Price Discrimination

One of the first things you learn in Industrial Organization (IO) is price discrimination. As in all IO models, the main objective of the sellers is to extract as much surplus as they can from the buyer. Since the seller can not discern between the different types of consumers or their willingness to pay, s/he has to devise different pricing schemes to optimize the revenue.

An excellent paper that looks at non-linear pricing for information goods is Prof Arun Sundararajan’s eponymous paper, found here. One of my all time favorite reads.

Of course, a different pricing scheme is needed in the case of non-information goods, because the key assumptions of the model may not be valid (non zero marginal costs, for example). Therefore, as always, I turn to Scott Adams for inspiration.

Yes, that is it. The golden rule of pricing: it depends.

The Economics of Training on Human Capital

Well, a few of you may know that I am interested in the economics of training on human capital, especially as applied to the knowledge and services industry. My co-authors and I are working closely with top notch IT service providers, for whom their human capital is the most important asset. In particular, I am engaged in a series of ongoing research projects that deal with this issue and have some really cool data to work on.

We sent out the first paper in the series last week, and we have been presenting the research at various places, with a fair bit of Oooh response. The idea that we are selling is: “hire for character, train for skills.” That training improves performance is a known yet seldom proven fact, and we corroborate that in our paper. Yes, more seems to be better.

But beyond exploring the aggregate impact of training, we dig into even deeper and more important aspects of RoI of training. We analyze the impact of various kinds of training on different employee profiles, and come up with stellar results.

So imagine my consternation when I see this. As usual, Scott Adams is a bit ahead of us academics :)

Why India = Outsourcing?

I was interviewed today by some journalists from the Irish National Television. Very cool, and I can brag about this in my next class. Coming so soon after teaching the Outsourcing course at ISB, I had the concepts clear in my mind.

Since this was for the Irish TV, they were naturally interested in knowing what was behind India’s success, and how would Ireland compare, especially in terms of education, access to Europe, and low corporate taxes.

So what is it? My thoughts:

1. Availability and scalability of talent:

Some numbers reported leave one astounded. 350,000 fresh engineering graduates every year compared to US’s 70,000. Even when these numbers are taken with a pinch of salt, that is still a lot of people. And the billion plus of us have close to 10 million English speaking population. Way more than the population of Ireland. And being a young country (our median age is around 25 years), we are poised to be the talent pool of the world.

2. Distances are in your mind:

So India is far from Europe, and farther from the US. Well, why not use technology, processes, and practices that mitigate these.

And offer a 24 hour work day.

Taking these up one by one.

Yeah, yeah, so CMU came up with CMM. (I know why on  a personal level, junta can not top my association with my beloved alma mater!) But here is a fact:  many of the CMM-5 rated firms are in India. Wipro, for example, was the first firm world wide to be certified at CMM-5. No mean achievement. Indian ITeS vendors have realized that processes can reduce uncertainty and risk, can act as quality signals to clients, and increase quality of output. All desirable in the world of ITeS outsourcing, KPO, or BPO.

Indian vendors also understand that they are geographically and culturally distant from their client base. Hence, the extensive use of technology to communicate with the stakeholders. Not to mention practices like onsite presence and handholding client that help bridge these distances.

3. Tax benefits:

Indian government is pretty bullish on the ITeS. Special economic zones, giving 100% tax breaks for the first five years, 50% for the next, and so on, make for a lucrative proposition.

****

So cost advantages, talent shop, processes and tax breaks.But then why would companies continue to stay on? What happens after the cost advantage vanishes, or the tax breaks, err., break?

Tada!

4. Value for money:

Some things never change. As in, clients look for value for money.

Y2K bug, coinciding with the liberalization policies of the 90s put Indian IT service vendors on everyone’s radar. Since then, of course, they have taken advantage of being the first mover and entrenched themselves into the client psyche. Now it is no longer about cost arbitrage (and indeed, given the current pay packages of IT professionals, that is a fleeting advantage). Whether you call it loyalty or the switching cost syndrome, Indian vendors have developed long term relationships with their clients, invested in them, and therefore made outsourcing a value proposition. In fact, over 90% of the business for the Indian Big 5 is repeat business. The vendors are also moving away from the staid old contract structures (fixed price or times and material), and offering the buffet: transaction based pricing> you got it. Value based pricing? Have that too. In fact, stay tuned for more research snippets on the loyalty framework…

Therefore, when you think of outsourcing, you think of India.

I rest my case.

So what do you think? I think I have scared the Irish quite a bit, helped by some of my students from the OITB course (thanks Sujay, Jasnoor, and Yannick from Co2010@ISB!).

Visionary healthcare

In my earlier life, while working as an IT engineer/consultant, I had a chance to work on a unique project commissioned by Kerala Tax department. The state’s vision of a more transparent process that yielded better results was a wonderful testimony to what IT can do, provided one has the vision for it.

Last week, I had an opportunity to observe another such visionary initiative in the Indian state of Andhra Pradesh: HMRI. I visited a village to see the operations in person, visited the call center, and then had a subsequent chat with the management folks at HMRI.

So what is HMRI and what makes this project unique? To set the context, I have to explain the state of healthcare in India, and rural healthcare in particular. I am going to talk about the facts as I got them.

So consider this: We have a population of about 1.1 billion. Assuming 4 visits to a doctor per annum we generate a demand of 4.4 billion a year. How many of this can be catered to? At an estimate (HMRI figures), only about 0.5-0.6 billion is catered to by the public healthcare, another 1.0-1.1 billion by the private sector. So, there are between 2.8-3.1 billion who are either treated by unqualified practitioners, or not treated at all.

While I wrap my head around these staggering numbers, I also ponder on the why. Of course, in many regions/states in India, it is the general apathy and corruption in the public sector. This coupled with the lack of the right incentives for health care personnel to go to the villages, should explain some of these stats.

Then how are we to achieve universal healthcare? Aha, that is where HMRI steps into the picture. The central idea is based on factual observations about the healthcare demand cycle. A majority of the visits to healthcare professionals are routine ‘reassurance’ visits that can be catered to by registered trained nurses, a few need the attention of a qualified doctor, and a very few are emergencies. So, HMRI was initiated. It has two central lines of operation: A toll free hotline (104), and a contingent of mobile vans.

I observed both the operations at first hand. First the village where one of the vans was stationed for the day. It was indeed very interesting to see the villagers being taken care of – registration (state of the art, using biometric software), initial height and weight check up, then BP then other tests if so needed, and even a pharmacy counter. The efficiency of the whole operation was astounding! And it is free! A van rounds up a village once a month, and for up to 8 hours for a population of 8K. This is especially useful for routine care (as in pre-natal), and chronic ailments. Serious cases are referred to either emergency care or sent on to a doctor. Considering that many of these villages did not have access to any medical facility whatsoever, this once a month is a blessing!

Even more interesting were the phone operations. The call center handles a volume of as much as 27K valid calls a day, and caters to people in AP region in three languages: Hindi, English, and Telugu. Amazing! People can call in and get advice on problems ranging from acne to severe trauma, and get counseled by qualified professionals, including psychiatric advice for suicide cases – which they follow diligently up! It surely doesn’t get any better than this. And free!

So how does IT come into picture? Hah! Thought you would never ask! Whether it is the mobile van or the call center, the data are fed into a sophisticated database and help with trend watching and predictions. The data also help fine tune the algorithms that aid call center operators. And, of course, the IT artifact is hard to miss, the scale of operations, the supply chain, and data analysis would have been hard to do without IT.

In the end, however, IT has been an enabler, no more. It takes vision to get this going. It takes innovation to come up with this novel approach to universal healthcare.

Good job HMRI!

An introduction to this blog

I have loved computers since I was this high (as you can’t see this, this is irrelevant), and I was delighted to be part of the IT bandwagon as soon as I could.

When I did decide to jump into academia and pursue a PhD, it seemed natural for me to look for managerial problems in the domain of IT. I applied to and got accepted in the doctoral program at the famed Carnegie Mellon University.

Not to toot my horn, but this pretty much rocked. A truly inter disciplinary university, the distinctions between departments and even schools was blurred as far as research went. I learned a lot at the place, but I truly learned to appreciate and tweak out the business value of IT.

Loving mathematics as I do, the economics of IT/IS attracted me a discipline, and I took several foundation courses (you know the drill, right? Microeconomics, Econometrics, Game Theory, Probability, Industrial Org) and thought was well equipped to delve into the real meaty problems.

Hah!

I did learn one thing though, there is way more to learn, and I am but started. This is a journey in the truest sense. One doesn’t arrive, but savors the toil.

So what is this blog about? I shall write my thoughts on the topics in the IS/IT research that interest me, and will try to explain some concepts that I can in my humble way. I will also opine on the business problems that our research domain has looked at.

Enjoy the ride!

PS: To any one who is interested in a PhD in this area, do drop me a line.