The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History

This book review made me blink and reconsider the dominant narrative that the west has always been smarter at weapons. Not so when you consider some of the times that China has been good. 

Today I was reading the guardian son and found that the uk is selling huge quantities of arms and planes and ammo and advice to the Saudis who are using them to break the laws of war and expected human rights in Yemen. I'm just sad that we are now associated with that dreadful regime. All that brainpower and it's going into doing shitty things like killing people. 

Sad. Very sad. 

Hate war! Such a waste of talent people and money. And nobody remembers after a few years. Who remembers the dead in Iraq and Afghanistan? Nobody. Bah. 

Love

Baba

The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History
http://imperialglobalexeter.com/2016/01/27/the-gunpowder-age-china-military-innovation-and-the-rise-of-the-west-in-world-history/
(via Instapaper)

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The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History by Tonio Andrade (Princeton University Press, 2016).

Reviewed by Francis P. Sempa

Cross-posted from Asian Review of Books

Tonio Andrade, a professor at Emory University, has written a well-researched, balanced, and comparative history of military innovation in Asia and the West in which he challenges the traditional notion—set forth most compellingly by Victor Davis Hanson in Carnage and Culture and Niall Ferguson in Civilization—that Western culture largely explains Western global predominance in the post-medieval world.

Well, d’oh, if you are more religious, then you are less innovative

File this under the label of stating the bleeding obvious.

In earlier work (Bénabou, Ticchi and Vindigni 2013) we uncovered a robust negative association between religiosity and patents per capita, holding across countries as well as US states, with and without controls. In this paper we turn to the individual level, examining the relationship between religiosity and a broad set of pro- or anti-innovation attitudes in all five waves of the World Values Survey (1980 to 2005). We thus relate eleven indicators of individual openness to innovation, broadly defined (e.g., attitudes toward science and technology, new versus old ideas, change, risk taking, personal agency, imagination and independence in children) to five different measures of religiosity, including beliefs and attendance. We control for all standard socio-demographics as well as country, year and denomination fixed effects. Across the fifty-two estimated specifications, greater religiosity is almost uniformly and very significantly associated to less favorable views of innovation.

Religion is a way of control, a way for safety, traditionalism and the like, why on earth would you be open?

Now there’s courage for you

Michael O’Leary, the boss of a low cost airline in Ireland says what he thinks. That its basically the state in the form of politicians and bureaucrats who are the enemies of innovation. The sheer irony that the European Commission had to setup a conference to talk about innovation. The stupidity of these morons is breath taking, which is why I don't have much hope for Europe, its currency or its future. Its a shitehole.

Guess what? He is the CEO of Ryanair, but the EU cannot pay for low cost air fares. And this is why I am paying my taxes for? WTF?

STOP SPENDING MY MONEY!

Watch the entire thing, see why these dinosaurs of the European Commission are extinct, moron and stupid. That is a good thing, but the only problem is that they will end up spending a wodge of my hard earned cash.

What happens when you decentralise education?

The current British Government is well known to centralise down to buttock clenching levels right up to the Prime Minister’s backside. Specially with targets, budgets, inspections, report cards and the like. Typical control freaks. But what happens when you decentralise education? let it be free? become easy to control at a local level? Well, a peek across to Sweden will give us some indications (I quote some bits from the paper)

 

Sweden undertook a conscious spatial decentralization of its system of higher education beginning in 1987. This policy was motivated by a complex variety of political, social, and economic factors. In this paper, we analyze the effects of university research activity on economic productivity and upon the level and distribution of innovative activity in the economy. We provide quantitative evidence on the effects of the decentralization policy upon output per worker and upon the award of commercial patents for innovations and discoveries. We also provide new evidence that the policy has increased aggregate productivity and economic output, but that the economic impacts are greatly attenuated over space and distance.

During the past 15 years, Swedish higher education policy encouraged the decentralization of post-secondary education. We investigate the spatial and economic effects of this decentralization on productivity and creativity. We provide several tests of the hypothesis that the establishment or expansion of university research in a region improves productivity and enhances creativity. We find systematic evidence that output per worker is higher and the award of patents is greater in regions that have received larger university-based investments as measured by the number of researchers employed on staff. We also find that changes in productivity are higher and new patent awards are more frequent in regions in which the “new” universities and institutions are located than in regions in which the “old” universities are located.

Our analysis permits us to hold constant the important factors affecting economic activity by municipality, labor market area and time, thereby improving the precision of estimates. The results are broadly consistent across theoretical models and statistical results. There is strong evidence that an expansion of university presence in a community, measured by the number of university-based researchers, is associated with increased output per worker in that community and with increases in the patents awarded to inventors in that labor market area.

The importance of the university in affecting productivity and creativity is consistently larger at the margin for the new institutions. For patents, at least, this could arise if the new institutions specialize more narrowly in technical specialties than do the more traditional institutions of higher education. Of course, some of the new institutions are, in fact, expansions of institutions that formerly provided some technical training (e.g., military facilities). This may explain some of the differences.³⁰

The productivity gains are highly localized. The spillovers from researchers employed at the old established institutions are concentrated. Roughly 40% of the cumulative gain in productivity is within 10 km of the institution. For the new universities the attenuation is even more pronounced; between one-third and one-half of the total effect upon productivity is registered within 5 km of the university.

Our findings are consistent with a substantial, but highly attenuated, external effect of investment in higher education, augmenting the productivity of local areas and the local economies in which they are situated.

Now this is quite interesting. And lessons are to be learnt from this. The first one is that the universities need to have their purse strings removed from central government and handed over to local regional authorities. That will push the decision making lower down the chain. Second that I would say is that the local universities should also have their fees handcuffs taken off. If you can charge more, go ahead and charge, plus with a system of bursaries if required to top up on means tested students. Third, local industry and banking/financial services needs to be brought into the picture for the universities to make sense of potential employment and/or SME generation. Finally, overall investment in universities helps in dramatic improvement in local labour productivity, the holy grail. But looking at this anal, stupid government, I despair that anything of import will be done. They will starve the universities by tying them to the government and because of their anal controlling nature, will not let them loose either. Why on earth cannot we have more private universities, I dont understand. Even India is letting them being setup now. sighs.

Let my universities go! Set them free from government control

And yet another piece of evidence that Universities perform better when the dead hand of the government is removed from them. I quote:

We investigate how university governance affects research output, measured by patenting and international university research rankings. For both European and U.S. universities, we generate several measures of autonomy, governance, and competition for research funding. We show that university autonomy and competition are positively correlated with university output, both among European countries and among U.S. public universities. We then identity a (political) source of exogenous shocks to funding of U.S. universities. We demonstrate that, when a state's universities receive a positive funding shock, they produce more patents if they are more autonomous and face more competition from private research universities. Finally, we show that during periods when merit-based competitions for federal research funding have been most prominent, universities produce more patents when they receive an exogenous funding shock, suggesting that routine participation in such competitions hones research skill.

This is for the birds

I mean, for crying out loud…people have too much time on their hands. A bird poop sack?

 

 

 

Ok, so I know what’s it supposed to do, but why on earth would you put in a pooper scooper for a bird? Things people come up with…

I have seen horses with poop sacks, but this is ridiculous.

Here’s another one:

Technorati Tags: innovation

Yet another Jew good/Muslim bad article

I do not know about why this thesis is so prevalent amongst a certain class of Muslims. It goes something like this. Jews have come up with so many Nobel prizes, inventions and discoveries while the Muslims have not. So Muslims should do the same and hark back to some mythical golden age. I am sure you must have read this before. What these frankly silly people do not understand is that if they are identifying excellence with a particular religion, then they are also identifying mediocrity or failure with another religion. If just belonging to Judaism was sufficient to start punching out Nobel Prizes and inventions, then is belonging to Islam sufficient reason for not getting Nobel Prizes and inventions? What follows is that the Muslims should convert to Judaism and viola', Nobel Prizes and inventions galore will come tumbling out of the sky. Or else there is something wrong with the religion. See what I mean? This is why this argument is so fallacious and the worrying thing is that this argument is usually made by quite highly educated people. Frightening, if this is what the educated masses are thinking. Stop beating yourself up for a made up argument.

Here's the latest epistle which got me moaning and whining. See how the issue is confused between religion, public policy, education, innovation and the rest? I quote some rather interesting snippets from this article:

The attitude explained above speaks volumes about love and care Muslims have for knowledge and research. Even in the 21st Century, in Pakistan millions of people have no access to education, and where schools are built they are systematically burnt down or blown out by bombs. Muslims are fast losing interest in education and benefits it could provide because they think they can become rich by other means which might not be legal. Also value of our education is constantly declining; and our ability to provide quality training and produce knowledge is shrinking. As a result of this Muslims are becoming less competitive in every field.

There are 57 Muslim Countries in the world with enormous resources, and yet there are only 500 universities in the Muslim World; and none of the universities in the entire Islamic World rank in the top 500 universities of the world. On the other hand the USA alone has 5,758 universities. In Christian countries 40% of population attend university; and in Muslim countries only 2% make to universities.

Even Pakistan's neighbour and Third World country, India has 8,407 universities; and Indian scientists, doctors and engineers are performing crucial role in advanced societies of the world. It is on strength of this, after the Mumbai carnage one USA based Indian wrote to me that India has softwere engineers, scientists and doctors to 'export', and Pakistan can only 'export drugs and terrorists'.

So problem is lack of educational and high tech training facilities, our failure to learn new knowledge; and our wrong priorities and failure to provide resources for education and research has put us where we are today. And instead of learning from our past mistakes and sorting out our priorities we Muslims, especially Muslims of South Asia like to shift blame to others by saying that it is Jewish, Hindu or American conspiracy.

A prominent Kashmiri journalist, Sardar Zia Mahmood who has kindly provided me this data, while talking to me said, 'One cause of extremism and terrorism is our inability to educate our young people and provide adequate opportunities for those who worked hard to get qualifications'. He further said, 'If we want to combat terrorism and extremism then we have to divert resources to educate and train people and promote culture of tolerance and democratic values'.

Not good, Dr. Shabir Choudhry, if you do have a doctorate or a medical degree, this kind of pap was not expected from you. Science and innovation is not driven by God or religion, but by human beings.

Technorati Tags: innovation,religion,Islam,Judaism

Innovation and Eastern Europe

Saw this note and was reminded of a lecture that I gave on outsourcing (will be giving a related one here) in conjunction with this firm at the Worshipful Company of Information Technologists.  The lecture was on outsourcing and offshoring to Eastern Europe and our experiences with that whole animal. It is quite an interesting area to discuss.

The fact that the blogger is comparing with Israel is quite interesting, but they should be careful of what they ask for. In my experience, copying basic principles such as democracy, education, vocational training is fine, but when higher reaches of human civilisation are copied (such as employment, entrepreneurship, economic development) willy nilly, then problems occur.

But I liked what the Czech have done with the eco system of universities, software companies, politics and bureaucracy. Very hard to replicate and scale but very good indeed. The Israel model of innovation is different, mind you, it is based on a different model of education and value generation. But that's for another essay.

Technorati Tags: Innovation,Czech Republic,Israel,Technology

Here's a great innovative idea

Check this out. I quote:

A German nursing home has come up with a novel idea to stop Alzheimer's patients from wandering off: a phantom bus stop.

The bus stop, in front of the Benrath Senior Centre in the western city of Düsseldorf, is an exact replica of a standard stop, with one small difference: buses never stop there.

The idea emerged after the centre was forced to rely on police to retrieve patients who wanted to return to their homes and families but had forgotten that in many cases neither existed any longer.

“It sounds funny,” said Old Lions Chairman Franz-Josef Goebel, “but it helps. Our members are 84 years-old on average. Their short-term memory hardly works at all, but the long-term memory is still active. They know the green and yellow bus sign and remember that waiting there means they will go home.” The result is that errant patients now wait for their trip home at the bus stop, before quickly forgetting why they were there in the first place.

“We will approach them and say that the bus is coming later today and invite them in to the home for a coffee,” said Mr Neureither. “Five minutes later they have completely forgotten they wanted to leave.” The idea has proved so successful that it has now been adopted by several other homes across Germany.

Technorati Tags: Innovation,healthcare

Another sign that the balance is tilting east

Now this is another issue for the west (besides the fact that the east is eating more meat...), more patent filings in China. I quote the impact:

 

The newfound respect for IP rights in China may be good news for many, but the explosion in applications there also creates a challenge for companies pursuing patents in the U.S. or other countries. A key step for applicants is informing patent examiners about "prior art"—existing inventions often described in other patent applications—and explaining why the patent they are seeking is different. Harold Wegner, a patent attorney and professor in Washington, D.C., noted in an e-mail bulletin, "Huge numbers of Chinese patent applications are becoming prior art upon their publication—and [appear] only in their Chinese version." It may be time for U.S. patent practitioners to bone up on their Mandarin.

The Chinese are still stuck on nationalistic viewpoints over knowledge generation (something akin to Islamic science), but patents are a crucial clutch of sand into the gears of knowledge generation and monetisation. So the sharp rise of China in terms of patents will have a giant impact on the future of the IP based industry. Knowledge centres will move to China (like they already have to India and Israel), and because they have their own very large internal market and a protectionist government, they will have a life of their own. India and Israel had to fall in with what the west and USA said about patent protection because most of their exports are to USA but China can raise 2 fingers (ish) as their internal market itself is big enough to cater for their unique patent system...

Technorati Tags: patents,innovation,china,india,israel,usa

Creativity - Saudi Arabia versus Malaysia

In a short discussion about creativity in Saudi Arabia, I was reminded of a presentation that I saw in KL. It referred to a bill of guarantees. This is a promise by the Government of Malaysia that it will help foreign investors. Now see the point that they guarantee that there will be never any internet censorship? Now its like that kind of broad based liberal thinking which will help Malaysia to power ahead compared to Saudi Arabia. Malaysia is digging and fertilising minds, promising not to interfere despite wherever those minds go to. I am not so sure whether Saudi Arabia can be this free, despite laudable steps like this. Still, identification of a problem is a good step towards solving it.

Technorati Tags: Creativity,Saudi Arabia,Malaysia,Universities

Games earn more than movies

When a computer game ends up taking more than the double of the first week's takings of any movie, then you need to wonder what's happening to the world's idea of entertainment. I quote:

Grand Theft Auto IV, the latest instalment of the video game franchise published by Take-Two, racked up sales of $500m this week after seven days on release – more than double the record weekly take for any movie. Rival Activision had exceptional results on Thursday, with sales of Call of Duty 4 pushing profits well above estimates. While music companies and movie studios grapple with piracy, games publishers are in a sweet spot. It is much harder to copy software for the new generation of consoles. New instalments in a games franchise tend to be a technological and an artistic leap forward. On a cost-per-hour basis, a $60 game may be better value than a $20 CD. And, unlike the “dream factory” movie studios of the 1930s, there is no risk stars will defect to a rival producer or, even more inconveniently, die.

I keep on speaking at various conferences and with senior people and the fact that they are missing what's happening at the bottom is frankly frightening. Do you know that most of the 18-25 year olds, the feedstock of our future business, work and society spends way longer online than watching tv or films?

Do you know that the youth of today do not know how to value their online work any more because of rampant copying of films and music? I was at a board meeting recently and one of the board members (he has a private equity background) was talking about how people have no idea about how much to ask for, what's the funding requirement, etc. etc. They have no idea how to determine what costs are and what to charge for. I had to add to that, in my experience and what i have been seeing in banking and hearing, people who are coming into work have no idea about Intellectual Property and how to price it.

You are a spotty young chap, sitting in a dark bedroom, spending your time online. You get fed and watered. Then online, somebody asks you to code something, or translate something, or use your avatar to man a info stand on Second Life. These boys cannot make the link between the effort expended online, the time spend on the effort and the value of that. Also, how much should they ask for to simply exist.

Look at the numbers above, this weird economy is now in such a state that these spotty youths are spending more money on a game than a film!. Wake up folks, the world is changing under our eyes.

Technorati Tags: economics,gaming,technology,innovation,intellectual property rights,internet

How does Google manage its innovation?

A fascinating interview on innovation is managed at Google. two crucial points (and it reminds me of the other adage, innovation happens despite management!!!)

Can other companies emulate Google's famous model of letting engineers spend
about 20% of their time on projects outside their main job?

The story of innovation has not changed. It has always been a small team of
people who have a new idea, typically not understood by people around them and
their executives. [This is] a systematic way of making sure a middle manager
does not eliminate that innovation. If you're the employee and I'm the manager,
and I sit down and say, "Our product's late, and you screwed up, and you gotta
work on this really hard," you can legally say to me, "I will give you
everything I've got, 80% of [my time]." It means the managers can't screw around
with the employees beyond some limit. I believe that this innovation
escape-valve model is applicable to essentially every business that has
technology as a component.

Can innovation really be managed, or is it a case where you have to keep the
company and its managers out of the way?

I disagree with the word "managed." You have to have a set of necessary
conditions for innovation to occur. To start with, you have to listen to people.

Pretty basic, no?
But not often practiced. Innovation comes from places that you don't expect.

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

The case for better education in the UK

I was in a CIO forum today talking about innovation. But besides all getting very excited about various new technologies, I unfortunately popped the bubble by asking, why is nobody talking about the people and talent aspect? That is my biggest worry here that our children and the British Education System is currently not fit for purpose. I am seriously worried.

For example, I told them, why on earth do we not see security, fraud and internet alerts from the UK? Dont tell me our police are that good, its because our students are so crap that they are unable to try to break into secure systems. You see, if I find a good hacker, I would like to hire him. Its those skills which lead people to make good IT systems, inventions, etc.

The tax system can try what it might but if the people are not educated up to the right levels, they will remain a drag on society. How on earth do people expect structurally and generationally unemployed people to move off benefit and move into work? Not via the school system that we have right now.

Talking to this government is useless, frankly, I despair of the current education department politicians, they are seriously a bunch of wankers and useless. The damage they have done to the country and society is frankly no less than criminal. What else can describe the rapid and relative decline of the British school system and the children's performance?

Here, check out what America is moaning about the school system here.

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

A visionary talks about the future of Finance

I indirectly worked for Till Guldimann before and the man has the brain the size of a planet. But read his interview, this is very thought-provoking.


Title: Taking Stock of the Future
Feature:
Date: 1 November 2007

Industry veteran and visionary Till Guldimann's job is to figure out how the rapidly evolving global market structure and technology advances will converge to change our world.
By Donna Miskin


You could say that Till Guldimann became SunGard's guru for long-term strategy the old-fashioned way-through acquisition. But he has certainly earned his standing as thought leader and visionary-as evidenced by his roles at major industry events-through his long experience in banking and technology.

A native of Zurich, Guldimann trained as an engineer. While studying, he turned his hand to brain research-"using early computers to analyze brainwaves," he says-and did a stint at the National Institutes of Health in Washington, DC. After earning his MSEE, he worked a year in Japan as a software analyst for NEC before deciding that engineering was not his bliss and heading for an MBA from Harvard Business School. He then joined JPMorgan and became an investment banker for 21 years. At JPMorgan, he was a lending officer in Zurich and New York, then headed the consulting group in London, moved to head of trading in Hong Kong during the Thatcher years and then returned to New York to become chairman of the Market Risk Committee and head of the Global Research Group. There he developed the bank's risk management systems and the RiskMetrics initiative.

In 1995, Guldimann left the bank to join Infinity Financial Technology, a derivatives trading and risk management software startup in the San Francisco Bay Area. The company went public in 1996 and was bought by SunGard in 1998. The rest is recent history.

At Sibos in October, Guldimann led the futuristically focused panel, "The 2013 landscape: will you still be a part of it?" The group included Anders Reveman, an independent consultant with the European Central Bank; Chris Foskett, managing director and group head, financial institutions group at Citi; Adrian Farnham, COO of Turquoise; and Don Donahue, president and CEO of the Depository Trust & Clearing Corporation (DTCC).

Some panel predictions included that on the exchange and depository front by 2013 Europe will have two to three clearinghouses but only one settlement provider. However, expect local depositories to be maintained to accommodate different laws, cultures and languages. Exchanges will continue to consolidate with NYSE-Euronext, Nasdaq, Deutsche Börse and the London Stock Exchange and likely Shanghai forming hubs or groups of markets. At least some of the alternative trading systems spawned by the Markets in Financial Instruments Directive (MiFID) will make an impact. Brokers will continue to have a role as intermediaries between issuers and investors. Technology will continue to provide a competitive edge as reliance on it grows. And despite the recent turmoil in the credit markets, further securitization is accelerating.

Since Guldimann's forte and job is keeping an eye on the future-trying to anticipate change and the moves industry segments will make to embrace it-Waters has had a chat with him on more than one occasion in recent months, including in Boston at Sibos. Here are some takeaways from those conversations in his own words.

More on the markets

Comparing all the sizes of the markets to the size of the economy, we can see where they will grow in the next five years. An interesting aspect is the size of the derivatives market. The trading revenues of the new CME Group are larger than those of the Nasdaq and the New York Stock Exchange (NYSE) combined, not including Euronext. And don't forget over-the-counter (OTC) derivatives. The derivatives market is huge and will grow faster than the cash markets. Overall, most of the trading volumes are now in the G7 countries, but a large part of the gross national product (GNP) growth will come from the emerging markets.

Seventy-five percent of the $6 billion in trading revenues globally is now consolidated with five exchange groups: CME-CBOT (derivatives), NYSE-Euronext (cash and derivatives), Nasdaq-OMX (cash and derivatives), LSE-Borsa Italiana (cash), and Deutsche Börse (cash and derivatives), with the rest scattered around a plethora of smaller exchanges. Given the growth of the Shanghai stock market with an estimated $1 billion in revenue in 2007, there is no question that Shanghai will evolve into one of the big financial centers of the world.

Exchange consolidation

We have seen massive consolidation of the exchanges but we still have another 200 exchanges out there and most are really small. It's the depository and the clearing side that needs to consolidate. There are over 100 depositories in the world, but the ones that matter today are well-aligned with the big five exchange groups. Somehow the smaller players will have to be linked up. Since the growth will be in the emerging markets, it means everybody will have to deal with the small depositories there.

Arbitrage in US equities is almost over. It will be incremental in G7 countries. In the newer emerging markets where mechanisms are not as efficient, there will be a huge pile on-in Latin America, Asia and ultimately, Africa. Hedge funds will change the game and investors will turn increasingly to the emerging markets.

Packaging Securities

Historically, securities were defined by the issuers assisted by their investment banks. If they needed debt, they issued bonds. If they needed equity, they issued shares. In the last 15 years we've seen securitization of bank debt or credit cards. Banks had assets and they were repackaged to sell to investors so those securities were defined by the needs of investors, who wanted to buy a credit card portfolio. Now the same concept is being applied to other securities. With exchange-traded funds, investors can say, "I want to buy Japan," or, "I want to buy the telecommunications industry worldwide," and somebody creates a security that reflects that. The situation now is that some securities are defined by what the issuer wants and some securities are defined by what the investor wants and in the middle are the packagers, which take instruments from one, repackage it and shoot it out to the other side. And the arbitrage people are sitting in the middle and using futures, forwards, derivatives to combine and hedge it all. When we project the number of securities that will be outstanding in the future, we usually do it by GNP forecasts, how big is the economy, how many securities does that take. That's standard. But looking at this repackaging dynamic, there will be far more securities than the GNP growth would suggest. So the conclusion is there will be a proliferation of securities and the growth in outstandings will be faster than anything we have seen in the past.

What happens to brokers?

The brokerage business is changing from providing access to markets to creating new securities from existing, other securities. Only a few global houses will be able to provide direct market access through one channel because connectivity is a scale business. Smaller local shops know exactly what the guy in southwest Milwaukee wants, so they can take all these instruments and package special new investment tools for him. The creation of financial instruments is no longer dependent on the issuer; it is dependent on the creativity of the intermediary. It's a big growth industry, despite the credit crisis, which went a little too far, too fast, not unlike the Internet bubble. In this business, collateral management is very important and that's the second big growth area. When everybody has to deal and settle in all these multiple instruments, to do it efficiently you have to manage collateral and margins very efficiently. So collateral and margin management among the plethora of markets is going to be a huge business. For that, it is not necessary to be big.

A co-location conundrum

Today the only data driving black-box trading is market price data. What is yet to come is digital company data and news. The more digital data you get and the faster your computer is, the more decisions can be made by black boxes. Annual reports are now being posted in digital form (XML) on the Securities and Exchange Commission's (SEC's) Edgar Web site. Company data is turning digital, which means that there will be much more information available to the black boxes.

In the information age when an unlimited amount of information can be distributed to anybody in the world, everything is available to everybody. You can sit in Connecticut. You don't have to be on Wall Street. The pipes have become so big and efficient that the cost of shipping information is zero. However, the time it takes to go from Chicago to New York cannot be faster than 8 milliseconds, the speed of light. Analyzing information very fast means it matters where you sit. If you want to trade in Chicago, you better sit in Chicago or you better have your black box in Chicago because you can't have your black box in New York and be 8 milliseconds slower. Co-location: What does that mean? In the US, the derivatives market is in Chicago and the cash market is in New York, and a juicy part is to arbitrage the two of them against each other and they are 8 milliseconds apart. Compare that to Germany where they sit in the same location. It could be that Germany is the more efficient market. It could be that some of the derivatives market is moving to New York or the cash market is moving to Chicago.

So what if the SEC decides Edgar will release company news first? Then you should have your black box in Washington, because you can analyze a new 10K report faster than 8 milliseconds with the right machinery and make your trades. Where does this go, because you can't put everything in one place? Nobody understands that yet, but the speed of light is suddenly having an impact on the structure of the market. Nobody has thought that way before. A second was good enough five years ago. Today in some markets, 8 milliseconds really matters. That's why people are co-locating. It's a whole different ball game.

In a nutshell

When you have more derivatives and more arbitrage between and across markets, the markets become far more interdependent, and therefore regulation is forced to become far more global. Black boxes are going to be important for arbitrage. Distance is going to be important. Clearing, margining and netting are very important. Repackaging of securities and how you manage them will be very important. Regulatory alignment like international accounting will also be very important.

The IT business environment

Now, instead of cost containment, there is speed. Instead of careful deliberation, there is agility, which is more important than anything else. That's counter to the trend in the last five years when firms had to become more efficient and centralized and put extra controls on spending-not that these controls are no longer necessary. You need size in order to get the economies of scale and to cut costs. You need the agility to exploit newer faster markets. Here is the dilemma.

Scale and growth

Financial services firms have to cut costs for the same transaction and service by 10 percent per year for the foreseeable future just to stay in the game. That's a huge driver for consolidation and economies of scale. The purpose of acquisition was to put more volume through the same machinery. You need cost control plus innovation to go after new opportunities, new markets, new instruments, new clients and new geographies. However, most important innovations over the last 20 years have come from small shops.

The rise of collaboration

In technology, Unix is getting replaced with the open source Linux; Yahoo! by Google; Encyclopedia Britannica by Wikipedia and Who's Who by Facebook and FaceBook by OpenSocial. The old is about centrally managed production and distribution of content. The new is about collaboration and sharing content and services. In looking for the next innovation in IT as it applies to finance, pay attention when you see these collaboration and sharing content ideas. The psyche of the changing mindset is that you don't have to have an idea of where you can make money. You can have an idea of how other people are making money so you can make money on their making money. That's a fundamental change.

Innovation flips to the consumer side

In the past, most of the chips/integrated circuits went to commercial applications-mainframes at GM or at Citi. In the future, more chips will go to consumer items. The Xbox today is significantly more powerful than the average laptop. That means most of the software innovation for the next five or 10 years will be consumer driven. But in large financial institutions, the IT department lets nothing past security. If you walk in with your personal computer, let alone your Xbox, you either have to give it up or they castrate it. Of course, their concerns are valid. The key issue, though, for large organizations is where to set the boundary between what they want to protect for security and confidentiality in house and what machinery and what gadgets employees can use. And where are the boundaries for how customers, particularly if they are individuals, can link to you? The bulk of innovation will be on the consumer side now. So the message here is rethink the boundaries. Be aware of the consequences. The senior IT managers in large financial institutions will be out of touch for the sake of security because they are no longer exposed to what's new out there.

Open source rules

Open source is one of these big collaboration things. At the beginning everyone said open source-you must be kidding. Today, Linux is replacing Unix. In Silicon Valley, the main qualification for a startup CIO is that he or she knows open source, where to get what and how to use it. In an IT shop in a large organization, the qualifications are can you manage large projects and do you know how to code a solution. This means the use of open source in startups is much higher than in larger organizations. As a consequence, startups are much faster and they can make many more mistakes, because it's much cheaper. This is another driver for innovation coming from the smaller shops.

Building sensitive systems

The third trend is business process management (BPM). Workflow systems streamline repetitive human actions around a given departmental IT solution. BPM goes one step further. It describes the logic of what people across business segments do and then the system is built around that. Take for example, how a large bank manages changing customers' addresses. The call comes into a call center, an agent verifies the caller is a customer and hands off to another agent in a different department who pulls up the existing documents. The request is then passed on to another agent in another department for the actual updating, and then a fourth agent reports back to the customer that the address is changed. Workflow goes through multiple operation centers and multiple systems and that is very hard to measure. So you build feeling nodes or sensors into different systems, like the FedEx Web site that can tell you where your envelope is now. These sensors provide information on what happens to each transaction, where and when. Statistics can be gathered to show where the bottlenecks are, where the delays are, so the process can be improved across business segments. Beyond that, instead of just sensing information, commands can be given to control and optimize the process. The new BPM systems comprise software to describe, software to measure and software to control process. SunGard acquired a German software jewel, a company called Carnot, which simulates and monitors processes and can also manage them by initiating software steps and integrating applications.

What is happening at SunGard?

Our greatest challenge is how to integrate a vast set of independently developed solutions. The answer is service oriented architecture (SOA) with an open source twist that we call "federated development." This means that any of our development organizations can ship in codes into a central repository and put a price on it or say it's free, and anybody else can reuse it. It's like open source inside SunGard. In the development of a new application it's not unusual that 70 percent of it exists somewhere else. So all these independent business units that never talked to each other before can now through this mechanism talk to each other and they can reuse code in the service of their client.

This approach started in 2002 as an experiment by an exasperated head of development to deal with a salesman's selling a solution that combined eight applications of the wealth management workstation packaged into a single application. Other units were starting to adopt this approach by 2005, when we went private. Going private allowed us to think long-term to transform the enterprise with new ideas. We then put the entire SunGard-all 190 development units in the Financial Systems Group-on this Common Services Architecture (CSA), combining an SOA platform with an open-source governance structure. We announced it in 2006.

What goes around ...

This year we announced Software as a Service (SaaS) on a shared platform we call Infinity. Instead of providing and hosting a solution, like an ASP to one user, we are providing and hosting a service of a bunch of services to multiple users. If we build our software so that everything is CSA-compliant, you can throw different services into a basket and reuse each. If you want a special solution, you can select specific services from the basket and orchestrate the services yourself into solutions tailored to specific needs. This is SOA deployed to users-as in, "I like Invest One but I would like to have a little piece of Front in it." In order to actually manage a solution as a combination of services you need business process management software. That is why the addition of BPM is important in this strategy.

This is the whole logic. We have a revolution from control to networks. We have the challenge in the industry to handle scale and innovation at the same time. We have consumerization, open source, BPM. We have Infinity to provide SaaS. We have the business model and the hosted services to roll it out. We believe that the future of SunGard is growing the federation by buying small innovative shops. That's why we continue to do acquisitions. We believe there will always be smarter, smaller shops out there and now we have a mechanism and an architecture to integrate them and deploy their innovation without killing the inventors.

The speed of change is accelerating. There has never been this much opportunity for agile organizations. We are morphing SunGard into a collaborative network of innovators as we believe the industry is moving toward a network of specialists. Welcome to the 21st century.


Source:

© Incisive Media Investments Ltd 2007


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

Innovation, Information, and Regulation in Financial Markets

Here is a very interesting speech on financial innovation, information and regulation. I keep on hearing about innovation these days. Whether its process innovation, technical innovation, financial innovation.... And I have to confess that I am puzzled. Because innovation for me is simply doing something better, cheaper, faster... And within the financial markets, we have been doing this since the year dot. And the current debate and discussion over innovation seems to be like it is a buzz word almost. You cannot manage innovation, it is there or it isnt there. So whenever we talk about innovation, be very specific. Are we talking device innovation? software innovation? reporting innovation? process innovation? cost innovation? relationship innovation? what?

But innovation does need to be managed as this speech says. It is long but very interesting, highly recommended to read the whole thing if you are worried about the state of financial markets.

Read and ponder.

Governor Randall S. Kroszner
At the Philadelphia Fed Policy Forum, Philadelphia, Pennsylvania
November 30, 2007
Innovation, Information, and Regulation in Financial Markets

Good afternoon. I am pleased to participate in the excellent annual Philadelphia Federal Reserve Policy Forum to discuss this year’s timely topic of innovations in financial markets. Innovations in financial markets have created a wide range of investment opportunities that allow capital to be allocated to its most productive uses and risks to be dispersed across a wide range of market participants. Yet, as we are now seeing, innovation can also create challenges if market participants face difficulties in valuing a new instrument because they realize that they do not have the information they need or if they are uncertain about the information they do have. In such situations, price discovery and liquidity in the market for those innovative products can become impaired.

In my remarks today, I would like to explore the role of information in the development of new financial products and then draw some lessons about risk management and regulation. In particular, I will examine the role that investment in information gathering, processing, and evaluating plays in supporting the price discovery process and how such investment can lead toward a tendency to greater standardization as markets for innovative financial products mature. Examples from both history and current experience will help to illustrate this tendency with respect to loan work-outs and restructurings. I will then conclude by considering how a regulatory approach that encourages transparency and sound risk management, such as Basel II, can be valuable in fostering a robust environment for the introduction of innovative financial products.

Experimentation and Learning in New Instrument Development
Typically, when a new product is being developed, there is an initial experimentation phase in which market participants learn a great deal about the product’s performance and risk characteristics. This phase involves gathering and processing information and modeling the performance of the product in various scenarios and under different market conditions. It may then take time for market participants to understand what, exactly, they need to know to value a product. During the early phases, a fair amount of due diligence is appropriate, given the greater uncertainty associated with innovative products. The investment in gathering, processing, and evaluating information then, as I will discuss, often leads to greater standardization of products and contract terms, which can enhance liquidity of products as their markets mature.

In the initial experimentation phase, the terms and characteristics of a new product are adjusted in response to market acceptance--or lack thereof. During this period, market participants are seeking and providing information so that they can properly value the product, judge its potential for risk and return, assess its market acceptance and liquidity, and determine the extent to which the risks of the product can be hedged or mitigated.

When a product’s track record is not well established, there should be a strong market demand for information in order to facilitate price discovery. Price discovery is the process by which buyers’ and sellers’ preferences, as well as any other available market information, result in the “discovery” of a price that will balance supply and demand and provide signals to market participants about how most efficiently to allocate resources. This market-determined price will, of course, be subject to change as new information becomes available, as preferences evolve, as expectations are revised, and as costs of production change.

In order for this process to work most effectively, market participants must utilize information relevant to value that product. Of course, searching out and using relevant sources of information--as well as determining what information is relevant--has its own costs. To underscore the last point, with new instruments, it may not even be clear exactly what information is needed for price discovery--that is, some market participants may not know what they do not know and they may therefore terminate the information-gathering stage prematurely, unwittingly bearing the risks and costs of incomplete information.

Price Discovery
Due diligence is an important part of the price discovery process. The due-diligence process allows market participants to “trust but verify” market-provided information through a range of activities, from assessing risks and exposures through stress-testing to assessing the enforceability of the contracts that define the legal relationship among originators, sponsors, investors, and guarantors. The due diligence is complemented by risk-management structures that allow participants to interpret, understand, and act appropriately in response to the information in the market.

Recently we have seen how a lack of information and inadequate due diligence and risk management have created problems in the market for certain structured finance products. Let me focus a moment on structured investment vehicles, or SIVs. SIVs have been created with a variety of terms and characteristics--for example, different underlying assets, different levels of liquidity support or guarantees, and various triggers that require the forced sale of assets or liquidation of the structure. Although SIVs or similar vehicles have existed for many years, many recent SIV structures involved a much higher level of complexity of the underlying credit risks, legal structures, and operations. This complexity--and the lack of information about where the underlying credit, legal, and operational risks resided--made these products more difficult and costly to value than many investors originally thought. Investors suddenly realized that they were much less informed than they assumed and, not surprisingly, they pulled back from the market.

We have seen similar problems in the subprime residential mortgage-backed securities market and the related derivatives markets. The lack of long historical data on the performance of these instruments, and their correlations with other assets and instruments, made it difficult to assess their overall risk-return profile, especially in times of stress. Moreover, in the subprime residential mortgage-backed securities market, many market participants were willing to proceed without conducting robust due diligence and without establishing appropriate risk-management structures and processes. They did not follow “trust but verify,” that is, they instead accepted the investment-grade ratings of these securities as substitutes for their own risk analysis. Ratings keyed to expected default or credit loss do not adequately capture the full range or magnitude of risks to which a product may be subject, including--as we have seen most dramatically--market liquidity risks. In addition, some originators may not have demanded sufficient information about the purchased assets underlying these structures and therefore may not have fully appreciated the credit risk of the assets and the consequential risk that the structures would come back on balance sheet when the assets defaulted.

When the problems in the subprime mortgage market began to emerge and delinquencies exceeded rating agency estimates and the defaults predicted by limited historical data, we had moved beyond our past experience with these instruments. Information was not readily available about the extent to which the economic context had changed, or even whether underlying loans would or could be modified to prevent default. When ratings were downgraded, investors lost confidence in the quality of the ratings and hence the quality of the information they had about subprime investments. Lack of information, a disrupted price-discovery process, and a stressed environment led to a reassessment of risk, not only in the subprime market but also in the residential mortgage market across the board.

Of course, this is not the first time that participants in a market for an innovative product have suffered losses. In the early 1990s, participants in the collateralized mortgage obligation (CMO) market and the markets for structured notes and certain types of interest rate derivatives did not have adequate information about the potential volatility and prepayment risk involved. Consequently, market participants did not appropriately model these risks and suffered significant losses when market interest rates rose sharply in the mid-1990s. As in the case of the residential mortgage-backed securities market today, the general market reaction was a flight away from these instruments. However, over time, the market was restored as market participants came to better understand the risks and as standardized methods were developed to measure the risks and model the value of these instruments under alternative scenarios. Increased information and standardized pricing conventions, such as the use of option-adjusted spreads, moved these instruments from the experimentation and learning phase to the phase of broad market acceptance.

When market participants realize that they do not have the information necessary for proper valuation of risks, the price-discovery process can be disrupted, and market liquidity can become impaired. A significant investment in information gathering, processing, and evaluation may be necessary to revive the price discovery process. This revival is likely to take time and the market may not look the same when it re-emerges.

Let me describe in a bit more detail the ways in which these investments will take place and hence why recovery of price discovery may be a gradual process. First, market participants will likely need to collect more-detailed data in a more systematic manner in order to better understand the nature and risks of the instruments and their underlying assets. Second, investments in enhanced systems to warehouse and model data related to these instruments will facilitate a better understanding of their risks, particularly under stress conditions. Third, investors need to ensure that they have the so-called human capital expertise--that is, the people--to understand, interpret, and act appropriately on the results of the modeling and analysis of the information gathered. The pay-off from these investments will be a greater understanding of risks and greater ability to value the instruments.

The Development of Greater Standardization in a Market
Another consequence of information investments is a tendency towards greater standardization of many of the aspects of an instrument, which can help to increase transparency and reduce complexity. As was demonstrated in the CMO market, as the market gains information about a product and develops a level of confidence in that information, the product tends to become increasingly standardized. Standardization in the terms and in the contractual rights and obligations of purchasers and sellers of the product reduces the need for market participants to engage in extensive efforts to obtain information and reduces the need to verify the information that is provided in the market through due diligence. Reduced information costs in turn lower transaction costs, thereby facilitating price discovery and enhancing market liquidity. Also, standardization can reduce legal risks because litigation over contract terms can result in case law that applies to similar situations, thus reducing uncertainty.

The benefits of the development of standardization for enhancing the liquidity of financial markets have a long history. One particularly clear example dates back to the development of exchange-traded commodities futures contracts in the mid-1800s. The standardization of the futures markets improved the flow of information to market participants, reducing transaction costs and fostering the emergence of liquid markets.

In the early days of the Chicago Board of Trade, in the mid-1850s, standardization took the form of creating “grades” or quality categories for commodities such as wheat, allowing for the fungibility of grains stored in elevators and warehouses, and breaking the link between ownership rights and specific lots of a physical commodity. Traders no longer needed to verify that a certain quantity of grain was of a sufficiently high grade because the exchange established a system of internal controls in the form of grain inspectors and a self-regulatory system to arbitrate disputes. The grain inspectors charged a set fee to certify the quality of the grain for any receipt traded at the board, a system with parallels to the mechanisms employed today by the rating agencies.1

In effect, standardization and related controls reduced traders’ information requirements and, thus, their transaction costs. In 1865, the Chicago Board of Trade standardized the delivery dates for the contracts, thus fostering the emergence of liquid markets in which traders could readily hedge the risk of price changes in the commodities and contracts. A final step toward standardization came years later with the adoption of the clearinghouse for the exchange as the common counterparty to all of the contracts traded on the exchange. With a central counterparty, the costs and uncertainties of failures and restructurings were significantly reduced, thereby reducing work-out costs and enhancing liquidity of the contracts traded on the exchange.2

The benefits of standardization can be realized not only on organized exchanges but also in over-the-counter markets. In more recent times, for example, the creation of the International Swaps and Derivatives Association (ISDA) master agreement for over-the-counter swaps and derivatives contracts has brought about the benefits of standardization while also allowing for product flexibility and customization. The ISDA master agreement provides standard definitions and a general outline for the contract but allows latitude in customizing terms. The master agreement also sets forth a template for workout procedures if a counterparty defaults, allowing parties to the agreement to adjust their risk-management strategies in light of the agreed-upon work-out process. This standardization reduces uncertainty about the instruments, which lowers transaction costs and facilitates price discovery and market liquidity.

The examples from the long- and more recent- past may hold some valuable lessons for how improvements in standardization could help to address some of the challenges in the subprime market. Uncertainty about the work-out process and the options that are available, for example, could be contributing to the difficulties in reviving price discovery and liquidity in the market for subprime residential mortgage-backed securities. Part of the valuation challenge is gauging the extent of the difficulties that borrowers will have in making payments and being able to stay in their homes given the reduction in house price appreciation--or actual declines in some areas--and the large number of interest rate resets coming on many adjustable-rate mortgages. From now until the end of next year, monthly payments for an average of roughly 450,000 subprime mortgages per quarter are scheduled to undergo their first interest rate reset. In addition, tightening credit conditions as reported in the Federal Reserve’s Senior Loan Officer Opinion Surveys on Bank Lending Practices suggest that refinancing may become more difficult.

Lenders and servicers generally would want to work with borrowers to avoid foreclosure, which, according to industry estimates, can lead to a loss of as much as 40 percent to 50 percent of the unpaid mortgage balance. Loss mitigation techniques that preserve homeownership are typically less costly than foreclosure, particularly when applied before default. Borrowers who have been current in their payments but could default after reset may be able to work with their lender or servicer to adjust their payments or otherwise change their loans to make them more manageable.

It is imperative that we work together as a financial services community to look for ways to help borrowers address their mortgage challenges, particularly for those who may have fewer alternatives, such as lower-income families. The Federal Reserve and other regulators have been active in encouraging lenders and servicers to take a proactive approach to work with borrowers who may be at risk of losing their homes. For example, the agencies have issued statements underscoring that prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the investor and the borrower and have had numerous meetings with interested parties to foster the development and implementation of work-out arrangements.

Given the substantial number of resets from now through the end of 2008, I believe it would behoove the industry to go further than it has to join together and explore collaborative, creative efforts to develop prudent loan modification programs and other assistance to help large groups of borrowers systematically. I am not suggesting a one-size-fits-all approach, but a bottom-up approach designed to appropriately balance the needs of all parties. Getting to borrowers who have been making payments but are at risk of falling behind before they actually do become delinquent, for example, can help to preserve work-out and refinancing options.

Some industry participants and consumer groups have begun to work collaboratively to develop loan-modification templates, standards, and principles that can help to streamline the work-out and modification process. This can reduce transaction costs and potentially provide timely relief to a wider range of borrowers. A systematic approach to loan modifications would likely reduce some of the uncertainties in the market for such subprime mortgage-backed securities, helping to restore price-discovery and liquidity. This would help to ease the tightening of credit conditions in the market.

I am privileged to serve as a board member of NeighborWorks America, a national nonprofit that partners with the HOPE NOW Alliance. This alliance is developing ways to facilitate the flow of information between servicers and distressed borrowers and to work toward clarification of loan-modification procedures. Increased standardization and certainty could also benefit investors in the mortgage market by improving information flows and the price-discovery process, thereby improving market liquidity while at the same time helping to avoid foreclosures and promoting sustainable homeownership.

A Regulatory Environment That Encourages Sound Risk Management and Transparency
Recent market events have underscored the need for better market information about new products, robust due diligence to verify that information, and risk-management strategies to utilize the information in management decisionmaking. The supervisory agencies and the industry both are addressing the need for improved risk management in light of the market disruptions

The newly adopted Basel II capital framework for large internationally-active banking organizations, for example, is an important advance that encourages the types of investment in information I discussed earlier. The Basel II framework is comprised of three pillars. Pillar 1 requires information gathering and robust modeling techniques to better take into account the risks of different types of instruments and securities than under the traditional Basel I framework. It also provides incentives for more robust risk management in connection with certain higher-risk activities, such as securitization and other off-balance-sheet activities. Pillar 2 emphasizes the further stress testing and analysis of the data in conjunction with an ongoing evaluation of the institution’s capital adequacy in light of its risks through the internal capital adequacy assessment process. Pillar 3 reflects the need for better information through investments in data gathering and analysis that are reflected in enhanced public disclosures and regulatory reporting. More-comprehensive and more-transparent information allows investors to better understand the banking organization’s risk profile and thus reduces transaction costs and facilitates price discovery and market liquidity. The three pillars of Basel II promote precisely the three types of investment in information discussed earlier that facilitate the price discovery process.

In addition to supervisory initiatives, industry leaders’ efforts to influence the adoption of sound practices and codes of conduct can efficiently and effectively facilitate market-correcting behaviors. To this end, the industry is actively engaged in efforts to improve sound practices for risk management through improved stress-testing practices to cover contingent exposures, marketwide events, and potential contagion and enhanced due diligence and modeling for new products. As they look into the causes of the recent market disruptions and determine the appropriate response, both supervisory and industry groups are carefully analyzing the weaknesses in risk management and the lack of transparency in complex structures--and the implications of that lack of transparency for proper valuations.

Conclusion
The recent market disruptions have dramatically underscored the importance of gathering and analyzing information about innovative products. When the price-discovery process for a product is disrupted, both investors and sellers need to engage in a period of information gathering, processing, and analysis in order to re-establish a market price. This can be a gradual process and one that results in fundamental changes to the market for the product. Efforts underway by both supervisors and the industry should encourage improvements in risk analysis and management and, thus, price discovery. We are hopeful that our efforts to increase the standardization of loan-modification options and processes for subprime loans will help to provide more information to lenders, investors, homeowners, and communities faced with potential mortgage loan defaults while at the same time helping to provide more timely relief for borrowers in distress.


--------------------------------------------------------------------------------

Footnotes

1. See Randall S. Kroszner (1999), “Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearing Houses and Recent Over-the-Counter Innovations,” Journal of Money, Credit, and Banking, vol. 31 (August), p. 600. Return to text

2. See Kroszner, “Can the Financial Markets Privately Regulate Risk?”, p. 601.

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

Where's the vision? eh? eh? you tell me!

At a dinner at Claridges recently, the room was heaving with the great and good of European Consulting, Telecoms, Government, regulators, TV, manufacturers, media, and a few industry bodies. The topic of the Business Week Roundtable Discussion 2007 was, Next Generation Networks for Next Generation Business. So I was quite excited about going there and listening to the pearls of wisdom about the future of business and what kind of networks will be required to support them. Unfortunately, I did not walk away with the feeling that there was a vision thing going on.

I went there to learn about Next Gen but all these guys were talking about copper, fibre and ADSL and Wi-Max. Gosh, guys, where is the vision thing? What about web 2.0? Where is the monetisation of online transactions? The impact on tax takings of internet based transactions? Economic activity moving into the virtual world? changes in value chains in various industry models because of Web 2.0 and technology changes? Utility pricing? Social valuation based pricing? Usage of traffic data to drive analysis? Bundling up of services?

They were patting themselves on the back about having good stuff about the steadily growing broadband penetration in UK. While one guy talked about people seeing TV soaps on their mobiles in the Korean underground while the minister for FDI for Macedonia explained how they jumped from a single fixed line provider to 99% digitally connected / fully wireless and in 18 months will be the first country in the world to be fully Wi-Maxed!!

I told them that you need to drive investments in the public sector in networks. Think sewers and waterworks, guaranteed return, and push for investments much faster via the government. The problem we have, I further pointed out, was that the deployment cycle is now longer than the new product / technology cycle. In other words, before you have managed to get the tech out from the labs, deployed and start generating money (forget payback) new tech has come around and nobody is willing to pay for the old tech any more. Copper took 27 years to payback in the UK, fibre is less but they are starting to roll it out while countries like Macedonia are two generations ahead!!!!

How about the fact that USA has just agreed to exempt all internet transactions from sales tax. So if you are going to fund essential national infrastructure from general taxation, where on earth are you going to get the money from if more and more economic activity is moving into internet transactions which are footloose and tax free? How about the fact that there are now different value systems such as the Linden Dollars, values for World of Warcraft user id's, etc.? These have a real life value, capable of being traded on an exchange or on e-Bay, and its value has been determined completely independently of any government or regulator. So what is the future of national currencies?

I gave the example of my son's comment to me when I moaned about paying £8.00 per month on his World of Warcraft game. Flash came the reply, Dad, I can sell my userid on eBay for £300. So at this moment, I am in profit if you want your money back. I was so dumbstruck at the very conceptual beauty of the idea that I completely forgot to take advantage of the idea. But do you see what has happened? He has created value electronically, it is not a physical product, not a CD, not a software product. It is but a user-id with a certain efficiency level, for which people are willing to pay real life pounds sterling. So if this is the future of one part of business, then what is the future of financial institutions, network providers, advertising agencies, regulators, central banks, credit rating agencies...

So to create the business case, you need government sponsorship and pushes to create a different way of working, funding, operating and regulating these kinds of networks. Business cases cannot just be created on the basis of fibre or WiMax networks, it has to be created on the basis of eco-systems as the old ways of measuring value are going to fast disappear. I would say that in my estimation, we will start seeing the bundling of financial services with telecommunications with mobile devices with social networks, and that sort of made people look at me as if feathers were growing out of my tongue.

An interesting comment was from the regulator; "we want people to think of networks as utilities, do not worry about broadband speed and contention ratio's, like you don't worry about size of water pipe or distance from pumping station!" Very smart thinking that, and something that should be covered much more. I also heard about how the Americans are desperate to get more European style of telecommunications regulations into USA. As you know, European regulators are very much independent of the politicians unlike the FCC which is totally entangled inside the Government. Bad mistake, but there you go.

But to conclude, I am very disappointed, forget about thought leadership, they were simply talking about last generation technology deployment and challenges. I mean, I walked out and I still not clear as to what exactly is a next generation network. I think I have a pretty good picture of what a next generation business will be and a bit of a hazy idea of what the networks and telecommunications support we will require, but I didn't get any idea that it was widespread or that far seeing.

I then goggled the dratted thing, and found this link. When you read it, you will see the mistake that they are doing. This isn't next generation at all. This is 1.5 generation. A very very silo driven, technically lead, vague framework to wrap some technical infrastructure bits. Sorry, this is not next generation at all, this is just a newer, better and fatter pipe. You could call it next version, but to call it next generation? No Sir. The business and the young generation have already consigned this technology to the same level as we did to the plumbing and sewer works.

If you do want to call it new generation, then you have to extend the value chain to include the customer (both retail and business) at one end and on the other end, you need to include the content generators, the mashers, the financiers and the social network framework providers.

But more about that later! I will be developing these arguments further as we go on.

Technorati Tags: Innovation , Technology , Europe , United Kingdom , Regulation , Government

What is your innovation archetype?

This document was passed on to me, about how to innovate in your firms. I quote from the starting paras:

Why do innovation efforts so often fail? We might expect individual innovations to fail – innovation is risky, after all – but that does not explain why companies often pull the plug on broad campaigns to accelerate innovation, sometimes after only short periods of time. While the business press hectors firms to try to become the next Google, many companies struggle with simply getting innovation initiatives off the ground.

The folks interviewed tons of people and firms and asked them about the following:

Products/services metrics
• Revenue growth normalized by R&D spend
• Average time to market for new products/services in days
• Average time to profitability/payback for new products/services in months
• Percentage of revenue from new products and/or services launched in the past year

Operational metrics
• Cost of goods sold as a percentage of revenue
• SG&A as a percentage of revenue
• Average days in inventory
• Percentage product and/or service sales orders delivered on time
• Fixed assets utilization rate

Business model metrics
• Number of new businesses launched in past three years
• Percentage of revenue by fulfillment channels
• Customer retention rate

Innovation enablers
• Employment of cross-functional teams
• Collaboration practices
• Mobilization capabilities (e.g., percentage of employees tasked with innovation goals)
• Innovation agenda (e.g., formal process for fostering and vetting new ideas)
• Customer satisfaction

Their research has shown the fallacy in the assumption that successful innovation will come simply by replicating the approach used by other successful innovators. A survey of more than 250 companies across multiple industries and 24 countries shows that the sourcing, shaping and implementation of ideas at innovative firms tends to conform to a small number of innovation archetypes, which represent a self-reinforcing combination of culture and operations. Google is representative of one of those archetypes, but only one.

Then they come up with 4 archetypes:

• The marketplace of ideas
• The visionary leader
• Innovation through vigour
• Innovation through collaboration

I will let you read about the archetypes in the document itself as they go more into detail into each of these archetypes, talking about the Leadership, Staff, Process and Environment.

Well, I suppose it is interesting to classify innovation processes and organisation structures. I can also see the sense in trying to do this for simple firms (single product, single country, etc.). But me sitting inside a financial institution, that too a global, multi product, matrixed managed firm, I cant see this happening at all. If I had to execute something like this into the firm, it would simply not work at all because the sheer amount of bureacracy, regulatory oversight, huge technology and operations tail, very high reputational risk, sensitivity of products, all go to make sure that innovation happens like mutation. While I do think that we are the market leaders in managing innovation with out outsourced and offshored partners, to try to build something like this into an overall firm will be a bit of a challenge.

Also, do we really need to work on innovation? Isnt it something like trying to teach entrepreneurship? you can manage the process and give tools/techniques to help manage the process, but you cant make it happen.

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

India and Israel: The great seduction

A great article on how Israel and India are linking up in wonderful ways to leverage technology and innovation.

Like all dreamers, Israeli entrepreneur Harel Cohen had an idea to change the world — well, to be precise, India.

“It’s one of the world’s biggest countries, it will be the world’s biggest economy in 40 years,” said Cohen, 37, an amiable, strongly built former Israeli army officer. “But with 22 languages and 10 scripts, India doesn’t have enough Indian-language keyboards.”

An e-mail and a flight to India in 2004 got him into the door of Vijendra Shukla, head of language technology at the government-run Centre for the Development of Advanced Computing in Noida and a pioneer in the development of Indian-language software.

Cohen is now CEO of FTK Technologies, which has a simple but smart way of programming keyboards for different languages: fit a webcam on a laptop to intuitively track the user’s fingers and create a “virtual” keyboard on screen, which mirrors the keystrokes of the real keyboard.

At the click of a mouse, it can switch from Kannada to Urdu or eight other languages. Indian words that took two minutes to type, now take 20 seconds.

It was December 2005 when, like hundreds of entrepreneurs who populate the tech hubs around Tel Aviv, Israel’s throbbing business capital, Cohen flew to New York. Within hours he sold his idea to a private investor. “I don’t think he’s ever been to India,” said Cohen of his investor. “He said, ‘it’s bound to be good, there’s one billion people there.’” It was as easy as that. “There’s a lot of money in Israel for ideas,” Cohen said. “That’s how it goes.”

People like Cohen are packing the flights to India and fuelling a spiralling but largely unknown trade beyond diamonds and secretive defence buys — India is now Israel's biggest arms customer, with $5 billion (Rs 2,000 crore) in purchases, officially, since 2001 - to infotech, security systems, drip irrigation, even television shows.

Annual trade is expected to touch $5 billion, a 46 per cent rise since 2006.

“We've been around for 24 years, but only recently have we become sexy," said Anat Bernstein-Reich (42), deputy chairperson of the Israel-India Chamber of Commerce, over lunch in downtown Tel Aviv.

Bernstein-Reich has an office and an Indian partner, Alfred Arambhan, in Sherly Rajan village in Mumbai’s upmarket western suburb of Bandra. A mother of three, she advises Israelis on conducting and developing business in India and her firm, A&G Partners, has interests that range from investment banking to Bollywood.

Israelis want to profit from India’s great leap forward, Indians seek opportunities in one of the world’s high-tech hubs. Over the last year, Mumbai’s Mansaria group has bought over Israel’s largest tyre manufacturer, Sun Pharma, has bought a stake in Israel’s largest pharma company, Jain

Irrigation from rural Jalgaon in Maharashtra has bought into a drip-irrigation company, a field in which Israel is a world leader.  

In another high-tech hub in the town of Petah Tikva — in the late 19th century the first Jewish immigrants fought malaria and began life here in what was then Palestine — Associate Vice-President Giora Reish said his company, Gilat Satellite Networks, is bidding for one of India's largest telephone expansions, a tender issued this month by state-run BSNL to link 14,000 villages.

Technorati Tags: Israel , India , Innovation , Technology

Islamic Innovation

This caught my eye while I was trundling down to Swansea and have decided to post it in its entirety, pretty good overview. As they say, from your lips to the ears of God! Now announcements are easy, its execution which is tough, but hey, hope springs eternal. Now the only thing to remember, there is nothing as Islamic Science, its just science.

Islamic innovation is finally on a rising crescent

By James Wilsdon

Published: October 19 2007 03:00 | Last updated: October 19 2007 03:00

The names of Nasir al-Din al-Tusi and Ibn al-Nafis may be less familiar to many people than those of Isaac Newton or Albert Einstein. But these and other Islamic scholars of the 12th and 13th centuries belong in the pantheon of thinkers whose work has shaped the direction of modern science.

Like that of China, the history of Islamic science and innovation is one of a period of great flourishing followed by a steep and protracted decline. Today, research and development spending across the 57 member states of the Organisation of the Islamic Conference averages just 0.38 per cent of gross domestic product, compared with a global average of 2.36 per cent.

This is not simply a sign of relative poverty: oil-producing states such as Saudi Arabia and Kuwait are among the lowest investors in research as a percentage of GDP. In 2005, the 17 countries of the Arab world together produced 13,444 scientific publications, fewer than the 15,455 achieved by Harvard University alone. A 2002 survey of science in the region could identify only three subjects in which it excelled: desalination technologies, camel reproduction and falconry research. This has led some commentators to suggest that there is something about Islam that is inimical to innovation. However, the picture is starting to change.

Across the Islamic world, the past 12 months have been punctuated by eye-catching announcements. In May 2007, the United Arab Emirates launched a $10bn foundation to create research centres in Arab universities. In Nigeria, the government has poured $5bn into a petroleum technology development fund to support research and education. In Qatar, a 2,500-acre education city has been constructed outside Doha and is home to international campuses of five of the world's top universities. Earlier, in August 2006, King Abdullah of Saudi Arabia laid the foundation stone for a $2.6bn university devoted to science and technology in Taif. In December last year, Egypt's President Hosni Mubarak launched a "decade of science of technology".

At a multilateral level, there is also a focus on science and innovation. In 2005, the Organisation of the Islamic Conference announced a 10-year action programme, which identifies targets for educational reform and proposes that by 2015, member states should aim to spend 1.2 per cent of GDP on R&D. Particular impetus is coming from oil-rich nations, which see innovation as the key to their long-term prosperity.

How far and fast individual countries move up the innovation league tables remains to be seen. Few are likely to compete with Europe, Japan or the US in the foreseeable future, nor with the emerging science powers of China and India. But just as small nations such as Finland, Ireland and Singapore have proved some of the success stories of global innovation in the past decade, so the Islamic world may yet surprise us.

In the west, thanks to the best efforts of Richard Dawkins, Christopher Hitchens and others, there is a renewed tendency to see science and religion as polar opposites. Elsewhere, there is often a greater acceptance that faith has its place alongside evidence and reason. More religious Islamist governments are proving some of the most supportive of scientific research. Iran, to give one example, was the first Middle East country to develop a human embryonic stem cell line.

The path to a more innovative Islamic world is not without obstacles. Some daunting challenges remain. An unusually large share of the increased funding for research is being directed towards military technology - driven more by geopolitics than the pursuit of new knowledge. Advances in Iranian nuclear technology are unlikely to be viewed elsewhere with the same equanimity as developments in Malaysia's software industry.

There is still a substantial brain drain out of the Islamic world, with many talented scientists and engineers opting to pursue their careers in the US and Europe, and little sign of the flows of returnees that have had such a positive impact in China and India. A final and more fundamental question is whether societies that are often still resistant to democracy and open debate can genuinely become hotbeds of creativity and invention. As Pervez Hoodbhoy, the leading Pakistani scientist, concludes in a recent article in Physics Today: "The struggle to usher in science will have to go side by side with a much wider campaign to elbow out rigid orthodoxy and bring in modern thought, arts, philosophy, democracy and pluralism."

The writer is director of the Atlas of Ideas project at the think-tank Demos

Technorati Tags: Islam , Muslims , Innovation , Education , Universities , OIC