Beyond Theor y: Out sour ci ngvs. Transact i on CostEconomi cs
INDIAN INSTITUTE OF MANAGEMENT ROHTAK
Faculty’s Message As IIM Rohtak is passing through an important phase in its journey toward attaining a prominent position amongst the best business schools in the country, the Strategy and Consulting (SnC) Club has a key role to play in shaping the future managers as effective problems solvers in a corporate setting. Staying true to its mission: “To skill up all aspiring consultants and strategists of IIM Rohtak,” the SnC Club has been continuously engaging with the industry through activities such as live projects, industry competitions, and case writing. Members of the club also organize activities such as case discussions and are involved in writing original industry reports in consultation with faculty and top executives from industry. Many of our students have brought laurels to the Institute by winning several competitions organized by the industry. As the management education in India is at crossroads owing to the fast-paced changes in the environment, I wish the members of SnC Club the very best in their efforts in getting young managers industry-ready. Dr. Rojers P Joseph Chairperson, Strategic Management Area
Brief Profile Dr. Rojers P Joseph is a faculty in the Strategic Management Area at IIM Rohtak. He has obtained his Ph.D. from the SJM School of Management, IIT Bombay. His research interests include Strategy and IPR, Internationalization Strategies of Asian Companies, Digital Business Strategy, and Business Models in a Knowledge/Digital Economy. Dr. Rojers has published his research in many journals and conferences of international repute. He has also published several case studies through Ivey and Emerald. His teaching interests include Strategic Management, International Business, Corporate Governance and Entrepreneurship and New Ventures.
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About Us The Strategy and Consulting Club at IIM Rohtak has four verticals: ➢ Strategy Wall: A monthly inhouse magazine published by SnC Club, publishing articles written by the students of IIM Rohtak and the latest industry trends ➢ Firm Relations: The Club believes in active engagement with the industry thus, creates ongoing relations with industry leaders inviting them for knowledge sharing sessions and consultation ➢ Internal Operations: We thrive to create a culture where students actively engage in discussions on various real-life cases and compete to be the best and close to industry ready solutions. So, we organize various events like ‘Consultant of the Year’ and ‘Zero Hour’ ➢ Original Reports: SnC writes its own reports on some cases in consultation with faculty and top executives from industry
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Articles Beyond Theory: Outsourcing vs. Transaction Cost Economics By Anirban Sinha, IIM Rohtak Businesses are driven by sales. If we ask a random group people who run or are involved with businesses about their primary objective, there’s a good chance that majority of them will be talking about selling more and more. Quite naturally, the words “sales maximization” have nearly become synonymous with the word “Business” yet not always sales maximization leads to profit maximization. When we speak about maximizing profits, we generally think about product pricing, increasing operation to reap scale economies, first mover advantage etc. and hence most of the frameworks and cases that we read in the books revolve around all these concepts. Yet maximizing profits is not always about optimizing prices, increasing demand or maximizing reach. If you look at firms which have been successful in the long run, one concept gets repeated again and again- reduction of cost. And I believe most of you will agree with the fact that the game is actually not played on the revenues but on the contribution margins and hence reducing cost becomes vital for success. However, this is easier said than done. Any business, however small that might be, incurs many different types of cost and many a times these are in reciprocal to each other i.e. one increases if other is reduced. A common example could be the cost of automation and labour. If you invest in automating your assembly line, you may reduce your labour charges or if you don’t want to invest in automation, you
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need to invest in labour to keep pace with the increase in demand. Hence, it is important for firms to find that sweet spot that maximizes net contribution rather than net sales. Firms are like human beings- they don’t like uncertainties. Our basic nature dictates that it’s better to keep everything under our own control rather than depend on someone else in matters that involve any uncertainty. Firms are like the same. But if firms decide to do everything on their own, will that be beneficial for them? Hence, at some point, a firm needs to draw a line as to what it can make and what they shall. And drawing this boundary gives birth to a phenomenon that is commonly known as “market transaction”. Let us talk about some theory first. In 1975, an economist named Oliver E Williamson, now a Nobel Prize winner in economics, introduced a concept called Transaction Cost Economics (TCE) that defined why there must exist two separate entities- a firm and a market. Think of a firm. It is nothing but a machine that gives you certain predefined, standard outputs on the basis of some repeated, idiosyncratic transactions that occur in the background. Now think of a market that is efficient and ideal (basic assumptions are perfect information, rational actors, homogeneous goods, no liquidity constraints). Understand that if the market remains ideal, there is no advantage for a firm to not do these transactions in the open market and only because there are IIM Rohtak
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imperfections in the market a firm decides that there’s some value to be gained if it does them within its control. To understand TCE, we need to look at its foundation. The first two elements are bounded rationality and opportunism; both have their roots sunk in behavioural economics. Because our decision-making capacities are dependent on information, one can become profitable by withholding them and convince another to become dependent. Think of an automaker that needs an engine as one of the key components for its cars. Yet if it lacks the capacity or information to build one itself, the engine supplier holds all the cards in this particular transaction. Next elements in TCE are asset specificity, uncertainty and frequency. Imagine the same automaker who doesn’t know how to make engines. It is designing the entire car to make sure that the engine, supplied from outside, fits the body eventually. Now if suddenly the engine maker changes the design of the engines by even a slight bit, the automakers’ assembly line becomes completely useless. This is called asset specificity. Uncertainty, on the other hand, is a whole different ballgame. If the government suddenly reduces taxes on
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engines, the automaker doesn’t reap any benefit as it has already signed a legal contract to buy the engines for a fixed amount of money. Same goes for frequency. Once this transaction of buying engines gets repeated again and again, the firm starts to depend more and more on its supplier and the status quo gets tilted. Hence, there exist realizable benefits to do these transactions within the firm. If the automaker knows how to make engine itself, all these problems are optimized. Transactions that require relation-specific investment can cripple a firm if it loses control over it. And hence the basic instinct of doing everything defines a firm’s attitude. However, there seems to be one small glitch in this rosy theoretical approach- outsourcing. Strategy is a very confusing field. At one hand we, theoretically, speak of doing things within the firm, but on the other we see numerous firms reaping huge value out of outsourcing their operations. In 2016, Deloitte conducted a survey among firms, 85% of which had annual revenue of USD 1 billion or more, belonging to different sectors to understand how outsourcing is becoming “The Strategy” to go with. The results are given in the figures-
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and expertise have become some of the most important success mantras even though it comes along with many uncertainties. Sometimes firms free up internal human resources to mitigate risks such as employee turnover, knowledge leaking out and in these cases, asset specificity makes very little mark. Take a look at the following figure to understand the economic benefit that comes with outsourcing-
(Source: Deloitte 2016 Global Outsourcing survey) If you understand what we have spoken so far, these numbers go beyond our theoretical basis. Think of the IT segment. If 72% of a firm’s IT work is outsourced, a huge amount of information which may be critical to the business, lie beyond the control of the firm. Think about human resources. TCE talks about asset specificity and sunk cost which shall also include the cost of training of human assets and hence is preferred to be controlled within the firm’s boundary. But when we see firms generating value by outsourcing 47% of HR function- our theories hit a wall. In reality, like our markets, our theories are not completely efficient. A firm generally has a core business and many a times focusing on that becomes more important than creating cross-functional expertise. If our automaker doesn’t even know how to make the other car parts in the first place, fitting the engine becomes an issue that it won’t even face. Hence minding your core business is extremely important. Next is globalization. Uncertainty principle of TCE considers socio-political volatility as a reason for firms to do transaction within its borders. Yet with more and more firms looking to do business in different countries, tapping into the local knowledge
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(Source: KPMG) Doing business is like being in a relationship. Controlling everything to optimize result, though theoretically sounds amazing, in reality, isn’t something that happens. And firms need to understand this as fast as they can. Markets will always be inefficient but that must not mean that a firm needs to internalize everything. When a firm sees sources of cheap labour in a country to which it can outsource some part of its operation, the only question remains is to whether or not they can live with the uncertainties. In today’s world, all markets are interlinked. A recession in the US will always pull the Sensex down and hence firms need to understand that like the markets, inefficiencies are interlinked as well. Wherever you may go, you will have to deal with them and hence it becomes just a matter of cost-benefit analysis.
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My article started with the theme of cost reduction and I will finish with that as well. Reducing cost doesn’t mean not incurring them completely- which may be considered the ideal scenario but can’t be the real deal. Costs are inevitable and hence maximizing contribution margin should be done by not looking at ideal or theoretical concepts. Firms need to understand that transactions
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are not isolated events. One transaction lead to another and hence contribution from a transaction is not only the direct benefit it creates but also the associated benefits it generates in other transactions. At the end, everything boils down to money and firms must look at the reality to earn them.
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Trust with Blockchain in Supply Chain By Arushi Garg, SCMHRD, Pune For any business to run smoothly, customer’s trust and loyalty is the fuel. In this digitized world, consumer wants more information, which they want to be verified by trusted sources, faster services, zero shipping costs etc. For all this an efficient and fast supply chain is required. Transactional data of supply chains of majority of the companies are paper based or are on tools like excel, emails which are difficult to collaborate and also are easy to tamper. According to recent study conducted by Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR), disruptions and lack of visibility costs USD 300 billion to companies.
Source: blockchain backbone of digital supply chain-Oliverwyman.com Nowadays, customers’ preferance for organic food is increasing, and using blockchain technology with a simple QR code they can scan the details of product on their phones and can validate every step product has gone through in the supply chain. It will show the real time data like origin, timing, location etc. Customer can decide on the basis of his/her need and preference for the product. The Strategy and Consulting Club
A crate of oranges scanned as part of a food safety blockchain. Courtesy of IBM According to CCN Health report, 2014, the United States files 1 million cases of salmonellosis every year. In 2012, Salmonella bacteria infected over 1800 people and killed seven in US. Salmonella bacteria can be found in almost any product or animal that has been in contact with fecal matter this can include handling by infected humans. Recently salmonella outbreak due to Mexican papaya infected 251 people, and caused 2 deaths in US. Centers for diseases control CDC found the origin of contaminated papayas yet it was impossible to recall all the shipments, because of poor records. In June 2017, Mars tried to recall its chocolates after suspicion of salmonella, however according to resources 3000 affected chocolate had already been sold to customers and it was impossible to track those. Recently, French baby milk-maker Lacatalis and health authorities ordered to recall all the packets after reporting of 26 children falling sick, nearly 7000 tons of production is feared to have affected by salmonella. They are unable to gauge the amount and reach of milk which is still in the market. Had their source been recorded in blockchain it could have been prevented.
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IBM is entering into a partnership with big food companies like Walmart, Unilever, Tyson, Nestle and Dole to introduce blockchain into their global supply chain. Blockchain can quickly trace back the origin of the product and in which hands it has gone. It creates a ledger which is strongly encrypted and is visible to all. It will increase levels of food safety and easy for governments to audit products, thus increasing the trust of consumers. It is the best way to determine
when a food can get spoilt, contaminated. Companies can track the source of contaminated product in the supply chain and stop it from causing outbreaks of foodborne illness. IBM made a technology with Walmart to trace products from farm to store shelves. All the blockchain services are integrated with IBM cloud. Earlier it used to take weeks to collect data, now it takes seconds.
IBM, Walmart, Beijing’s Tsinghua University, Chinese pork on a blockchain- fleischwirtschaft.de IBM and Walmart have positively tested blockchains on tracking Chinese pork and Mexican mangoes. Food giants want to simplify supply chains, with tracking of information like temperature, shipment, quality, dates, safety certificates etc. Blockchain can be connected to IoT, distributors place sensors inside refrigerated trucks to monitor temperature and the temperature is noted in the ledger periodically. Company can track delays and estimate delivery time minute by minute. A U.K. software startup, Provenance, is working to use blockchain to establish the authenticity of food it plans to track tuna fish The Strategy and Consulting Club
caught in Indonesia and used in Japanese eateries, from “hook to fork” using information taken from sensors or RFID tags. For Maersk, the problem is that it has huge piles of paperwork with every container. A single container can have as many as 30 approvals and stamps from different people, which includes customs, tax officers and health authorities. It takes few minutes to load containers on ship but most of the times it is put on port for days because a paper has gone missing, this leads to spoilage of goods inside. The cost of moving and storing of paperwork is almost equal to cost of moving containers around the world. There’s a loss of billions of IIM Rohtak
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dollars in maritime fraud every year, because of easy tampering of bills. Maersk and IBM are working on software that would be visible to everyone for every container. Custom authorities while signing the document need to immediately upload a copy of it, with digital signature, so that Maersk can see that documentation is completed. It becomes a proof of transfer of liability of goods, and custom clearing. If there’s any discrepancy or dispute everyone can track the record, since data is secured and on blockchain it can be trusted. This was first tested in the port of Mombasa in Kenya, containers of flowers were to be transported to Rotterdam in the Netherlands; it was a success and was followed by tracking containers with pineapples from Colombia and oranges from California. Alibaba is also investing into the blockchain, it implemented healthcare technologies in Changzhou, China. This will provide
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doctors with patients’ medical records and help in making more efficient healthcare procurement process. As the world is moving towards big data era, and AI and machine learning are used as competitive advantage, the hand with the data is the king. To implement blockchain, an internal blockchain of the company is to be setup first then extending blockchain to partners, suppliers and customers so that data can be merged. This technology is still in naïve position but it’s growing at speed which is uncatchable. Blockchain has the power to make all data public and free, where wealth comes from its manipulation and application. Every company should be adopting this technology because it would lead to efficiency, transparency and most importantly trust of customers.
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Boardroom Battles in the Indian Corporate By Shreyans Jain, IIM Lucknow “…his continued presence as a Director is a serious disruptive influence on these Company Boards, which can make the company dysfunctional, particularly given his open hostility towards the primary promoter, Tata Sons.” Ratan N. Tata, Chairman, Tata Group (In his appeal to the shareholders to remove Cyrus Mistry from the boards of Tata Group companies, dated December 06, 2016) Introduction Boardroom battles are a manifestation of deteriorating quality of corporate governance in board-managed companies that disguise the interest of their shareholders in mere numbers on their financial statements and create multiple centres of power in corporate boards to undertake risky ventures for ‘altruistic’ reasons. The outbreak of such incidents in succession in recent years has reiterated the need for a robust institutional framework that not only seeks to revamp the role of independent directors but also put in place necessary safeguards to protect the fortunes of minority shareholders. It is time the corporates overhauled their due diligence, both internal and external, to avoid incurring losses in apparently unhealthy investments, including manpower, and indulging in a bitter blame game later to justify their actions to the investors.
governance, rampant conflict of interests and distrust between shareholder activists and managers result in unintended consequences and adversely affect value creation. The management is overwhelmed by unrelenting pressure to achieve financial results even at the cost of undermining long term corporate strategy and deviating from organisational mission1. The system of corporate governance is vulnerable to litigation and a mere hiccup in the stock price or earnings raises a red flag, inviting litigation against the board from plaintiffs’ (shareholders) attorneys. This compels corporates to relinquish staggered board structures and elect directors for shorter terms. Thus, with a narrow perspective of the corporate strategy, these board members end up de-stabilising the entire structure instead of promoting continuity and stability in the boardroom.
Peter Drucker coined a phrase, “Culture eats strategy for breakfast” to caution businesses about the risk that emanates from disconnecting the two and results in crowding out of thoughtful discussions in boardrooms. Often, a complex system of regulation, lack of mutually acceptable metrics for measuring
Corporate boards are obliged to ensure proper mix of skills and perspectives in the boardroom. It is often argued that age and term limits are a blunt instrument for achieving optimal board composition2. Key strategic decisions require time for evaluation of their success. Improper succession planning not only leads to waste of right business acumen and functional knowledge but also loss of future value creation opportunities.
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Boardroom Governance
Battles
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Corporate
Barton, D. and Wiseman, M., Where boards fall. Harvard Business Review, 93 (2015)
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Guhan Subramanian, Corporate Governance 2.0, Harvard Business Review 96 (2015)
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The Solution “Guidelines today have taken the force of law and Indian corporates have to come to terms with the existence and importance of Board evaluation” Suhas Tuljapurkar, Director, Legasis Services (Legasis Services is a provider of technology solutions and support services in legal and compliance domain) The outbreak of boardroom battles has necessitated board evaluation as a statutory
requisite. In October 2017, a Securities and Exchange board of India (SEBI) - appointed panel proposed more powers for independent directors, limiting chairmanship to nonexecutive directors, and called for a greater focus on transparency and disclosures to improve corporate governance3. The following exhibit depicts some of the recommendations that span areas such as the composition of the board, the make-up of board committees, treatment of subsidiaries, information sharing with promoters and related-party transactions, audit evaluations, and conduct of annual general meetings.
Exhibit: Measures suggested by the Uday Kotak – led SEBI panel on corporate governance reforms4
In addition to the proposed solutions, some of the following litmus tests can be considered: ▪
evaluation on various attributes. The use of software and interpersonal tools like psychometrics and role-based evaluation interface, for instance, has now gained prominence in the light of Tata-Mistry corporate battle as the latter had come off
Meaningful Director Evaluations: The Securities and Exchange Board of India has specified guidelines for board
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Sebi panel led by Uday Kotak proposes corporate governance reforms, dated October 17, 2017 http://www.livemint.com/Money/MWHMT9Uwt7xxvr Famx4GWP/Sebi-panel-to-submit-report-onindependent-directors-evalua.html
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Livemint dated October 06, 2017 (http://www.livemint.com)
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with flying colours in his evaluation just few months before his ouster. This would improve boardroom dynamics by discouraging underperforming directors from seeking renewal of their terms and push others into action, lest they be perceived as underperforming. â–Ş
â–Ş
Shareholder Proxy Access: To prevent talent from gravitating to other boards and ensure the right mix of skills in the boardroom, shareholders with significant ownership can nominate director candidates on the corporate ballot. Transparency is the ley to ensuring the highest standard of corporate governance. For instance, if United Spirits Limited (USL) had a proxy access rule, it would not have lacked directors with risk expertise on its board at the time of USL-Kingfisher Airlines fiasco. Compensation Structure: Value-based management practices that align interests of the board with that of the shareholders
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help in mitigating reputational risk and loss of value. For directors to think and behave like owners, it is necessary for them to have more skin in the game and so they should be allowed to purchase equity with their own funds. Infosys with the right compensation structure could have prevented its boardroom battle from making news and bridged the divide between CEO Vishal Sikka and founder N R Narayana Murthy. Conclusion Boardroom battles is a serious corporate governance issue and calls for formulation of pragmatic solutions that can clarify governance roles and procedures by taking into account differing board leadership cultures. It is time the Indian corporates revamped their board structures and delivered the kind of sustained value creation that long-term shareholders expect, and that the society deserves.
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Payments Banks – New revolution By Deepak Rawtani, KJ SIMSR “I ask you to ensure that humanity is served by wealth and not ruled by it”. The message was conveyed by Pope Francis on the issue of economic inequality during the World Economic Forum meeting in 2014. One of the weapons mooted by India to fight the sentiments conveyed by Pope is “Payment Banks”. Payment banks in India were mooted to replace Pre-Paid instrument providers (PPIs) and overcome its demerits. PPIs are payment instruments such as e-wallet, smart cards or those having access to prepaid money that facilitate purchase of goods and services against the value stored on such instruments. Also, the concept of payment bank addresses the challenge that has become a buzzword these days “Financial Inclusion”. According to statistics, only 40% Indians have access to the banking system in India. Payment banks, the most basic version of banks, are expected to reach customers mainly through the internet and mobile platforms. The concept of payment bank was based on the premise that it would be uneconomical for traditional banks to open branches in every village and far lung areas of the country. Thus, the concept of payment banks was promulgated with the objective to provide secure technology-driven financial services and offer low-income households, small-scale and mid-scale businesses an alternate method of the banking system. Currently, there are 4 active payment banks in India i.e. Airtel Payment Bank (PhonePe), Paytm Payment bank, Indian Post Payment bank and FINO Payment bank.
Overview of Payment Banks • The concept of Payment banks is to redefine the Indian banking system. The Strategy and Consulting Club
• 25% of the bank branches must be in areas where penetration of banking system is low or next to nil. • The banks can accept a deposit of upto 1 Lakh per customer and can be raised in the future based on the performance of the bank as assessed by Reserve Bank of India (RBI). • The banks cannot issue credit cards and offer loan/credit services. • Both savings and current account can be operated by the bank. • The Payment banks can accept utility bills. •They cannot form subsidiaries to enter the non-banking financial sector. •The banks can offer services like Debit cards, ATM cards, mobile banking, and Net banking. •Also, the word “Payment Bank” has to be used in order to differentiate them from traditional banks. Opportunities • Market Size: As stated above only, 60% of Indians i.e. 75 crores do not have access to banking facilities. The problem gets multiplied in rural areas where 68% of India’s population i.e.85 crore lives. Also, with the rise of FinTech sector and government’s initiative of “Cashless India” post demonetization, there is the increase in demand of digitalization. Thus, this is the opportunity the payment banks should encash in. • Simplification: The current banking processes are cumbersome and complex both financially and physically. MDR (Merchant discount rate) on debit cards and credit cards are high for small and mid-size businesses. RTGS, NEFT are not free and OTP based digital verification is too time-consuming. Mobile banking comes with its own set of challenges. Thus, it is imperative for Payment
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banks to provide simplified solutions and move quickly. Utilize the payment infrastructure of NPCI (National Payment Corporation of India) and think of biometrics as a medium of payment transaction to gain upper hand. • Bank as a platform: There can be 4 potential ways in which payment banks can diversify their customer offerings and revenue model A) Merchant Acceptance: A holistic merchant acceptance infrastructure is essential for a cashless society. Thus, a model that would incentivize customers and merchants like 0% MDR to accept cashless payments and help payment banks in increasing their bank balances. Also, they can act as a solution for ecommerce industry to increase the use of online payment. B) One stop shop for financial services: Payments banks, with minimum effort, can sell financial services to their existing and potential customers through digital medium or correspondence network. C) Microsavings: The concept of Microsaving accounts bodes well for financial inclusion. A Microsaving account is designed around the smaller amount of money with the concept of minimum balance requirement is very low or waived off, allowing users not to be charged for services and save a small amount of money. Considering the fact that 22% of Indians are Below Poverty Line and 60% out of banking network, Payment banks can grab this opportunity. D) Creating large-scale access to credit: Though not allowed to offer loan/credit facility, they can act as a platform for credit assessment. Profile and analyze the customer stability and transaction which in return could
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help lending agencies in identifying their potential customers.
Challenges • The foremost challenge before Payment banks is lack of internet penetration coupled with low internet speed, weak cyber security laws and lack of digital literacy. According to statistics, there are 46 crore internet users in India; thus, a large part of the population is out of internet ambit. Also, internet penetration in rural areas in just 16%. India has an average internet speed of 12Mbps, the lowest in Asia. • Payment only model: The model of payment banks relies only on low ticket account balances (capped at ₹1 lakh). This model can be related to low margin-high volume business that is driven by convenience and pricing. Thus, consumer loyalty takes a backseat. • Fund deployment challenge: Payment banks are put their both current and saving account balances as Statutory Liquidity Ratio. This huge amount restricts them to optimize treasury operations. Concluding that payment banks must focus on their strengths, target the lower income, small and mid-businesses and tap into the abovementioned opportunity that waits for them despite the plethora of challenges that they face. There is a shift from conventional banking to technology-driven banking system. This calls for quick optimization of resources and continuous engagement with RBI. In short, with patience and agility of banks and support from RBI, the concept of payment banks can be a boon for the nation.
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Effects of Accounting Conservatism on Financial Decisions By Kaushal Maurya, MISB Bocconi Introduction: FASB feels conservatism should not be followed any more but there should be a proper balance in financial flexibility and conservatism. In contrary, our opinion is that there should be a proper balance. To substantiate this, different scenarios where accounting conservatism is playing both positive and negative role have been identified and discussed. Accounting conservatism has a profound effect on the financial flexibility of a firm that in turn affects all its major financial decisions. For firms to remain financially stable, it is critical to find the right balance of conservatism vs flexibility. Accounting Conservatism in International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles: Major differences between IFRS and U.S. GAAP a key difference between IFRS and U.S. GAAP is that IFRS tends to be principlesbased while U.S. GAAP tends to be rulesbased. A rules-based accounting system is more detailed, with specific rules and guidelines to check to any problems that can be faced by the firm. In case of IFRS, a principlesbased accounting system provides a more "conceptual basis for accountants to follow instead of a list of rules". As a hence, a principles-based accounting is more flexible, and allows more room for accountants to make choices. Both accounting systems have their own cons and advantages. The rules-based accounting The Strategy and Consulting Club
system such as U.S. GAAP is normally criticized for its complex rules and being less flexible. For example, in the article "Defining Principles- Based Accounting Standards'', that the rules-based accounting system "has made standards longer and more complex, and has led to summary criteria for accounting treatments that allow companies to structure transactions to avoid unfavorable reporting. In addition, the quest for bright-line accounting rules has shifted the goal of professional judgment from consideration of the best accounting treatment to concern for parsing the letter of the rule." Compared to a principlesbased accounting system such as IFRS, the U.S. GAAP guidelines are much longer and more complex, with 25,000 pages of rules and standards compared to 2,500 pages of IFRS. Relation between Accounting Conservatism and Bankruptcy Risk: Conservative financial reporting refers to timelier reporting of loss and bad earnings news than reporting gains and good earnings news. Accounting conservatism decreases subsequent bankruptcy risk through its cushioning role and informational role. By understating net income and assets, conservative reporting reduces the proportion distributable to contracting counter-parties, thus allowing the firm to retain more cash and other assets. Conservatism also promotes precautionary cash savings and creates cushions when future earning is risky. In addition, rather than passively retaining cash savings; conservatism also promotes efficient reinvestment that increases future cash flows and cushions. This cushioning role of IIM Rohtak
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conservatism enhances firms’ capacities to repay or renegotiate their debts as it increases liquidation values and debt-holder rights that deter managers’ strategic defaults and bankruptcy threats, thus lowering bankruptcy risk. Conservative accounting also plays an informational role whereby the timely reporting of bad earnings news reduces information asymmetries between debtholders and the firm, thus facilitating access to capital and debt renegotiations. This in turn helps the firm avert bankruptcy filings. Conservatism and Political Economy of Whistle Blowing: Many researchers and professionals identify whistle blowing as the one of the important technique to detect frauds. There have been difficulties in identifying the red flags associated with the fraud practices, in the sense that there is a human agent in every fraudulent behavior. This difficulty led to emerge of whistleblowers to support fraud investigation. Therefore, there are some benefits and costs for the whistleblowers. Whistle-blowers take into consideration of the above factors and decide whether to blow the whistle or to remain silent considering the motivating factors like political factors. Different accounting techniques help Forensic investigators in identifying the frauds in one or more department but it not for the personality behind the fraud. In order to detect the fraud, there are word-ofmouth confessions and testimonials before the court of law as techniques. But word-of-mouth and testimonials have some demerits. One of the main demerits is that it can give rise to the conflicting truth even though the truth is obvious and this may complicate the investigation process. In order to avoid so many complications and to avoid the ethical dilemma for people testifying the fraud cases as one does not want to implicate themselves.
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Whistle- blowing helps in saving time, cost and resources that are channeled to the process of fraud investigation using the traditional techniques.
Conservatism, fraud.
SEC
investigation,
and
The convention of conservatism is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to "play safe". However, accounting conservatism is also regarded as one of the reasons of distortion of accounting information. Accounting conservatism is not a direct qualitative characteristic of FASB conceptual framework, the FASB itself has been considering to revise conservative disclosure practices in order to achieve more neutrality of information. FASB adds that the accounting information has to be relevant, it has to be verifiable, it has to be neutral and it has to contain representational faithfulness. Any kind of bias and noise in the financial statements generate soft accounting numbers. Accounting conservatism does not mitigate but it rather induces asymmetry in the timeliness of incorporating economic events in reported earnings. US GAAP affords managers considerable reporting discretion, with accounting conservatism being one of those reporting practices, Studies reveal managers use accounting conservatism as a means to address information asymmetry and agency costs in their private information and financial reporting strategies. It has been observed that the use of fraudulent accounting tactics, in regards to conservative financial reporting, is evident in SEC Accounting and Auditing Enforcement Releases (AAERs) where firms have been
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accused of manipulating reserves. In its 2010 study, the Deloitte Forensic Center revealed that one of the 12 main categories of alleged fraud schemes included the manipulation of reserves. In fact, the manipulation of reserves accounted for 7% of total fraud schemes for the period 2000–2008. Conclusion: The discussed outcomes pointed out in the literature review are constructive towards alternative measures for bankruptcy risk, unconditional & conditional conservatism and other controls. In addition, study infers that accounting conservatism influences and is
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influenced by bankruptcy risk. This study also reflects conservatism’s role as a widespread phenomenon and central tenet of financial accounting. It is evident that Conservatism has a negative impact on financial flexibility. Most CFOs prefer flexibility over implications of bankruptcy. But too much inclination towards maintenance of flexibility means a substantial decrease in conservatism, which ultimately could lead to bankruptcy. Hence, finding a tradeoff between conservatism and financial flexibility is critical. There should be balance maintained in conservatism that does not lead to any fraud activities and have required financial flexibility.
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Blockchain Technology a revolution By Mayank Banka, IIM Rohtak There is a lot of fuss going around blockchain and cryptocurrency. So I started reading about bitcoin and other cryptocurrency – “THE CURRENCY OF FUTURE”. While going through many articles the word “Blockchain” was used many times to describe how these currencies were developed and how blockchain is the backbone of these currencies. There can be no doubt that this century is one of the most remarkable in the Tech industry. One would have thought what next in this industry. Everything one can think has been invented or has been modified and relaunched. The next
revolution in the “BLOCKCHAIN”.
industry
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The blockchain is one of the most trending topic around the world. It is the hot topic. All around the world, in every corner, someone or something is done in evolving blockchain. The question everyone is asking is “What is Blockchain?” Blockchain is shared public ledger for recording the history of transactions. It is based on distributed ledger technology. The ledger can be seen by anyone who is participating in the network. The data is stored in a block and stored in a chronological chain which cannot be altered.
Source: https://www.pwc.com/us/en/cybersecurity/navigating-trust/timeline.html#0
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Everyone has associated Blockchain technology with Bitcoin or other cryptocurrency. But there are many different uses of this technology. What are potentials of Blockchain? 1.
Financial Services
Blockchain will change how the financial institution function. Currently, the system is prone to a lot of error. The current system requires a high cost to maintain records and a lot of conflicts arise due to an error in recording transactions. A very high cost is incurred to resolve these conflicts. Blockchain will be cheaper and more transparent. It will be highly effective. Blockchain will eliminate intermediaries. Since transactions on blockchain are done between two parties and there are no intermediaries, it is more secure and less risky. These transactions are also encrypted. 2.
Supply Chain
Blockchain will record all transactions. The most important foundation in logistics is traceability and transparency. It will help improving transparency and accountability across the supply chain. It can be used to track and trace material in the supply chain. This will help in reducing wastage of resources across the supply chain and help in detecting fraud. Every person from supplier to distributor to the retailer can be involved in the blockchain. Even customer may be integrated into the blockchain. Customer will be able to see where the raw
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material was supplied from, where the product was manufactured, at what date and time, how old is the product, etc. 3.
Smart Contracts
Smart contracts are contracts which have terms and conditions mention as a piece of code which is stored in blockchain network. All the parties using contract agrees to the terms of the contract. When the required conditions are met, the contract is executed automatically. The contract is stored in every node on the network, they will all execute at once and will give the same results. Conclusion: There are many utilities of blockchain from government utility services to healthcare services. The blockchain is likely to revolutionize how business is conducted. It will help in reducing cost, increasing efficiency, creating a more transparent system, reducing fraud and developing overall business environment. It will also help various government institution to function efficiently and effectively while reducing the cost of keeping records and maintain transparency. It will also help in eliminating corruption in government functions if blockchain is implemented. We will have to wait and watch how government agency adopts the new technology “Blockchain� and how business leverage the benefits of Blockchain Technology.
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THE BITCOIN BUBBLE? By Mudith, FORE School of Management Imagine a situation. You have just bought a car worth USD 60,000 by paying 3 Bitcoins (assuming 1 Bitcoin = USD 20,000). It has been a week and you are (apparently) happy with your car. But now one Bitcoin is worth USD 30,000. You would have surely felt – “Why didn’t I wait for just another week? I could’ve bought a better and costlier car. Damn my luck.” Welcome to the “unstable” and “unpredictable” world of cryptocurrencies.
buying the hype surrounding it. This is speculating, not investing. What else would you call something that, as on the closing hours of December 15, 2017, has gone up 10 percent the past week, 121 percent the past month, and 630 percent the past year? And you know what the most remarkable part of it is? It has all happened for no observable reason whatsoever.
Crypto-currency is basically a currency in nature and all currency should have a steady price. No buyer would like to exchange a coin that will jump sharply in the next hour. And no seller would wish to receive some currency that may plunge into the depths of Grand Canyon in a blink. (Source: coindesk) Now let us assess certain reasons why the Bitcoin is likely heading for a crash. Fundamental Value (or should we say dearth of fundamentals) A bubble is a situation when the underlying price of an asset diverges from its “fundamentals” – the parameter that the investors use to assess the value of something. And for the current scenario, I have a set of questions. “How are you valuing the Bitcoin? What is the basis for it? Why is it worth what it is today? Do you have any rationale or explanation for it?” I know we all are a bit blank now. The Bitcoin doesn’t have any intrinsic value. Neither does it provide any return. The stocks have the dividend. The real estate has rent. The bonds have coupons. What does Bitcoin have? NOTHING. Most of the people are not buying the value of the technology but are going with the tide and The Strategy and Consulting Club
Confidence and Commitment Crypto-currency doesn’t have any central authority backing or authorizing it. And unless that happens, the general public will not be confident about its usage and will hesitate to use it for their day-to-day operations. A statutory backing is necessary for Bitcoin. Or else who is stopping someone to steal all your Bitcoins? Or who will guard you against another incident like the KashhCoins (a fictitious Indian cryptocurrency which got busted for a fraud worth USD 7.79 million)? Or who knows someday at someplace some brilliant boy/girl will break this technology and counterfeit as many as Bitcoins s/he may want? Adding to all the possible theories, what if Central Banks such as Federal Reserve and IIM Rohtak
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Reserve Bank of India (Indian Government is reportedly considering launching its own crypto-currency – Lakshmi Coin) launches their own crypto-currency. With such institution backed crypto-currency in the market, the public will lose all its confidence in Bitcoin and it will be out of business in no time. Now, talking about commitment – Bitcoin is a technology generated virtual currency. So who is putting his/her own money into establishing it? What is the underlying asset backing its purpose? And the question comes back to the issue of “valuation”. What if this entire industry is a bubble? Now, that is a huge thing to worry about. Comparing this to the dot-com bubble of 2000, no one then knew how the sector of internet-based companies would work. Internet was new and everyone was very optimistic about its disruptive power (Just like how they are now with Bitcoin.) But what did we witness at the end of the day? – Crash.
Greater Fool Theory What is the “Greater Fool Theory”? Keep trading a stock/commodity expecting someone will buy from you at a higher price until at the end when someone becomes the scapegoat and the ultimate sucker. Isn’t that the same thing that happened in the infamous “Tulip Mania” in Holland in the 17th century? So will you put yourself in the shoes of the “Greatest Fool”? Take an informed decision. Another driving factor for the demand of Bitcoin is that the scarcity of it is becoming a strong selling point. With a finite number of Bitcoins (21 million) that can be mined and the reward associated with every discovery of a block, the Bitcoin miners have the kept the market of Bitcoin going on. However, the reward (currently at 12.5 Bitcoins) shall reduce by half every 210,000 blocks. And Bitcoin mining is not a child’s play. It requires a lot of knowledge and power back-up. The miners have been reportedly consuming more electricity a year than Ireland does in the same period. This raises a fundamental question of what will happen when the cost exceeds the reward. The transaction costs will go up, the rewards will reduce, the demand will fall and so will the prices. Simple economics, you see.
(Source: MarketWatch)
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The other bubbles promised some kind of return backed by the underlying asset? What does Bitcoin have to offer? Nothing. We just have a speculative investor mania where the frenzy has caught on the retail investors who have created this roar about a digital currency for the primary advantage of being anonymous in nature. Is it a good
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investment option like other currencies? Or it is just another fad or as Jamie Dimon (CEO of JP Morgan Chase & Co.) said – “It is a fraud”? I tend to lean more towards the latter. And I would end by saying that economics has to be the basis for any currency and not technology.
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Analytics in Supply Chain Kunal Mahanwar & Maheep Ajay (NITIE, PGDIM-I) Introduction: Demand forecasting is the most important phase in any supply chain. Most of the forecasting is driven by guestimates. Nowadays, analytics is playing a great role in demand forecasting. Other important pillars of the supply chain such as procurement, distribution, planning etc are also being driven by analytics in order to minimize the cost and improve efficiency of whole value chain. Lean, agile or le-agile supply chain is the requirement of today’s world. There is a glut of data present in the industry which needs to be structured to be used and make sense of. Processes that can be automated and intelligent interfaces that can be developed. With the advancement of technology and emergence of new players, there have been huge efforts bring organization to the supply chain industry and speed up the processes involved. With ever increasing operating systems, pricing pressure and customer expectations, it is becoming difficult to rely on the traditional supply chain. Literature Survey: Supply chain analytics is still at the beginning stages of the development at many companies and will take time to build out. Time for real time supply chain practices has come and is on the verge of being more mainstream. Deloitte utilizes advanced predictive analytics to predict and reduce lead times as well as inventory. Warranty Cost & Claims Analytics accelerates warranty claims management
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process and uses predictive analytics to identify patterns which isolate anomalies in claims and uses those patterns to create rules which can be applied when assessing the legitimacy of future claims. (Deloitte, 2017) Challenges: One of the biggest challenges is maintaining the accuracy of the data on which various complex algorithms are being applied. There is an increasing interest in the areas of improved forecasting and Sales & Operations Planning. Supply chain is the backbone of any company and plays prominent role in company’s cost structure and profitability. So, supply chain is great place to use analytic tools in order to gain competitive advantage over other organizations. Reducing cost fluctuations by optimizing sourcing and logistics activities is the need of the hour. Analytics (Descriptive, Predictive):
Prescriptive,
The growing tsunami of data is a boon to businesses in the digital age. Limitless oceans of data, often reflecting customer experience as it happens, have the potential to remake supply chains. To put data growth in context: the world’s total digital data volume, which is doubling every two years, stood at 4.4 zettabytes (trillion gigabytes) in 2013 and is projected to reach 44 zettabytes by 2020. (EY, 2016) With such amount of data generated it is imperative for the players in the industry to understand and utilize this opportunity.
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(business2community,
n.d.)
the effect of shifting to a new supplier on product quality or even it can help to decide whether introduction of the new autonomous machine would increase safety on the warehouse floor or not. The degree of detail to which companies can predict the future depends entirely on the ability of companies to bring together all the key elements of supply chain into an integrated whole. Cloud Computing Based Services:
Figure 1: Analytics in Supply Chain Supply chain analytics, be it descriptive, prescriptive or predictive has become an integral part of the industry. Diagnostic analytics are used for root cause analysis (RCA), online analytical processing (OLAP), and what-if analytics. They are commonly applied for RCA of supply chain performance and data visualization. Prescriptive analytics allows optimization of transportation routes, factory scheduling and inventory. (Masters, 2016) Predictive analytics and machine learning provide a platform to make utilize it to make decisions. Today, companies are using different kinds of neural networks for predictive analysis. Different time-series stochastic models are being built to analyze customer preferences and forecast sales and other parameters to plan for the everchanging demand. Data: Financial data, demand data, product data, manufacturing data, inventory data, weather, traffic, track and trace data, etc. are inputs for prescriptive analytics which helps in answering the questions such as: What will be the effects of decision or situation? How can an organization make a particular target to happen? Prescriptive analytics help to predict scenarios at very minute levels of details. It helps to predict The Strategy and Consulting Club
Analytics can be combined with services such as cloud computing to provide solutions to the stakeholders whenever they want and reduce the costs involved in maintaining them. Cloud computing has helped bring further scalability to this industry. With Cloud computing, businesses now no longer need to maintain costly equipment and can access various tools and dashboard through the net from anywhere in the world. This has led to the companies opting for an OpEx based model as opposed to the CapEx based model that was being followed by the companies in the past. Cloud computing has also allowed various technologies to compound together and build unique supply chain solutions. General Electric’s Predix is one such cloud computing based solution. A PaaS (Platform As A Service) that allows the users to build their tools for analytics after combining it with sensors from different machines that generate relevant data. Conclusion: In conclusion, analytics in supply chain can be a game changer for any organization because of its ability to provide a major competitive advantage over others. Data is growing exponentially, and analytics provides a tool to the industry to organize it and make sense of the emerging patterns IIM Rohtak
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that come up. Analytics in conjunction with other technologies is shifting the way industry operates and bringing in real time solutions to ease the pressure and reduce the operations expenditure. It is the need of the hour and we are seeing its presence and the effect it brings to the industry.
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Student experiences on Club Activities COTY-3 By – Shashank Jindal, IIM Rohtak “More you know, better advice you give. Less you know, more advice you give.” Amidst the prevalent thought of “Winter is Coming”, the Strategy and Consulting club of IIM Rohtak introduced the event called Consultant of the Year(COTY)-3 to continue the legacy of knowledge sharing. The topic of event, which was more of a learning session than a competition, was GUESSTIMATE. As per the name, which is a blend of two words i.e. Guess and Estimate, guesstimate allows us to make an estimate without adequate information i.e. by making some suitable assumptions. It is a quantitative approximation not based on previously observed data. I was excited to get some insights of this technique since Guesstimates from an important part of all Consulting Interviews. To enhance the take away from the session, a pre-read document was shared so that we could get the essence of the topic before coming for the session. My eagerness for this topic reached the zenith when I was unable to understand the document shared. Finally, the session started with brief description of the topic where we were enlightened with technique to approach the problem. Every Guesstimate problem can be solved from two perspectives – the Demand side and the Supply side. Demand side allows us to estimate taking in consideration, the probable demand of the product/service. It gives us a rough picture of situation of consumers. On the other hand, the supply side enables us to take decision following the capability of Producer. To solve a guesstimate problem, we could use one of the three methods: first known as Top Down in which macro level is considered at The Strategy and Consulting Club
inception and then we come down gradually to granular level, second being bottom up approach in which small chunks are connected to from the big picture, and finally the third one known as Employing a proxy method. The most important aspect of Guesstimate is to make relevant assumptions as and when required, which should be vague in respect to the problem being solved. Finally, the answer can be calculated by developing the Guiding Formula, which consolidated all the assumptions and guesses made.
After a brief introduction, a group of five was constructed and each group was given a question. My group was asked to estimate the total number of mineral water bottles used in India per day. After deciding to use the bottom up approach and solving from demand side, we started analysing the various possible factors. Since we cannot find variables to determine the percentage of market share of bottles of different sizes, we made an assumption that all bottles used are of 1lt. Next on our assumption list was the fact the mineral water would be consumed by urban people only, which constitute about 30% of the Indian population (30% of 130 crore = 39~ 40 IIM Rohtak
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crore). Next, we assumed that on an average, a person drinks 2lt of water, which makes it Rs.40 per head per day. Following this for a monthly basis would cost Rs 1200 (40*30=1200) per head. In continuation, we assumed that a person would not spend more than 2% of his monthly income on drinking water. Thus, the person consuming 2 bottles per day would have Rs 60,000(1200*100/2) as his monthly income. In urban population, not more than 10% of people has monthly income which is equal to or more than Rs 60,000. Henceforth, people consuming water bottles are around 4 crores (10% 0f 40). Since each person consumes 2 bottles, the total number of water bottles used in Inia per day comes out to be 8 crores.
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Our approach was liked and approved by all the club mates, and the huge applause boosted my morale. From the session, I observed that it is very important to use simple numbers and round off intelligently so that you don’t get stuck on account of calculations. Also, it is extremely important to ask questions in case of any ambiguity faced while calculating the answer. This event helped the students to taste the consulting world. Also, the event provided us an edge over others in different guesstimate competitions held nation-wise.
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COTY-4 By – Sarath Babu, IIM Rohtak We got a chance to live the IPL auction experience during the COTY 4, Hit wicket auction game, conducted by Strategy and Consulting club of IIM Rohtak. It was more like a combination of fun and learning. The learning was how to devise a strategy to counter the decisions made by other teams during the auction at the same time optimize the sum of money given to you to spend (Rupees 70 Crore) and maximise the points as a team. As per the rules it was supposed to make a team which had a minimum of 11 players and a maximum of 14 players. The players had points attached to them, and the objective was to maximise the points earned as a team. After a brief introduction about the rules of the game, the bidding started. We found the teams were aggressive in bidding during the first phase of the auction, and hence were patient during the time. We made sure that no false decision were made during the first phase and earned only players who had 8+ points attached to them. As a result we had a good margin over others after the first phase. In the second phase we called out for players always on the first 15 seconds and were more involved in bidding as compared to the first phase. We ensured no players of 7 came to the team. We finally had a good squad with a total of 115+ points in hand and came first in the event.
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Latest Trends Anil Ambani’s Third Innings As a young business man, Anil while working for his father led various businesses at different times for the group. He came to be known as the fund-raising wizard for the group. This can be termed as his fist innings. In the second innings, he fought a battle of nerves with his elder brother Mukesh Ambani, leading to the split in the group. Anil got the finance, telecom and media businesses along energy and formed Reliance Anil Dhirubhai Ambani Group (ADAG). In his third innings, with a goal, to make it big in defence and aero-space, Anil is forced to sell his flagship businesses like Mumbai power distribution and mobile telecom services related assets. Last month, RCom announced Reliance Jio as the buyer of the assets of its main mobile telephony. Earlier the sale of Mumbai power distribution business of Reliance Infra to Adani Transmission was announced. Together both deals potentially worth Rs 42000 crore could help RCom to come out of SDR process and make Reliance Infra debt-free. The twin deals change the face of the Reliance Group as Crisil in its January 2, 2018 report upgraded the rating of Reliance Infra bonds and out forward its change of perspective. The third innings of Anil will see Reliance Infra as its flagship business. The stakes in defence business companies are housed in RInfra. In a change of strategy, instead of trying to sell its (engineering, procurement and construction) EPC business assets, the company has now decided to grow it. Reliance Capital, the financial services of the group, has successfully listed its mutual fund business, Reliance Nippon Life Asset Management. Its general insurance business is also likely to be listed soon. In an interview to an English daily, Anil Ambani said, “The Dhirubhai Ambani legacy is protected-we have kept our word and moral commitment, which is most important.” He also thanked his mother for showing him the way.
HNIs in smaller towns and cities turning into Angel Investors The earlier wave of angels was mostly MNC CEOs and COOs and owners of established organisations and confined to IT industry. Today, a large proportion of start-ups belong to nonIT space- such as logistics, communications, healthcare, food and travel. The HNIs from smaller cities like Raipur, Ludhiana are liking angel investments as a new asset class as it has dynamic market opportunity and investor service. The rising trend of angel investors from tier-1 and tier-2 cities points to the fact that the co-system for start-ups is getting mature. Out of 177.45 crore invested by Venture Catalyst, India’s biggest early stage start up investment fund with 33 deals last year, Rs 110 crore came from HNIs from smaller cities. Angel Investing has become the preferred way to flush high disposable income. It has moved up the asset class to become the highest risk and reward avenue with big returns. The Strategy and Consulting Club
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Indigo wet leases to cash in on winter traffic Airlines lease aircrafts from other leasing companies or airlines for two major reasons: to provide temporary increase in capacity, and to operate aircraft without the financial burden of buying them. Aircraft lease has two main leasing types: wet lease, which is used for short term and provides aircraft, complete crew, maintenance, and dry lease, which is usually for long term and provides only the aircraft without the crew. Indigo has recently wet leased aircrafts from Lithuanian airlines SmallPlanet due to the delay face in the delivery of A320 planes from Airbus. Under wet lease, the induction of planes becomes faster. IndiGo will only pay a fixed amount every month and the lessor will take care of operation and maintenance This is the first time Indigo is wet leasing whereas it has been dry leasing since 2015. Air India, Jet Airways, Spicejet & Go Air have all had wet lease aircraft with them at some point of time. Wet lease is costlier than dry lease and may lead to a spike in operational cost for IndiGo. But if the airline does not deploy enough capacity, it fears losing market share, besides lucrative slots at airports. Lease cost ranges between 0.8 per cent and 1.2 per cent of the aircraft’s cost, depending on factors like its age and Indigo may go for older aircrafts to bring down the costs. Further, Indigo is slowly moving away from the no frills model to a more complex one where they are incorporate multiple fleets rather than a single fleet across. We have to see how they will fare moving away from the time-tested model.
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The Strategy and Consulting Club Indian Institute of Management Rohtak Team Members Batch 2016-18
Batch 2017-19
Aditya Kumar
Ijas MC
Anuj Shakarani
Lavesh Bhadada
Mayank Jain
Mayank Banka
Pushkar Roy
Nishant Garg Varun Parvathaneni
Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak
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