Thank you, Steve Jobs

Steve Jobs Picture courtesy: Apple Computer Inc.

It must be very strange that I write my reactionary post to the demise of Steve Jobs, five days after he passed away. Unlike most media agencies who would have a readymade eulogy for every ailing celebrity, for me, the unfortunate passing of Steve Jobs was extremely sudden and has still to sink in. It was just like the time I was told that Michael Jackson passed on.

I am not an Apple user, have never bought an Apple product (apart from an IPod that I was gifted and hardly use) and have been fed a staple of competing products from the day I saw my first computer. But when you saw an Apple product, you felt envy. They were beautiful, simply beautiful. While most of us would argue that were not exactly functional, you have to agree that they were beautiful.

As a computer technician, I remember when I was asked to install software on an iMac G3. None of the other technicians wanted to take that service call. This was in India where the standard is Windows and Intel. And the Apple iMac was the costly fancy gadget that everyone wanted to just gape at and not mess around with. In a small discussion room in my office, there stood the Bondi Blue funny shaped monitor. When I snapped out of the awe for the funny looking computer, my first reaction was “Where’s the CPU??” And when they told me, I said “Why didn’t they think of that before??”

That reaction embodies Steve Jobs’ influence on Technology. He proved that technology was not just functional, but needed to be aesthetic too. The joy of a product is not just what it can do, but also what it looks like, feels like, the experience that the user gets. For Steve, like with Michael Jackson, it was the experience, not just the product. When you focus on that, its not about the product anymore. Ask any Apple fan anywhere in the world. 

Then as I got Steve Jobs as a case study in MBA class, you started to marvel at the maverick business sense the man had. With ideas that were way beyond the present, but with constant touch with what the customer would desire, he went onto to do things that were outrageous for the norm. The Apple Macintosh, iMac, the iPod, the Macbook, the Apple Store, the iPad… everything that made no conventional business sense, but Steve knew it would work. And how.

I know Steve only from what I’ve read about him, the presentations he made and generally hearsay. But when you hear him talk about life in a commencement address to new students at Stanford, you realize the depth of the man. he was not all technology and business, not all greed and the other human shortcomings. He was about life, and being the best you can be. And he was. In his own way, Steve Jobs was the best he could be.

Sir Richard Branson, the entrepreneur I most admire, calls Steve Jobs the entrepreneur he most admired. And in a way, I have to agree. Steve Jobs was the magician and showman who resurrected not once, but thrice in an entrepreneurial career that I’m sure he looked back at with restless satisfaction. There are few people for whom Frank Sinatra’s My Way would be the perfect swan song. Sinatra was one. Steve Jobs would be the other. But then for Steve Jobs, his swan song would be the enormous legacy of products, ideas and “awesomeness” he’s left us to gape at…

I’m going to miss him say, “One more thing…”

Thank you, Steve.

Mergers & Acquisitions: Due Diligence – The IT view

Organic growth in organizations is slowly becoming a concept in the past. While many would argue that sustainable growth is only possible organically, the fast paced nature of business today forces organizations to add capabilities, preferably without the delay of  developmental learning. Albeit, there is an entire entrepreneurial business model of developing a niche organization and then selling it to a larger general conglomerate.

Due diligence during M&As are a core area of expertise that have been arguably the holy grail for a lot of Finance and Strategy consultants. Deep expertise in valuation and strategic synergy becomes the core area of focus in the M&A evaluation process. However, a third element, Technology Synergy has become a major supporting factor during the decision process. It is estimated, that up to 38% to 40% of synergy savings in a Merger or Acquisition are enabled by IT synergy.

Every organization today depends on IT systems as a prime enabler for its business efficiency. Therefore, ensuring the ability of the disparate IT systems of merging entities to yield themselves to relatively easy integration, becomes the prime consideration for IT due diligence and subsequently, corporate due diligence as well.

The real life

In reality however, IT would be one of the last things considered during a M&A. I dare say, that IT integration is often given the priority just above Administrative Logistics. After all, as one business leader once told me, “We’re just have to be moving the servers, right?? We can put them with the office furniture.” Not exactly the kind of regard that the CIO would have liked, but usually that’s what happens.

Who should be blamed for this apathy? I think both sides of the table, Business and IT are equally at fault. While business to a large extent, tends to keep IT away from the strategic decision making table, for its part, IT very rarely tries to position and justify itself as a core business driver.

Business IT non-alignmentThe main reason I believe this happens is that everyone is caught up with the operational aspects of the IT organization. Including IT itself!! The working of IT is a hygiene factor. If IT works, nobody really notices it. But if IT stops working, everything is blamed on it. The IT organization ends up becoming a high value back office operation, with no initiative to justify the business enabler value that it really has.

Moreover, too much focus has been placed by IT on its operational achievements. A new web portal in 24 hours, new ERP deployment in 12 months, 99.999% uptime, zero downtime, 75% optimum utilization; some of the things you’d hear at an IT review or in an IT departmental newsletter. But does business really care, other than a pat on the back?

This contradicting focus is what builds up distrust among the two towers inside an organization. CFOs and CEOs become increasingly assured of CIOs as money wasters and CIOs correspondingly think of CEOs and CFOs as ignorant, stingy and oppressive. The result, IT and business remain separate.

The solution is communication. Consistent, coherent communication between both parties. CIOs must strive to translate their achievements and needs, operational or otherwise, into business terms, profitability, revenue, and ROI. CEOs and CFOs must invite CIOs into the decision making circle and in many cases, coach them to project business value.

 

IT value in an M&A

A merger and acquisition exercise is an important area where the IT Organization can prove its worth as a true business enabler.  The important aspect for any Merger or Acquisition is synergy – business synergy, market synergy, financial synergy. The biggest aspect that IT can proactively address is Technology Synergy – the possibility of integrating diverse technology systems to work together.

While there is practically no framework to govern what constitutes good value in a Technology Synergy scenario, it is obvious that during a M&A, it is essential to go beyond the obvious. It is easy to look for infrastructure or software integration candidates, however it is essential to take a holistic view of the systems to encompass people, operational processes and data as well.

 

Some of the areas to watch out for while making a technology synergy audit are:

Presence of Legacy Systems

One of the biggest reasons a technology synergy can lose value is when any one of the entities still relies on legacy systems. While it can be argued that the industry did not warrant state-of-the-art technologies, in a merger or acquisition, legacy systems might prove costly to replace and difficult to maintain. In such a scenario, if the IT systems have to merge, the legacy systems have to be replaced by current technology. Usually it would be a question of which of the merging entities has more mature processes and technology. This would be the best candidate for becoming the standard.

 

Use of Open standards for Data Exchange

Every enterprise chooses technology based on a number of parameters, the most common being functionality, ease of use and cost [hopefully in that order]. One more parameter that CIOs and IT decision makers have to keep in mind is Data Exchange standards. Not necessarily in a merger or acquisition scenario, but increasingly enterprises need to integrate with technology landscapes of multiple entities – partners, customers, vendors and of course, the internet. Gone are the days when proprietary data exchange standards were used in the name of data security. Open data standards like XML and ASN.1, thanks to the all-pervasiveness of the internet, have emerged as the glue that integrates disparate technology systems.

 

Areas of consolidation

Most of the time, IT Infrastructure is taken as a given. It would seem as if all the enterprise applications run on their own. That said, the platform on which enterprise applications like Email, ERP, CRM, Web Portals run is as important and signifies a large investment if not planned properly. However, in an M&A scenario, this is arguably an area of relative happiness. When two infrastructure stacks are brought together, the result is more capacity. However the happiness is relative because the governing factor is the combined usability of this capacity. The two systems may not be compatible with each other or the relative capacities might be so far different that the combined capacity is hardly an improvement. CIOs and IT decision makers have to watch for consolidation possibilities, whereby systems can be merged efficiently with maximum reuse.

Cloud services, specifically Infrastructure as a Service offerings, aim to solve these issues. By providing vendor independent infrastructure platforms, IaaS deals solely in infrastructure capacity. As a result, two entities running on IaaS platforms yield themselves much easily to consolidation.

 

Process Reengineering

If technology is considered the heart of the IT organization, operational processes would be the nervous system. Efficient and mature processes, which get the job done, remove inefficiency and redundancy, enable IT to react faster to incidents, address business needs faster and ensure overall functioning of the IT system. The maturity of a process is governed by its ability to reduce redundancy and to adapt to business change. While making an evaluation of IT operational processes, it is worthwhile for the CIOs and IT stakeholders to evaluate processes on the basis of their maturity and depending on the business need, judge the magnitude of process reengineering that would be required on both sides.

 

Core personnel

Mergers or acquisitions are a worrying time for employees of both organizations, specifically due to the looming fear of redundancies and as a result, layoffs. Most of the time, the easiest way to show cost reduction during a merger or acquisition is to reduce personnel. While this may seem effective in the short term, it is evident that any merger or acquisition exercise is executed for growth. With growth, eventually there will be the need for additional manpower, more so in the IT organization. To avoid costly recruitment in the future, it is important for CIOs and IT stakeholders to evaluate their teams and decide on two specific groups of individuals. On the one hand, individuals who would automatically fit into roles in the resulting IT organization [including one of the CIOs] and on the other hand, individuals who need to be groomed to fit into existing or future roles. It is important to note, layoffs should be used only as a last measure and only in cases where a candidate is found irrecoverably incompetent. As far as personnel are concerned, reuse of personnel should be the qualifying factor for technology synergy.

 

Dilemma

If the acquiring entity, despite its size, has legacy systems, proprietary data exchange standards, low maturity processes and the acquired entity, relatively smaller, has more modern technology and best of class processes, which becomes the standard??

Bringing Quality consciousness into the system – or how people can give their jobs the best they can

Have you ever picked up a book on Quality Management?? Not that it is the most interesting of reads, but when you read parameters and measurements and metrics, it should very quickly be evident that, in essence, quality is never just about “not more than 3.4 defects per million 0pportunities.” (isixsigma.com)

Over the years, through countless quality certifications and audits, I have come to believe that the definition of quality, in reality, is what you have been told quality is. Exactly that…. what you’ve been told quality is.

 This would usually translate to one of following belief statements among the organization:

  • No defects no matter what the target. We’ll rework till its top quality or go bankrupt trying…

  • So what if a few quality errors occur?? Hey, we got a great Replacement Policy

 But at the end of the day, the essence of quality rarely trickles down to the “little guy” on the production floor. Unless the guy who runs that lathe machine actually believes in the 0.5 micron finish he has to put on that chair leg, it really doesn’t matter you’re ISO 9833452340322 qualified [Trust me, one day that number will come].

That brings me to my bit about the various certifications about Quality that organizations strive to achieve and maintain so “diligently”. Each of these certifications had been essentially designed and developed to organize the best practices about Quality in an organization’s way of existence, but in 9 cases out of 10, Quality certifications have been about as effective in bringing about a commitment to quality across the organization as has Marx’s Communism delivered on its “golden-era” promises. Like communism, it sometimes works…but only in places where it gets ingrained into the system. If you’re really good at quality, having a certificate pronouncing so becomes quite redundant, doesn’t it??

So then, the solution?? How do we get whole organizations eat, drink, sleep, breathe quality? Practically speaking [the little guy’s view], there are two ways of doing it:

  1. Drill it into the boys till they repeat it in their sleep
  2. Visible, genuine commitment to the processes by the top management

The first method is effective to the extent that it gives a chance to the boys to consciously and ultimately subconsciously shut off the programming, the same way targets drive the salesforce performance at the end of the quarter [Get it done somehow, anyhow, BUT I DON’T KNOW HOW!!!!].

The second method however is usually easier said than done. Top management need to get out of their ivory towers and Harvard Business Review hangovers [Its a great magazine, but seldom easy to put into practice]and visit the floor. Know what you produce or offer as services. Its amazing how many IT organizations have executives who do not know what services they offer or who do not understand the business markets they are in.

Once you’re familiar with “what’s inside the box”, start thinking “what’s supposed to be in there in the first place”!!!! An analysis of Quality is not just producing the best, but analyzing whether you’re the best to produce it or are you just an “also-ran product or service”?? Is your product or service the best thing to produce with your capabilities??

Allow me to be more direct —— Are you best qualified to produce what you produce??

Once you answer that question in the affirmative, and I do mean a BIG RESOUNDING ‘HELL YEAH!!!!!!!!’ , that’s when you start the process of IMPROVEMENT and everything else in that book you picked up in the start.

In Sanskrit, there is a saying Jatha raaja, thatha prajaa which means “As is the king, so are the subjects”. John C. Maxwell in his book “The 21 Irrefutable Laws of Leadership” states that there can be no leader without followers. The boys on the floor look upto the Top Management for direction. Here it becomes imperative that the Top Management demonstrate a concern for quality in the product coupled with the knowledge of the product.

Imagine for a moment, the tremendous effect that occurs, when a Sr. Executive in an organization walks upto a guy on the floor, picks up a finished chair leg and asks him whether in his opinion, a tapering leg would be more stable without sacrificing on aesthetics?? That feedback flows back to the product design team, eventually playing a role in the improvement of the design, yielding a better chair. Voila, Quality improvement!!!!!

But it doesn’t stop there!! The Sr. Executive makes another round of the floor, congratulates this guy in front of all his colleagues and honestly tells them all, in simple but quantifiable terms [read dollars!!], how much the changed design helped boost sales.

At this moment, the shop floor guy is going, “WOW!! I just got recognized for the effort and the guys at the top know it!! There is a lot that can be improved out here, I’m glad they’re asking now!!!!”

At the same time, each of his floor mates go, “Man, there are a lot of ways that my output can be improved. Let me try and come up with some improvement. Now that they’re listening, the big boss will be shaking my hand next!!!”

And there you have it!! Quality Consciousness IN THE SYSTEM!!

Driven by the boys themselves, this consciousness becomes very infectious. Much like word-of-mouth marketing.

Easier said than done, you say?? Well, its up to you to try it!!

News and views: Microsoft to buy Skype for $ 8.5 billion

The biggest buzz on the street today is the imminent acquisition of Internet Telephony major Skype by IT giant Microsoft. More details about the news are here.

My particular read of this news is essentially that Microsoft is giving into its panic of losing the race for IT dominance to competitors like Google and Apple. I contrasted this with the earlier news of the tie-up with Nokia and in many ways, the rationale for the decision also seems to be the same. The Nokia tie-up was aimed at Apple iPhone and Google Android, while this one is solely levelled at Google.

Microsoft hit a plateau with innovation a long time back and has been content with providing “me-too” products. Somehow, the Microsoft top management answer to tackle this is either tie-up with or acquire popular market leaders in a financial crunch. Other than a few winners like Forethought (which became Microsoft Powerpoint) and Visio Corporation (which became Microsoft Visio) Microsoft’s history with acquisition has not been very promising, case in point, Hotmail.com, Savvis and Fast Search & Transfer.

The synergies for this acquisition are clear. Skype, being the first and most popular Internet telephony, has a huge retail fan base as well as is popular with Small Businesses. With Google’s GTalk slowly gaining popularity due to its integration with social networks, Microsoft would want to integrate Skype technology with its Operating System and Office Suite products and leverage its loyal user base in those products. Whether this integration would be smooth or would end up being another feature in the Microsoft products that users never use, is still to be seen.

The winner here is clearly Skype, which just like Nokia, has received much needed funds to remove its financial woes. Microsoft on the other hand, has gained powerful technology, which it would need to use innovatively to succeed.

Cloud Computing: Addressing the scepticism

KONICA MINOLTA DIGITAL CAMERA

I was in a Cloud Computing conference a week back and had the chance to interact with multiple CIOs and top decision makers in the Indian market space. A common reference that kept reverberating, despite the jazzy presentations and the free pens, usb drives, books was:

  • Cloud is great, but I won’t bet too much on it.
  • Maybe it works in the US, here [India] it won’t fly!!
  • Aah, that’s all hype. No substance. (My personal favourite)

The level of scepticism surrounding Cloud Computing is stifling. I mean, a little apprehension about a new [??] concept is understandable, but a whole community of decision makers expressing collective disbelief in a concept is a rather serious indicator of trouble. Cloud Computing Service Providers had better sit up and take notice of this scepticism.

I have to admit that the kind of marketing muscle put behind this concept of cloud computing is mind boggling. Everyone from industry experts to IT product vendors, IT services providers to Industry Research Agencies seem to have an opinion about how Cloud Computing is redefining business as we know it. The trouble is, these opinions, while being individually thought provoking, end up often being contradictory when taken together.

At the receiving end of this confusion is the customer, who is honestly searching for the business edge that he believes IT can provide, but the clarity of which remains completely elusive to him.

 

The confusion

No clear definition: One of the primary reasons of the attitude towards a powerful concept such as Cloud Computing is that it is not defined clearly enough. Today, if you were to ask the marketplace for a definition, chances are the definitions would be as varied as the number of products available in the market. The result: Confusion, total and absolute. And what you don’t understand, you do not venture into.

No clear adoption methodology: Even when you get Cloud Computing defined clearly in terms of its applicability to the organization, the larger hurdle that most customers fear is the implementation. Most of the time, customers have made medium to large investments in IT capacity and their biggest fear is whether they would have to junk all that investment to get onto the cloud. The other fear is the kind of complexity and skill requirement that would be needed for moving to the cloud.

No clear pricing logic: If one were to analyse the pricing mechanisms for various cloud computing business models, two main models emerge: the subscription model, where you sign up for a service for a period of time, and the pay per use model, where you pay for the service as per the time or amount you use. It can’t be concluded that one model is better than the other, but the pricing issues for customers run deeper than how service providers bill them.  Customers fear how costly the whole migration to cloud computing is going to be, in terms of upfront investment as well as recurring costs. That’s not including the fact that they will have to revamp their internal support teams to work with the new models of IT Service delivery.

No clear stand on data security: While most Cloud Computing service providers take security issues with a all encompassing “We’ve-got-it-covered” stance, it is very evident, from a potential customer perspective, of the deliberate and very visible attempt to downplay genuine security concerns. Most of the time, queries about security are answered by jargon filled replies about complex data encryption techniques and security devices.

 

Addressing the confusion:

There is only one solution to dispelling the darkness around cloud computing and that involves service providers, Product OEMs, IT Consultants and IT Industry Experts to exhibit jargon-free honesty about Cloud Computing. While the potential for Cloud Computing to address real pain areas within IT is huge, there are certain pain areas that Cloud Computing just does not apply to. It is necessary that Cloud Computing providers be absolutely honest about not just the possibilities but more importantly, the limitations of the cloud.

The following pointers might help customers and service providers engage more meaningfully about Cloud Computing:

Relevant Definition: The first step to addressing the confusion about cloud computing would be to define it meaningfully.  I believe that the most relevant definition for cloud computing would be in terms of the solution to the customer’s specific problem. Case in point: What makes better sense while introducing a Software as a Service based CRM package to a customer struggling with managing his salesforce and customers:

  • An online SaaS CRM package that absolutely revolutionizes the way you interact with customers, utilizing the latest virtualization, grid computing, PHP, Ruby on Rails………..  
  • A web based portal that is easily accessible from anywhere and allows you to share customer intelligence easily within your sales team, providing a central point of information, resources and data to help the salesforce effectively interact with customers. 
    Which one have you heard? Which one would you like to hear??

Clear Adoption Methodology: While the noise about the benefits and salient features of Cloud Computing are well know, the plethora of terminology invented around the concept is rather unnerving. It is essential for service providers to ensure customers have complete visibility about the components and implementation of the specific Cloud Computing solution. The customer needs to know in precise detail, among other things:

  • what changes they will have to make in their existing systems and processes
  • how complex the migration to the cloud would be
  • What are the possible issues / problems / risks associated before, during and after the migration
  • Possible impact on business during and immediately following the period of migration

TCO, not just Pricing: Cloud computing providers have been extremely careful about their pricing strategies, knowing fully well that the price of their services will be the most important factor to get customers to migrate to the cloud. After all, that was exactly what got the Outsourcing boom going, wasn’t it?? But in the post recession scenario, cost is at the very top of the list of priorities for every CIO. Most often, Cost seems to be the list. Stakeholders and decision-makers are increasingly being forced to trade state-of-the-art for most-bang-for-the-buck. In such a scenario, plain pricing incentives just would not cut it. Cloud computing vendors need to strongly and with clarity, demonstrate the monetary benefits of cloud adoption. The ability to classify and quantify costs, real or indirect as well as returns, real or long-term, will establish the vendor/provider as an expert in the services he delivers and build credibility for the service provider.

 

Clarity about security limitations: As a friend of mine in the Information Security field would say, nothing’s safe in IT. The truth of the matter is, anything put on a public network like the Internet is not safe. There is always, always a finite limit to what the best security measures can protect. So, cloud computing consumers must be discerning about the information they migrate to the cloud. Confidential data like Customer records, payroll, financial data, strategic plans should be kept under the organization’s control. Public data like websites, marketing material, customer interaction applications can be migrated to the cloud readily and would probably end up saving both resources and money for the organization.  

Cloud service providers would end up building a lot of credibility by being honest about the limitations of the cloud in terms of security. When a customer’s genuine security concerns are met with a condescending attitude like “Our cloud is completely safe”, without any solid evidence, it can put off a potential customer very very quickly. It is advisable for cloud providers to guide the customer through solutions which address his specific concerns, honestly laying down the pros and cons of all offered solutions.

 

In conclusion, cloud computing offers a large array of benefits for enterprises wanting to introduce a competitive edge in their information architecture. However, addressing the scepticism about cloud computing would take a generous mix of honesty and customization to part the clouds, so as to speak.

India Budget 2011-12: MAT and why India needs to build IT products

It is two days since Mr. Pranab Mukherjee presented what many are calling the boldest budget from the ruling NDA coalition in recent years. And while the budget would have been dissected and laid bare thread by thread at the time of this writing, the most amusing aspect is noting the reactions that come from of various quarters to the proposed changes.

I specifically noted with much amusement the various reactions that came from the IT and ITES sector head honchos. Being part of the IT fraternity myself, while the budget made no specific gains for the IT/ITES sectors, there was the very visible tax whammy that the sector was hit with.

In a nutshell, with respect to the IT and ITES sector,  the 2011-12 Union Budget proposed:

Tax exemption to export-oriented units under the Software Technology Parks of India (STPI) scheme ceases in 2010-11. This effectively removes the following benefits:

        • Custom duty and excise duty exemption
  • Central Sales Tax reimbursement
  • Corporate tax exemption on 90% export turnover

Minimum Alternate Tax (MAT) was increased to 18.5% from 18%. MAT was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but who were not contributing to the Govt by way of corporate tax, by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax. MAT now is applicable to  units operating in Special Economic Zones (SEZ), which enjoyed a 100% tax exemption, among other benefits.

Dividends from foreign subsidiaries on Indian companies would be taxed at the lower rate of 15% instead of the normal tax rate. This would facilitate flow of this revenue into the country.

So to appreciate the full impact of these recommendations, let us examine the typical case of an IT company that has three units, one in an STPI, one in a SEZ and one in a foreign country. Let’s say each of these units makes Rs. 100 in profit. The normal corporate tax rate is roughly 34% including surcharge and cess.

Unit

Before Budget

After Budget

Net Loss / Gain

STPI Unit 90% exempt
10% taxed
34% x (10% of 100) = 34% of 10 = Rs. 3.40
34% of 100 = Rs. 34.00 Added Tax of Rs. 30.60
SEZ Unit 100% exempt
0% of 100 = Rs. 0.00
MAT of 18.5%
18.5% of 100 = Rs.18.50
Added Tax of Rs. 18.50
Foreign Unit Normal tax rate
34% of 100 = Rs 34.00
15% tax rate
15% of 100 = Rs. 15.00
Lowered Tax of Rs. 19.00
Total Tax on Rs. 300.00 Rs. 37.40 Rs. 67.50 Additional tax of Rs. 30.10

* MAT provision explained below

So effectively, while companies paid an effective tax rate of 17.33% before, they will now pay an effective tax rate of 22.50%, roughly 5.17% more tax. Naturally, this will vary based on the proportions of profit revenue from the various types of units.

Direct Implication

IT Industry pundits and players have obvious reason to be disappointed. The removal of STPI tax exemption was coming, as it was a time bound incentive scheme which was supposed to end in 2009-10 and was extended for one more year. While further extension was on the wish list, it was unrealistic to expect it.

The MAT inclusion for SEZ units was the unexpected blow. While large, established firms like TCS, Infosys and Wipro would only see a rise in their tax burden, the implications run deeper for smaller firms.

MAT is the minimum tax payable if the tax computed normally is less than 18% of the book profit.  Take the case of the STPI unit before budget. Let’s say that out of an income of Rs. 100, the book profit is the complete Rs. 100.  (A lot of consulting companies have this kind of business model, whereby the profit margin is 100% or more)

Normal computation of tax would make the tax liability only Rs. 3.40, which is less than 18% of Rs. 100. Thus the MAT provision would kick in and the company would have to pay a minimum tax of 18% i.e. Rs. 18.00.

Book profit refers to profit which is booked, but not realised. For example, a computer maintenance services company gets a contract for annual computer maintenance a year. This company would show the contract amount as its revenue for this financial year, while it will provide the services and get actually paid for in the next financial year. While the company has not received the money, its income for computation of tax has increased by this amount.

Now though MAT was a way of earning tax revenue by the Govt. from high profit making companies who were enjoying incentives, MAT was just unfair additional taxation. So, to make it look fair, a provision was made whereby the difference between actual tax and minimum tax could be carried forward for a period of upto 10 years and used to offset the tax liability when the normal tax exceeds the minimum tax.

So the differential amount in our STPI unit example (18.00 – 3.40 = 14.60), could be carried forward as tax credit and be used in a year when the normal tax (90% exempt, 10% taxed) exceeds the minimum tax (18%).

If in the next year, our STPI unit has a income of Rs. 100 again, but makes a profit of only Rs. 10. (Either low sales or too many expenses). The normal tax would again be 34% of (10% of 100) = Rs. 3.40 while the minimum tax would be 18% of Rs. 10 = Rs. 1.80.

Now in this case, the real tax is higher than minimum tax and the company is liable to pay the higher amount. But due to the tax credit of Rs. 14.60, it can reduce its tax liability from Rs. 3.40 to Rs. 1.80 by using some of that credit.

 

Due to the years of tax exemptions, larger and older companies have accumulated large reserves of tax credit under this provision, These tax credit reserves can be used now to offset the added tax burden. However smaller and newer companies do not have the benefit of such tax credit reserves and hence will be strongly affected by the pure tax burden. Such newer companies also have main units in SEZ areas and virtually no foreign units. As a result, the budget provisions only add their woes.

 

Long term solution

The Indian IT Industry is predominantly a Services oriented industry. It is true that there are few products in the market, but given the size of our economy as well as the number of potential innovators, the numbers are few and far between. While services are undoubtedly the strength of the Indian IT Industry, it is fast becoming evident that the traditional business model is not sustainable. Factors that contribute to this are:

Shrinking profit margins: Gone are the days of Y2K where India was a dormant pool of readily available talent. As services business models have matured, so has the commoditization of services grown. Rather than the service offering being a niche area of expertise, it has transformed into a downward spiralling price game.

Increased competition from other low cost outsourcing destinations: The solitary position of India as a natural English speaking outsourcing destination is a story in the past. The emergence of Brazil, Russia and China as major competitors for the outsourcing pie has put a direct threat on the viability of the services model.

Economic downturn in traditional markets: The focus of the IT Industry continues to be US and UK markets. Both these markets are currently saturated with an influx of service providers and customers in these markets are spoiled for choice. Moreover, both these traditional markets are becoming increasingly hostile to the concept of outsourcing, mainly driven by local political pressure.

If the industry’s blind adherence to this kind of static business model continues, increased taxation and eliminating incentives, which will slowly become a norm towards good fiscal policy making, will eventually cause the Indian IT Industry to lose its competitive edge.

The answer lies in making a shift from the supply driven model of outsourcing services to the demand driven model of IT products and branded services. Products and branded services predominantly enjoy the luxury of naming their price, as against a commoditized service, whose price is solely based on what the buyer is willing to pay. Moreover, products are also easy to quantify in terms of value, as against services, whose value is increasingly subjective and largely perceptive.

When a company sells products, the revenue and subsequently profit, is booked immediately. As a result, the book profit and realized profit is more or less the same. This eliminates the need for additional taxation elements like MAT. Moreover, the taxation is simplified as corporate tax will be calculated on the income revenue only.

[Disclaimer: The views expressed in this article are solely the opinion of the author and are not under the influence of any external parties thereof] 

What matters now

Seth Godin has always been one of my gurus. Be it his ideas about being “remarkable” to being the lynchpin and doing “work that matters”, he’s been one of the guys who leads without assuming leadership.

 What matters Now

This is an old offering but one that is always a good read to me. Seth has got some of the modern world’s greatest management gurus and thinkers to put together ideas on how you, me and everyone can “do work that matters”. The result of this effort is “What Matters Now”, a free ebook which , according to Seth:

Here are more than seventy big thinkers, each sharing an idea for you to think about as we head into the new year. From bestselling author Elizabeth Gilbert to brilliant tech thinker Kevin Kelly, from publisher Tim O’Reilly to radio host Dave Ramsey, there are some important people riffing about important ideas here. The ebook includes Tom Peters, Jackie Huba and Jason Fried, along with Gina Trapani, Bill Taylor and Alan Webber.”

The ebook is here, for those who want to make a change this new year!! And thank you, Seth!!! 🙂