Incentives & the Blueline Blues...

As statistics go, here's one thats as banal as it is disheartening: In the 10 months that have passed this year, the Blueline bus service of our nation's capital has just claimed its 100th victim. 100 people have been scythed, mowed down, run over and killed...by a public bus service. See here for details.

I wont spend any time on verbose adjectives denunciating the state of affairs. As a citizen, I'm certainly entitled to...but we'll leave this to our over-anxious, over-bearing media. They bore us stiff with this already.

Instead, lets look at something more useful: Why is this happening? Most people blame reckless drivers. Blueline blames citizens who often cross roads in the midst of perilous traffic. I'd say the blame is probably 80:20 --> drivers:citizens. So, lets look at a typical Blueline driver, Mr. Gopal, and the incentives that drive him.

Today, Gopal is paid a fixed percentage of the day's earnings. In other words, the more the passengers he transports, the more money he makes. To Gopal, this translates to: the more rounds I can make, the more people I transport, the more money I make. Make more rounds by driving faster...and oh yeah, cut a few corners while I'm at it....approach that bus stand just a bit more quickly. $$$$. To me its as simple as that...you can train the drivers all you want, warn citizens to be careful...but we've got the wrong incentives in place...and THAT, is the real problem.

This point hit home hard while driving back last night from a wedding. I was struck by how disciplined our truck drivers are, at least relative to Blueline. By and large, they stick to their lane, stay off the fast lane and drive at reasonable speeds. And here's why: truckers are given a target per month: transport 500 tons (theoretical number) of cargo. There's no demand for anything more than that...so no credit for anything more. Truckers work out their own pace, which fortunately for us, keeps people on the roads safer.

Of all incentives, studies have repeatedly shown that renumerative incentives are far stronger than moral or coercive ones. So you can coerce drivers and citizens to be careful, you can appeal to the moral concience of everyone concerned, but as long as financial incentives contradict these, the situation will not reverse itself.

The government must regulate this service. Drivers must be paid a flat monthly fee with a reasonable objective of daily/monthly km's covered. De-link their reward from the risks they take...throw in stronger punitive action...and we might ensure that in the coming years, we chip away at this senseless loss of life.

Gold digger seeking 'bad' business deal...

I found this article about a posting on a New York online dating scene hilarious.

A 25-year old woman posted an ad on an NYC dating site seeking a husband earning at least US$ 500,000 a year.

"I dated a business man who makes average around 200 - 250k. But that's where I seem to hit a roadblock. $250,000 won't get me to Central Park West," she said on the website.

A Wall Street banker, allegedly from JPMorgan Chase, has likened her request to a business transaction and concluded plainly that the deal is wishful thinking on her part. Read the article for the entire story.

Two pearls of wisdom stand out....

1. "...in economic terms you are a depreciating asset and I am an earning asset," he said. "Let me explain, you're 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you!"

2. "It doesn't make good business sense to "buy you" (which is what you're asking) so I'd rather lease," he said.

Hilarious...

The relative (un)-importance of different stakeholders...

My younger sister has been feeling pretty disheartened lately. Ever since graduating with a Master's in Technology degree from the prestigious Indian Institue of Technology, Delhi in December, 1999, she has worked for one firm. One firm...which in less than 8 years, has been sold twice, resulting in three different names...three different identities.

It was Hughes Software Systems until 2004. Flextronics, a global electronics design & manufacturing company picked up a controlling stake in HSS in 2004 and named it such. And just last year KKR, the global Private Equity player, made its first investment in the Indian market by picking up HSS aka Flextronics Software for US$ 900 million. After a much-publicized opportunity to erstwhile employees to coin a name for the new entiry, Hans Juergen Leicht's response was eventually chosen and the entity was christened Aricent.

Now, I've talked in some of my earlier posts about the different stakeholders in a corporate organization, often with subtly conflicting interests. Consider the interests of the owners versus that of employees. Senior management's priority numero uno is to generate shareholder value, i.e., generate high returns for the firm's owners. Employees, of course, have a set of expectations as well that dont always coincide with those of the owners. In the long-run, management's job is to ensure that these 2 sets of expectations coincide as much as possible. ESOPs were essentially born out of this thinking. Nonetheless, when times are hard, cracks appear.

To my mind, the entry of a celebrated (some would say ruthless) PE firm into the Aricent equation coupled with the current macroeconomic scenario in India (rising rupee hitting earnings) has accentuated this conflict. Aricent is not a public company but its owner, KKR, is probably more demanding than any public institutional investor would be, particularly in terms of its Return on Invested Capital (ROIC) demands.

To meet these demands, KKR no doubt is driving efforts to ensure that Aricent operates with the maximum efficiency possible. Depending on the firm's positioning, this often boils down to streamlining cost structures, particularly variable costs, as these restrict scale and eat into ROIC margins. "Soft" perks visible to the employee suffers first. So earlier, while working long hours, my sister could pop into the cafeteria at 10 pm and get a quick snack virtually free, today she needs to get such a 'perk' pre-approved. Earlier, she could have availed of a taxi anytime after 9 pm, today she has to wait till 10 pm for the sole service. Morale suffers, frustrattion fosters and with time, a sense of betrayal creeps in.

In a country with a socialist economic background, where today's professionals grew up with their parents working for 1 firm all their lives, loyalty to a firm (and a firm's loyalty to its employees) still means something. And in this pursuit of higher margins, employee discontent does not get the attention it deserves for 1 simple reason: the losses are initially intangible and manifest themselves only in the long-run. And for KKR, who only made this deal to leverage on Aricent's upside potential, and convert every $10 invested to $15 (hypothetical) in a 2 - 3 year timeframe, such long-term considerations merit no action. Pity.

I wish I could consign this to a PE-limited problem. Publicly owned companies tend to obsess over short-term numbers just as much. It takes a brave, honest set of leaders to resist this temptation. Jack Welch provides perhaps the best model when he famously refused to give out obscene Wall Street I-bank-type bonuses to GE's banking subsidiaries. The rest of us though must continue to dream...