Desicritics Category: BizTech: Companies

Managing Discretionary Spending and Pensions

Dr Bhaskar Dasgupta — Mon, 5 May 2008 01:14:23 EDT

Companies generate funds for investments from various sources. These investments are again allocated to various purposes, such as business expansion, for improving processes, for purchasing new businesses, or what have you.

When you invest in a new business, you usually track the revenue generation or the new business that it has generated and if it has not brought in anything near what you originally thought it would, then you re-evaluate it and then leave it or digest it.

Investments can be measured easily by revenues or costs, but when one is talking about operational changes, technology investments, purchase or implementation of patents and other intellectual property or say buildings, it suddenly becomes extremely tough to evaluate whether your investments are doing well.

Here, I try to shed some light on how one can help manage discretionary investments.

In my short experience, I was continuously surprised at how lazy people are in terms of managing their investments, in other words their capital. I asked the same question when I was at a conference some months ago, namely how many people actively check their internal firm investments in the same manner they do their pension fund investments? Hardly any hands went up in the hall, where numerous senior managers were sitting. This is why so many firms have less than efficient internal investments.

Portfolio management has existed for many decades, since Harry Markowitz proposed his portfolio management theory way back in 1952 (here’s something for the conspiracy theorists, his major work was done in the RAND Corporation…). Since then, three generations of investment managers have grown up and applied the principles of portfolio management to their investments. Portfolio Management is applicable to any form of investments and the basic concepts are the same: diversify your investments, make sure you know what you are investing in, the effective and efficient capacity to disinvest is more important than to invest, the objectives for the overall portfolio might be different from the sub-component objectives, do regular reviews of your investment and finally, be as transparent as possible, etc.

What do you do with your investments in your pension funds? You check them regularly, no? You invest in your pension with the expectation of future gain or benefits.

Depending on your personal circumstances, you decide your investment profile and target areas and then monitor the risk-return profile regularly, you replace badly performing funds with better performing funds if required, etc. In other words, you do Portfolio Management. And frankly, that is what you do within firms as well. Or rather, this is what you should do. This relates mainly to financial institutions, although the concept will apply equally to any firm.

The support areas within the companies also invest, but not in bonds or shares. Instead, they invest a certain discretionary sum in technology, in improving and running those processes, in offshoring and outsourcing, in satisfying regulatory and compliance demands, in revenue generation activities, in setting up branch offices, etc. By their very name and nature of being support areas, they provide some business benefit, either by allowing us to operate as a firm, or reducing cost or satisfying regulatory requirements or increasing revenue or a combination of some or all of them.

In a firm, there are two types of spending: "Business as Usual" versus "Discretionary" spending. The former relates to the spending you have to do to support your existing business, while the latter relates to “new” spending, designed to support growth and explore new opportunities. This second type is that which we would call investment.

Bearing this definition in mind, there are some key questions to consider. For instance: Do you analyse your discretionary spending for suitability? Do you know what you are spending the money on? Do you check whether it is providing value? Do you stop investments? Can you respond to ad hoc information requests from the business on the return on investment footprint for the investments? Often, the answer is "no." So, if you do that analysis with your own pension, why not do so with your technology or operations investment? And if you wanted to do so, what do you do?

The level to which you will go to analyse your investments obviously depends on the size of the firm, how you run your financial systems, what kind of financial governance do you impose internally etc. But for a large global financial institution, what you do is to get a small team of senior chaps together and get initial agreement on what you want to achieve, what will be the methodology, logistics and how will this portfolio management function be governed.

The data you need is simple, such as the name of the programme or project or investment, start and end dates of the projects, which business unit is paying for it, which unit will be involved in the implementation, the status of the spend (committed, authorised, approved, spent…), the purpose of that investment (regulatory, revenue generation, enhancements…), when the benefits will arise and so on.

Don’t complicate matters, a simple Excel spreadsheet is just fine. There is much benefit in keeping things simple but mind you, it would be worthwhile to invest in some good technical expertise in reports, graphs and business intelligence to present the data. But I am getting ahead of myself.

There are two problems which are crucial to manage. The first is the process to get the data and the second is the data itself. Senior management engagement is vital for this, but then, anything of this nature will require senior management engagement anyway. If you don’t have senior management approval and push, then you might as well stop, because your life will be hell.

Nobody likes their spending to be made transparent and if you do not have backing, you will get trashed, ignored or worse, actively banned. You see, transparency means performance matching. If your head of operations has $10 million to invest, the business can legitimately ask him, where are you spending that money and how do you justify that investment? Also, show your productivity gains (as in return on investment…).

But if transparency is not achieved, then the head of operations can merrily go about spending money without any care for performance or improvement. Even if they are all above board, how do you know where the money is going? Is it going into unproductive causes? How much is left in the kitty? How much of the money is tied up on multi-year spending?

To answer all those questions, senior management support is vital.

Senior management cannot, by themselves, sit in on every meeting with the spending divisions. This requires the second solution, and that is to have relationship managers. Whether you are doing this at the technology level, the operational level, the business unit level or whichever level you are aiming at, you need senior relationship managers who can talk to the business managers at their level of expertise and experience. If you do not have serious relationship managers who can understand the spend patterns, the business that is being supported etc., the process and data will not be good. In other words, you cannot have a fixed income trading background relationship manager talking about investments with the chief infrastructure officer, they simply cannot relate to each other.

The third solution is to invest an indecently huge amount of time and money in the pre-training, communications, workshops, conference calls, etc. BEFORE the process starts off.

This portfolio management process has the capacity to seriously influence your entire organisation, from top to bottom, from trading to procurement, from regulatory reporting to market data. So, before you actually kick this process off, make sure you have talked, discussed, debated, argued with as many stakeholders as possible and then document the agreements and then talk, discuss, debate and argue again. It is easy to go wrong once underway and difficult to change direction when started, so front load all the push, training, motivation, and discussions.

Then come the data challenges. Even though you have a good simple data model, you will be surprised how difficult it is to get the data. Simple concepts become horrendously complicated when seen across national boundaries, cultures, ages, sexes, languages, charts of accounts, etc. For example, a simple question like, what is the difference between a programme and a project becomes exceedingly complicated (Go for a more than 10 million budget as an example, and it’s a programme with sub-projects, and anything below 100 K has to be a task which has to be rolled up into a project).

What do you mean by project / investment start? Does start mean that some steering committee somewhere has given the go-ahead or the capital allocation committee has said, yes or the CFO has signed off or the money has actually been transferred to your cost code? Or does it just mean the project / programme initiation document has been signed?

A data dictionary should be written and training has to be given. Regular training, communications, etc. should be the lot of relationship managers. One has to beware that this portfolio management process might conflict with local financial governance, so having a word with the local or functional CFO before rolling this out would be better. For example, the standardisation of the “start” of a project across the globe and all units could require all CFOs to adopt the same sort of financial governance in terms of signing off and transference of funds to cost codes. So, keep it simple. Remember what Einstein said, "everything should be made as simple as possible, but not simpler."

Once the data starts rolling in, then get your business analysts and reporting gurus to work on it. A short, sharp presentation with some smart graphics showing the spending, its type and shape etc. is great, but add commentary to this analysis.

If you find that 40% of your funds are spent on regulatory aspects, which are multiyear in nature, consider asking the business COO and / or the CFO to ring-fence those sums into an SIV or in special codes which do not belong to the business or function.

This has huge advantages.

You do not have the temptation to dip into that pot. That pot of money is not something that you can influence, so you concentrate on value additive aspects of your investments, etc. It’s like the difference between spending your money on electricity versus spending your money on an iPod. Over the course of a year, both amounts would be the same, but you manage each investment differently and the same goes for mandatory spending.

Analyse when spending happens. The number of times I have seen people forget the yearly cycle is amazing. Spending behaviour changes over the year. The months just before accounting closes change as vendors and clients change behaviour, so that costs/revenues hit their books differently. People forget there is something called committed spending, especially in these days of outsourcing and offshoring. So if you want to cut costs, it is not that simple. If you were planning to put in gated funding, it does not work properly with outsourcing contracts. So commentary around that will help.

If you can get figures for return on investment, then there is nothing like it. That will make you the darling of the firm. You can turn around and ask (well, request…) the business owners: “You invested 100 million in that business, show that it returned the funds you said it would in the business case.” This commentary and visibility on the numbers is absolutely golden for senior management.

So what do you end up having? You have a process providing you with investment information which ends up giving management information on the investments. Now what?

Well, now you use this information in various management areas. Budgeting should be one. Performance evaluation should be another. Cash flow planning is another area where this can be used. Human Resource planning is an area begging for good portfolio resource planning. Across the firm, you will have very few good change managers and on the back of this process, you can hang a strategic resource plan. This structure also allows you to make investment changes with the greatest efficiency. This takes the emotion out of decision-making. If you have to cut your costs, then you can home into the areas where they are exactly possible, rather than areas where people “think” and “emotionally” believe costs can be cut. That is not good for the firm.

This structure also allows you to re-jig investments. If a strategic project is overrunning, then this structure and data allows you to make unemotional scientific decisions to take money from another project and give it to the project which is running a shortfall. Another advantage of this process is that it forces the entire firm to start talking the same language. Never underestimate the benefit of the firm using the same functional language and this is very useful indeed.

Think about it, your mergers and acquisitions will go much more smoothly if you have a clear-cut way to handle investments, both the old and new employees are clear about their business functions and their future. Again, the emotion is removed from the argument.

One way to get the language part right is to use a methodology. No point in hiring expensive consultants to tell you how to run your business.

Industry firms such as HP, IBM, Accenture and other firms release pretty good white papers on project portfolio management. If you want to go for a good book, then select this one by Shan Rajegopal, Philip McGuin and James Waller, titled Project Portfolio Management (ISBN:0-230-50716-6, Palgrave MacMillian). The book comes highly recommended and is written by authors who have obviously implemented project portfolio management.

They have written an excellent manual based on their experience with their clients. The only couple of criticisms one might have with the book is that they do not consider discretionary spending more widely, but rather take a perspective of technology spending only. However, that complaint is perhaps unique to Banking and Financial Services compared to other industries. Second, some more case studies might have been useful, but I suspect this kind of data would be very difficult to get. Still, you can do much worse than to keep this book on your reference shelf.

It is not an easy exercise. It needs much senior management attention and support, months and quarters of work and talk. You need to overcome a lot of cynicism and you have to work against the inertia of rest.

At end of the day, the data that you will get will be rich and will definitely be worth it. Don’t think that this is only for senior management; this can be done by any manager in charge of investments.

How do you know if you have done your job of portfolio management well? If your presentation to your management is received by raised eyebrows and the sentence, “This is interesting”, then you know that you have done a good job of it. But treat your investments as you would treat your pension, and your future life will be much safer, smoother and exciting.

All this to be taken with a grain of piquant salt!

Technorati Tags: management,financial institutions

Recovery Agent : Evolution of the Gentleman Goon

Shantanu Dutta — Wed, 30 Apr 2008 03:23:55 EDT

In India, the term recovery agent or debt collector throws up chilling images of unnerving phone calls, bounces landing up at the door, goons intercepting your car at a traffic signal and throwing you off as they repossess in mid traffic and all of that. So unsavory have the tactics been that the courts have often been asked to intervene and codes of conduct have been laid out as to how banks will go about the business of collecting bad debts.

But according to the New York Times, India’ s “ability” to recover debts is some thing that attracts American companies very much and it might b the next big thing, that might be out sourced to India. It seems according to the NYT report that in recession hit USA, consumers are finding it hard to keep up their payments on time and this is exactly the scenario, where India’s famed recovery agents are just equipped to step in and ring in the coins.

“India will be the only place we grow this year,” said J. Brandon Black, the chief executive of the Encore Capital Group, a debt collection company based in San Diego. India is the company’s largest operating area, with about half the company’s collection force of more than 300. Although the stereotype of a collector may be “some guy with chains and a cut-off shirt,” Mr. Black said, collectors in India are “very polite, very respectful, and they don’t raise their voice.” He added, “People respond to that.”

Of course those in dialogue with India’s debt collectors would be best placed to respond to The Encore CEO’s comments that Indian debt collectors are very polite, very respectful and don’t raise their voice. Possibly he is right and the collectors don’t need to. Who ever said that a deep, coarse and gravelly voice was necessary to send your spine tingling and your mind twirling!

So are debt collectors going to be India’s latest export? It would seem to be so, though it does not look that the business model that the US companies are adopting would see them sponsoring Indian recovery agents for an H1B visa just yet. But the ubiquitous call center executive is swiftly evolving to perform one more function - the sweet talking tele caller who will coax and cajole though not threaten delinquent customers into agreeing to pay at least a minimum amount an earn bonuses for managing to do so.

Given that the call center based recovery agents would not have the luxury of dropping into some body’s house and bull dozing them into payment promises – both for geographical reasons as well as legal, the collection agents’ methodology is dependant very heavily on through study and home work of the clients’ profile and behavior patterns. Encore is for instance coaching its staff bout the intricacies of the IRS refunds- the refund season beginning in May and the caller might know based on their study and research, just how much refund a particular lien is likely to get.

One thing to ponder here is that in this system, although there is a lot of psychological pressure and implied threats of “further action” –meaning law suits, there is no physical violence involved. The tele recovery agents essentially depend on their wits and the eventual might of law suits to get the reticent clients to pay up. Does this mean any thing for India? Will these global best practices in debt recovery which Indians are using to service debt across the oceans get adopted in their own country or the Indian experience will continue to be that of hoodlums and goons and people howling in newspaper columns and consumer courts? Let us wait and see and in the meanwhile, not wanting to take any chances, not run up any unpaid debt at all!

Foreign Investment Causes Child Labor?

Dr Bhaskar Dasgupta — Fri, 18 Apr 2008 14:34:54 EDT

It is almost a truism in the modern day and age that Foreign Direct Investment (FDI) is bad, and one way that the negative effects manifest is that it causes child labour. What nobody sees is the impact on the child itself (see here for an interesting email discussion that I partook in). Blame the foreigner for making our children work, while we are quite happy to have children work as servants or not to provide any other economic way to allow the children to actually study. But its better to kick out the foreign investor, no?

Here is a study which checks what is the impact of FDI on child labour. The authors find that FDI is negatively correlated with child labour and even after controlling for per capita income, the effect totally disappears. Nothing, no impact, zilch, zero, nada.

Another very interesting conclusion that the authors come to is and I quote, "A key policy implication of this finding is that policies that increase the income effects of FDI may be especially useful in combating child labour. Such policies include payroll tax reductions that encourage multinationals to increase employment and wages. Thus, rather than interpreting these findings as an indication that FDI has no effect on child labour, we believe that our results point towards the need for nuanced policy that exploits these indirect effects."

This was a very curious conclusion to draw. I can understand concluding that dont swear at FDI, guys, if nothing, there is no relationship to child labour at all. But why talk about income effects? How will reducing payroll taxes actually help improve child labour? Well, the fact remains that child labour exists because of a variety of factors, not least because their parents are not gainfully employed. Get their parents into employment and you will lop off a very large number of children having to work. Which parent would want to see their children work when they could be playing and studying? But, all those payroll taxes do is to make it difficult to increase employment.

Ronald B. Davies and Annie Voy, The Effect of FDI on Child Labor, Journal of Development Economics In Press.

Technorati Tags: Childrens Rights,Employment,Labour

Student Suspended For University Criticism on YouTube

Dr Bhaskar Dasgupta — Fri, 11 Apr 2008 08:54:15 EDT

A student was suspended after criticizing an Anglia Ruskin University Course on YouTube. Is this going to be related to a freedom of speech case or a defamation case? Well, this step by the university is frankly silly. Here's the video. Take a look at the comments, what defamatory comments?

On the other hand, students demanding to be like consumers? Absolutely, why ever not? They have paid good money for it and if the offering does not match what was given, then they have a perfectly good right to complain. I would complain as well. If a student has not learnt, a teacher has not taught. And after having had an MBA, having taught in business schools across the world, recruited from several across the world and having been on advisory boards, I firmly believe that business schools should practice what they preach. And Universities should realise that they are running a business.

But why on earth is the university not listening? I will tell you why, because business schools are almost always looked upon as cash cows by the university. They take the money from the business school and use it to pay for the salaries of people who are investigating the Mongolian cultural significance of the Argentinean blue bean. I am joking, of course, but this is fairly typical of what I have seen.

But again, if you are a business (and lets get this very clear, universities are businesses now), this is your customer complaining. What are you doing about it? Threatening your customer with legal action is NOT a great way to improve reputation or getting additional customers.

Also, what the university has forgotten (or is perhaps stuck in the 18th century) that removal of comments does not mean that comments are removed. This episode has now created an internet electronic footprint which will be available every time anybody searches for Anglia Ruskin University. Not good, their internet, student and media management leaves much to be desired (even if their education and teaching management is perfect).

Technorati Tags: Universities,United Kingdom,Freedom of Speech

Indian Retail and Consumers - A Followup

Anuradha Goyal — Thu, 10 Apr 2008 08:04:24 EDT

My last post citing incidents from experiences across retail stores is the first post out of some 250 odd posts, where no one disagreed with me and people just kept adding their own experiences. Apart from comments at DC and on my blog, I also received a lot of e-mails and a few phone calls including one from a customer services head of one of the stores that I had mentioned in the post. Now what I infer from all the feedback and rejoinders to the post is what I am trying to put across in this post.

Billing fraud in retail stores is much bigger than I had imagined. While writing about it, I was not very sure if I am doing the right thing, as it could have been series of co-incidences with me, but the replies to my post confirm that the organized fraud in retail stores can be much bigger than I first thought, or much bigger than what we can manage to ignore. There are two perspectives to this potential fraud. One is from the customers or consumers perspective, who are the ones being cheated. Now as a customer I have no clue if the employee at the counter is cheating or the retail store is also involved in the process. To me as a consumer the employee standing at the counter is nothing but the representative of the retail organization, so from my perspective the retail organization is cheating me. At the same time, if I flip the situation and see it from retailer’s perspective, they could also be at the suffering end from this problem, as the employees pocket the money or the items from the wrong billing and though store may not suffer financially but they do suffer in terms of brand value and customer loss.

Second, area of poor customer service also has ironical viewpoints when observed from customers and retailers perspective. Almost all customers feel that there are far too many people on the shop floor. On top of it, they do not know anything about what they are selling in the store, where is it located and basically are useless from the customer perspective. You would usually find salespersons cuddled together in a corner and often see customers and their queries as an interruption. All our friends in retail think they do not have enough people and quality of people is a big issue.

I can not comment about the quality of people, as that seems to be an issue across the industries. But I am sure retailers need to seriously look at number of people they deploy on the shop floor and also their knowledge of the products. In grocery stores, it should not be very tough. Probably training needs to involve usage of not so common items by staff members, so that they know about what the customer is asking for. Let me take an example, you go and ask for Tofu to any salesperson and they would not know about it, probably because they have never used it themselves, and while it is lying in the shelves they would often mistake it for Paneer or Cheese. As far as the number of people is concerned, I am sure retailers are using some benchmark numbers which may have come from the western world, and hence may not be relevant as such in India. They probably need to work out the no. of people on the shop floor based on total area of the store, the cultural element, expected footfalls and usability of those people to the customers. I am sure customers would prefer less people, who can help them when required and not intrude them when not required. I seriously believe that the retailers who can manage their customer servicing are the ones who are going to survive or thrive.

The only point in time solution that I can think of is to ‘Check your bills properly every time you shop.’ Do not think that since there is a bar code reader and a computer involved, nothing can go wrong. There are those fingers on the machine that have mastered the art of manipulating the system and hence you. Doordarshan’s ads on ‘Jago Grahak Jago’ seem to be just in time.

PS: Can’t help sharing another incident that happened last evening. I went to Nilgiris, and picked up an item which came in two sized, the smaller priced at Rs 12/- and the larger one priced at Rs 22/- , and picked up the smaller one. I had only 4 items in the basket and since my last post I have been observing the behavior of people at the counters even more keenly. The lady at the register swipes the items on the barcode reader, and when she swipes the above mentioned item the bar code reader correctly picks up the item and shows Rs 12/- on the screen. The lady very quickly goes and changes the item code and the screen now shows Rs 22/- . I asked her what is she doing, she first gives me a look of ‘what did I do?’, and then when I tell her what she did, she says Sorry as rudely as possible and then corrects the bill. Then in her frustration, gives me Rs 1.50 less than what she is supposed to return, when I ask for the same, she takes out the change and gives it to me as if she is obliging me. I was amazed to see the manipulation done with immense ease.

Derivatives Losses in Indian Companies

Ramki — Wed, 9 Apr 2008 10:21:39 EDT

The Institute of Chartered Accountants of India (ICAI) has recently ruled that companies should disclose and provide for derivative losses in their profit and loss accounts for the financial year ended 31/Mar/2008. Prior to this, these guidelines were to be followed from 1/Apr/09 and were to be made mandatory from 1/Apr/2011. Though there is some confusion regarding applicability of the above ruling and companies decide not to disclose anything in their books of accounts, the auditors would put in a qualifier when they certify the books of accounts.

I am sure everyone has been reading in the papers of companies having big MTM (marked to market) losses due to exotic derivatives and the above guideline would essentially mean that companies would need to disclose them in their books of accounts. And some of the companies are reluctant to do so. This article is primarily to give an illustration of what is the nature of these deals and how these losses have come about.

Suppose a company (eg. ABC Ltd) has money in USD (US Dollar) due to realisation from export orders and lets say it has a stream of USD receivables for the next 3 years. The company can convert the USD to INR (Indian Rupee) at the spot rate every time they receive it (or) the company can buy a forward cover (wherein the exchange rate at which the USD would be converted to INR at a future date is fixed today) (or) the company can undertake a derivative deal.

What the companies have typically done is that they have entered into a derivative deal wherein the underlying receivables in USD are swapped (exchanged) to another currency (say Swiss Franc, symbol CHF). And the other currency that is chosen as a pair with the USD is typically CHF or JPY (Japanese Yen). And the derivative deal that is done would essentially state that if the exchange rate between these 2 currencies (USD/CHF) is between a certain range, then there would be a certain payout to the company from the bank who sells this derivative to the company. If the exchange rate is higher/lower than the range, then the company has to pay an amount to the bank. The payout amount is essentially a formula that would be the multiplication of the principal involved (the amount of underlying receivables in USD that was swapped to CHF) and the difference between the exchange rates with a multiplier thrown in. To illustrate with the example of USD/CHF derivative, the deal would be that if the exchange rate range is between 1.2 and 1.3 (ie the range is between 1USD=1.2CHF and 1USD=1.3CHF), then the bank would payout to the customer and if it is outside this range, the customer would payout to the bank. So, if the exchange rate is 1.1, then the payout would be (1.2-1.1)*Principal involved*multiplier(say 5 or 10). The multiplier magnifies the amount to be paid by the company in case the exchange rate falls outside the range.

So why do these companies execute such deals where the potential payouts are huge with a multiplier effect? If we consider the above example of a deal with the range of 1.2 and 1.3, the above range is fixed based on the actual rate history of USD/CHF where data shows that this pair was in the above range for 2-3 years prior to Nov/07. So, for the period before Nov/07, the companies were getting payouts on these derivative deals and hence they had no cause to complain. Infact, a lot of small and medium enterprises with no understanding of derivatives have done deals like this that boosted their profitability due to the payouts received from the bank.

But starting Nov/07, the exchange rates started moving out of this range and when this happened, banks started calling on these companies and asked them to pay (the current USD CHF rate is 1USD=1.005CHF). Some of the bigger corporates were hit (eg. Wockhardt, Hexaware, etc.) but the worst hit names are the small and medium enterprises where the amount that the companies needed to pay the bank was in some cases a significant percentage of the net worth of the company. And it is these companies who started reneging on their contract and started blaming banks stating that these derivatives were 'missold' to them and they do not have any liability to the bank and they have now gone to the court.

Who is to blame? I would say both the banks as well as the corporates are to blame. The banks did sell derivatives aggressively and though they are supposed to assess derivatives appropriateness and customer's understanding of derivatives before selling a derivative to him, this may not have been adhered to in all cases or may have been adhered to only in paper. And as far as the corporates are concerned, when the going was good and they were receiving payouts, they were very happy. But now that things have turned ugly, they are crying foul.

What is the way forward? There would be some cases where the corporates would not be able to pay the banks on time and those are the ones who are panicking as if they disclose their losses in the notes to accounts and if the auditors ask them to provide for the same, then their profitability would be seriously hit. Some of the corporates would approach banks to restructure the derivative to postpone cashflows. Though this is not allowed by RBI, I am sure that the banks/corporates would arrive at a structure that would beat the system. But one thing is for sure, the fact that disclosure of these losses needs to be made in the books of accounts is a welcome change and hopefully would bring about some transparency in the system.

Book Review: Merchants of Deception - The Amway Inside Story

enidhi — Sat, 29 Mar 2008 11:15:43 EDT

Merchants of Deception is a book by Eric Scheibeler, former Amway Emerald Distributor, who once believed strongly that Amway would fetch him a financial freedom and success, reached near top of the chain, only to discover how fraudulent the system is and how everyone involved are guaranteed to lose money.

His book exposes some key inside info regarding the operation of Amway (and other such multi-level marketing companies) and is a must read to everyone involved in this business or considering entering into it.

Most of you have heard of Amway and other network marketing/MLM companies. Chances are, some of you might be a part of it or faced pressure to join it. These “Business Opportunities” are projected as wealth creation tools or vehicles to achieve financial freedom. But the truth often is otherwise.

Those who join these kind of business almost always suffer a loss - financial or otherwise. It may be difficult to blindly agree that these NM/MLM companies do more harm than good and you HAVE to read, Merchants of Deception, to know how exactly these companies fool people with an illusion of financial freedom.

The book is 232 pages long and free for download in pdf format from the author's website (2.91MB), MerchantsofDeception.com Click here to read Merchants of Deception for free.

The book is written in first person, in a sequential order, starting from Eric’s life before joining Amway, his initial days as Amway distributor, how he trusted the company, developed loyalty to his up liners and slogged hard to promote the business and eventually climbed up the ladder to different levels in the chain.

Then he gradually discovers he is not making the amount of money he is supposed to me making at his level (Emerald) and slowly comes out of his pre-programmed mindset and starts exploring things. The truths he uncovered and the trouble he faced from his upliners because of that make this book a must read for anyone who believes network marketing can make them rich.

As some of you may not find enough time to read all 232 pages of the book, I am listing below some key extracts from the book, with permission from the author, the facts you might have never known and are guaranteed to find it difficult to digest.

First, an open request to all Amway IBOs and members of other similar businesses who are reading this: I am aware that your current mindset doesn’t allow you to accept and digest the facts given below. Your upliners are guaranteed to brand these facts as rubbish and baseless allegations and distractions which will deviate you from your goal. MY sincere request to you don’t trust me or your upliners - Think independently and make an attempt to verify the facts on your own.

1. Amway top leaders make a fortune, NOT from Amway distributorship but by selling training material (Seminars, video, audio and books, etc.)

While few top Amway IBOs (At Diamond level and above) appear to be super rich, everyone thinks they made money because of core Amway activities (buying and using products), but Eric has discovered that their IT returns prove that wrong. Just 5% of their income came from Amway and over 95% came from “tools business”, a collective name for motivational stuff they sell to down liners .

These include, conducting seminars and charging people for it, selling audio and video contents with motivational stuff that will guide down liners towards success, books, etc. Low-level IBOs who buy this stuff think that the diamonds are sharing their success about to how to become millionaires like them, while diamonds pocket millions for the simple reason that others are buying their motivational stuffs.

Hardly 1-2% of members in a total network reach Diamond and above levels and mint money this way and the rest of the distributors (IBOs) will never be able to achieve that (because they can’t create and sell such motivational stuff)

If you doubt the above, ask for the income tax returns of these millionaires.

2. There’s no way to track your earning.

Amway IBOs don’t have an option to track their earning on Amway's Web site. If they get a check for an amount which is far below what they were supposed to get, there’s no way they can trace down the cause. At Emerald level, Eric was supposed to be making $100,000 an year, but he was making a little less than $30,000.

One of his down liners, a Ruby Direct, was supposed to be earning $50,000 but had made only around $4,000. An IBO is not supposed to discuss his woes with his downliners or cross lines and upliners won’t give any explanation why there is such a huge difference. Not earning enough is attributed to "not working hard enough" or "lack of commitment to the business" or "a personal failure" and an IBO will be assured that all his woes will vanish once he reaches the next level - for which he needs to work harder.

Everyone will be under an illusion that everyone else is making lots of money and only he is not making enough. They may try to hide this fact by attempting to show off wealth and saying they’re making huge money. If they say they are not earning enough their downliners will get discouraged and de-motivated, new prospects hesitate to join and business falls further, so faking success is the only way for everyone in this business.

3. Amway founders were very much aware of all the wrong things in the organization (Cultism, Tools, Business, Under-paid distributors, Near 100% of people lose money)

Eric shows, with evidence, that the frauds he detected were not isolated incidents but spread across the organization. More importantly he proves that Amway founders were aware of this from the very early stages and nothing was done to protect innocent distributors who lost tens of thousands of dollars or punish kingpin distributors who were making fortunes by exploiting the unsuspecting downliners. The book also details several unethical things done by Amway management to silence things they didn’t want the outer world to know.

4. The four cardinal principles of Amway (and such companies)

Amway distributors were brainwashed systematically about four cardinal rules, that they should never, ever violate. They will have 100% success rate as long as they blindly adhere to the system following instructions of their seniors and outside the system there is a 0% success rate.

a. Never De-edify:

Never question your upliners. You are expected to blindly believe in whatever has been told/instructed to you by your up liners. You’re not welcome to give suggestions / make deviations / use your discretion. Eric’s loyalty was questioned when he decided to correct a few grammatical errors in a newsletter given to him for circulation by his upliner.

Further, a distributor is expected to praise his upliner whenever there's an opportunity and serve him (by fueling his tank, paying the bill and being loyal) whenever he receives advice/help from his upliner. You’re expected to blindly duplicate.

b. Never pass on negatives:

Anything that’s against Amway is branded as negative stuff. IBOs are brainwashed to believe that those who chose not to join Amway are losers, who have no dreams, no hope, no ambitions and would never achieve anything in life.

Anyone who cautions you about any possible negative impacts of Amway are jealous of your progress and trying to pull you down. You’re supposed to use only Amway products at home, nevermind how expensive it is. You’re expected not to have a plan B as that would mean you don’t trust the system fully.

If you’re not willing to put in enough efforts to promote the business you don’t love your family. You’re always expected to give positive feedback and talk good things and show off (though you didn’t like the product or running a financial loss).

c. Never Cross Line:

You need to interact with your upline and downline only and are not supposed to interact with other members of the company. This is typically to ensure retention of secrecy.

d. Never implement new ideas:

You must do what you’re told to do. Nothing more, nothing less. You’re supposed to be the owner of your business, but you have no freedom to bring in a change or run it the way you want it.

5. Nearly 100% people fail

This can sound unrealistic. With so many millionaires as living examples, how can anyone say the system is not good? After recruiting over 2,000 people under him, Eric realized that he could identify only 10 people who made net earnings of $1 or above in a year (after deducting the expenses incurred in promoting the business).

The system is such that it ensures its members keep pumping money in by buying overpriced products, attending seminars, buying motivational materials, etc. The earnings they make usually will be far less than expenses incurred for all these. People are kept going until they break, under a nonexistent hope of financial freedom which would come as soon as they reach the "next level."

Failure, when it finally happens, is attributed to an individual rather than the system, so others continue in the belief, "That can’t happen to me."

6. Dream building is a key technique employed

A prospect is made to build a huge dream (mansions, private jets, etc.) and is made to believe that their current job can never take them there but a business like Amway has the potential to take them there within years.

Greed is quite a common weakness in humans and MLM companies very effectively target that and most people don’t find any fault as such in the system and silently fall prey. The brainwashing that happens gradually after they join will keep them loyal to the system. If anyone tries to save them from the impending disaster they are heading to, such people are treated almost like enemies who are snatching their dreams away.

The book explains all these in detail. It also reveals the cultism, the emotional and financial trauma he and his family faced, the tactics adopted by his upliners to keep him silent, how he was blackmailed and threatened and more.

His struggle to recover to normalcy is remarkable. He could have walked away with huge amounts of money, had he chosen to remain silent. But he chose to spread awareness and has actively helped law enforcement agencies across the globe to investigate scams of this nature. He receives over 3,000 testimonials a day from MLM victims across the globe and his Web site is full of supporting documents, proof, the latest news related to the business.

Prasar Bharati, Cricket and a Free Lunch - Not!

Sathya — Thu, 27 Mar 2008 00:18:42 EDT

Expecting Prasar Bharti to screen test matches on Doordarshan; is it our way of seeking refuge in socialistic benefits, when being chased by capitalistic behemoths? I would nod my head in agreement and say, “yes it is.”

After all whether we like it or not, Doordarshan is a free lunch, where unlike the BBC in Britain, we don’t pay a license fee to the public broadcaster. In England, every citizen possessing a radio or television is expected to pay a license fee to the BBC. But aren’t we doing the same in our telecom sector, each of the private players pays an Access Deficit Fee to the state carrier – BSNL, for provision of rural connectivity. It is common knowledge that this is passed on to the end user, who probably doesn’t complain much, thanks to the cut-throat competition that has resulted in a geography which boasts of the lowest telecom tariffs. Worthy of mention here is the strategy adopted by Virgin Mobile, a new player in the telecom space. They claim to pay you one tenth of a rupee for every minute of an incoming call. And to think, when you are in Big Brother’s land you would wonder why you are having to pay for an incoming call – The merits of a fledgling market!

Back to the rant. The same Prasar Bharati that would fight in Madras High Court with some of these broadcasting companies, the same Prasar Bharati that would push the parliament for legislations about what it called “Sporting events of National Interest,” this time folded without giving a fight. This time it is not fighting with the Nimbus promoted Neo Sports, for broadcasting the India South Africa series.

The socialist in me is crying foul.

One, I feel the broadcasting rights in our country are extremely overrated. I don’t have any numbers with me, but the amount that broadcasting rights for these matches fetch can be only described as vulgarly excessive.

Two, the way every inch of the television space is littered with advertisements in an effort to monetize every pixel, can just be described as obscene. I didn’t complain, when advertisements between overs overshot the available time. I didn’t complain when a logo of a sponsor was embedded into the on-screen graphics. I didn’t complain when another graphics appeared for a replay, cutting off one corner of the screen. And then another one appeared, and then one more.

Today when I see a ticker/advertisement ticking over the top end of the screen taking along with it a good amount of the players’ faces, I want to look away from the game. The game doesn’t deserve me anymore.

The only way, this overrated broadcasting bubble would have been deflated to a more manageable size would have been if Prasar Bharati had put in a fight for the free signal. The companies would realize that it is not so profitable, if they were to share the signal with the state broadcaster.

Before I get onto how the bubble is only being inflated further by the emergence of the two cricketing leagues, I think I should stop and ask – Does your cable operator provide Neo Sports? Maybe he says it's overpriced. Maybe he says you would have to pay some amount more by way of monthly subscription. Maybe he is the sort who pilfers a signal and ensures that you get to watch the game. Maybe I dream of a day when I can get to see a cricket match, with fences for boundaries unlike advertising hoardings, where the ground is of green grass not painted with the motifs of some corporation and maybe a telecast sans that annoying commercial.

But alas! Like that cliché goes – There ain't nothing called a free lunch!

Sony Reverses Plan to Charge For Bloatware Removal

Ashish — Mon, 24 Mar 2008 12:20:49 EDT

When you buy a new OEM machine, it comes with a lot of programs that are on trial, such as anti-virus software trial versions, and numerous other software. There are two advantages for the makers of these software as well as for the computer manufacturers. The software makers depend on a proportion of consumers becoming attracted enough towards these applications that they are willing to pay for buying these programs. Getting these software products pre-installed on the machine helps expose them to a much higher number of consumers and increases the chances of conversion. For this advantage, these trial software makers pay computer manufacturers for the chance of placing their software on these machines. It is estimated that computer manufacturers can make more than $50 per machine from such software.

For a vast majority of the final users/buyers of the machine, these software consume hard disk space, as well as run all the time slowing the machine down. Most consumers will not know how to remove such software, and suffer. For an advanced user, the options include removing the programs one by one, or by doing a fresh install on the machine that will remove these software, called 'bloatware'. So, imagine the pleasure of consumers when Sony declared that it will give a machine that does not come pre-loaded with such software; then this pleasure turned to shock when they found out that Sony will charge them $49.99 for removing this bloatware. There was a strong reaction to such a move; imagine paying extra to have the manufacturer not loading extra stuff on your machine:

"Bloatware" is a term that is familiar to many new computer buyers. Most new computers come saddled with HDD and memory-robbing applications like trial versions of antivirus programs, various desktop search and chat applications, or perennial offenders like Adobe Acrobat. Computer makers rely on these add-on programs to generate additional revenue in the age of decreasing computer prices -- bloatware can add as much as $60 in additional revenue for each computer sold.

Sony, however, made the unwise decision to charge customers a $49.99 fee for the bloatware removal. Whether the charge was intended to somewhat makeup for the estimated $60 windfall from the application publishers or just an effort to squeeze more money from its customers remains to be seen. News of the $49.99 Fresh Start fee quickly spread around the Internet Saturday with sites taking Sony to task over the blunder. Sony quickly recoiled and removed the Fresh Start fee.

This quick reaction by consumers and Sony's quick acceptance of this customer outrage shows that corporations are quickly cottoning on to the fact that customers, especially in this age of quick communications can turn reactions against a company very fast. Sony last suffered such a bad reaction over their Rootkit fiasco, and the prolonged bad press at that time would have made them much nimbler this time.

Mark to Market - Vital for Democracy & Western Civilisation?

Dr Bhaskar Dasgupta — Mon, 17 Mar 2008 11:36:09 EDT

I am seeing articles about how marking positions to market is contributing to the recession and how it should be stopped or amended almost daily in the financial press. But this is dangerous thinking, because if you cannot mark to market, then how did you manage to value it in the first place and if you did, who was the idiot who bought it without having the ability to value it on a mark to market basis? Because that is what it means. The value of transparency and mark to market goes way beyond some badly priced instruments. Mark to market provides one of the foundations of Western civilization. How so?

The premise for current liberal democratic societies and Western civilization rests on the belief that your behaviour will be judged by your peers. Take the example of democracy where it is for the people, by the people and for the people. In other words, we get together on a particular day and then based on open and transparent ways and means, we elect one person or a group to represent us and rule for the next few years. Then again, we get together after that and again there is peer analysis and judgement, following which, we either keep them or get a new leader.

These leaders (Presidents, Prime Ministers, Members of Parliament, Members of Congress…) then get together and think up with laws, which are again judged by our elected representatives who form another peer group. If most of the peer group judges the law as good or great, then it indeed becomes law. And if in the future the peer group of parliamentarians and leaders think the law has to be changed, then they change it according to the same process. If somebody falls foul of the law, you simply cannot just lock him up. One has to bring him in front of some judicial body and tell him why he needs to be locked up and refer to the right law.

But not content with that, we go and apply the judgement of our peers on our court cases. We have a judge who is more of a referee rather than a judge for the laws. When somebody is accused of breaking one of the above mentioned laws, he is brought to a court where he is judged by a group of his peers based on the evidence that is placed in front of them. And if the jury (peer group) thinks the evidence is not enough, then the defendant is let go or his sentence is reduced. This is not a theocracy where laws and rulers are up there in the heavens and only the clerics can judge. It is a man made world and only man judges man.

Similarly, mark to market is nothing but judging your investments against the consolidated judgement of your peers. If you have purchased an equity share, then after two years, you judge if the value is good or bad. You try to mark to market it, or look around and ask for the value of that equity share. If the judgement of the market is that the value is bad, well, then it is. And when you are thinking about your pension funds or your own investments, it is a good idea to regularly check the value of your investments.

So why is this habit of transparently checking the investment value suddenly getting hit on? Well, previously, you would not check the current market value, but you would book your investments based on the value of the investment on the day it was purchased. As you can make out, it is silly. Imagine your father purchased a piece of land in London in 1950 for £2000 and then gifted it to you fifty years later. The current market price of the land is £200,000. If I asked you about the value of the land, would you say it is £2000 or £200,000?

So this is what the accountants of the world united for and forced companies to do (pun intended). They forced them to evaluate their assets and investments based on the current market price, or in other words, forced them to do mark to market. And while the markets were going up, they were fine, it was when they started tanking (like now), that they started whining that mark to market is bad. Well, no, you have to take the good with the bad. And judgement of peers is not bad.

But I am curious why there is not much more noise about this. If I tried to remove or reduce a democratic judgement by jury then the most almighty hell will break loose (think about the reactions against Guantanamo Bay, the time to detain without charge in the British Terrorism Acts, the changes to election law, the question about Europe in so many European countries, the Florida voting problems in the previous US presidential elections and so on and so forth). But look at the issue about mark to market, besides the financial press (newspapers and magazines), nobody gets excited about this issue.

If you remove mark to market, then huge swathes of the economy will be in trouble, simply because we work based on trust and openness. Think of the land value example given above. Extend this out to any sector of the economy and if we do not know the current value of our assets (whether public, private, corporate or individual ones), then we will find out that our economy is in trouble because pensions, taxation, benefits, the public sector, the local council or municipality, the import and export of goods, the value of our currency all are directly or indirectly tied to the value of our assets.

The government cannot tax anything without a way of checking if it is correct. Say they want to introduce taxes to improve or build more railways. Later, they decide to privatise the railways. So how on earth will they value it, if they do not have an idea of the current value of all those assets involved? Your money went to buy assets, which are now being sold back to you. Our pensions could be reduced with no way of checking if that is right or wrong. And so on and so forth.

The fact that marking to market on certain products is causing the markets to sink is no justification whatsoever that it is bad. It is indeed good to clarify these reasons and bring them out in the open, otherwise we are looking at inflated values based on nothing more than some fevered statistical modelling and some bonus driven desires.

You would hate it if trial by jury is removed. You would hate living in a dictatorship. You would go to war to impose democracy on a country and you would lend tons of money to a country to develop its legal system, but nary a peep when your own economic and financial system is being undermined by attempts to remove transparent valuation of assets?

All this to be taken with a grain of piquant salt!

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