Ravi, in Conversation

A small organization has many advantages that a large organization can hardly duplicate. One of them is the proximity between different stakeholders of the organization that fosters synergetic teamwork and an open-minded culture. As much as we enjoy the fruits of this benefit, we often overlook the lurking menace in the form of personal bias. Decisions in a small group often tend to be filtered based on personal judgment rather than what works best. When bias creeps into a small organization, the decision-makers award all the opportunities that arise in that organization to the same set of people, effectively letting them carry home the rewards and, at the same time, further enhancing their prominence among peers.

Some people combine the positive bias that supports them with their personal relationships to take up more opportunities than they can possibly handle. We cannot deny that there are a smaller percentage of people who are in the limelight because of their talent, even though they do not specifically nurture that idea. In smaller firms, the two groups of people mentioned above end up getting more responsibilities than they ever asked for. News spreads fast in a small organization and capable people who do not fall into either of the above groups feel under-utilized and unmotivated. Though we need to give a fair amount of weightage to personal judgment, we can easily see that determining just based on bias can be detrimental to a small organization. For instance, even though Person A and Person B have similar skills to perform a certain Task A, Person A gets selected if Person A had been selected to a analogous role earlier or if the selector has heard about Person A doing well in another unrelated and different Task B within the same organization. But as we can find out, this selection strategy is not always the best. In the first case, it is possible that Person B did not get an opportunity to demonstrate his or her prowess through prior experience though equally capable. In the second case, Person B might have more skill in that specific area of responsibility compared to Person A, even though the decision-making is clouded by Person A’s performance in Task B. But since the decision-makers have already made up their minds, Person B cannot do much to change their verdict. I suggest two alternatives to remove bias and create an environment that prevents some people becoming “more equal” than the others utilizing a favorable bias: distribution of opportunity and process-orientation.

Distribution of opportunity by making sure that one person does not get involved in too many activities at the cost of others who are equally interested or skilled is one way to solve this issue. A pertinent question at this point is the capability of Person B to perform. Assuming that small organizations are usually highly selective, we can imagine that each person is an iceberg, and that 80% of the responsibilities would not require more than 10% of their skills. Even otherwise it is usually the right opportunity that creates leaders, not higher skill, as we can learn from the biographies of world leaders. As we mentioned above, the takers of the first few opportunities usually stand to gain a positive bias for every future opportunity that may arise. By making sure that these first-movers stay away from grabbing every other opportunity, we may find potential talents who may outshine the first-movers. This actually works to the benefit of small organizations who cannot rely on a few people who take all the work and make (Hidden here is some suggestion for a person who joins a small firm and wants to make it big: Grab those first few opportunities – you’ll be there to stay!)

Process-orientation is another approach to solve the bias problem. Process-oriented firms are usually the big organizations – and they implement processes for completely different reasons. Big organizations want to make sure that their size does not constrain them to end up becoming the biblical Towers of Babel. By implementing strictly enforced processes for even minor activities, the big organization tries to make sure that each of its departments work towards the same objectives with complete transparency without a need to employ too many people to manage the show. Also, they can make sure that the work is done in the same manner even when the responsible people move or quit. In other words, big organizations avoid silos through process-orientation. The automation brought in by an efficient process is effective to a small organization where every decision-maker and even every individual acts as a silo, and is prone to personal bias. We need to notice that we often find the small organization to be lacking in efficient processes, mostly because the inputs and the feedback channels to a process have minimal contribution. Small organizations are often reluctant to adopt defined processes and treat them as a burden rather than as a necessary value-add. When we probe deeper, we can find that the culprit is usually the same – it’s personal bias that makes the implementation of processes complicated in a small organization!

Though the finance sector has seen an erosion of jobs, I believe that this is short-term, and just one of the side-effects of being greedy and not focusing on the bigger picture – going too thin to get too deep, whether it is into progress or into calamity. In other words, my premise is that we are limiting a lot of our energy and effort into a subset of economics, viz. finance, without considering the macro-economic implications and micro-economic fundamentals that lie embedded in the time value of money.

The debate between the behavioral economists and the quantitative economists has been widening as new events unfold, and we find ourselves scampering around for all-encompassing explanations and accurate predictions of the future. We still lack an understanding of what we have ourselves created in the likes of asset-backed securities and credit default swaps, their implications, and why we failed to predict what was coming. We do not know what a drop in the interest rates mean, or where the 700-billion dollar bailout package is going to end up. This, I would argue, implies that an influx of fresh talent into finance is increasingly necessary. We can smell opportunities for budding finance professionals who have the credentials to take a long-distance satellite snapshot in order to drill deeper, by effectively integrating other fields of management, literature, history, psychology, biology and technology into our financial thought processes – which essentially means that our future finance practitioners need to come from all other areas of art and science. It is also necessary that these minds are given ample freedom to break-out of routine models to build integrative approaches that can stand the tests of time.

The BRIC economies are all the more in need of such talent that has survived and understood turmoils such as the one we currently face, since these nations would want to progress without struggling at the same stumbling blocks as the present-day US economy does. For instance, in a sector like energy, we can expect huge infrastructure investments in India and China in the days to come (remember the Indo-US nuclear deal, and GE's investment) and we need financial talent to channelize and manage these investments on the basis of interdisciplinary knowledge rather than complicated spreadsheets.

I am not sure whether we will find jobs in such interdisciplinary areas in the near future, but this is certainly going to be the long term trend. So, the best thing for finance professionals to do today is to read, think, understand and prepare oneself for the future. I would suggest to everybody, myself included, to accept jobs that can take us a step nearer to where we want to be, rather than stressing ourselves out because we didn’t get what we set out to achieve.

The same way as a language will survive as long as (wo)men want to communicate, finance will remain as long as (wo)men want to transact.

It is becoming increasingly clear that India is no longer shielded from the global credit squeeze as it once used to be. The effects of the collapse in the financial industry in U.S. and Europe are evident in the heavily U.S. dependent Information Technology sector that has started lay-offs, as well as the Real Estate Industry which is facing dropping property rates. Both I.T. and non-I.T. companies in India are already facing a liquidity crunch as international investors are pulling their money out and banks are becoming more cautious with their lending. Traditional low leverage financial management methods and operational efficiencies are going to be the strongholds for India Inc. to survive this economic turmoil. Unless the recession extends beyond a year, much of this crisis does not seem to trickle down to India’s common man unlike in the West, mostly due to cultural differences due to which people save for a rainy day coupled with the effects of internal consumer demand.

IT and Real Estate

I had heard that Real Estate prices in India, especially in Bangalore, were undergoing huge correction as early as April or May 2008[1]. I believe this correction is going to continue in most other cities as well, because the property valuations have been sky-high until now, triggered by the booming I.T. sector and property purchases by cash-rich NRIs. On the lending side, Indian banks continue to be commendably conservative, and do not carry any “sub-prime”[2] mortgages in their assets like their U.S. counterparts. Indian loans are mostly fixed rate[3] mortgages and the family-backed and savings-oriented culture of the Indian population, combined with the shame of going bankrupt will come to the rescue of I.T. people facing job-loss. Therefore, loan delinquencies will not be too high, and the markets will not turn as sour for the common man as it is happening in the U.S. But definitely the real-estate brokers and land-owners are going to be hit hard[4] - in fact deservingly, because they were until now making too much money way too effortlessly.

The effect on the Indian I.T. industry is two-fold. I.T. companies will lose a string of projects, because the clients themselves are not going to sustain their business. Companies like TCS[5] and Infosys that have a bigger BFSI and retail component[6] will have a higher impact. This said, I.T. companies recognize that there is light at the end of the tunnel. They are sure use this opportunity to prune their workforce by laying-off non-performers, and correct salaries, in a job market which had been highly inflated until a year ago.

In tough times, like for individuals, cash is king for I.T. companies (even for any other company, since credit is soon going to be tight even in India). I.T. companies in India have been traditionally effective in managing their cash, and will be able to survive with what they have for the next year or so. As U.S. and European banks consolidate and re-configure their operations, opportunity knocks in two ways – projects to integrate I.T systems of merged entities, and further out-sourcing of non-core financial analysis activities. Companies like TCS are already active in the latter. With the acquisition of Citi’s BPO division in India[7], TCS is trying to cash-in on the opportunity to bring a larger part of the banking pie offshore[8]. HCL’s acquisition of U.K.-based Axon Group[9] beating Infosys is an effort to provide more value-adding end-to-end services. Acquisitions will trigger growth as long as companies do not compromise their cash position.

All the small I.T. start-ups mushroomed by the thriving industry which are not in a position to offer end-to-end services will eventually get washed away or taken-over as they face a dwindling client-line and worser cash-position. Of course, the super-specialized ones that have a solid value proposition on offer have a chance to survive. The last thing I would want to see in such a scenario is some big company panicking and removing talented people, which will in turn affect all the other players and spiral into a much larger crisis. But I believe that NASSCOM, CII, FICCI and other industry associations are strong and experienced enough to proactively prevent such a situation.

Therefore, not everything is bad for I.T. companies in India. India still maintains a huge though comparative advantage over other countries. This advantage will eventually erode as cheaper economies adopt similar game-plans, but such an effect seems to be a long way away. A recession can even be good for Indian IT[10] because companies suddenly find that land costs are back to normal and talent is getting cheaper helping them bring in more outsourcing investment to the country. Indian I.T. companies have grown large enough to establish themselves outside India as well – going where the money is. Moreover, as long as the dollar remains stronger against the Rupee, the I.T. exporters are better off, and have enough clout that the government will not do much to help the other importing companies for whom stronger dollar brings bad news.

Causes for the crisis and overall effects on India

At the core of the U.S. crisis, is the lack of regulation in two key areas, one, the derivatives market (which led to soaring oil prices, which are back to normal now due to slackening demand) and two, the investment banking area (which led to crazy subprime mortgages and securitization).

Second is the huge dependence of U.S. companies as well as individuals on credit, whereas Indian companies traditionally keep cash in their balance sheets. The bailout package will temporarily ease credit for a few months, but as many economists predict, might not be enough to completely reverse the effects of a recession. In fact most of the effects of the infusion of taxpayers money into the financial system are yet to be seen, and may be beyond prediction since it depends a lot of human behavior in times of crises.

Third but not the least, is the mishandling of the economy by a frightened U.S. government, reducing interest rates and prolonging the effects of recession rather than waiting for the system to cure itself. Allowing Lehman to fall has already shown up a strategic mistake since it triggered a lot of panic among investors, spreading the crisis to Europe and resulting in WaMu’s and Wachovia’s sell-off at a fire sale prices.

The derivatives markets in India are relatively undeveloped, and investment banking activity is limited and regulated. Indian interest rates are still high, and Indian companies are not credit dependent, and do not have a huge investment in the US markets. The only predictable effects on India will be due to the slackening I.T. sector, reduced international trade opportunities and withdrawal of funds by FIIs. As long as Indian consumers keep their jobs and keep spending and infrastructure needs keep growing, India will still keep a healthy 6 - 7 % growth (not as high as last years' 9% or the predicted 8%)[11].

Nevertheless, India should look at this crisis as an opportunity to learn from what went wrong in aggressively capitalist Western economies and proactively implement regulations to avert such a crisis in the future.

Aravind Eye Hospitals (AEH) and Narayana Hrudayalaya (NH) are two pioneering India-based social enterprises providing healthcare to the rural poor. Let us attempt to study their individual models and compare and contrast them emphasizing their long-term sustainability and scope for expansion.

Aravind Eye Hospitals and Dr. V

Social Issue. 45 million people around the world lack eyesight while another 180 million have impaired vision. The annual global economic burden of blindness is around 25 billion USD. Almost 90 percent of the blind live in developing countries, and India, with around 15 million blind people and 52 million visually impaired[1] people, has the largest burden. 75 percent of the blindness in Asia and in India is due to cataract and is mostly curable. More than 80 percent of cataract is age-related[2]. 70 percent of India's one billion people reside in rural areas and over 70 percent of the people live below the $100 (Rs. 2,500) per capita per annum poverty line. However, 80 percent percent of the ten thousand ophthalmic surgeons live in the cities[3]. This presents a clear gap of supply and demand in terms of the quantity as well as the price.

Organization. In 1976, upon retirement from his medical career, Dr. Govindappa Venkataswamy (favouritely called Dr. V) started the Govel Trust under which he founded the Aravind Eye Hospital with a modest 20-bed facility in Madurai, Tamil Nadu³. Today, with a 3500-plus-bed multi-hospital system, it is one of the largest and most productive eye care facilities in the world[4]. It treats over 1.4 million patients each year, two-thirds of them for free and performs over two hundred thousand sight-restoring surgeries each year. With less than 1 percent of the country's ophthalmic manpower, Aravind performs about 5 percent of all cataract surgeries in India.

Aravind takes its services to the rural poor with its unique outreach services conducted with community participation. Aravind’s facility includes an international resource and training centre and has developed a cost-effective method to develop mid-level ophthalmic personnel. The hospital has also contributed to transforming hundreds of eye care programs in developing countries by partnering with over a thousand community organizations and international NGOs. The hospital also has several specialty clinics and comprehensive support facilities, and also a lab producing low-cost ($7) intraocular lenses and other ophthalmic supplies to make eye care affordable.

The model. Aravind has pioneered a model that follows the principle that large volume, high quality services result in sustainability and lower costs. The revenue generated from the "paying" patients fully offsets the cost of caring for the poorer two-thirds of the total number of patients with the same quality of care received by both segments. Aravind effectively markets itself by organizing camps to attract patients in rural India. The hospital even takes up the responsibility to pick up diagnosed patients from rural areas and to send the patients back to their homes when the surgery is completed. HBR mentions that an average ophthalmologist in India performs about 200 cataract surgeries a year, while "an Aravind doctor performs about 1,500 - an efficiency multiple of 7.5." The technology used at Aravind is cutting-edge. The effective management makes sure that the operations are streamlined and effective.

Narayana Hrudayalaya and Dr. Devi Shetty

Social Issue. Cardiovascular disease is the world's leading killer, accounting for 16.7 million or 29.2 per cent of total global deaths in 2003[5]. In India alone, around 2.4 million people need heart surgery annually, but due to the high cost of treatment, only 60,000 surgeries are performed. The average age for heart attacks in the West is 65 years, whereas in India, it is 45, making a significant impact on the workforce[6]. World Health Organization (WHO) estimates that by 2010, 60 percent of the world’s cardiac patients will be in India and by 2015, half of all deaths in India will probably be due to coronary artery disease[7]. Around 224,000 newborns in India are affected by congenital heart disease annually. Given that less than 14 percent of the population is supported by health insurance and that the ratio of physicians per 1,000 people is just 0.5 in India compared to 2.7 in the USA, the treatment options are limited.

Organization. In the year 2001, Dr Shetty started a heart specialty hospital called Narayana Hrudayalaya (NH: meaning ‘God’s Compassionate Home’) in Bangalore, Karnataka[8]. The hospital now has more than 500 beds, 10 operating theatres and two cardiac catheterization units. NH performs around 24 open heart surgeries and 25 catheterization procedures a day which is eight times the average at other Indian hospitals. Under normal circumstances a person recommended for surgery needs less than 10 days of wait time for the surgery. Almost half of the patients are children and babies and NH provides 60 percent of the treatments below cost or free of charge. With the help of Indian Space Research Organization (ISRO), NH has developed a telemedicine program to provide cardiac care for the rural poor through nine cardiac care units (CCUs) across India, linked to NH. This also lets the general practitioners access the expertise available at NH. The state of Karnataka has planned to sponsor 29 additional CCUs in the next few years. In addition to training doctors, the staff of NH has trained over 700 nurses. The hospital offers India’s only formal training program for pediatric cardiac surgery, reflecting the expertise of NH in pediatric care.

Since 2002, NH also operates an insurance scheme called “Yeshasvini” for the 2 million farmers in the state of Karnataka. Subscribing farmers will pay Rs. 5 (12 cents) a month and will have access to free treatment at 150 hospitals in 29 districts in the state for medical procedures costing up to Rs. 100,000 ($ 2500). Less than ten percent of the cardholders would require medical procedures; therefore, the total funds collected will cover the cost of the treatment for those in need. The premium amount is collected annually to reduce administrative costs.

The model. NH operates based on the belief that hospitals can make profit by offering inexpensive quality treatment if “physicians are devoted, new technologies are used, and insurance packages are designed to serve the poor[9].” Dr Shetty calls his strategy “Walmartization of healthcare.” NH provides low cost high quality treatment implementing several cost saving methods, increasing the volume of patients served, using assembly-line processing of surgeries and accepting donations. The exceptional reputation of the staff at NH brings in a large number of wealthy patients as well, who make up for the cost of treating the poor. In 2004, the proportion of patients who paid NH’s full price to those that could not afford to pay was about 60:40[10]. NH also organizes outreach camps for cardiac diagnosis and care.

Comparison and Contrast

Both Aravind and NH tried to make a difference in a situation where there was a social need but neither the government nor the market forces were able to step in. Both organizations have applied the best of management tools and economic models to aid the efficient delivery of service. In essence, these organizations represent living examples of what C K Prahalad talks about in the book “Fortune at the Bottom of the Pyramid.” Both the organizations started from the passion of highly skilled individuals with revolutionary ideas and social service intent. Though both NH and Aravind accept donations, both of them are self-sustaining and work independent of donor motivations. Both the organizations have overcome the inefficiencies that afflict non-profits by not limiting themselves to the rural poor. NH and Aravind possess the latest technological advancements in their respective fields.

Aravind has different hospitals for the free and the paying patients. Anybody can choose to go to the free hospital, which will provide the same quality of medical support as the paid hospital but not necessarily the same facilities. In contrast, NH has the same facility for all patients though it does provide luxury facilities for the wealthy. NH, working in a more complicated domain like heart-care that needs costlier amenities than eye-care, was not only able to replicate the model but also become profitable within a shorter period of time. Moreover, by combining insurance into his ambit and directly reaching the rural population through the telemedicine facility, Dr. Shetty is taking NH one step ahead.

Sustainability and scope for expansion

The organizations possess proven strategies and are mature enough to pursue expansion. The organizations are no longer dependent on their visionary founders and will be able to sustain themselves in the long term. But we notice that these organizations have not spread their operations across the country. Acquiring talent willing to sacrifice a part of their earnings for a social cause is obviously a hurdle. They have to spend a part of what they earn from the paying customers to serve the poor and that imposes capital constraints. Finding money for expansion is not an easy task. Aravind was pursuing options for expansion akin to what the McDonalds and the Pepsis do in private enterprise domain by franchising their brand. Though highly debatable and risky there, could be options which can make this idea work.

The mix of paying and nonpaying patients is critical to sustain the objective of reaching the poorest of the poor. This mission requires careful planning, internal financial controls and operational efficiency. In order to make sure that the wealthy people continue to prefer to obtain treatment from these social enterprises rather than choosing other competing private enterprises, NH and Aravind have to ensure that their reputation and goodwill does not get tarnished in any manner. High emphasis on quality and technological innovation are some of the few means to maintain the reputation. Capacity utilization and productivity are important to drive the costs down in order to be affordable to the poor. Reaching the masses and convincing them of the safety and efficacy of treatment is a gargantuan task. It needs the involvement of community service professionals and the media. Both these organizations get sufficient media coverage by performing complicated surgeries and developing innovative programs for social outreach.

Blindness and heart-ailments, though entirely different in their effects, have one factor in common – the poorer sections of people choose to live with these diseases even after being diagnosed for surgery, instead of getting them treated. This is usually due to the potential economic burden the treatment costs would put on them and their families, and also partially due to the fear of the consequences of undergoing a surgery. Their heightened suffering and the incapability to work for a living nudges these families into even greater distress and poverty. Social enterprises like NH and Aravind help such people by spreading awareness and treating them for free. In effect they help to eradicate poverty by removing the uncertainties and unemployment caused due to such debilitating diseases.

Aravind and NH have a lot in common and are organizations that should essentially work together. There are many more areas of healthcare and many more regions of the world where the same model can be replicated with little adjustments. By joining forces, for instance, Aravind could gain from the telemedicine facilities set-up by NH. This provides NH an opportunity to expand their services to markets in regions where Aravind operates and vice versa, allowing patients to get better facilities without having to travel in search of medical aid. Also, the two organizations could strive for an insurance scheme that covers the rural poor for expenses around $5000 for the same premium of 12 cents utilizing the larger population base.

References and Further Reading

We are prone to imagine that cultivating vegetables, given a choice between, say, tomatoes and corn, would not make sense, since tomatoes are less useful than crops like soy and corn. Corn recently has had a surge in demand due to its utility ranging from High Fructose Corn Syrup (Coke and Pepsi, you got it right!) to renewable ethanol fuel. This is what Wikipedia has to say about HFCS:

High-fructose corn syrup, derived from corn, is more economical since the American and Canadian prices of sugar is artificially far higher than the global price of sugar and the price of #2 corn is artificially low due to both government subsidies and dumping on the market as farmers produce more corn annually. The food industry turned to HFCS as a substitute, with both Coca-Cola and Pepsi switching to HFCS in 1984.

Do you know that some crops are subsidized in the U.S., like corn, soy (which again gives you oil and even milk - now with all the enzymes, since you can't be sure of the quality of cowmilk, people seem to be switching to soymilk!), cotton (all your clothes - fashion has overturned the hierarchy of needs), wheat (all that bread), and rice (that most common cereal after wheat), while other vegetables are not?

Well, who cares about vegetables anyway, when we have all those chickens and cows? Wrong; when did we imagine we can survive just on meat! Well, don't we need to subsidize some of these crops, so that farmers "become intelligent" and start to produce more of them? Wrong; when did we imagine that farmers don't know their markets?

Here is an op-ed article in NYT by a Midwest-based farmer which talks about the lack of freedom that farmers face when they try to meet the demand for fresh fruits and vegetables. This gives us some insight into how government policies can unnecessarily skew the food habits of a population. Another good read would be this article in the Feb 2008 issue of USDA AmberWaves. The graph below is from that source: