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Hello, everyone. I hope you all are well. In Chicago, although investments are languishing, we have a winning baseball team.
I remain a believer in the long-term prospects of this company. It is a survival and positioning game now. Phan and Yang appear to be working that game well. When China's WTO accession comes, the game will shift. At that point, it will ne interesting to see where the U.S. economy and market are. If they are still in the dolrums, then we will be holding the right cards (shares).
Best of luck to you. Have a nice summer and fall. It should be a good time for accumulation.
Thanks for the response, Gary!
Actually, I mischaracterized Caliber Learning Network as a subsidiary. It is actually a JV. Nevertheless, will it have any adverse bearing on CBQ's business with Sylvan?
Whiz, this is a very difficult market. Take a look at the article below, which provides information about the revenue, stock price, and valuation of Juno and NetZero, two companies that just announced they are merging. The combined revenue of the two companies over the past 12 months is over $180 million. The combined entity has a market value of around $180 million as well. Combined, they have 7 million subscribers, second only to AOL. Yet the stock price of Juno is just over $1.50 and NetZero is around a buck. Of course, NZRO racked up a nearly $12 million loss in the last quarter. (I haven't researched JUNO's financial state.)
http://www.usatoday.com/money/tech/2001-06-08-net-merger-usat.htm
Internet service providers Juno, NetZero to merge
By Jon Swartz and Andrew Backover, USA TODAY
Fierce rivals NetZero and Juno Online Services agreed Thursday to merge in a $71 million stock swap that creates the nation's second-largest Internet service provider.
The merged company, to be called United Online, pairs the last large independent survivors of the free Internet access providers.
Combined, it will have 7 million subscribers, behind AOL Time Warner's 29 million but ahead of Microsoft Network's 5 million.
United Online will continue to offer free services under the NetZero name. About 1 million of the merged companies' subscriptions are paid, and about 90% of those come from Juno.
While the companies billed the deal as a merger, NetZero is, in effect, taking over Juno, says NetZero CEO Mark Goldston. He will head the new company.
"Instead of beating each other's brains, we decided to work together. We have a tremendous chance to make a run at AOL," he says. Juno CEO Charles Ardai says he will pursue other interests.
Analysts doubt the deal will affect AOL, Microsoft or other big ISPs, because they go after higher-paying customers.
Under the deal, NetZero shareholders will own 61.5% of the new company, and Juno shareholders will own the rest.
As of the close of trading Thursday, Juno had a market value of $59.6 million and NetZero of $119.1 million. Yet Juno's revenue the past 12 months reached $118.7 million vs. $64 million for NetZero.
The firm will trade under the symbol "UNTD" on Nasdaq.
After the news was released, NetZero inched up 9 cents in after-hours trading to $1.04 a share. Juno rose 10 cents to $1.58. Shares of both companies are 89% off their 52-week highs.
Further consolidation is likely for ISPs, because many of them are struggling to generate enough cash to survive, says Jack Ferguson of investment banking firm Rampart Associates.
"Their stock prices are in the toilet because their revenue models have primarily been based on advertising," says Rob Lancaster, of the Yankee Group.
"The free ISP market has been slowly dwindling. It really came down to those two players, and there aren't enough dollars in the marketplace."
The struggling companies have wooed customers with free basic service, then tried to entice them with premium offerings for a fee. NetZero's pay plan of $9.95 a month is less than half the cost of AOL's monthly service. Juno's monthly paid plan is $14.95.
NetZero and Juno are no strangers. In December, NetZero sued Juno for patent infringement of its advertising technology.
Earlier, Juno sued NetZero and Qualcomm for violating its advertising patent.
Hi, Gary. I've been out of town on business for the past week. I look forward to the event necxt week.
Will this problem with one of Sylvan Learning Systems' subsidiairies have any adverse implications for CBQ?
http://www.nytimes.com/2001/06/16/technology/16CALI.html?searchpv=nytToday
June 16, 2001
Learning Network Files for Chapter 11
By BLOOMBERG NEWS
BALTIMORE, June 15 — Caliber Learning Network Inc., the online training provider backed by Sylvan Learning Systems Inc., filed for bankruptcy protection from creditors because of continuing losses and mounting debts.
Caliber, based in Baltimore, listed $29.8 million in assets and $22.7 million in debts in its Chapter 11 petition filed in United States Bankruptcy Court in Baltimore. Caliber said that a loan from Sylvan Learning would pay for the reorganization.
Caliber was founded in 1996 as a joint venture of Sylvan Learning, the largest provider of educational services to schools and families, and MCI WorldCom Inc. Caliber, which provides Internet training for companies and once operated 40 learning centers, has not made a profit since offering shares to the public in May 1998.
"Today's actions provide us with the flexibility to explore all strategic alternatives including the sale of the company, as well as the viability of a stand-alone reorganization," Glen Marder, the chief executive, said.
Sylvan Learning, which is also based in Baltimore, will take $14 million in pretax charges against its second-quarter earnings in connection with its Caliber stake, the company said.
The charges stem from reserves for notes payable to Sylvan by Caliber and lease obligations guaranteed by Sylvan, the company said.
Caliber has hampered Sylvan's earnings, analysts said. Last month, the educational company said it had to write off about $12 million in the first quarter.
Caliber's problems stemmed from its decision to emphasize its learning centers rather than the Internet as its main way of providing corporate training, said Trace Urdan, an analyst for W. R. Hambrecht & Company.
Boy, you've lost it and will never get it.
Wrong! If you did more than simply pull speculation out of thin air, your contributions to this thread would be worth more than what they actually are---a good excuse to set the record straight and get the CBQI story spelled out.
Have you considered the fact that the assets CBQI purchased represented all of the revenues of SOCT?
Consider it, and then check back in.
Boy, you haven't been paying attention, have you? Wow. That's rich.
Bix, you just proved in this post that you DO NOT know what ARRR is?
For once and all, you don't calculate ARRR for 2001. That is a projection. ARRR is not a projection. In assembling the 2000 ARRR for CBQI, you look at the current divisions (in 2001) and add up the revenue theygenerated in 2000.
Capiche?
Sheesh!
Thanks for the answers, Gary. When you find out about question number 3, please let us know.
Da!
1. Gary, when you say "all jobs are manned," what do you mean? That CBQI has been able to staff all of its existing engagements as well as any engagements it acquired as part of the Technet deal?
2. How many programmers does CBQI have now in total, including those leased from Technet?
3. Is CBQI currently doing any of the programming for its clients through its offshore outsourcing connections?
Gary, do you know the term of the lease whereby CBQI is leasing the Technet employees?
Will the lease be affected by a change in ownership, as can sometimes be the case with leased real estate?
WHat has happened with the receivables CBQI acquired from Technet and Networkland? Have they attempted to collect on these, or are they selling them at a discount to third parties?
In the asset purchase agreement contained the following clauses:
2.6 Closing Balance Sheet; Prorations. Not later than twenty (20) days after the Closing Date, Purchaser shall prepare and deliver to Socrates a balance sheet of the Business as of the Closing. Such balance sheet shall be prepared in accordance with GAAP as of the Closing, and shall include pro rated (based on the number of days during the relevant period) prepaid expenses and other payments made pre-Closing by Sellers in respect of the Assets (including pursuant to Contracts) that relate to post-Closing periods and payments made post Closing by Purchaser in respect of the Assets and expenses that relate to goods and services provided in pre-Closing periods. From and after the Closing, Purchaser shall provide Socrates and its representatives and accountants access to such books, records and personnel of the Business as is reasonably requested by Socrates to permit Socrates and its representatives or accountants to prepare a balance sheet of the Business as of the Closing and to otherwise determine the accuracy and basis for Purchaser's Closing balance sheet and prorations. Socrates shall have thirty (30) days after delivery by the Purchaser of its Closing balance sheet (the "Objection Period") to object to any item or items shown on thereon, and during the Objection Period, Socrates and its representatives and accountants shall have access to all work papers of the Purchaser and its accountants which were used in the preparation thereof. If Socrates does not object during the Objection Period, the Closing balance sheet received by Socrates and such prorations shall be conclusive and binding on the parties hereto and may not be challenged by any of them in any forum, in which case, Socrates or Purchaser, as the case may be, shall remit to the other party the appropriate payment no later than five (5) days after the last day of the Objection Period. If Socrates and Purchaser are unable to resolve any dispute with respect to the Closing balance sheet or such prorations within thirty (30) days after delivery by Socrates of Socrates' objections, the matter or matters in dispute shall be submitted to such firm of nationally or regionally recognized accountants as Socrates and Purchaser may agree if they cannot so agree, Socrates shall select one such firm and Purchaser shall select another and the two firms so chosen shall select a third firm of nationally or regionally recognized accountants to which such dispute shall be submitted. The accounting firm chosen, whether by agreement of Purchaser and Socrates or by their, respective accountants, shall be limited to determining a value for those items on the Closing balance sheet prepared by the Purchaser or for the prorations that are in dispute by Socrates in accordance with this Section 2.6 and are not resolved by agreement between Purchaser and Socrates. The decision of such firm shall be conclusive and binding upon Socrates and Purchaser and shall be incorporated into the Purchaser's Closing balance sheet which shall thereupon be conclusive and binding on the parties, and may not be challenged by either of them in any forum, and the fees and costs therefor shall be borne by the parties in a proportion to be determined by such accounting firm taking into account the relative fault of the parties in the dispute. Socrates or Purchaser, as the case may be, shall remit to the other the amount found to be due hereunder within five (5) days after the decision of the accountants has been received. All amounts payable by Socrates or Purchaser, as the case may be, hereunder and any indemnification obligation by either Socrates or Purchaser, as the case may be, for breach hereof shall be without regard to the limitations on indemnification contained in Article IX hereof which limitations shall not apply hereto.
2.7 Payment from Escrow. If Sellers or Socrates fail to pay any amount due and owing by Sellers or Socrates to Purchaser within the time periods prescribed in Section 2.6, Purchaser may recover the amounts due from Sellers or Socrates from the Escrow Deposit in accordance with the terms of the Escrow Agreement upon written notice to Socrates as provided by the Escrow Agreement.
Gary, The periods outlined in the above clauses for submitting the final palance sheet and objecting to that balance sheet have expired. I have the following questions:
Did CBQI submit the final balance sheet?
Did it show whether Socrates owed CBQI any monies? Or vice versa?
Did Socrates object to the final balance sheet?
If so, what is the status of negotiations?
Any answers you can provide to these questions will be appreciated.
I am impressed with the fact that Bart Fisher has left his post at the Porter Wright law firm and is now 100% employed at CBQI. This leads me to make three assumptions:
First, CBQI can afford to pay his salary (see note below).
Second, Bart Fisher is confident that his vision for CBQI is becoming a reality. In short, he has placed his bet and it's all or nothing on CBQ.
Third, Bart Fisher can no longer run the company with his attention split in different directions. There is a lot in the works that will require his full concentration if it is to come to fruition.
Remember, these are assumptions.
Note: I have not been able to find any mention in the filings of Bart Fisher's compensation. I will be interesting to see if the next filing contains information about it.
Thanks, Gary. Thought it was probably a coincidence. I like the fact that it is growing. Someone is buying --- either Riggs or an individual through Riggs --- which is a very good indicator.
It is probably an interesting coincidence, but isn't 1.3 million the amount of shares owned by Riggs Bank?
Thank you, Gary. That is a comprehensive examination of the "method" this individual has been practicing. I am working long days this week, so will only be able to check in at the end of the day and can't read all of the posts, but it is clear that your thoroughness stirred up some controversy, seeing as there are 40+ posts after this one. Won't have time to read them all. It is starting to become clear, however, why this individual is hesitant to contact the SEC. If I were this individual, I would also be quite careful about threatening lawsuits, when all of this could become part of the public record in a court of law.
Hmmmmmmmmmm, sounds like there's more to this than you're willing to admit.
Anyone who knows more about this scandal, please post it. As a shareholder, I am concerned about what this individual has been doing to affect the price of this security. Now wonder he has been unwilling to contact the SEC.
geezer, I can only speak for myself, but I welcome any other information you have to contribute. If it is wrong, someone will refute or correct it. But bring it.
People on RB are complaining because they don't like the way the thread has been. And yet I haven't seen them bringing any of the sort of behavior and information they want on the thread. At least you're bringing something to the table, and that in and of itself is appreciated.
From the Washtech article of April 5:
"They are "not the last, just watch," said Bart S. Fisher, CBQ's chairman, president and CEO. Fisher further said CBQ has inked letters of intent to buy two unidentified Baltimore-area companies, which he expects will close in the next two months....
"...The expected acquisitions of two Baltimore-area companies also will bolster the company's offerings. One is a Web design and hosting group while the other is a network integration and infrastructure company - both areas in which CBQ does not currently concentrate."
http://206.144.247.79/news/merger/8847-1.html
Gary, very nice breakdown. The earnings are clearly there and the cost of revenues is down significantly, which is impressive work by the company. It looks like they made the right decision to cut out the operations that were sucking up too much of the company's resources. They took the hit on revenues in the first quarter. And I would guess that the G&A expenses were higher than normal in the first quarter due to the extraneous acquisition costs. They may be high again in the second quarter as the company works through the integration of the assets and any disputes that arise. But we will show the revenues brought in through those two entities, which will be a plus.
Hey, as you've shown, CBQ has addressed the earnings issue. That should make Bix happy, shouldn't it? In the next filing, we should see that they have addressed the revenue issue. That should make Bix happy, too, shouldn't it?
Oh, that's right, I forgot. By that time, ol' Bix will be complaining about something else. What'll it be, then, I wonder?
Bix, you still haven't showed me a company that meets the criteria you set out. Heck, you even dredged up technology top guns MSFT and CSCO and still couldn't do it. What do you do then?
Change the subject. How conveeeeeeeenient.
That does it. Thanks!
Yeah, Bix over on IHUB posted MSFT, AOL, GMC. I like the fact that he has expectations for this company that track with that kind of company. I like it a lot. Be a good thing when CBQ does it, too. Right now, CBQ isn't quite in the league those companies play in. It's something to shoot for, I reckon. It wouldn't surprise me a bit if they are shooting for that league. Heck, they've cleaned the dead wood off of the financials. The growth rate is staggering. Anyone notice the depreciation numbers?
I asked ol' Bix to send in a suggestion that they adopt the same sort of revenue breakdown that the MSFTs, AOLs, and GMCs use. If he does, I wouldn't be surprised if they take it to heart.
Yes, Gary, I know that ARRR is not a projection. But what I'm wondering is that if you try to establish the ARRR for the entitiy that is currently CBQ, wouldn't you need to eliminate the revenue of the operating units for last year that are no longer in operation.
Let me give you an example:
Company X sells off Division A at the end of 2000 and continues its operations in 2001 with Division B. Company X's revenue in 2000 was $30 million, $15 million of which came from Division A. At the beginning of 2001, Company X also acquired Company Y, whose revenue in 2000 was $30 million. If you want to state the ARRR for Company X, you could say that it is $60 million (the sum of both companies' 2000 revenue). But that would be misleading, because Division A is no longer in the picture. If you are going to add the ARRR of Company Y, then it would make sense that you subtract the ARRR of Division A, n'est ce pas?
Gary, does any 2000 revenue from discontinued operations need to be subtracted from the $27 million CBQ ARRR?
Bix, I wonder if you would be so good as to respond to my inquiry:
I am interested in identifying other companies that provide the information you are trying to get for CBQ. Since you seem to have experience in this area, could you please provide the names of other companies that have given you the sort of information you are seeking.
Da!
Well, Bix, he is probably giving you the same advice I gave you over the weekend. At that time, you questioned the truthfulness of the paragraph I posted in response to your questions/assertions regarding the source of the decrease in revenue. If you still continue to believe that that paragraph (which is a direct quote from the filing) is in error, or misleading, or worse yet an outright lie, then you should take these concerns to the SEC. As a shareholder in CBQ, you would be doing me a favor if you uncovered a violation of their statutory requirments as a public company and brought it to the attention of the SEC so that they could compel CBQ to rectify the situation. Now, if you don't have the sort of evidence that could convince the SEC of sucha violation, then I could understand why you would hesitate to approach the SEC, which also investigates the actions of individual investors.
Hey, Bix, I asked you for some information over on Raging Bull that relates to your questions. I am interested in identifying other companies that provide the information you are trying to get for CBQ. Since you seem to have experience in this area, could you please provide the names of other companies that have given you the sort of information you are seeking.
Da!
Gary, Bix is upset because his post was deleted, but mine was not. Why don't you or Frank go ahead and delete any posts of mine where I called him a name. There is a fictional character in the Lord of the Rings, a slimy, duplicitious, wheedling, whining, resentful, spiteful, greedy creature by the name of Gollum. I used that character's name to refer to Bix. I believe it was over the weekend. I have no problem having those posts deleted. Or this one, for that matter. It's just a puff of air in cyberland, for Cripe Pete. I don't know why he gets all worked up about it. Maybe little people have big egos. I dunno. Besides, Gollum is not the right character, anyway. Anyone ever read any Dickens? David Copperfield, to be specific. Remember that character whose first name was Uriah? Mm-hmmm. That's the more appropriate comparison, I would think.
Bix, I believe you are mistaken. You should try to check your information carefully before posting it, especially when it involves statements regarding another person.
Does anyone know what the deal was when we sold the assets of Reliance and TopherNet to Greg Allen? I've not been able to find mention of any specifics in the filings.
Gary, any word on resolution of the legal dispute involving Dr. Ashok Rattehali?
Whizz, I am looking at it as a buying opportunity. Listen, I am very comfortable with the position I am holding with this security. You seem not to be. Hey, differences of opinion are what make the world go round.
I am mystified by the tune you are singing these days. You seem to be asking other people to give you good reasons why this is a good investment. Yet your posts in the past have derided individuals for statements expressing those type of opinions.
I am also unclear as to why you would base your negativity (or enthusiasm, for that matter) upon the movements of the stock price. That is not an appropriate way in which to evaluate the formulation and execution of a business plan.
You certainly do bring astounding insight and new perspectives to your every post. Thanks for contributing.
The best one yet, because it talks about the impending "software gap"...
http://www.economist.com/printedition/displayStory.cfm?Story_id=568320&CFID=2137041&CFTOKEN=...
As goes software...
Apr 12th 2001
From The Economist print edition
...so goes business—and, perhaps, even society itself
LET software disappear, and life as we know it would break down, at least in developed countries. It controls most of the objects which surround us: computers, of course, but also telephones, cars, toys, TVs, much of our transport system, and so on. Yet if the vision of web services comes to pass, today’s dependence on software will appear slight. Life in the cloud will mean that much of what we do, as homo oeconomicus at least, will be automated, from restaurant reservations to car purchases, from share trades to entire business deals.
All this is at least some years off, and may not happen at all. But the prospect raises some interesting questions. Who will write all the code needed for these services? What needs to be done to ensure that it is reliable and secure? And, last but not least, is there a way to prevent a few dominant companies or governments from controlling the cloud? Conveniently, the Internet and the institutions it has spawned may hold some answers.
Laments about a “software crisis” are almost as old as the industry itself. There are never enough skilled programmers to satisfy the demand for high-quality code. But in the years ahead this chronic imbalance could turn into a veritable “software gap”, as an American presidential advisory group made up of leading computer scientists put it in a 1999 report. “This situation”, the researchers wrote, “threatens to inhibit the progress of the current boom in information technology.”
The group is even more concerned about the current fragility of software. Even much-tested commercial varieties are often riddled with bugs, lack security, do not perform well and are difficult to upgrade. This was a bore when most software was confined to isolated devices and networks, but it becomes a serious problem in the world of web services. Software delivered online has to be able to withstand the onslaught of millions of users, and is at risk of security attacks from myriad sources.
Whereas these technical issues have been discussed for some time, the social and political aspects have only recently come to the surface. As code increasingly penetrates daily life, it becomes de facto law that regulates behaviour, argues Lawrence Lessig, a Stanford law professor, in his book “Code and Other Laws of Cyberspace” (Basic Books, 1999). For example, code needs to be compatible with our ideals of privacy and free speech. Another pressing issue is open standards. The continuing antitrust trial against Microsoft has shown that the world needs common technical rules that are not controlled by a single company (or indeed a government). Such rules can provide a level playing field for competition. But they must not be too strict, because that would stifle innovation and diversity.
The other main regulatory issue is less obvious: it concerns directories, the digital equivalent of telephone books. Even more than open standards, they will hold the cloud together. Some directories will tell users where to find web services and what they offer; others will keep track of available hardware; and yet others will list not only the identity of users, but also where they are and whether they are online at that moment.
The reason why these directories might need to be regulated is that they are subject to strong networking effects: the more data they contain and the more users they have, the more valuable they become and the more data and users they will attract. Sometimes it will even make sense to have a single directory, as it does for the domain-name system (DNS), the current address book of the Internet. Competing domain-name systems would probably balkanise cyberspace.
Whoever controls such directories will wield potentially enormous power. If a company owned, for example, the directory for web services, it could try to make its own electronic offerings more accessible than those of its competitors. The continuing controversy about the Internet Corporation for Assigned Names and Numbers (ICANN), the body that administers the DNS, is the clearest example so far of how difficult it can be to regulate these directories.
There are other simmering disputes, too, such as whether and when AOL Time Warner should open its dominant instant-messaging (IM) system and extend it to other providers. The point about IM, a cross between a telephone call and e-mail, is that it keeps track of whether users are currently online and, in the future, will also be able to monitor where they are. This is important information for providers of smart web services. That is why the Federal Communications Commission (FCC) made its approval of the AOL/Time Warner merger contingent on the new company’s promise to open up its IM system once it includes video services.
Microsoft had heavily lobbied the FCC, telling the agency that for IM to live up to its promise it must share the features of “openness and interoperability that characterise both the public telephone network and the Internet”. It will be interesting to see whether Microsoft will apply the same philosophy to its own recently announced directory-like services, intended to become building blocks of the .NET world.
Luckily, the Internet is already helping to solve some of these dilemmas. Its very structure, for instance, has caused the software gap to narrow. Programmers no longer have to live in America or other developed countries, but can work from anywhere on the globe. In the future, there will increasingly be a global market for software development, just as one already exists for the manufacturing of electronics. The fast-growing software industry in India is only the beginning.
Moreover, the Internet allows for massive testing and peer review, boosting the quality of code, in particular through open-source projects. The more people look at a program, the more likely it is that mistakes will be spotted. “Given enough eyeballs, all bugs are shallow,” writes Eric Raymond, another leading thinker of the open-source movement, in his influential book “The Cathedral & the Bazaar” (O’Reilly, 1999).
Finally, it is the Internet’s institutions—such as the Internet Engineering Task Force (IETF)—that offer a possible solution to the regulatory issues. These consensus-building bodies are not just a good mechanism to develop robust and flexible open standards; their decision-making processes could also be applied to other issues, such as the regulation of directories. These communities are guided by respected members, known as “elders” or “benevolent dictators” (for open-source projects), who have gained their status because of the quality of their contributions.
Most of these elders are technical and social engineers who work for academic institutions or other not-for-profit organisations. Governments would do well to provide economic support for these elders instead of regulating directly, argues Paul Romer, an economics professor at Stanford University: “This would be money far better spent than on antitrust actions or agencies like the FCC.”
This may be the Internet’s most crucial effect on the software industry: that it has made it possible for groups akin to scientific communities, rather than market forces alone, to lay the groundwork of the digital world. That seems to be a far sounder solution than allowing a small handful of firms to become the not-so-benevolent dictators of the cloud.
Don't take your reading glasses off just yet, because the April 14 issue of the Economist had a special section devotyed to the software industry. Here is the first article:
http://www.economist.com/printedition/displayStory.cfm?Story_ID=568249&CFID=2137041&CFTOKEN=...
The future of software may be a huge Internet-borne cloud of electronic offerings from which users can choose exactly what they want, says Ludwig Siegele
STUART FELDMAN could easily be mistaken for a technology pessimist, disillusioned after more than 25 years in the business of bits and bytes. As a veteran software architect, the director of IBM’s Institute for Advanced Commerce views programming as all about suffering—from ever-increasing complexity. Writing code, he explains, is like writing poetry: every word, each placement counts. Except that software is harder, because digital poems can have millions of lines which are all somehow interconnected. Try fixing programming errors, known as bugs, and you often introduce new ones. So far, he laments, nobody has found a silver bullet to kill the beast of complexity.
But give Mr Feldman a felt pen and a whiteboard, and he takes you on a journey into the future of software. Revealing his background as an astronomer, he draws something hugely complex that looks rather like a galaxy. His dots and circles represent a virtual economy of what are known as web services—anything and everything that processes information. In this “cloud”, as he calls it, web services find one another automatically, negotiate and link up, creating all kinds of offerings.
Imagine, says the man from IBM, that you are running on empty and want to know the cheapest open petrol station within a mile. You speak into your cellphone, and seconds later you get the answer on the display. This sounds simple, but it requires a combination of a multitude of electronic services, including a voice-recognition and natural-language service to figure out what you want, a location service to find the open petrol stations near you and a comparison-shopping service to pick the cheapest one.
But the biggest impact of these new web services, explains Mr Feldman, will be on business. Picture yourself as the product manager of a new hand-held computer whose design team has just sent him the electronic blueprint for the device. You go to your personalised web portal and order the components, book manufacturing capacity and arrange for distribution. With the click of a mouse, you create an instant supply chain that, once the job is done, will dissolve again.
Visions, visions everywhere
All this may sound like a description of “slideware”—those glowing overhead presentations given by software salesmen that rarely deliver what they seem to promise. Yet IBM is not the only one with an ambitious vision. Hewlett-Packard, Microsoft, Oracle, Sun and a raft of start-ups are thinking along the same lines. Unless they have all got it wrong, companies, consumers and computers will one day be able to choose exactly what they want from a huge cloud of electronic offerings, via the Internet.
The reality will take a while to catch up; indeed, it may turn out to be quite different from today’s vision. But there is no doubt that something big is happening in the computer industry—as big as the rise of the PC in the 1980s that turned hardware into a commodity and put software squarely at the centre of the industry. Now it looks as though software will have to cede its throne to services delivered online.
Not that software as we know it will disappear. Plenty of code will still be needed to make the new world of computing run, just as mainframe computers are still around, though in a much less dominant position. But the computer business will no longer revolve around writing big, stand-alone programs. Instead, it will concentrate on using software to create all kinds of electronic services, from simple data storage to entire business processes.
The agent of change is the Internet. For a start, it has changed the nature of software. Instead of being a static program that runs on a PC or some other piece of hardware, it turns into software that lives on a server in the network and can be accessed by an Internet browser. Already, most big software firms offer versions of their programs that can be “hosted”, meaning that they can be delivered as a service on the network.
But more importantly, the Internet has turned out to be a formidable promoter of open standards that actually work, for two reasons. First, the web is the ideal medium for creating standards; it allows groups to collaborate at almost no cost, and makes decision-making more transparent. Second, the ubiquitous network ensures that standards spread much faster. Moreover, the Internet has spawned institutions, such as the Internet Engineering Task Force (IETF) and the World Wide Web Consortium (W3C), which have shown that it is possible to develop robust common technical rules.
The first concrete result of all this was the open-source movement. Since the mid-1980s, thousands of volunteer programmers across the world have been collaborating, mostly via e-mail, to develop free software, often taking Internet standards as their starting point. Their flagship program is Linux, an increasingly popular operating system initially created by Linus Torvalds, a Finnish programmer.
The emergence of web services is a similar story, even though at first glance it may not look like it. The computer industry and other business sectors are collectively developing the next level of Internet standards—the common glue that will make all these web services stick together. Hence the proliferation of computer-related acronyms such as XML, RosettaNet, ebXML, XAML, SOAP, UDDI, WSDL and so on. This alphabet soup illustrates a potential problem for the new web services: they too could become victims of their own complexity.
Why should anyone care about this geeky stuff? One good reason is that software is one of the world’s largest and fastest-growing industries. In 1999 the sector sold programs worth $157 billion, according to IDC, a market-research company; and software spending, which is increasing by 15% a year, influences investments of another $800 billion in hardware and services. The changes now under way are likely to reshuffle the industry completely. The next few years may make it clear which companies will end up on top.
Moreover, the software sector could well become a model for other industries. Open-source communities, for example, are fascinating social structures. Similar communities could one day produce more than just good code. Thomas Malone, professor of information systems at the Massachusetts Institute of Technology, sees great opportunities ahead: “The Linux community is a model for a new kind of business organisation that could form the basis for a new kind of economy.”
And yet another good one. This one about timing the market:
http://www.economist.com/printedition/displayStory.cfm?Story_ID=581847&CFID=2137041&CFTOKEN=...
Waiting for the midnight hour
Apr 19th 2001
From The Economist print edition
Has the stockmarket bottomed? One way to answer the burning question is to study the investment clock
BY EARLY April, America’s Nasdaq had fallen by nearly 70% from its peak, with the S&P 500 down by almost 30%. April is supposed to be the cruellest month, yet even before the Federal Reserve set stockmarkets ablaze by cutting interest rates by half a point on April 18th, shares had been rallying for two weeks. The Nasdaq has now climbed back by almost 30%, and the S&P by 12%. Some much-followed shares have done far better: Amazon’s price has doubled over the past two weeks. Investors want to believe that the worst is over and that the next bull market is now under way. Possibly, Alan Greenspan wants them to believe that too.
The fall in the S&P 500 in the year to early April was the second-biggest drop (over a 12-month period) since the 1929 crash, beaten only by the notably savage bear market of the early 1970s. However, just because share prices look cheaper does not mean they will immediately rebound. Timing is all.
Financial markets, like economies, move in cycles. Bonds, equities, commodities and cash are affected in different ways by economic growth, and by changes in short-term interest rates. There tends to be a period over the economic cycle, distinct enough with hindsight, when each asset outperforms the others. No two cycles are identical, of course, but the relative performance of assets follows a familiar, if rough, pattern.
Bond prices typically start to outperform other assets at least a year before the trough of the economic cycle, just before interest rates begin to fall—as in 1990 and 2000. Share prices usually take off about six months before the economic trough, when monetary policy has become laxer. As the economy strengthens, and interest rates start rising again, bond prices fall, while equity prices continue to climb on the strength of rising profits. Then, as the expansion nears its peak and inflation rises, commodities and property fare best. Finally, as central banks raise interest rates to quell inflation, cash is king. This pattern can crudely be presented in the form of a clock (see chart 1): as we move around the dial, each asset has its moment. The investment clock says nothing about the size of future asset-price movements, but it may help people to understand their timing.
So where are we on the clock? For the recent bounce in share prices to be sustained, the American economy must already have reached 12 o’clock, and be within six months of the end of the downturn. A study by Peter Oppenheimer, global strategist at HSBC, examines the equity market in more detail over the economic cycle. It breaks the cycle into four phases based upon growth rates in GDP (see chart 2), measured quarter-on-quarter. These phases are of varying length, but they more or less correspond to the four quadrants of the clock. In phase one, growth slumps below zero until it reaches the trough of the recession. In phase two, growth is still negative, but output falls at a decreasing rate. Phase three sees accelerating growth. In phase four, the economy slows from its peak rate of growth to zero growth.
Over the past 30 years American stockmarkets have always fallen in phase one, as the economy slumped, but in phase two (when the economy is still contracting, but less steeply) shares have surged, with an average real gain of 36% at an annual rate. Phase two is relatively brief, lasting on average only six months—ie, it is often all but over before a recession has officially ended. It is heart-rending to miss: the initial six-month rally in share prices has typically accounted for as much as half of the total stockmarket gain in the first three years of a bull market.
The lesson from this is that the best time to buy shares is not when the level of GDP has reached a trough, but when its rate of decline has bottomed out: stockmarkets, after all, are in the business of discounting the future. Bull markets can begin when output and profits are still shrinking. The darkest hour is just before dawn. Shares bottomed in October 1990, six months before the economy.
For anyone who, like most economists, believes that the downturn in America will be brief and that the economy will be recovering strongly by the fourth quarter, now is indeed the time to buy. For those who believe that America is heading for a more prolonged recession, as overcapacity and high debts hold back spending, then the current market rally will prove to be a false dawn.
Liquid lunch
The investment clock is a useful framework for testing investment decisions. But is there a global clock, or just one for each country? After all, stockmarkets these days are increasingly moved by worldwide factors.
This is why many analysts use global liquidity as their investment yardstick. One investment bank, CSFB, calculates a “global excess liquidity” index: this combines real money-supply growth in the OECD area minus growth in industrial production and changes in real interest rates. It attempts to gauge the amount of excess liquidity, surplus to the needs of the real economy, that is potentially available to be invested in financial markets. The index has surged this year as most central banks have eased.
Still, a bull market requires more than liquid refreshment: shares must also be undervalued. The price/earnings (p/e) ratio on America’s S&P 500 is still historically high, at just over 20 at its low two weeks ago. That compares with 10.5 after the October 1987 crash, 12.6 at the start of the 1990-91 recession and a long-term average of 15. However, an alternative measure, the gap between the earnings yield (the inverse of the p/e) and real yield on government bonds, suggests that most stockmarkets now look cheap relative to their average of the past decade.
But are they cheap enough? After a big overshoot on the upside, share prices can undershoot by as much on the way down. What is more, profit forecasts still look unduly optimistic. According to First Call/Thomson Financial, analysts’ forecasts imply flat profits this year, but a staggering 17% increase in 2002.
Mr Oppenheimer of HSBC, a long-time bear, reckons that shares are now looking cheap in relation to bonds. He expects shares to bounce in the second half of this year, but then follow a prolonged period of low returns as growth in output and profits proves disappointing in relation to the recent past. He reckons that it could take ten years for the Nasdaq to regain its peak, two years for the broader indices.
The judgment about whether the market has bottomed hinges on your view about the shape of the downturn. The longer you think the downturn will last, the greater the reason to put off getting back into the market. Most analysts are now working on summer time, hoping they haven’t turned their clocks forward too soon.
Another interesting Economist article. This one about global equity markets:
http://www.economist.com/printedition/displayStory.cfm?Story_ID=594293&CFID=2137041&CFTOKEN=...
The rise and the fall
May 3rd 2001
From The Economist print edition
The fall in global equity markets has delivered a salutary shock to investors. But it should not stop the spread of an equity culture around the world, says John Peet
THE first few months of 2001 have been tragic in a classical sense: the hubris engendered by the long rise in most of the rich world’s equity markets has duly been followed by the nemesis of their sharp fall. Now the world is gloomily contemplating the possibility of the first sustained, globally shared, bear market for a quarter of a century. All those who have spent the past five years predicting a crash, even as the markets attained ever giddier heights—including, it should be confessed at once, this newspaper—are feeling belatedly vindicated.
There have been other sharp falls in equity prices, and indeed several genuine bear markets, within living memory: in the 1970s, for example, or, even more painfully, over the past decade in Japan. But most of today’s investors have never experienced them. Some may even have begun to assume that, perhaps thanks to the benign influence of America’s Federal Reserve, it was normal for share prices to keep going up and up. Yet, historically, what is truly unprecedented is not the arrival of a bear market. It is the extraordinary two decades of rising share prices that ran until late last year.
It is worth putting the figures on record before the bears stamp out the memory altogether. At the start of 1982 the Dow Jones Industrial Average stood at 875; the index for the exuberant and then newish Nasdaq stockmarket was 196. Eighteen years later, at the start of 2000, after the longest and strongest bull market in history, the two indices stood at 11,497 and 4,069, respectively. That meant they had run up average annual real increases over that period of 11.7% and 14.6%, respectively. And this included, among several other dips, the great crash of October 19th 1987, when the Dow fell by 23% in a single day.
Over the past year, the markets have fallen back sharply, with the fall picking up speed as company profit warnings and worries about a recession have spread. Until a recent recovery, the broad S&P 500 index had fallen by well over 20% from its January 2000 peak (a 20% fall is widely, if unofficially, regarded as defining a bear market). The Dow has fallen by less, but it too is well off its peak. As for the technology-heavy Nasdaq stockmarket, despite its recent climb, it is down some 60% from its peak in March 2000. Plenty of blood-curdling figures have been hurled around. Some $3 trillion has been wiped off the nominal value of America’s stockmarkets, equivalent to (though not comparable to: one is a stock, the other a flow) a third of the country’s GDP. Around the world the paper loss amounts to as much as $7 trillion.
As chart 1 shows, Europe’s stockmarkets have mostly followed a similar path to America’s, with a slightly less dramatic rise followed by an equally sharp decline. Europe’s smaller technology markets have seen an even bigger short-term boom and bust than the Nasdaq. Among rich countries’ markets, only Japan’s has followed an essentially different path, reaching a peak at the end of 1989 from which it crashed, and has since stagnated as worries about the economic outlook have increased. All in all, it seems safe to conclude that, whether or not the bear market persists, the long bull market is well and truly over.
Bulls and bears
What caused markets to put in such an unprecedentedly strong performance in the first place? Many things, not least two broadly successful decades of macroeconomic performance, with mostly low inflation and steady growth (except in Japan). Yet equity valuations, as we shall see, are a matter of huge controversy, and markets have a pronounced tendency to get out of line with economic fundamentals, producing froth or even bubbles. The sharpness of the fall into a bear market, at a time when the real economy has done little more than slow down, suggests that this may have been happening in the 1990s.
It is the now notorious technology, media and telecoms (TMT), or “new economy”, bubble that was largely responsible for the heady rise in the markets, and it is its deflation that was responsible for a big part of the subsequent fall. If TMT stocks are taken out of the equation, the rest of the market (sometimes called the “old economy”) was much less buoyant in early 2000; until this spring, it seemed to be partly recovering, confirming its inverse relationship with TMT (see chart 2). Yet bear markets can always be defined away by excluding those sectors that have fallen farthest: that does not make them any less real. Besides, shares have recently declined right across the board.
Alongside the cyclical market rise, and now fall, there has been a structural factor at work in the 1980s and 90s. This factor, which might be called the equitisation of world finance, forms the main theme of this survey, which will seek to answer one of the big questions of the moment: can the new “equity culture” around the world survive a bear market?
Equitisation is only part of a veritable revolution in finance that has taken place over the past 20 years. In most countries, including America, capital markets at the start of the 1980s played a much smaller role than they do today. Banks, once the staid but trusty handmaidens of industry, have been subject as never before to competition and to an erosion of their traditional functions. New financial instruments, from derivatives to high-yield (“junk”) bonds, and from swaps to sophisticated options, have been invented and popularised. Securitisation has turned almost any income-producing asset into a tradable instrument. And technology has changed finance perhaps more than any other industry outside computing itself.
Under the buttonwood tree
It may seem surprising, against such a background of febrile change, that something as old-fashioned as equity should have come so strongly to the fore. Stock exchanges have, after all, been around for centuries. The New York Stock Exchange (NYSE) dates back to 1792, when traders met under a fabled buttonwood tree close to where the Big Board’s floor still stands. The London Stock Exchange began trading in its present form in 1801. Amsterdam’s bourse is older than either. Yet for most of their history, stock exchanges traded government bonds far more than equities. Until relatively recently interest in shares was limited, confined largely to wealthy individuals and a few institutions. But over the past two decades four related trends have changed that.
The first is rising issuance of equity on the public markets, not least shares in companies that had been either state-owned or privately held. Dick Grasso, the combative chairman of the NYSE, likes to cite his two conservative heroes of the 1980s, Margaret Thatcher and Ronald Reagan, as chief inspirations for both privatisation and the spread of share ownership. Mr Grasso now declares that “equity is the crude oil of the global economy”. Ironically, the net supply of new equity in America has actually shrunk recently, thanks mainly to share buybacks by companies.
Elsewhere equity supply has steadily increased. Privatisation, a term coined only in the early 1980s, has given a huge boost to stockmarkets and equity ownership in Europe. The fashion for private or mutually owned firms to list on public stockmarkets, not least to raise capital more cheaply, has spread. The bear market will slow things down: global equity issuance in the first quarter of 2001 fell by 63% compared with a year earlier, to $48 billion. But it seems sure to pick up again.
Second, there has been a growing appreciation of the huge demographic challenge that faces most countries’ pension systems. The old ways of relying on state pensions and pay-as-you-go financing both look increasingly unsatisfactory. Whatever soothing noises governments may make, few prospective beneficiaries now believe that they can depend on these systems in their old age. Instead, the trend is towards greater emphasis on privately funded pensions.
Within the private pension business itself, another significant change has been taking place: a steady shift from “defined benefit” to “defined contribution” schemes. In the first (also known as “final salary”), the employer guarantees the level of the pension and assumes the risk; in the second (often called “money purchase”) the risk is shifted to the employee. Individual pension-fund investors, for instance those with 401(k) plans in America, are likely to be especially interested in equity investment. If demographic change is the biggest problem in the provision of pensions, equity has to be the biggest part of the solution.
Third, almost all investors, almost everywhere, have come to understand that, in the long run, only shares hold out the promise of sufficiently large returns to pay for people’s pensions. Over the past two decades the notion that there are better returns to be had from equities, with less risk, than from almost any other financial asset has become entrenched in investors’ minds—perhaps too much so, as they became used in that period to above-average annual returns in double figures. The result has been a proliferation of equity investing, and especially of equity mutual funds, first in America and Britain, but more recently even in such previously unpromising countries as Germany and France.
Today’s bear market, if it endures, will certainly test the enthusiasm for this new-found equity culture. Indeed, one apparently perverse reason for welcoming the arrival of a bear market is that it will remind investors of the main reason why equities have offered better returns: because they are riskier. As the hackneyed phrase from the brochures, usually in small print, has it: “Shares can go down as well as up.” If shares only ever went up, the long-run returns from investing in them would inevitably fall to match their lower risk.
It is because of the riskiness of equities that, over time, they outperform other investments, as repeated studies over many decades, including periods of previous bear markets, have confirmed. Table 3, drawn from a long-running annual equity-gilt study undertaken by Barclays Capital, shows comparisons for America of equity, bond and cash returns for as much of the past century as there are reliable records. Equities can underperform significantly in any one year—2000, for example, was one of the worst in living memory, and 2001 could well prove worse still. But over most longer periods (barring such an exceptionally gloomy decade as the 1930s) returns have been substantially higher for equities than for either bonds or cash. Jeremy Siegel, a professor at Wharton Business School and author of “Stocks for the Long Run”, showed similar results going as far back as 1802 when he compared the returns on shares, long-term bonds, short-term bills, gold and cash.
These three structural trends pushing the process of equitisation have, however, become conflated and confused with the fourth (and perhaps biggest) factor of all, which is the two-decade-long bull market itself. In retrospect even the crash of 1987 now looks like a mere blip. It is thanks largely to the bull market that stockmarket capitalisation as a share of GDP had everywhere risen to record levels by the end of 2000. Against the background of such big share gains over such a long period, it is hardly surprising that so many new investors have been lured into the stockmarkets.
In America, for instance, nearly half of all households now own shares, either directly or through mutual funds, 401(k) plans or directly managed pension plans. In Australia, the level of share ownership is even higher. In Britain, the proportion is a little over one-quarter. Germany and France still lag, with less than a fifth of the population owning shares—but, thanks not least to privatisations, they have made tremendous strides from a far lower base. The number of shareholders in Germany now exceeds that of trade union members. Even in Japan, despite its long bear market, the stock exchange claims that around 30m individuals now own shares directly or indirectly.
The impact of equitisation stretches wider than the number of people investing in the stockmarkets. It reflects the broader triumph of capitalism in the post-cold-war era. There are few better symbols of capitalism’s success than the spread of share ownership. It is also part of a shift in favour of what is often tagged as the Anglo-American model of capitalism, in which markets, not banks (and still less governments), become the key allocators of capital.
The rise of equities is also affecting the management of companies. Now that larger numbers of investors pay closer attention to the daily movement of their companies’ share prices, bosses’ main concern has become the promotion of “shareholder value”—all the more so when their own rewards are linked, as they increasingly are, to share performance. In many companies, employees have got in on the act as well. Stock options for staff and employee share-ownership plans have proliferated everywhere, becoming particularly important in America’s technology industry.
In Europe, this has pushed company managers into paying far more attention to short-term profit and share-price performance. In America, it has also led to the fad for share buybacks by firms, which have become so popular as to shrink the net supply of publicly traded equity. Everywhere, people now pay far more attention to what is happening in the stockmarkets. One sign is the mushrooming of personal-finance journalism in many countries.
There are broader economic effects too. The spread of share ownership means that a growing proportion of people’s savings is tied to the equity markets. This creates a potentially far bigger direct “wealth effect”, with consumers adjusting their spending with an eye on the rise and fall of the stockmarkets, regardless of whether they realise their own capital gains or losses. Even more important, stockmarkets are having a growing effect on consumer confidence, and therefore on the economy itself. One of the reasons that consumer confidence fell off a cliff in America at the end of 2000 was the poor performance of the equity markets. Now a vicious cycle may be at work: falls in equity markets contribute to a slowing of the economy, which leads to further falls in the markets.
Equitisation has microeconomic effects as well. Avinash Persaud, an economist at State Street Bank, talks about the equitisation of innovation in the 1990s, by which he means that venture (or private equity) capital was freely provided to innovators, especially in the technology business, in the knowledge that there was an early and profitable exit route through an initial public offering (IPO). Mr Persaud has also shown, on the basis of information in State Street’s custodial database, that equity flows across borders account for a growing share of all capital flows, so they are helping to determine the course of exchange rates and the balance of trade.
The effects of equitisation on the world’s economies are thus huge. But the biggest question now is how a bear market will influence things. Might it encourage investors to cast around for safer havens, putting an end to the incipient equity culture? And that invites another question: what determines the value of an equity—and a stockmarket?
INVEST7168, also see this article in the May 5th article of The Economist. Although it isn't about software outsourcing per se, it provides insight into the outsourcing phenomenon:
http://www.economist.com/printedition/displayStory.cfm?Story_ID=610986&CFID=2137041&CFTOKEN=...
Back office to the world
May 3rd 2001 / BANGALORE, DELHI AND MUMBAI
From The Economist print edition
India has high hopes for its burgeoning trade in business-support services.
UNTIL a few months ago, Marc Vollenweider was a partner in the Delhi office of McKinsey, that most patrician of management consultancies. Mr Vollenweider, who is Swiss, is still in Delhi, but in a line of business that sounds almost plebeian by comparison: back-office work. He and his partner (lured from running the Delhi arm of IBM’s research centre) have set up Evalueserve, a firm that undertakes various business processes for clients in Europe and North America, offering cheaper, better and faster service than they can deliver themselves.
Mr Vollenweider and his partner, Alok Aggarwal, were seduced by an irresistible proposition. First-world companies do lots of things that are expensive and necessary, and yet peripheral to their “core competence”. The main requirement for these tasks is an intelligent English-speaking workforce—which India has in abundance, at a small fraction of rich-country wages.
So why not ship the work electronically to India, which missed out when the West sent much of its manufacturing to China and other points east? With admittedly suspicious precision, Mr Vollenweider has calculated that a typical western bank can outsource 17-24% of its cost base, reducing its cost-to-income ratio by 6-9 percentage points, and in many cases doubling its profits.
Such calculations have created a new industry in India that could, in theory, transform commerce in the developed world. The fizziest forecasts have come from Michael Dertouzos, director of MIT’s Laboratory of Computer Science. He reckons that India has some 50m English-speakers who could each earn $20,000 a year—making a total of $1 trillion, twice India’s current GDP—doing “office work proffered across space and time”.
Other predictions are more restrained, but still heady. NASSCOM, India’s main association of information-technology companies, thinks India will employ 1.1m people and earn $17 billion from what it calls IT-enabled services by 2008. A report to the Electronics and Computer Software Export Promotion Council (ESC), a government body, sees the industry’s exports to America growing from $264m in 2000 to over $4 billion in 2005 (see charts).
Yet India has been doing white-collar work for the rest of the world long enough to know that reaching targets such as these will not be easy. The new-born industry is already old enough to have tasted failure.
“Indian entrepreneurs look at riding the wave,” says Sanjay Jain, a partner in Accenture, a consultancy. Earlier waves were the power industry, telecommunications and dotcoms. “Now the latest buzzword is IT-enabled services,” he says—what this article will term teleworking.
Charismatic captives
The first riders of this particular wave have been of two types. One is “captive” operations of big western companies looking to reduce back-office costs without outsourcing. The other is more fleeting arrangements between western clients and subcontractors in India, often brokered by middlemen.
The first sort, which provide the bulk of employment in the business, have prospered. GE Capital Services opened India’s first international call centre in the mid-1990s. It now employs more than 5,000 people, whose jobs range from such relatively simple tasks as collecting money from delinquent credit-card users to such complex ones as data-mining. Swissair and British Airways have centres that run frequent-flyer programmes and the handling of errors in computer messages. American Express has a big back-office operation near Delhi.
Such companies often save 40-50% by shifting work from their home base to India. The savings may grow, because India’s telecoms costs, which are higher than in rich countries, are falling thanks to liberalisation. Shipping out more sophisticated services could also produce higher savings, because the salary gap between, say, an American or an Indian accountant is larger than that between an American high-school graduate and an Indian college graduate doing the same job.
Money is not the only attraction. No company will direct white-collar work to India for long if it does not get standards of service at least as high as those it is used to at home. Many Indian teleworking bosses claim to raise service quality. eFunds International, part of a company spun off from Deluxe, the biggest American printer of cheques, says that in Gurgaon, a suburb of Delhi, it has cut the number of errors in data processing for one client by 90%, and also cut the number of days taken to close the client’s monthly accounts from five to three. Rajeev Grover, eFunds’ head of “shared services”, says that Indian teleworkers outperform Americans in similar jobs because they treat them as serious careers, and also because they are better-educated than their American counterparts, who are often college drop-outs.
Shifting office work to India can also provide an opportunity to upgrade technology and service. Citigroup, an American financial giant, has an affiliate in Mumbai called e-Serve International, which employs 2,000 people to provide such services as the processing of documentation for letters of credit and the handling of questions over money transfers. e-Serve says that the time needed to respond to inquiries about global money transfers has been “drastically cut”. WebTek, a subsidiary of Germany’s Dresdner Bank, plans to use a shift in accounting work from London to Delhi as a chance to introduce “thin client” technology, which plucks from a computer only new data needed when a change is made, instead of always having to pick up an entire screen of data.
Insecure independents
Independent teleworking outfits have had a rockier time than captives. Too many crowded into the field too fast. One popular offering is medical transcription, in which companies convert dictation by doctors in America into written medical records. The report for ESC (conducted by Stevens International Consulting) estimates that India has 200 medical-transcription firms employing 10,000 transcribers. America sends enough work to India to employ only 6,000 of them. Bidding for business through middlemen, India’s glut of medical transcribers has driven the price of a line of transcription from 12 cents to as little as three, undermining both quality and profitability. Many firms in the business have gone bust.
A similar fate awaits some of the call centres that sprang up in the wake of GE’s success. Indian promoters hoped that, by filling a few rooms with speakers of mellifluous English, and by hooking them up to a bit of bandwidth, they could scoop up business from the American mid-west, from Ireland and from other call-centre clusters in rich countries. One entrepreneur tried to swap his sewing machines for handsets. But few bothered to set up marketing operations in their target countries, and many could not convince potential customers that they could do the job. Capacity use at Indian call centres is “abysmally low,” says Mr Jain of Accenture. He estimates that some $75m-100m of investment is idle.
There will, however, be life after the shake-out. Stevens expects the value of outsourcing in America of medical transcriptions to double by 2005 to $4 billion, outstripping capacity. India could take as much as two-thirds of that increase, providing work to 45,000 transcribers. Similarly, outsourcing of work handled by call centres (now transformed into “contact centres” that can handle e-mail, fax and other media as well) is expected to go to India. Jones Lang LaSalle, a property firm, reports that people cannot put up fast enough the buildings needed for such centres.
Into this arena is stepping a new breed of entrepreneur, flaunting international savvy, management finesse and venture-capital finance. He does not skimp on bandwidth or any other technology; and nobody can describe his premises as a data sweatshop. His employees are encouraged to ponder careers with the company, and might even own stakes in it. He aspires to the professionalism of a GE or an American Express, but aims to serve many masters. Messrs Vollenweider and Aggarwal belong to this breed. So does Sanjeev Aggarwal (no relation), who set up Daksh.com, a contact centre that now employs 500 people. Yet another is Raman Roy, who left GE Capital Services to set up Spectramind, which has a similar-sized workforce. None of these firms is much more than a year old.
Many of the charismatic captives are themselves joining the ranks of the independents. eFunds (no longer part of Deluxe) has landed a second client and is eager for more; e-Serve is scouting avidly. British Airways and Swissair are selling services outside their groups. All are eyeing the $200 billion of “business-process outsourcing” that Dun & Bradstreet, a research firm, says is farmed out by companies worldwide. They see no reason why India should not claim a big chunk of that.
Mr Roy divides the teleworking pie into five slices, in ascending order of value:
• data entry and conversion, which includes medical transcription;
• rule-set processing, in which a worker makes judgments based on rules set by the customer. He might decide, for example, whether, under an airline’s rules, a passenger is allowed an upgrade to business class;
• problem-solving, in which the teleworker has more discretion—for example, to decide if an insurance claim should be paid;
• direct customer interaction, in which the teleworker handles more elaborate transactions with the client’s customers. Collecting delinquent payments from credit-card customers is one example, sorting out computer snags is another;
• expert “knowledge services”, which require specialists (with the help of a database). For example, a teleworker may predict how credit-card users’ behaviour will change if their credit rating improves.
Mr Roy’s taxonomy, broad as it is, could be extended to just about any service that is deliverable over fibre-optic wire. Indian animators are putting virtual flesh on the skeleton ideas of American film makers. Indian lawyers are doing research for British and American firms. Indian engineers are designing construction projects and testing car parts for foreign clients. At the most rarefied end of the spectrum, Indian scientists are conducting basic research and development for western firms. In some cases, the availability of low-cost, high-quality expertise in India could transform the economics of the industries that they serve.
Most of the new entrepreneurs are aiming for the higher rungs of the value ladder, where competition is scarcer, returns are generous, and new technology does not threaten to make them redundant. Technologies that enable computers to interpret voice and handwriting, for instance, could eliminate the simplest “data capture” jobs, such as converting handwritten documents into electronic form. To avoid being swamped by copycats, Mr Vollenweider says he is erecting “as many barriers to entry as I can”—one of which is not to say much about what exactly he plans to sell.
The sales pitch is similar to that of India’s software houses, which have built an $8 billion business on the quality and price of Indian programming talent. There are differences, though, which work both for and against Indian teleworking. One is that, unlike software, where the shortage of manpower has long been acute (at least until the technology recession took hold), teleworking has ample scope to increase output, even at the top end. India “churns out vast numbers of PhDs,” says Mr Roy.
Another is that recession is less likely to hurt teleworkers, and may even help them. Cuts in IT investment by customers are leaving Indian software programmers idle. But teleworking firms are offering to reduce the cost of back-office processes that are indispensable. Thus, while the notoriously profitless Amazon.com has cut customer-service jobs in Seattle, it has added positions in Gurgaon through Daksh.com.
Why, then, are teleworkers collecting merely millions, rather than the billions that their cousins in software make? People in the business say it is easy to persuade chief executives of the virtues of doing white-collar work in India, but rather harder to convert those who must actually execute the change—“the people whose world you’re going to shrink,” as Mr Roy calls them. They find any number of excuses to resist, especially if the prospective contractor is independent rather than captive.
Dead lines
Excuses are not hard to find. India has a reputation, partly deserved, as a place where nothing works: the power cuts out and the telephone lines crackle and die. The services provided by the teleworkers are as exotic to most Indians as lychees are to most Americans: few Indians have chequebooks, let alone the 12,000 variations available to Deluxe’s customers. Credit cards are even rarer.
Then there is confidentiality, a particularly big issue in health-related services. It is hard enough to keep up privacy standards at home; to trust strangers thousands of miles away seems to many foolhardy. The issue is not merely theoretical. Some American medical-transcription firms refuse to outsource work to India on grounds of privacy, despite potential savings of up to 50%.
To overcome the problem, the new breed of teleworkers invest a lot in reassurance. The office of Spectramind in Delhi, for example, is as slick as anything in Silicon Valley. Two generators back up the municipal power supply, and another generator backs up those two. If one telecom line breaks down, others take over. Sound-absorbent ceiling tiles are imported from America, and the name tags of Spectramind’s workers report their blood types, in case anybody needs an on-the-job transfusion.
In the quest for seamless connections with their clients, call centres often give their staff American pseudonyms and train them to speak like Americans, a practice that has become something of a national joke (and a badge of shame, in the eyes of some commentators). The workers at Daksh, a Sanskrit word that the company translates as “utter preparedness to act immediately with supreme urgency”, sometimes, refreshingly, use their real names in handling inquiries from customers of their clients.
The new teleworkers increasingly try to absorb the specific corporate culture of their clients. Sanjeev Aggarwal, Daksh’s chief executive, talks not of outsourcing but of “co-sourcing”. When Daksh signs up a client it sends over a ten-man team to learn its procedures and study its culture. On its return, the team becomes the client’s “ambassador for driving the entire work ethic.” For example, one person at Daksh “almost reports” to Bill Price, Amazon’s vice-president of customer service, says Mr Aggarwal. Mr Price agrees. Daksh’s Gurgaon centre, he says, “is virtually part of our operation”.
Fulfilling Amazon-style promises to customers is not second nature for workers who have probably never shopped online for anything in their lives. Firms in the business, therefore, train all the time. At Daksh, training is not part of the “human-resources” function but a department in its own right.
India is such a tough place to operate in, the new firms argue, that only a local outfit can deal with the hassles. But many are still poor at attracting foreign clients. Some are simply not trying hard enough: they have built up impressive operations at home, but they have so far neglected to establish strong marketing arms in the countries in which their main prospective customers are to be found. Former captives such as e-Serve and eFunds have an edge over the local start-ups. Their international networks are denser and their pockets deeper, a comfort to clients looking for long-term relationships.
Whatever the fate of the individual enterprises chasing it, the pot of gold is too alluring to be ignored. Consider two examples from outside mainstream “business-process outsourcing”. Crest Communications, a Mumbai-based company, spent four years and a couple of million dollars training special-effects artists and building a 40-seat computer graphics studio for them. To exploit this fully required further investment: the acquisition eight months ago of an independent Hollywood producer called Rich Animation, which has produced films such as “Swan Princess”.
Rich/Crest’s next feature will be written and dubbed in Los Angeles, but Crest’s animators will do most of the rest, creating the look of the film from the sketches that Rich sends over. Crest promises savings big enough to change the economics of film making. “Mad” Max Madhavan, head of international business, claims that Crest can produce a film like “Toy Story 2” for little more than half its American cost.
The acme of teleworking occupies a spanking new building in a technology park near Bangalore—the John F. Welch Technology Centre, which is to double GE’s research and development capacity within three years. (GE, incidentally, now employs more people in India than in America.) Less than two years after opening its doors, the centre employs 600 people, nearly a third of them with PhDs. GE plans to double that number by October. “The pipeline of advanced scientists is unlimited,” says the facility’s director, Jean Heuschen.
The abundance is such that GE can deploy 60 scientists on its plastics business alone. They are available at a cost that makes some projects that would have failed the profitability test more viable. “Now you have finance people who like R&D,” says Mr Heuschen, with glee and wonder. “All of a sudden they say, give me more.”
With accolades like this, white-collar work may shift to India even faster than some forecasters expect. Consider exlService, a teleworking outfit started in 1999 by Gary Wendt, ex-head of GE Capital. Mr Wendt later became boss of Conseco, a financial group in Indiana, and soon persuaded it to buy his Indian firm for $53m. Exl is now doing a roaring business: Conseco plans to shift 2,000 jobs from Indiana to India, saving over $30m a year. In America these jobs suffered from high turnover and quality problems over customer service. If moving to Exl solves these problems, as well as saving money, other American companies seem sure to join the stampede that is turning India into the world’s back office.
Your inability to discern the information printed in black-and-white in the filing is achieving legend status. Keep working at it, and you'll be infamous. By the way, you are twisting my words, Gollum. I stated quite clearly that the Q syas the $1.5 million loss resulted from a change in business model in Quantum Distribution.