I have not written for a while as I am attending the International Conference on Information Systems (ICIS) 2006 in Milawaukee, Wisconsin. Its a delightful downtown full of holiday decorations and lots of beer places. Yesterday I presented a research paper in the OASIS Workshop - Empirical Analysis of Determinants of Perceived Customer Satisfaction with Open Source Software (extended abstract).

This post is essentially an update of previous posts. First - my stock portfolio, then an update on my Prosper adventure and lastly, research.

Stock Portfolio

My post on a 60%+ stock market return in 9 months generated a lot of interest. Well - my portfolio is continuing to perform and I am on on track for ~80% by the end of the year. I will be paying capital gains tax on this end of the year - but thankfully my marginal tax rate is low so its not going to hurt too much. Here is my current stock portfolio:

• Seagate (STX): It has been the largest stock in my portfolio for a while. Now I have booked profits to the extent of about half of my initial holding but I still have quite a bit left.
• LCA-Vision (LCAV): I bought some when it dropped after bad results as I am positive on its medium term growth. It has been reasonably volatile since then and that had given me the opportunity to book profits and re-enter.
• Cemex (CX): It is the classic business school case - and its growing. There have been some unpleasant acquisition news going around - that gave me an opportunity to enter. This is my first time holding on Cemex.
• TurkCell (TKC): I put in a lot of money on this a few months back - was down a significant percentage one time then it recovered sharply and I was able to book profit on my entire holding. Then it dropped and I have re-entered.
• Tata Motors (TTM): I have a smaller holding in my one time employer than I would like to have. I am looking for entry points but it has been consistent and strong.
• Other small holding are - Select Comfort (SCSS), Christopher & Banks (CBK), PepsiAmericas (PAS) and HiMax Tech (HIMX). I picked initial stakes in all of these after their sharp down move recently.
  

You can see that I am quite heavy on emerging markets. This also insulates me from the coming decline of the dollar and the slowing down on the US economy. Here is a screenshot of how my portfolio has grown in last 6 months. Not all of this is stock appreciation - I also infused cash along the way. I have cut out the values on the y-axis for privacy reasons.

Figure 1: Stock portfolio growth in last 6 months

Prosper Adventure

I am continuing to put money in Prosper - although the careful lending strategy that I use necessitates slow scaling up. Now I have ~3.5% of my total investments in Prosper. All the data analysis pieces I posted here has helped me make better sense of the dynamics in Prosper. All my loans are current and I have average interest rate of 20%+. Lets see how long the honeymoon continues. This is my current Prosper portfolio distribution. As I had recommended in my previous posts - D credit group is the way to go in Prosper.

Figure 2: Portfolio distribution on Prosper, December 2006

Research

I am in the middle of all the big names in IS research here in this conference. I have been talking to several researchers and here is the big thing everyone is talking about - impact of IS on Innovation. The troublesome thing is that I am also looking at the same thing - although I am confident that the niche I am following is quite unique and I will be able to look at it from a different angle than other researchers.

PS> LFCFan has inspired me to put some ads on my blog and “monetize” the traffic. I am not completely comfortable about it - but its exciting to see that all this that I write has a hard cash value. If you find the ads in bad taste, not appropriate, unpleasant… then please leave a comment and I will take them out.

PPS> Its that time of the year when NASDAQ 100 index is rebalanced. This year Infosys (INFY) is being added to the index and its a great great story for the Indian businesses. Although I am very positive about future growth of Infosys - I am quite uncomfortable with current valuations (PE 45, PEG 1.29) - so I will stay out of it till valuations come down to more reasonable levels.

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Continue reading → Current Stock Portfolio, Updates

I feel like charts and numbers today. I have been following India’s development progress for a while and want to draw attention to some macro level data that illustrate the direction and magnitude of this progress. All the data used in this post are public and you can find them at the India page of the CIA World Factbook. You can also find previous years data and a lot many charts at the IndexMundi Country Facts website. I have borrowed the charts from there - though they are all based on public information. All the text, interpretation and analysis is original.

1. Population Growth: Lets start with something broad and basic - Population. India’s large population and predictions for India crossing China as world’s most populous country by 2025 or something is well known. I agree with the assertion that India *does* have a population problem and India’s large population is an impediment to growth and higher standards of living. Now - the good news. India is seeing significant improvement in population growth rates - look at the chart below:
   Chart 1: India’s Annual Population Growth Rates, Year 2000 - 2005.

   The chart shows *consistent* and reasonably rapid reduction in India’s population growth rates. Its almost constant rate of change: reduction by 0.04% points per year. Keep going at this rate and soon India will have annual growth rates of less than 1% - very manageable! Though India’s growth rate is still significantly higher than that of China (0.58% in 2005), it should be remembered that India is reducing her population growth rate in a peaceful, democratic way without any coercion.

2. Birth Rates: Just so that its clear - India’s population growth rate is not coming down because of epidemics and illnesses! India’s birth rates are declining - again consistently and significantly. Here is the graph to prove it:
   Chart 2: India’s Birth Rate (No of births per 1000 population), Year 2000 - 2006

   What makes me happy is not the decline - but the persistent and consistent decline. Again - almost at a uniform rate. This shows that this is a *systemic* phenomenon and not the result of some one-off policy, epidemic, whatever.

3. Fertility Rate: As can be expected, the decline in birth rate shown above is because of women in India are having less number of babies. There is a special point here - look at the fertility rate trend below:
   Chart 3: India’s Fertility Rate, Year 2000 - 2005

   Here is the point: to me, year 2002 is a landmark year. For the first time in India’s history, fetility rate (defined as number of babies for every mother) fell below 3 in 2002. Anybody familiar with India’s middle class ethos would understand how big a deal it is. Not long ago the ideal family size used to be 5 0r 6 persons (parents and 3 or 4 children). Now, the average family size is less than 5. That means the *ideal* family size is moving towards nuclear families of parents and two kids - which BTW is the replacement level!! Fertility rates have continued to fall in the same consistent manner as other charts above - and its so very encouraging!

4. Infant Mortality Rates: So the population growth rate is coming down and people are having less kids - but what about standard of living? Here is the answer - Infant mortality rate (how many kids out of every 1000 die by the age of 5) in India has, again, been declining consistently over the years. This indicates an improving healthcare system and improving availability of medicines and nutrition.
   Chart 4: India’s Infant Mortality Rate, Year 2000 - 2005

   Not that 56 kids out of every 1000 dying by the age of 5 is no tragedy - it is and its deplorable. But - there is a ray of light. Its coming down and coming down every year. For a country as large and diverse as India, being able to maintain a secular improving trend in all the demographic parameters is commendable.

5. Life Expectancy: The last chart - what is happening to overall standard of living of people in India. One of the broadest standard of living measure is the life expectancy - the average expected lifespan of an Indian. Here is the data:
   Chart 5: India’s Life Expectancy, Year 2000 - 2005

   Same story - the average age to which an Indian can expect to live is increasing every year. The increase is consistent and almost uniform. We can broadly conclude that the standard of living in India is improving - consistently.

Okay - now that I have shown all the charts and data that I wanted to - the question is - what is the message? Well - the message is simple. India, in spite of all the chaos and problems, is developing consistently and rapidly. It might seem like a redundant message with all the media attention on India these days - but I feel that true measures of a country’s development are not economic but social. India’s economic growth is well known - but there is a social side to development as well and I am very happy and reassured by the strides made by India in this field over the years. There is still a long way to go but at least the trend is positive, consistently positive, consistently and uniformly positive. The future looks bright from where I am standing!

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Continue reading → India: Facts and Figures on Development

This is the third article in a series of data analysis pieces I have written on Prosper.com. Links to my previous two articles are there at the end of this article, in case you want to dig deeper. Okay - so what am I saying here? As would be clear to anyone who has read my previous posts, I like data and I like visual representation of data. So here are three charts and what we can infer from these charts. All these charts are drawn on a monthly sampling basis for 10 months from Feb 2006 to Nov 2006. I am starting my analysis from Feb as the Prosper’s size before Feb was quite minuscule and not really comparable. All data is from Prosper’s Lending Performance page. It takes a while to retrieve all this data but its all publicly available.

Chart 1: Growth of Prosper

This is a chart of dollar value of loan’s originated every month from Feb 2006 through Nov 2006.
Two things are obvious from the chart. First - Prosper’s growth has been phenomenon. It has grown from half a million dollars of loans per month to more than three million dollars of loans per month in less than a year. Second - the growth has levelled out in last three months - in fact it the loan volume declined in Sep and Nov. Whats going on? My read of the situation is that in Aug Prosper received some good media coverage and it lead to an influx of borrowers and lenders leading to a huge spike in Aug. However, this spike also meant a decline in quality of loans - more loans of lower quality got funded. Prosper then clamped down on its verification process and started rejecting some loans (even when they got funded). Further, some lenders who got burnt after lending indiscriminately in June-July-Aug tightened their belts. Both these combined to reduce volume of loans in following months. However, the long term uptrend is very much intact and we should see continuing growth in Prosper’s loan volume.

This loan volume also gives us a fair idea of how much money Prosper might be making. Lets assume an monthly loan volume of 4 million dollars per month and all repayments being reinvested. Prosper charges 1% of loan amount from borrowers - so that makes $0.48 million a year. Further, Prosper charges 0.5% of outstanding loan principal from lenders - so that makes $0.24 million. So a total of $0.72 million. Prosper will also make some money from interest (it does not pay any interest to lenders with free cash in their Prosper account), some from fees etc - so may be we are looking at $0.75 million per year. Lets say that in three years (I guess venture caps will stand by you for that long before pulling the plug) Prosper grows to be ~$40 million per month - not too outlandish considering past growth rates. Then Prosper will be making $7.5 million per year. Now - its not too big an amount but remember that running costs for Prosper is quite low - it does very little advertising, it employs few (maybe 20-25) people and it doesn’t cost much to have servers and the site running. Combine this with potential for rapid scaling up and perhaps cross selling and other revenue sources and you are looking at a sustainable, profitable business here.

Chart 2: Distribution of Prosper Loans across Credit Grades

The chart below shows distribution of Prosper loans across credit grades for loans originated in every month from Feb through Nov 2006. The chart is a little busy - so look at the attached table to make sense of the graph.

You can see that the composition of Prosper loans has changed significantly since Feb. Initially AA and A credit category used to be quite big - more than 20% each of total loan amounts in Mar. However, over time, their proportion came down and by Nov - they were barely 20% of total loans combined. This declined has happened because of the increase of share of E and HR category loans. They combined for ~14% of loans in Feb but by Nov, E category alone claimed higher than 14% of total loan amount. B, C and D credit grades have mostly held their ground over the period. So what can we infer from this? Perhaps lenders have become more open to funding low credit loans after previous good experience with them. This is unlikely because except D, all other low credit category has performed miserably. Perhaps word has gotten out that Prosper is a good and affordable source of credit for low credit borrowers and many people with payday loans and such are not coming to Prosper in droves and hence the increase in E and HR category borrowers on Prosper - this is quite possible. There may be other explanations as well. Let me know if you have a different opinion.

Chart 3: Reduction in Credit Quality at Prosper

This is a followup of the previous chart. I thought - well - loan composition is changing - so lets see how the average loan profile is changing over these months. So I created a simple index of credit quality. Under this index - a loan with credit AA has an index of 0, A has an index of 1 and so on till HR has an index of 6. Then I take a weighted average of all loans for the month to calculate a credit quality index for the month. By definition, this index will be between 0 to 6 and higher number will mean lower average credit quality. So how has this average credit quality index changed in past months - here is the chart:

Its clear from the chart that the average quality of credit at Prosper is declining - rather sharply. In Feb and Mar, average credit quality was less than 2.5 - that is - a credit rating better than middle of B and C. It has now changed to higher than 3 - that is - a credit rating worse than C on average. It seems to have stabilized after July to a 3-3.25 level. It will be interesting to see how this develops in coming months.

I must post a disclaimer that this is still early days for Prosper and its numbers have not really stabilized - so reading too much into overall trends may not be accurate. So lets continue to watch Prosper and see what direction all these numbers are taking. I will be updating the above analysis every month or so and post updates on this blog.

In case you are interested in my previous two data analysis pieces on Prosper - here are the links:

• How to select a borrower on Prosper - Part II
• How to select a borrower on Prosper - Part I

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Continue reading → Prosper Growth and Credit Quality

Business Process Outsourcing (BPO) has been on a center of a lot of debate and controversy. However, the fact remains that it is here to stay, it will continue to grow and it benefits both sides. Important thing to note through is that the nature of BPO and hence the potential benefits of BPO as well as the capabilities needed to successfully compete in the BPO marketplace have evolved significantly in past few years. This evolving nature of BPO and associated issues have been part of my recent research focus. Here is one picture that explains my view of the evolution of BPO:

The figure above says many things - so needs a little explanation. The left axis represents the main driver of BPO in a particular BPO evolution stage. The right axis represents the ideal role that a vendor should play (or a client should establish) for a BPO evolution stage. The x axis represents the three stages of evolution of BPO. The main body of the graph depicts the core activity or work that is outsourced for a BPO evolution stage. This framework was presented by Prof M S Krishnan (my doctoral advisor and dissertation chair) at the Global BPO Forum organized by the CGRL:India in New York. Prof Krishnan and I both attended the forum.

This framework is helpful in understanding the future direction of BPO. We will increasingly be moving towards the third generation BPO - BPO 3.0 - high value added, knowledge intensive BPO work. This will require vendors to change their focus from cost (predominant focus right now) and quality (emerging focus among top players) to innovation. Clients, on their side, would need to make sure that they do not use the old and outdated mechanisms (efficiency oriented SLAs, restricted collaboration…) to engage with their vendors. They will have to enter into strategic partnership with their BPO vendors to co-create value for both sides of the transaction. This is of course easier said than done - but there are many leading indicators to suggest that this is happening and growing. We (as in researchers at Ross, Michigan) have documented instances of BPO 3.0 in our case studies, analyzed them in our ongoing research and I plan to investigate this phenomenon further in my dissertation.

From a research point of view, the most interesting question to be asked is: on a broad level, what are the antecedents of a successful BPO 3.0 engagement? What kind of contracting, engagement structuring, engagement monitoring, HR policies, process selection etc needs to be done to leverage the “innovation” aspect of BPO 3.0. BPO vendors and clients have more of less perfected the art of an “efficient” BPO engagement with main focus on cost reduction. Many have acquired sufficient mastery over running an “effective” BPO operation with main focus on quality improvement. However, based on my interactions, most companies are still looking for directions on how to successfully leverage an “innovation” oriented BPO engagement where an efficiency or effective oriented policies might not only be ineffective, they may even be critically detrimental to the success of the engagement. I hope to throw more light on the subject through my ongoing dissertation research.

To end, an image I have found quite effective in breaking the ice when teaching any BPO related topic:

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Continue reading → Evolution of Business Process Outsourcing