooling workers into thinking that wages had risen relative to prices, making them more willing to offer their labor. Once they realized the truth and they demanded more pay, unemployment would rise back to its "natural" rate. If governments tried to push unemployment below this rate, they would succeed only in pushing inflation even higher in the long run.

Friedman pointed out that governments simply had to adopt a stable monetary framework by controlling the growth of the money supply. Since central banks could control money supply more easily than prices, Friedman emphasized the targeting of some measure of the money supply. As chairman of the Federal Reserve, Paul Volcker did this in the US between 1979 and 1982. Margaret Thatcher’s government tried it in the UK between 1979 and the mid-1980s. In both cases inflation was drastically cut down.
In 1957, Friedman argued that consumption depended not on current, but on permanent or long-term income. People, he suggested, did not spend on the basis of the current year’s income, but according to their "permanent income"--what they expected to earn over a long period of time. In a bad year, they might dip into their savings. On the other hand, when they had a windfall, they might not spend the entire amount.
Friedman’s favorite economy was Hong Kong. Its astonishing economic success convinced him that economic freedom was necessary for political freedom. However, the converse was not true. Political liberty, though desirable, was not needed for economies to be free. Hong Kong had thrived even as Britain, which controlled it until 1997, lost much of its dynamism. But just before his death, Friedman expressed concern that greater state intervention in Hong Kong was putting a question mark on Hong Kong’s economic freedom.

Not that all of Friedman’s efforts were successful. Since 1989, when Ronald Reagan, Friedman's ardent supporter left office, America's government has grown just as fast as its economy. The public sector has also kept growing in Europe's three biggest economies--Britain, France and Germany--and in the OECD economies as a whole. In education too, what Friedman wanted, has not quite happened. For many years, Friedman argued that parents should be given more choice in schooling of their children. The government, he said, should not spend money on their behalf, but should give them vouchers that they could spend on the education they thought best. Competition between schools would do more to raise standards of education than any amount of bureaucratic direction. But vouchers have not really taken off in a big way across the world.

Friedman received the greatest complement from his contemporary and rival Paul Samuelson[1].: "Milton Friedman was a giant. No 20th-century economist had his importance in moving the American economic profession rightward from 1940 to the present." While Friedman was based at the University of Chicago, which became a bastion of conservative, monetarist thinking, Samuelson operated in MIT, where Keynesianism continued to have a foothold. Despite their sometimes open rivalry, their competition was always healthy and collegial. While admitting that he and Friedman had considerable differences on policy, Samuelson mentioned[2]: “Knowing that differences on policy and ideology often poison and taint personal relations, I think we should both be admired for the friendship and civility we maintained over all these years."

To know more, read the following articles :
“Keynes v Friedman: Both Can Claim Victory,” Business Standard, 23rd November 2006.
“A natural choice,” The Economist, 14th October 2006, p79.
“Unfinished business,” The Economist, 25th November 2006, p13.
“A heavyweight champ, at five foot two,” The Economist, 25th November 2006, pp 79-80.
“Milton Friedman: Death of a Giant,” BusinessWeek Online, 17th November 2006.

[1] “Milton Friedman: Death of a Giant,” BusinessWeek Online, 17th November 2006.

[2] “Milton Friedman: Death of a Giant,” Business Week Online, 17th November 2006.