Activist investing would be a boon to the UAE

May 17, 2016 By in Asset Management Tags: ,

In my previous article I suggested, using scenes from the film A Beautiful Mind, that game the­ory could explain why more than 50 banks exist in an economy too small to commercially need such business. The idea is bas­ically that banks choose to be mediocre because competition would harm them to the benefit of customers.

The feedback was tremendous, and I would like to expand on some of the points made. The first is the concern that I might antagonise people in the banking system. I believe that transparency and open dialogue fosters a healthy commercial environment and that most people will listen if your intent is positive. The few people who have a closed mind might react negatively to new or open ideas. One just needs to accept that this exists and hope that the greater good outweighs any personal backlash.

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Mediocrity as a strategic goal for UAE banks?

May 10, 2016 By in Strategy Tags: , 2 Comments

For some time, and as mentioned in previous articles of mine, I have wondered how there could be over 50 banks in the UAE, around half of which are full operating banks, given a population of circa 8 million, over half of whom are blue collar workers not in need of banking services. Basic economic theory would suggest that competition would lead to mergers or banks withdrawing from the market until the supply of banking services dropped to a level commensurate with the level of demand for banking services.

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Keep a close eye on strategy – what’s yours?

May 3, 2016 By in Strategy Tags:

What is strategy? In particular, what is strategy as it applies to the GCC?

At the simplest level there are four types of strategy. First is do the same thing; second is build on what you, or others, have been doing; third is do something new; and, fourth, covered in a previous article of mine, is adapt to market threats and opportunities.

In my experience the most prevalent approach in the GCC is to do the same thing. Sometimes there are superficial changes that are meant to masquerade as strategy building on current business, but in the end it is simply doing the same thing. A bank expanding into retail or Islamic banking from a corporate banking base, a real estate developer building units targeted at middle-income buyers as opposed to high net-worth individuals or hospitality moving from five-star hotels to four and three-star hotels are such examples.

A true extension strategy of building on something that already exists is Apple and the iPhone. The core demand for the iPhone came not from new technology but from packaging various services into a single unit. Mobile phones and MP3 players already existed and were in widespread use. Less known, but nevertheless well developed, were personal digital assistants, such as those developed by Palm. Frankly, the I-mate series of smartphones operated in ways similar to the iPhone. Apple simply improved on these technologies and backed the iPhone with the iTunes service.

A good way to understand whether the extension strategy you apply is a true strategy or simply something superficial is to look at your market penetration or your pricing power. A personal example comes from the strategy that we deployed for Zawya, the business media company in which I was a private equity investor and chairman.

We kept a close eye with each product that we deployed, whether it was a new database, analytical tool or news. If we captured market share we poured more resources into it, but if we didn’t get any market traction we cut the product. By 2008, Zawya had more Middle East screens than Reuters and Bloomberg combined, according to our surveys.

In terms of pricing power, the best example was after the global financial crash of 2008. As you would expect, Zawya’s main clients were in the financial services sector and therefore it would make sense that we would lose revenue. However, as we were delivering far more value per dollar spent relative to our competitors, our subscription base was not only resilient, but we actually increased our prices in January 2009 and increased our revenues tremendously. Our product was relatively price inelastic.

Extension strategies are plentiful in the GCC. But a strategy of doing something new seems to be rare if not completely elusive. We do not seem to be able to launch a Facebook, Twitter or Uber other than as a copy of something launched elsewhere. Don’t get me wrong, we don’t just take an idea, we improve upon it – I love Careem’s ability to book a car in advance and to prepay cash, both features not included in Uber in the UAE last year, when I was extensively using the two services. But we are not developing new core concepts.

We have seen governments in the region push for more innovation. I feel the issue is a lack of a deep venture capital source of funds, which is critical to developing innovative companies. For the UAE, this stems from three main sources. The first is the reticence of entrepreneurs to sell equity in their start-ups early on. The second is restricted options for expatriates in owning 100 per cent of their company, at least if the company is allowed to do business in the UAE. The third is that when an entrepreneur or start-up is funded and the investment does well, then the venture investors do not exit. Ever. As a result, investors willing to finance new ventures do not recycle their money.

The solution could well be a change of the company regulations. Anyone investing in private equity should be familiar with the concept of a limited partnership, whereby one party, the general partner, has near complete control of the business and the limited partners simply participate in the economics.

Bloomberg LP, the global media giant, has such a structure. The “LP” stands for “limited partnership”. A second change is clear: allow 100 per cent foreign ownership outside the free zones. Saudi Arabia allows it for most sectors, why can’t we?

The focus on strategy, so far, in the region seems to have been focused on competence in developing strategy. The reality may well be legal and cultural structural constraints in the market.

This article was originally published in The National.

Improving customer service is not that hard

April 26, 2016 By in Management Tags: ,

At the top end of customer service, airlines such as Etihad and Emirates are world leaders. In hospitality, service in nearly all five, four and three-star hotels is outstanding. This quality is not reserved for the private sector. For example, renewing my passport or driver’s licence is now pure joy compared with a decade ago.

At the bottom end of customer service there is a wide range of culprits. One of the banks that I deal with repeatedly calls me ahead of when a credit card is due, to tell me that the due date is approaching. Worse, it calls at all hours – not only during working hours – and calls repeatedly even if you reply. Even worse, it often uses an automated system to call, and when I answer a message tells me to hold the line while they connect a call agent. This insanity repeats itself right after I pay – the bank wants to thank me for paying. I do not see how any sane executive looked at the proposal for this service and decided that, yes, this would improve customer satisfaction.

Another bank I use has an internet banking application that allows me to log in using a code that is texted/emailed to me or generated via an electronic device. Most banks do this. They also use a virtual keyboard whereby I have to use the mouse to click on the keyboard on the screen to enter my password. Many banks use this. What drives me crazy? This particular bank positions the keys randomly on the keyboard so that I have to spend five minutes playing “Where’s Waldo?” to type out my password. I now fear having to access my account online. This approach to security has been dropped by everyone else.

The problem with customer service is that there is little incentive for decision-makers to do anything about it. Consider companies and government departments of old, where there was no queuing system for clients. It was a mob scene, but it did not affect the employees that much. It takes a brave executive or technocrat to request a simple system, queue tickets on arrival – that costs money but the return is to the brand and not easily measured. I for one would like to thank all the decision-makers who put such systems in place, thus ending chaos and frustration.

Etihad, Emirates, the Jumeirah Group and others all understand the value of customer service to their brand and the value of their brand to their profits. The stronger the brand, the more it can charge for services and the less it has to pay employees and suppliers who benefit from working for a company with a brand.

So how can you avoid the mistakes of the two negative examples used above? The first is a little common sense. For example, tacking on mountains of supposed internet security systems may seem to make things safer, but in the end they also make things unusable. Managers should use the services of their competitors just to get a first-hand feel for what is happening in the market.

Another tool is an effective customer survey. To be effective, such a survey must first attract a representative cross-section of the client demographic. For example, it does not help the banks above if a client, such as myself, simply leaves, thereby denying the original bank the chance to rectify an issue.

More importantly, for a survey to be effective the executives of the company must do something with the results. A good way to encourage this is for companies to publish the results to their clients along with a plan to rectify the issues followed by a post-plan survey to see the results. This approach not only keeps management honest but also engages clients by showing them that they have been heard.

Customer services does not begin with the magic that is Etihad, Emirates or Jumeirah Group. It begins with simple steps: a queue ticketing system; virtual keyboards with keys in the normal positions; effective capture and remediation of client complaints.

These simple steps are not where client-service gurus usually start. They begin at the advanced stage, talking about interpersonal relationships, the psychology of managing an irate customer and, invariably, a client-orientated culture. These are important points but only relevant after the systems, processes and procedures have been fixed.

This article was originally published in The National.

Preparing for your Start-up

April 19, 2016 By in Entrepreneurship Tags:

Many people dream of starting their own business, but in nearly every single attempt that I have invested in, mentored and even directly experienced, the preparation has been woefully lacking.

The trigger for starting a business should be the completion of a preparation phase. Unfortunately, the reality is that the trigger has no correlation to preparation. In its most basic form, budding entrepreneurs attempt to overcome the procrastination of preparing for a start-up by jumping straight into it – à la Nike’s “Just Do It” tag line. It should be clear why this is disastrous, especially if one quits their job as a way of forcing themselves to work on the start-up.

There is a lot of preparation that can be done before you quit your job, which lowers the risk not only for the start-up but also for your quality of life. Having personal expenses with no income while preparing for your business is not the smart choice.

The first step in preparing to build your business is to actually understand all the facets that you can cover before leaving your job. Looking at personal expenses is one such facet. This includes understanding clearly what your expenses are and preparing a personal budget. Next is estimating a conservative time frame for your business to become cash-flow positive, adding a wide margin of comfort and saving up enough cash to cover this period as well as contingencies. A good idea would be to also add enough cash to cover the time needed to find a new job should the business not take off.

Another oft-neglected facet that can easily be addressed before leaving your job is building the right personal network for your business. This includes finding investors, talking to potential employees, developing relationships with vendors and suppliers, and building a relationship with key clients. Building a network takes time, as relationships do not develop overnight, and it is therefore a good idea to spend a few years working on this facet before attempting to launch the business.

Of course, the end result of building your network is to convert these relationships into business. Having clients sign up ahead of time is rare. However, having anchor investors, a core employee team and key suppliers signed up will drastically reduce your risk.

This leads into the fact that negotiating certain contracts, especially for those of you without negotiation experience, is also best done ahead of leaving your job. It is not necessary to nail down every last point, but even agreeing the headline items can take time. These contracts would include employment contracts, where understanding compensation models with respect to performance-based pay can be daunting, as well as contracts with service providers such as legal counsel and auditors, and last but not least, with suppliers. Shareholder agreements are also best done ahead of time.

A third facet of having a long lead time is the legal incorporation of the company. This is especially true in our region, where first-time entrepreneurs usually find the process confusing. Hiring the right legal firm or a set-up consultant can drastically cut this time down, but at great financial cost.

A word of caution. I am not proposing any reduction in your responsibility to your employer. There are not only legal and ethical issues to be cognisant of, but also reputational issues. If you are seen as shirking your work and using it as a stepping stone to your own business, even if this is not true, the damage to your reputation will be significant.

There are other facets, and the above examples should be enough to get any budding entrepreneur to understand the realities of building a business. For some reason business schools seem to teach people how to create beautiful, well thought out business plans. However, I have rarely seen a start-up fail because of a flaw in the business plan, but rather because of a gap in the entrepreneur’s reality and the actual reality of the market. The official name for this gap is “lack of experience,” also known as “you haven’t failed enough times yet.”

You might like: Discovering the Meaning of Entrepreneurship.

This article was originally published in The National.

What makes for a Happy Workplace?

April 17, 2016 By in HR Tags: ,

It is thought that happy employees improve the performance of a company. This has been championed most publicly by Google, with its large assortment of toys, break rooms, food and beverages, services and transport for employees.

But is this concept correct?

Although it is relatively clear that unhappy employees would be harmful to a company, this does not necessarily imply the opposite. And it is even less clear that just giving workers goodies will bring them joy, either.

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How can government acclimatise lenders to SMEs?

April 12, 2016 By in Risk, SME Tags: ,

Over the past six months leaders in the banking sector have announced that SME owners and managers were departing the UAE with their companies in trouble and defaulting on their loans.

The implication was that the SMEs were in trouble because of a contraction in the economy.

However, the banks clarified that a portion of the defaults was because of banks getting a clearer picture of the SMEs’ borrowings thanks to the UAE’s Credit Bureau, and then calling in or not rolling over credit facilities – although there was no clarity on what percentage of the defaults were because of banks behaving in this manner.

There was also no clarity on whether the numbers mentioned in terms of SME defaults were gross or net – did the banks subtract out the value of the collateral and provisions already booked?

To their credit, the banks came together and developed a framework, the “mini bankruptcy law”, that is supposed to discourage banks from acting prematurely against SMEs and instead to try to work out a more effective solution by talking to the other banks involved as well as the SME.

Although seeing the banks work together to stave a wholesale rout in the SME sector, considered strategic by the government, is quite salutary it is disappointing to see the SME sector take yet another hit.

As the SME sector is strategic to the government, which not only talks about it but also has developed institutions to help its growth such as the Khalifa Fund and the Dubai SME 100, then how might the government work to better develop private sector lending to SMEs?

There are more than 50 banks in the UAE, which has a population of about 9.5 million, the majority of whom are blue-collar workers.

With that much competition one would expect that the lenders, both banks and non-banking financial institutions, would be forced by competitive pressures to expand into every sector, including SMEs. But this is not the case.

There are at least three ways that the government can incentivise lenders into lending to SMEs.

The first is to guarantee the principal of SME loans. This approach has been used the world over to help shepherd banks into lending to parts of the economy they might initially be wary of.

Guarantees, of course, create a moral hazard, in that if the lender has nothing to lose then they might lend recklessly, wasting government money and lending to the wrong SMEs.

The idea would then be to create some level of risk, such as a co-pay or a deductible on, say, the first 10 per cent loss.

Other moral hazard busters include charging for the guarantee – in other words, credit insurance. Or some combination of the above.

This can lead to lenders familiarising themselves more thoroughly with the SME market before taking the plunge of lending without guarantees.

The second way governments can incentivise lenders is extrapolated from the 50-plus banks surviving in a relatively small economy.

The only answer as to why competitive pressure has not culled this number is that the government supports lenders through outsize deposits, possibly at below-market rates, and huge loans for infrastructure development, possibly at above-market rates.

If this conclusion is true, then the government can steer this lucrative business to banks that are more attuned to its policy objectives. If one such objective is developing the SME sector, then government business can be steered to those banks supporting such an objective.

The third way is through education.

As I have written in detail in previous articles, SME lending is different from large corporate lending. A real-world example is a board member who was not used to the volatility in non-performing loans demanding that the credit risk be decreased by lending smaller amounts.

The unintended consequence is that the client demographic moved sharply to small SMEs.

To understand why, consider an SME that wants to purchase a piece of equipment for Dh1 million. It does the company no good to be offered a loan for Dh200,000. So it doesn’t take it. Only a smaller firm with smaller needs would be interested in such loans.

The problem with sliding down the size curve is that although any individual loss is smaller, the probability of loss increases tremendously. This can lead, and has led, to large losses at a portfolio level.

This is why erroneous thinking with regard to the SME market needs to be corrected.

This article was originally published in The National.

Good Management is more Kaizen and less Blitzkrieg

April 5, 2016 By in Management Tags:

Many finance authors, including this one, will usually talk about the big steps that a company has taken to become successful. Sony’s Walkman portable tape player in the 1970s, Microsoft’s Dos operating system in the 1980s and Apple’s iPhone today. But this is not managing a business so much as it is innovation; innovation can only take you so far, and it is not strictly necessary.

What is management at its core? It is constant maintenance and making small, continuous improvements, which the Japanese call Kaizen and is one of Toyota’s core values. A good metaphor is tending a garden. A garden, like a company, cannot usually just come into existence. Sure, you could buy plants and grass turf and have a garden overnight, but that is no different than buying a company. I’m talking about planting seeds and nurturing the garden.

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Sharpe Enough to Cut You: Misunderstanding Investment Models

March 22, 2016 By in Investments Tags: ,

Investment management when done with funds appears to have developed permanent blind spots. By being unaware or unconscious of these blind spots, investment managers using funds have quite often performed poorly. The greatest of these blind spots is a set of tools developed by Professor William Sharpe, a Nobel laureate and professor at the Stanford School of Business.

Prof Sharpe introduced three main tools into the investment world – the Capital Asset Pricing Model (CAPM), the Sharpe ratio and Style Analysis.

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Financial Model Pitfalls

March 15, 2016 By in Analysis Tags: 1 Comment

One of my previous jobs was to be a rocket scientist – financial jargon for somebody who is good at mathematics.

Naturally, this makes you the guy who works the most on the financial models that drive strategy.

A financial model simulates the future, and by manipulating the various inputs to the model you are supposed to get an idea of how the company will perform. From these scenarios you learn which strategy to pick.
What could go wrong? Every­thing.

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