Al Gore’s speech yesterday was noteworthy. America, he said, faces three big problems - the economy, national security and climate change - all three of them have the same solution - replace fossil fuels. He said that the US must set a 10 year target of producing 100% of its electricity requirements from renewable and carbon-free sources.

What a refreshing change from the G8 summit where world leaders bickered about a goal of a 50% reduction in green house gases by 2050. Even for this modest (and I would say meaningless) goal they couldn’t agree on the benchmark year.

The problems I have with the G8 goal, if you can call it that are as follows:

50% is too modest. The goals aren’t fair - they don’t share the pain fairly. The goals aren’t clear - 50% of what? Can you even reliably measure CO2 emissions of a country? But most of all 2050 is just too far off. All the politicians who are bickering about the goals will be dead by then.

Al Gore’s challenge takes away all these problems. It creates a sense of urgency and a mission. And the man in the street can understand it. The message is clear - replace the use of oil/gas/coal in producing electricity with solar/wind/nuclear/… within 10 years.

It’s just like another goal, clearly stated and clearly understood, that galvanized this nation in the past - putting a man on the moon.

At the most basic level the framework says that to maximize the chances of switching you should maximize Switching Benefits, minimize Switching Costs and make Research and Trial really easy.

Maximize Switching Benefits

If there isn’t a compelling feature or two in your product that will get a large percentage of your target user base to check out your product, it won’t work. When you introduce a product, it is more important to focus on the Switching Benefits than on lowering the Sacrifice. If the Switching Benefits aren’t there, you won’t get enough people into Research & Trial. If the Switching Benefits are there but the Sacrifice is somewhat high, at least you’ll get the trials and perhaps some early adopters to switch. You might also get some parallel runs, where users use both products for a while. But most importantly, you will get feedback.

Getting the Switching Benefits right is half the battle - that is the innovation, the idea. But sometimes it is not big enough. For instance, the challenge that online office competitors like Google apps and Zoho face is that their Switching Benefits over Microsoft Office are so slim that most of their users continue to use Office for the most part and use online spreadsheets for shared lists or some such occasional use case. Meanwhile Microsoft keeps making progress with Office Live.

Minimize Relearning

In recent years this has received a lot of attention. Design of software particularly has now entered an era where the bar on usability and aesthetics is getting higher and higher. This is partly because of enabling technologies like Javascript, AJAX and of course ubiquitous broadband. And partly because it needs to. It has become so easy to offer new software based services over the internet that, well, people are. In droves. When many services that do very similar things compete to keep users, user experience becomes very important.

Minimizing Relearning is not just about designing for better usability and aesthetics. There are other important considerations that are perhaps more strategic. Like not making it so different from what the user is using today, that they are totally lost. Or, holding off on introducing power user functionality to when a section of users are familiar enough with the simpler workflows and are ready for the power user functionality. And when you need to make the software more complex, layer the complexity so that a new user can still achieve simple tasks quickly. Many Web 2.0 companies do this really well. The poster child (if you don’t count Google) is perhaps 37signals.

The greatest design technology, will still leave some users looking for help for something or the other. When they do, they should be able to find answers to their questions quickly and in many different ways. A service that I use (and like immensely) called Wufoo has so many different ways of getting an answer to a question that is unlikely that anyone at the end of it will actually use the email support that is also available.

Performance

In Enterprise IT products were, and in some cases are still, bought based upon a comparison of features in presentations and marketing material. Here, having a feature is more important than how well it performs. But in software targeted at the individual, for personal use or for work, try before you buy has become so common that a technology marketer cannot hide a low performance feature.

Outlook 2003 could claim that it had a search feature, but one used it only under duress. Google Desktop changed that and Search became the natural way to find old emails. Now Outlook 2007 has better search, but Google Desktop and Spotlight on the Mac, are what users use even for searching email.

Integrating with peripherals

This one is important, but brings up the rear after Sacrifice and Performance. Sometimes, you won’t be able to integrate with peripherals even if you’d like to. Apple, for years, courted application software vendors to port software to the Macintosh platform. Some didn’t. Some did, but all new releases would be on Windows only and the Mac versions would follow after months.

Now Apple makes it easier to bypass this problem by allowing users to run Windows on the Mac. As momentum shifts to the Mac, application software vendors will automatically shift (or balance) allegiances.

Research and Trial

As I said in the last post, Research and Trial is a separate kind of Switching Cost. It is a component of the total Switching Cost, but in addition, it is something like an “investment”. Regardless of whether the switch happens or not, the individual has “sunk” in this cost. Also, a successful Research and Trial cuts through all the marketing hype and the fogs of the unknown usage patterns of each individual to uncover all the Switching Costs. What is still left uncovered becomes the Switching Risk. The higher it is the less likely is the individual to switch.

Thus it is important not only for the cost of Research and Trial to be low, it must appear to be low. Very often a potential user will not even go through the Research and Trial because it appears too costly in terms of time invested.

For tangible technology products, being able to touch and feel the product is very important. I remember how intrigued I was about the Segway a few years back. I read all the press about it, but nothing could beat the 30 second trial ride at the San Jose Tech Museum. Riding it was easy as pie. It’s another matter that I and a million other enthusiasts could never figure out when or where to use it.

In the world of software, free trials are the rule. But by itself that is not enough. One shouldn’t expect users to figure out how to use your product or even the purpose of it just by downloading your software and playing around with it. Most people don’t go through all the menus and screens just to figure out how it works. They want to know what it does and how it can help them in their jobs or their lives. And they are short on time.

Again 37signals and Wufoo do a great job here. They have Free Trials of course. But also product tours, video tutorials, FAQs, testimonials, forums…you can research their product any way you like.

These two posts turned out to be much longer than I thought they would. I hope I have done justice to the topic, at least what you might expect from a blog. But the downside of long posts is that you keep putting it off for when you have a stretch of free time from work and family commitments. In the future I’ll have to think about how to tackle deeper subjects - maybe break them into more posts.

But this post isn’t really about Windows vs Mac. While making the switch, I went through a process which set me thinking about the nature of the whole switching process. Some switches are simple and easy - changing your brand of toothpaste, for instance. Some look simple but aren’t. Like switching from throwing kitchen scraps into the garbage to using the green bin for composting (it’s a lot easier with bio-degradable bags now). Buying a new car, a new house or a new computer are very complex switches to make. Most people take these decisions with great care mixed with a large dose of trepidation.

Let’s use a simple framework to understand the switching process a little better. For an individual to switch, their perceived value of Switching Benefits less Switching Costs should be enough to compensate for their perceived Switching Risks.

Switching Benefits are what make you consider the switch in the first place. They could be functional (the Prius’s higher gas mileage will save me money) or emotional (I support Green causes. The Prius helps me make that statement.). This is all the Marketing 101 stuff.

Switching Costs are the costs in time, money and however you perceive negative outcomes, of making the switch. They don’t have to be all quantifiable. Since you are making this decision yourself you don’t have to make an itemized list of costs and benefits in dollars. You’ll just know when the whole thing - Benefits, Costs and Risks - doesn’t justify making the switch.

Switching Costs fall into a few categories. Understanding them will help us understand the nature of switching better.

Switching Risk can be simply defined as your perception of the ‘residual’ Switching Costs. Research and Trial uncovers Switching Costs which are deterministic. In a perfect world you would research and trial the product until you knew every single Switching Cost. However that would be too costly for you as well as the product vendor. So there is a good bit of ‘residual’ left. You may not know what’s in there exactly. But you will carry some perception of it. That’s Switching Risk.

There is an important trade-off between the Research and Trial cost and Switching Risk. The more you spend on Research and Trial, the more you lower the residual Switching Risk. But if it appears like the Research and Trial cost is too high, you might not even undertake it.

We now have a framework to understand Switching. I was building up to where I could connect this analysis to its implications for marketers of technology products. But this post is already too long. It’ll have to wait for the next one.

In the risk factors section of its first quarter 10-Q filed Friday, Anworth gives this warning: “In an effort to earn greater amounts of incentive compensation under their Employment Agreement[s], as our executive officers evaluate different mortgage-related assets for our investment, there is a risk that they will cause us to assume more risk than is prudent.” (Anworth has included a version of this disclosure in its filings for the past couple of years, but the latest Q throws in some new language about the structure of a certain bonus pool.)

Now its all great that Anworth is making full disclosure on what it thinks are truly its risk factors. But really, calling compensation policy a risk factor is like saying “Our management practices are deficient. And now you’ve been warned.” This begs the question - why don’t they fix the incentive compensation?

On the other hand, one can rightfully ask, why aren’t other companies giving “uncontrollable executive greed” as a risk factor? Its not like everyone else but Anworth has found the answer. The problem is far too deep set. It is a difficult problem to solve. I have written about this before as well here and here.

One of the topmost problems that the Capital Markets will have to solve as it digs itself out of the hole it is in is executive compensation. Disclosing it as a risk factor isn’t enough.

The logic works this way. Let’s say Acme Inc. set up a captive for its IT work in Bangalore 4 years back. The experiment went sour. Attrition is high even though wages keep climbing. The costs and the rupee have together blown the business case to smithereens. So now Acme wants to get rid of this white elephant. They would have laid off everyone except that the 100 odd engineers in Bangalore, actually do good work (as long as they stick around, that is). Since they support some mission critical systems, Acme can’t just shut down operations. A reverse transition to US based employees will take time and will be hugely expensive. The other problem is that some of the Indian employees carry knowledge about Acme’s business and systems in their heads that Acme would like to retain. The CIO’s ideal scenario is to find a home for these employees in one of the IT majors who will then have to deal with the employees as well as transition and knowledge retention risks.

In the eighties this was called Outsourcing. EDS and IBM built huge services businesses doing exactly this in the US. Today, the same thing in India is called an acquisition. Acme expects the Indian outsourcer to ‘acquire’ Acme’s Indian subsidiary and pay them for transferring a “stream of cashflows”.

To me this seems like an unnatural act. I can’t see how the IT services company can justify this beyond paying for the acquisition of assets. But there is obviously a way this is being justified because it is happening.

How would the IT Services company justify this ‘acquisition’:

- Growth is hard to come by. This deal will, from day one of the deal give me a revenue stream of $Xmillion.

- A deal like this will not impact margins since the acquisition cost will be a balance sheet item. ROCE has never been a problem or a key metric for IT Services. Depending upon how the amortization is set up, impact to net margins may be minimal.

- If my company doesn’t do this deal, my competitor will be happy to pay up.

- The market keeps asking us about acquisitions. Acquisitions outside India are too hard to integrate. Instead, we’ll just acquire a few captives in India.

- With this acquisition we will acquire some very important skills both technical and industry domain. This will give us a foothold in the Insurance industry or the German market or whatever.

None of these justifications work for me. They are ways to rationalize what these companies feel compelled to do to meet short-term expectations from the market. By this logic, every client outsourcing work in the US should first form a subsidiary, transfer all employees into it and then ’sell’ the subsidiary.

This new game is a dangerous one. It tells a story of an industry that doesn’t know how to respond to the triple whammy of costs, exchange rates and a US recession.

The theme is clean and functional but easy on the eye. Migrating to the new theme required some work, but no major challenges. Had to figure out how to edit a psd file without having to buy Photoshop. GIMP did the trick.

I think I have everything working. Let me know if you find anything broken.

“We must aim at 9%, as I will, and we must be happy if it’s between 8% and 9%.”

This begs the question “Is he setting a goal for GDP growth for the country or is he managing expectations?”

A goal, IMO, is something that is ‘actionable’, i.e. you and your team can take actions which help you achieve that goal. Much like a goal in football, you can’t score one by just being on the field.

GDP growth, on the other hand is a product of:

- externalities - like the monsoon or India’s demographics which no government (knowingly) had a hand in creating
- long-term policies and action - one could argue that the 1991 liberalization is the biggest driver of GDP growth in India today.
- short-term policy and action - which tends to be more monetary policy - interest rates and money supply. Even here, short-term means at least a couple of quarters.

If you agree with the above, then you have to also agree that within a fiscal year, there is precious little that the Finance Minister or the government can do to influence the growth rate positively. In fact, in order to control inflation, the FM will have to throttle back growth. So the quote above, is in effect, expectation setting.

But it doesn’t come across as such. In all the discussion about growth targets everywhere (and there is a lot of it), growth rates for the year are projected as goals, not estimates. Words like “target”, “goal”, “aim for” are liberally used. Don’t be fooled by it. This is just taking credit for not screwing up something that was going to happen anyway.

You’ll find this behaviour in the corporate world as well. When cause and effect are separated by long cycles, it is quite common to penalize the manager who did the right things, but did not last to see them bear fruit. As also the manager who does nothing or worse but is around at the right time to reap the harvest that someone else sowed.

Scott Herhold was a judge for an essay contest that WNI ran for school kids. Very interesting reading. The first place winners (Grade 5-8) are here and here.

Both states have able forward thinking administrations. And some help of course. Haryana’s proximity to Delhi is something they have taken advantage of. Orissa is blessed with more than its fair share of natural resources. But beyond that there is still a lot of good work going on. In Bhubaneswar, the traffic isn’t anywhere near being a problem yet. But the government is working hard to widen roads. Shows that someone is thinking ahead.

Patnaik attributes the differences and the trends in investment per capita to the quality of the state government administration. If I were to drill down a little more and ask myself the question, what would I look at if I were to set up a new center for my business my criteria would be as follows:

Rule of the law - This is not just about riots and bandhs. It is also about how secure my employees feel to live and work in the state. Do government officials harrass or help businesses? And so on. The two states at the bottom of the table are Uttar Pradesh and Bihar.

Resources - In our case that would be about skilled human resources. For a steel company it might be iron ore or coal. Orissa and Jharkhand have plenty of the latter.

Infrastructure - I don’t need to explain this one. But I believe there is a nuance here which should not escape us. Maharashtra, Tamil Nadu, Andhra Pradesh and Karnataka are either below the national average or have dropped their ranks. This is somewhat unexpected. My explanation for this is - urban infrastructure. All four states have mega cities that are the main centers of investment. However, while real estate prices in these cities climb into the stratosphere, traffic, pollution, water and electricity shortages are making them less attractive. Haryana is an exception here in that Gurgaon and Faridabad, to a lesser extent aren’t yet repelling investment.

The data itself is quite interesting. Being in the financial information business, I automatically start looking behind the numbers. How is this collected? What are its sources? Inclusions, exclusions? Is it investments announced or investments deployed? Regardless, if the data is comparable across states it is valuable.

Hopefully the states are looking at the data too, not just economists.

[via Ajay Shah]