What Infosys’s Vishal Sikka’s tenure teaches us about ‘ Strategy ’

Recently Wipro’s Azim Premji and Infosys’s Vishal Sikka made joint statements about the stresses and tough times that lie ahead in the Indian IT sector and how the global factors have caused immense uncertainty – I agreed, for its been 2 years that I have been - through this blog, making a case that greed, unsound economic decisions and self-fulfilling political pursuits by nations and central banks have pushed the world to a brink of dangerous unanticipated consequences and that the present prices of ‘pretty much’ all asset classes are unsustainable.

But this piece is about strategy. I read this word so often that I am now almost sick of it. Speak to an over enthused student at a business school – he wants to excel in strategy and make a career out of it, speak to a new CEO – he would talk of a 10 year strategy and vision and make the incumbent employees feel scummish for their lack of strategy and vision, speak to a consultant (highly paid youngster at probably the big four with all authority and no responsibility) and he would regurgitate so much on strategy through his 100 page presentation that the customer would really start cursing the historical past, when the consultant wasn’t on board.

Well strategy is fashionable, it sounds great – but in reality its bullshit. As Peter Drucker says Culture eats strategy for breakfast everyday

200 years ago when nations orchestrated wars to take over other nations and land masses across the oceans, strategy made sense. A strategy once made could remain relevant for 50 years as letters and information could be sent/received over sea/horses at most twice a year. Officers of invading nations had orders to execute a decision and the same could be reviewed only after a few years. Results to judge successes or failures was possible – at best – over a decade.

Today all it takes is a tweet by Trump to make the price of fortune 100 company crash or a claim by wikileaks to make Hillary lose a winning US presidential election or a unfounded misinformation that encourages a nation to invade another and create a world havoc that is likely to have a century long ramification.

Disclaimer : Now I don’t know who Vishal Sikka is or what he stands for or what he brings to the table and I have nothing against him. He is just a case in point because I remember him as a non-promoter Indian to get the highest salary in India, to get an annual compensation of about 6 mill USD besides all the stock options. But I read 3 newspapers everyday to have a fairly good memory and to form an opinion.

When Sikka joined Infosys somewhere in June 2014 as the first non-promoter CEO, he was the next big thing in India. He talked of strategy and he talked of vision and the world took notice. The stock price of Infosys soared and he became the poster boy. At the time of his joining, the annual revenues of Infosys were about 6.9 billion USD and he talked of a six year 2020 vision of 20 billion in revenues. ie a approx. 2 billion increase in revenues each year. And he maybe got more bonus. Many of the rockstar executives who built Infosys over last 2 decades, allegedly quit out of frustration.

This reminds me of the despicable Jack Welch who made a fortune for himself but made the most ruthless organisation by firing 5-10% of workforce every year. As Simon Sinek says, companies that sacrifice their people for numbers rather than numbers for people aren’t built to last.

So as time progressed Sikka’s rhetoric of his vision became louder and the performance became quiter at about 7.9 billion USD in FY 2016 but he still maintained the gusto of his rhetoric.

The last Q3 FY17 results of Infosys are due on Jan 13^th 2017 (oops that’s a Friday) and Sikka already warns of tough times ahead and by the way all of it is the fault of BREXIT and Trump.

And going by the HY (half year) run rate of FY17 Infosys will achieve about 9.5 billion USD in annual sales. With three years to go for 2020 – a 3 billion USD per annum increase.

Whats the point:

Its not Sikka’s fault. He has no role to play. The multitude of global factors and externalities are so diverse that any CEO or alleged strategist who talks of a 10 year or a 5 year strategy is only fooling himself or the board.

Its good to have a general aspiration (call it vision) for next 5-10 years. But having a 5/10 year strategy and a promise can help you get a bonus but all that matters is the next few quarters.

Companies are wasting too much time on vision and strategy not realising that merely a tweet, a simple geo-political externality or an event on which no one has a control can change the dynamics of our aspirations and strategy overnight.

Boards must realise and encourage the following:

1. Growth is important – and imperative. Don’t put so much pressure on CEOs that they are forced to make specious commitments.
2. Preserve cash – When a Brexit or a trump hits you – no one knows. Cash is king and cash is the one that will help you survive in tough times.
3. Leveraging created on the assumption of ‘future growth of present revenue run rates’ (sounds almost as exotic as CDO’s of 2007 isnt it) is a sure shot recipe of disaster.
4. The Baniya style of business has stood a test of time over 200 years, till Goldman arrived on the scene and changed the rules of the game. Live within your means and borrow what you can pay from present income – not future income.
5. Every decision maker must have a skin in the game. Convert decision making executive’s present bonus and compensation into future equity if you want the organisations to survive.
6. Conservatism isn’t a bane, it’s a virtue. For fools are full of confidence and wise are always in a state of doubt.
7. Every present expense must pay for itself – strategic decisions taken in present for future issues without having a control on future are likely to be disastrous and not reflective of a sense of ownership or good leadership.
8. Stop expecting month on month or quarter on quarter. Allow your CEO’s to work in peace and keep a quiet watchful eye. Fire them if you don’t like them but don’t create noise and disturb them every single day.
9. In an ever connected highly efficient world make a 3/6 month strategy – if at all. Anything more than that is gas.
10. Keep a watchful eye on people talking of 300 years of vision and balance sheet (surprisingly same people couldn't retain their CEO for more than one). Anyone reading this will probably be dead in less than 40 years and anyone talking of 300 years probably has no plan at all.

And lastly for GOD’s sake – stop talking about strategy and start working on culture.

Manu also writes in Huffington Post

The Savers Dilemma

During a recent trip to the US, I happened to meet many young executives from the Silicon Valley, doing relatively well and perhaps in the 95 percentile of income group but all fed up with lack of options to generate alpha on their idle cash lying in their savings / checking accounts. And that too in one of the most advanced and efficient consumption driven economies on the planet.

One relatively accomplished executive (we’ll call him John) in one of the top social networking company had an even stranger story. In 2009 (at the peak of the depression), John invested a million dollars with a top hedge fund with a non-guaranteed promise of indicative returns upwards of 15% CAGR on a premise that the bounce back from those levels was likely to be phenomenal in all asset classes and returns could even be higher than indicated.

Impressive isn’t it! I would have sold my wife’s jewellery to invest – for where else would one get that kinda return.

My curiosity got the better of me and I couldn’t help but probe. To my surprise John recently withdrew and got back USD 1,126,493 after 8 years, a CAGR of 1.5% with a detailed explanation from the fund manager as to how well his money worked for him in the hands of the fund and why the investors should feel happy in the times that were tough (2009-2016)

And by the way John was smug - for his sense of achievement was emanating from the fact that his checking account would have yielded just a fraction of this return. So John really did well by his own accord. And top of that the fund sent them a special shopping voucher (unexpectedly) worth USD 2000 for shopping on Amazon.

I did some research on US asset classes and was rather surprised at my findings.

Dow Jones moved from 7000 to 20000 in March 2009 thru Dec 2016

So if John had simply (read dumbly) invested in an index fund then his 1 million USD would have been 2.85 million USD

If John had bought gold his investment would have peaked to about 2.5 mil USD in 2011-12 but would have still been about 1.8 mill USD today

And of John had bought Apple stock for that amount, his money would be worth approx. 9 mill USD today besides earning about 17 dividend payouts in the same period

And lastly if rise of oil prices had impressed John, his money would have remained almost the same in 9 years

John and thousands like him would have definitely paid for his fund’s billions in bonuses.

Oh - I so hope that my best friend John doesn’t read this piece because the comfort of smugness on an issue is a virtue that once acquired must not be lost or destructed.

The point is simple :

Lack of financial knowledge is hurting the potential growth rate of capital that is being used by fund managers.

The greed for a superior return without a guarantee of capital protection just puts gullible investors at huge risks and there is no redemption from these ill-informed investment decisions.

And John isn’t alone – except for less than half percent of top wealthy people on the planet, very few are able to generate an alpha on their savings that beats inflation and grows capital.

If the annual rate of inflation is about 2% historically, the savings must generate a min yield of 2% for the value of the money to remain same or real return on investment to remain 0.

An average or above average executive is just too busy in the daily rigmarole of life, wife, kids, performance appraisals, corporate slavery to make any real sense of what to do with spare cash.

But the success of stocks like apple or gold are outlier events that occur thrice or 4 times in a 100 year spectrum. Only the people who have deep understanding of economics or trends can generate alpha or even protect capital.

Thomas Pikkety, in his award winning research and book has beautifully summarised that capital over a long period of time gets accumulated in the hands of few and the common man continues to suffer (relative income inequality)

If capital is deployed in non-sexy instruments and stocks of companies with sound management and fundamentals, and portfolios are diversified to include a variety of asset classes and the inherent greed can be curtailed to be satisfied with ordinary real returns on capital, all investors will definitely and most likely grow their capital at a far better rate than anticipated.

Mutual funds from trusted fund houses, that have low expense ratios and the ones that are tried and tested with historical success of more than 7 years should be bought rather than being carried away by the glamor of irrational returns.

Investing is simple as Buffet says Be greedy when all are fearful and be fearful when all are greedy. And if Buffet’s to be proven right, a Global Financial Armageddon is round the corner but then – that would be the time to be greedy – Isn’t it?

The next blog

Why it’s a stupidity to ever invest in a house

Manu also writes on Huffington Post

The Run Rate Conundrum - 'Or the beginning of The Great Depression'

Being a citizen of a country obsessed with cricket, the only run rate that I ever knew was the runs that a batsman makes per over and that i thought defined the run rate - till recently when I realised that even businesses (read new e commerce world) are getting discounted and valued on their run rates. It must be very interesting for those old brick and mortar industrial houses such as the Tatas in India and Walmart

in the US that flipkart and facebook are valued more than these over a century old business behemoths. What took billions of man hours to build has now been surpassed in value by young turks who took their ideas to fruition in a matter of a few years.

Hats off to these young companies for what they have created in such a short period of time.

But there is another side to this story of how the calculations based on ‘run rate’ have brought the world to the precipice of destruction and collapse.

And 2 sectors, one with which I am closely involved - hospitality, and one which I am closely watching lately, are perfect examples of how Bill Gates has done an immense disservice to the human mankind by inventing that little devil (thats what we will call it from now on), the ‘ + ‘ sign on the excel cell where you plot the run rate for the shortest period of time between the two cells, drag the cells to a time period of convenience, where the potential extrapolation of that run rate makes Walmart’s annual sale look pale in comparison to the run rate and get millions of dollars of funding for the idea that is yet to hatch.

In late 90’s it was as easy as registering a domain and coming up with an idea. And a couple of million dollars could be raised easily and the founders would start surviving on Dom Perignon in the hope of a Nasdaq listing just a few months from the conception of that idea.

What happened in early 2000 and the dot com crash merits no explanation or waste of time of the readers of this piece.

The consultants and investment bankers who had deployed trillions of dollars of funds (..of HNI’s , pension funds, 401K in the US etc) in these dot.com companies and earned and digested their deployment bonuses (because no one ever made any profit) suddenly became lecturers and advisors on topics such as how the chaos of 2000 could be avoided.

Relying on the perfectness of the short human memory, about 7-8 years later these investment bankers got a brilliant idea and a new scam of CDO’s emerged on the premise that house prices will go up infinitely and incessantly across the globe and a simple burger flipper ended up owning 3 houses because of cheap credit and loose control on credit checks and what followed consumed the likes of Lehman and over a hundred banks across US and Europe. But the investment bankers had already encashed their ‘deployment bonuses’ and share of the brokerage incomes by doing a circular trading of these Collateral Debt Obligations and who was left behind holding a carrot? The commoner who was enticed to buy his second or the third home and the pension funds and the hard earned money of HNI’s (that was siphoned off by the likes of Madoff and hundreds of fund managers of these Ponzi schemes).

And - Because many of these institutions were too big to fail, it was all eventually funded by governments thereby expanding the balance sheet of the respective central banks and during this time when people were losing their homes and losing jobs, interestingly the global sale of ultra luxury goods was at an all time high and there are no prizes for guessing who was stoking this insatiable demand of these luxury goods (Louis Vuitton, Hermes, Dom Perignon, Rolex and Cartiers of the world)

Almost 7 years later (I am convinced that collective short term human memory begins to fade after 5 yrs and is completely wiped out in 7) we are seeing a frenzy like never before where people say that ‘this time it’s different’ because the businesses have actual run rates and e commerce activity has actually taken off and the approx. 16-17 trillion dollars that’s conveniently printed by the US Fed needs deployment and therefore the same cycle all over again.

While we are yet to see many/any of these multi billion dollar companies churn any positive cash flow, the distribution of deployment bonuses is at an all-time high.

I was amazed to hear that a Japanese company paid out close to 135 million dollars in a year to one of its rockstar executive for deploying approx a billion dollars in the same time period. That’s 13.5% in deployment fees/bonus. (this example is over-simplistic but is being mentioned just to make a point)

Small companies selling salads, idlis, sandwiches, rotis are getting obscene amounts of funding because they are allegedly having an exemplary run rate and conveniently someone is seeing immense potential of growth because of a 15 day run rate which if you extrapolate using the devil ‘+’ on excel makes this company/portal worth a couple of billion dollars.

Why?? Because they sold 2 pieces of their product on the day of the launch and ever since they have been registering a 100% growth in the last 30 days. And none of the investment bankers want to miss this opportunity to own these growth stories. Is this sustainable? I don’t think so. And I am quite sure about it. On the 31^st day of course the run rate isn’t the same but the funds have been deployed for accelerated value creation.

During the times of irrational exuberance everyone only talks of growth potential and entrepreneurs only look at their product and imagine that every single person on the planet is their potential customer and an infinite demand is assumed and therefore exuberance. No one realises that in the hyper competitive and efficient market with negligible barriers to entry any great idea is great only as long as it’s in the mind.

Hotels are an interesting case in point. The consultants make the owners spend humongous sums of money on the basis of the ‘little devil’ and suddenly large investments on land and building seem recoverable but oops only a handful of hotels in this country have been able to recover their investments and majority of the hotels chains are reeling under severe debt and a popular chain ‘Leela’ is almost bankrupt and many other hotels will take over a hundred years to recover investments going by the actual run-rate.

But consultants have taken their fees and are looking for new clients and there is no answerability.

This will continue for ever unless:

• Every fund manager is made a part owner of the businesses where he is recommending investment.
'change the consultancy model from all authority and no responsibility to all authority and all responsibility'

• 80% and not 20% of the compensation of these deployment managers comes out of the positive cash flows of the businesses.
• Consultants are made to move from the model of ‘all authority and no accountability’ to ‘all authority and all accountability’.
• Consultants, investment bankers, and deployment managers aren’t allowed to ‘hit and run’ at the cost of the investor.

Till that historic instance in time some innocent child again shouts and says that the ‘emperor is naked’ this bubble will keep getting inflated and will consume the world all over again and if indicators are anything to go by and if the sum total of all present economic, political, financial, emotional and judgemental decisions could be plotted on some model to arrive at a result……

What lies ahead will make the depression of 1929 look like a walk in the park.

Manu also writes in Huffington Post