Executive Summay: A speculative look at innovation in sourcing strategies driven by Cloud Computing, based on pricing complexity and on third party players and standards helping develop seamless integration across vendors.
Would the adoption of cloud computing across industries lead to innovation in sourcing strategies? Would it lead to innovation in how the sourcing strategies are implemented?
Tried and tested single, dual or multiple vendor approaches exist, along with bidding mechanisms. If we are to speculate on potential for innovation, below are some possibilities. These are driven by the increasing complexity seen in the pricing of sourcing contracts- the elements of which sometimes resemble derivatives transactions.
1. Does the future hold structured arrangments where cloud computing locations (think: risk management/ disaster recovery/ pricing & capacity management) are transparently bundled into dynamic pricing of services? E.g. Dynamic energy trades/ demand management in the enery sector?
2. Does the future hold structured arrangements where multiple vendors could transparently bundle their services in a dynamic pricing model? E.g. Advertisers bidding on Google search response positions.
As you can see, this speculation rests not only on pricing going "derivative", but also on the emergence of a "glue" that holds all this complexity together and packages it for translation into everyday use.
Getting an answer to this can be broken down into the following steps:
1. Current state of the art in, and future trends in the industry:
- Are the players specializing? How?
- Which tiers of the computing infrastructure are being moved to the cloud and how?
- How are different sectors engaging with cloud computing and its vendors? E.g. Data privacy concerns in healthcare and financial services. We have covered some thoughts that impact this here:
http://randomjunkyramblings.blogspot.com/2009/08/privacy-and-social-media.html
The current state analysis process may be similar to the one we previewed for the consumer electronics industry here:
http://randomjunkyramblings.blogspot.com/2010/01/consumer-electronics-show-ces-2010-ce.html
2. Alliances:
- Is there a potential for alliances between players in the sector? Or would any partnership within the sector be a step toward mergers and acquistions?
- Is there a potential for vertical alliances? E.g. Cloud computing providers and Google Analytics?
3. Development of Third Party Standards for Cloud Computing:
- These would range from metrics to methodologies across quality of services, monitoring and executive reporting.
What do you think?
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Tuesday, March 23, 2010
Stock Repurchase Trends and Forecasts
Executive Summary: Companies as diverse as Pepsi and Intuit have stock buy back programs. Below is an effort to structure an analysis of this corporate finance mechanism, and provide a filter for someone frequently coming across news on this mechanism.
Are there explicit stock repurchase trends in the equities markets?
Can these trends be categorized by sector, geography, excutive compensation structure, company capital structure, dividend policy, need to maintain EPS and EPS guidance, competitive nature of the industry, ranking in the industry, maturity of the player or the industry, or specific macro-economic forces (say a recession) at play?
Or, are these trends and forecasts driven by the specific circumstances of a particular company, and that there is a "natural" limit to a successful, organic reinvestment of cash flows back into the company's operations? If there exists such a "natural" limit, would the company's hurdle rate be the single most important factor in decision making?
What do you think?
Are there explicit stock repurchase trends in the equities markets?
Can these trends be categorized by sector, geography, excutive compensation structure, company capital structure, dividend policy, need to maintain EPS and EPS guidance, competitive nature of the industry, ranking in the industry, maturity of the player or the industry, or specific macro-economic forces (say a recession) at play?
Or, are these trends and forecasts driven by the specific circumstances of a particular company, and that there is a "natural" limit to a successful, organic reinvestment of cash flows back into the company's operations? If there exists such a "natural" limit, would the company's hurdle rate be the single most important factor in decision making?
What do you think?
Parallels to Regulating the Financial Sector
Executive Summary: The financial services industry and regulators are in rare agreement over the need for some sort of reform. The broad spectrum of views on the issue suggests a need for some fundamental questions that highlight the key decision making elements of the process. Here are some questions that may position you to quick get to the crux of the matter.
A friend* who owns and runs a company in the chemicals industry asked, "If the state is responsible for everything, and pays for everything, why have any liability (on the private players) at all?" As a responsible businessman, he was reacting to a news article that in case of problems, a power plant operator's liability would be capped at 5 to 10% of the total cost of building the plant. The sector? Nuclear power.
The financial services sector and its regulators are apparently in rare agreement that some change must be effected in the sector. The questions I raised in the exchange over the nuclear power sector may be applied to the financial services sector. This is to serve as a parallel to help think through the direction of regulatory reform.
The key to the questions is based on:
1. Market structure
2. Managing liability
Fundamental Questions
Here are some fundamental questions that may help us get a better grip on the discussion.
1. Liability:
- Why do we need the concept of a corporation and the limited liability corporation, for private industry to successfully exist?
- Why do we need the concept of bankruptcy and the potential of a corporation emerging from it?
- Why do countries support the concept of LLCs, and why do more "efficient" (???) economies have "good" bankruptcy laws and implementations?
- Does liability, actual or nominal, ever disappear? Or does it just sit hidden (liability arising out of the risk of a catastrophic event), or rest in plain view (estimated liability after the catastrophic event has occured), till some action is taken?
2. Comparables:
- Does a generator of hydro electric power, who has built a dam, get some sort of liability support?
- If yes, is there a particular reason for either denying or augmenting liability support for the nuclear power sector?
3. The Need for Private Players in the Industry:
- Why do we need private players in the sector? Why can't the government go it alone? Is there a need for more capital, technology, management expertise, or innovation?
4. Regulation:
- How does regulation create the right sort of safeguards and incentives?
- Can the regulation be effectively implemented/ enforced?
More on Liability
An example from the brick and mortar world:
If a building falls a few years after construction (now, we could use the example of crane accidents which have happened in New York), the supplier of building materials/ builder/ building management/ city may get sued/ face civil or criminal action/ etc. Perhaps the high cost of paying out the liability may cause one of the players to go bankrupt. Lets deconstruct this scenario:
1. Was the supplier of building materials working in an environment where faulty components were expected to be weeded out by other players in the value chain, and were not supposed to make the building collapse? In that case, was the liability shared by the "integrated" supplier, construction company and the checks and balances system?
2. Was the liability so huge that, despite it being correctly apportioned to all stakeholders, it remained so large that even after liquidating, the private players involved couldn't make a dent in the liability? In that case, what's the point of apportioning liability?
3. Is it possible to limit the effects of a collapse of a market to within the market? E.g. Does the market have enough players to replace the bankrupt company?
4. Would the collapse of the company cause the market to collapse? Would the collapse of the market be acceptable?
5. Is this a market where "failure" means only two options- all players come together to fix the problem, or someone is prosecuted for negligence, while the rest try to fix the problem?
An Example of a "Negotiated" Allocation of Liability
Lets return to the financial services industry, and look at how Iceland is handling the liabilities arising out of the collapse of its financial services industry:
http://online.wsj.com/article/SB10001424052748703391004575106452707894556.html
What do you think?
Update: Nikhil shared a wonderful article that showed that folks in the 1950s in the US had thought about these deep philosophical questions while creating an industry in the Nuclear Power sector. It's just fantastic to know that. Now, the same assumptions may not apply in a different context, but it is still fantastic to get an insight into "market engineering".
* Thanks Nikhil.
A friend* who owns and runs a company in the chemicals industry asked, "If the state is responsible for everything, and pays for everything, why have any liability (on the private players) at all?" As a responsible businessman, he was reacting to a news article that in case of problems, a power plant operator's liability would be capped at 5 to 10% of the total cost of building the plant. The sector? Nuclear power.
The financial services sector and its regulators are apparently in rare agreement that some change must be effected in the sector. The questions I raised in the exchange over the nuclear power sector may be applied to the financial services sector. This is to serve as a parallel to help think through the direction of regulatory reform.
The key to the questions is based on:
1. Market structure
2. Managing liability
Fundamental Questions
Here are some fundamental questions that may help us get a better grip on the discussion.
1. Liability:
- Why do we need the concept of a corporation and the limited liability corporation, for private industry to successfully exist?
- Why do we need the concept of bankruptcy and the potential of a corporation emerging from it?
- Why do countries support the concept of LLCs, and why do more "efficient" (???) economies have "good" bankruptcy laws and implementations?
- Does liability, actual or nominal, ever disappear? Or does it just sit hidden (liability arising out of the risk of a catastrophic event), or rest in plain view (estimated liability after the catastrophic event has occured), till some action is taken?
2. Comparables:
- Does a generator of hydro electric power, who has built a dam, get some sort of liability support?
- If yes, is there a particular reason for either denying or augmenting liability support for the nuclear power sector?
3. The Need for Private Players in the Industry:
- Why do we need private players in the sector? Why can't the government go it alone? Is there a need for more capital, technology, management expertise, or innovation?
4. Regulation:
- How does regulation create the right sort of safeguards and incentives?
- Can the regulation be effectively implemented/ enforced?
More on Liability
An example from the brick and mortar world:
If a building falls a few years after construction (now, we could use the example of crane accidents which have happened in New York), the supplier of building materials/ builder/ building management/ city may get sued/ face civil or criminal action/ etc. Perhaps the high cost of paying out the liability may cause one of the players to go bankrupt. Lets deconstruct this scenario:
1. Was the supplier of building materials working in an environment where faulty components were expected to be weeded out by other players in the value chain, and were not supposed to make the building collapse? In that case, was the liability shared by the "integrated" supplier, construction company and the checks and balances system?
2. Was the liability so huge that, despite it being correctly apportioned to all stakeholders, it remained so large that even after liquidating, the private players involved couldn't make a dent in the liability? In that case, what's the point of apportioning liability?
3. Is it possible to limit the effects of a collapse of a market to within the market? E.g. Does the market have enough players to replace the bankrupt company?
4. Would the collapse of the company cause the market to collapse? Would the collapse of the market be acceptable?
5. Is this a market where "failure" means only two options- all players come together to fix the problem, or someone is prosecuted for negligence, while the rest try to fix the problem?
An Example of a "Negotiated" Allocation of Liability
Lets return to the financial services industry, and look at how Iceland is handling the liabilities arising out of the collapse of its financial services industry:
http://online.wsj.com/article/SB10001424052748703391004575106452707894556.html
What do you think?
Update: Nikhil shared a wonderful article that showed that folks in the 1950s in the US had thought about these deep philosophical questions while creating an industry in the Nuclear Power sector. It's just fantastic to know that. Now, the same assumptions may not apply in a different context, but it is still fantastic to get an insight into "market engineering".
* Thanks Nikhil.
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