Cloud Computing: On Cloud Nine?

A classmate of mine, during my ‘Masters’ days, always had the habit of storing his resume, his project work, and anything that is important in a separate folder of his email. He thought it made lot of sense, as he had the flexibility to use it whenever and wherever he wanted. Also, it was free. Replace my friend with a company, and his stuff with software, applications, and data, stored in the Internet accessible through a web browser. It’s called cloud computing. In this case, however, the company pays a rent to the vendor who provides this service.

Going 'Ga ga' over the cloud
Cloud, a metaphor for the Internet, with its terminology borrowed from the telephony, is an inspiration from the symbol that represents Internet in flow charts, and a depiction for work done behind the scene. Some experts call this as 'virtual servers' over the Internet, while others opine that anything that we use outside the firewall should be considered as cloud computing. No matter what the definition is, it seems to be a quintessential CFO's delight. Especially, during a downturn. After all not all companies shut their business during the bad times. With zero upfront costs, little working capital and even lesser management overhead, firms get access to the needed infrastructure and software within minutes. The 'pay-as-you-go' (Microsoft’s Azure charges $0.15 per GB stored per month) feature, no long-term commitment, the service levels (for instance, Amazon's EC2 offers 99.95% uptime) coupled with financial penalties, makes it even more attractive. With a slew of providers including Amazon, Google, Cisco, HP, IBM, and Microsoft, vying for the market share with their versions, and hoards of users including Washington Post, Virgin Atlantic, Harvard Medical School, 3M, VeriSign and Siemens , Cloud computing is here with a vengeance.

What it means to Financial Services Providers
Cloud computing is finally making its presence in the Wall Street, 50 years after John McCorthy wrote that ‘computation may someday be organized as public utility’. Nasdaq Stock Exchange, for instance, uses Amazon’s S3 (Simple Storage Service) to store time-series market data (historical stock prices, trade volumes etc). Several financial services providers are also testing the water with smaller pilots, even as the IT majors scramble to incorporate it as part of their offerings. Does that mean we will soon be seeing a mass scale adoption of Cloud computing in the capital markets? Perhaps not. Several deterrents stand in between:

· A firm may save capital expenditure by opting for this model. However, it will not make fiscal sense, if the savings gets offset by higher operating expenses, especially if the firm is growing rapidly.
· For a large organization with enough capital budgets, this model may not make economic sense. Ditto for a company with relatively small capex requirements. This, however, may change over time, if cloud computing evolves and gets even cheaper over time.
· There don’t seem to be clear guidelines or regulations on the data ownership, data security, privacy, the responsibilities of cloud providers etc. And a FS provider may not be interested in sharing a cloud with another, considering the sensitivity around the client and trading data involved.
· Enough concerns are already been raised by the security experts on the vulnerability of clouds. Last week, a leading cloud provider’s data center had a power outage resulting in clients losing connectivity for more than half hour. Instances, such as this may result in ‘cautiously optimistic’ approach towards public clouds or shift the direction towards the ‘private clouds’.
Gartner, a leading IT research and advisory firm, appears to be cognizant of these. It expects large organizations to continue to have an IT organization, till 2012, which manages and deploys IT resources internally, some of which will be ‘Private clouds’ – scalable and elastic IT enabled capabilities delivered by the company to its internal customers using Internet Technologies. However, it opines that they may also leverage IT sources from external providers for specific services.

My two cents
Most of the cloud providers only provide plain-vanilla standard operating systems (Linux, Windows etc) and software (Databases, web hosting, application development environments, application servers etc.). The financial services providers, however, would require more than just that. For instance, a typical asset manager may want an investment accounting system or a trading platform (without incurring capital costs) hosted in the cloud to lower its cost per transaction. In addition, the success of cloud computing in Wall Street, will hinge on the emergence of potential regulations, and well-addressed data security issues. Till then, this model will befit smaller players, be it bouquet investment banks or ‘Dark pools’ – new trading venues that are invisible even to regulators.

The author, Madhan Gopalan, based out of Hackensack, NJ, is an Associate Vice President with Ness Technologies. The views expressed here are his own and not necessarily that of his employer. He can be reached at madhan.gopalan@gmail.com

The Economics of Hurling a Shoe

What would you do when you are frustrated or angered by a leader’s action (or the lack of it)? You can spit, call names, shout, burn effigies, bite your lip and remain silent, or keep listening to your MP3 and pretend you never thought or heard about it. And, you can also throw a shoe. At least that’s how people seem to express their anguish in recent times. Throwing a shoe at leaders is globally becoming a synonym for expressing displeasure, a method for venting rage, a sign of extreme disrespect, and an act of ultimate insult.

Jarnail Singh, a journalist with the Hindi news daily, Dainik Jagran, who flung a shoe at the Indian Home Minister, P. Chidambaram today, is not first of his kinds. He has several Indian and foreign predecessors. In December last year, Muntadhar al-Zaidi, an Iraqi Journalist, called the then American President, George Bush, a ‘dog’ and threw a pair of size 10 footwear. Though Bush carefully dodged it, the assailant became an overnight celebrity and a hero among the Iraqi general public. The act also inspired several tech-savvy Internet game designers. Result: tossing shoe at George Bush became the favorite pass time of several Internet users. Muntadhar is currently languishing in an Iraqi prison serving a three-year sentence.

In February 2009, the Chinese Premier Wen Jiabo, met with almost similar insult while he was giving a speech on Global Economy at the University of Cambridge, London. A young member of the hand-picked audience blew a whistle, screamed ‘how can you listen to these lies’, and hurled his shoe, which missed Mr. Wen by a few feet. A message in a board that was discussing this incident said, ‘He got lucky. He didn’t do it in China’. The current state of assailant is not known.

If tossing shoe is ‘The’ way expressing anger at Leaders, shoe manufacturers will never be susceptible to recession, one of my colleagues quipped. I beg to differ. It’s a simple case of supply and demand. You will soon find several retail shoe chains all over India. And they may give you ‘throw one, get two free’ offers. You may also soon find ‘used shoes’ market, selling a pair with a tag ‘Rs. 99 - Thrown at the Prime Minister’. Politicians may conduct ‘Shoe throwing’ rallies or processions. The famous New York based Christie’s may try to auction ‘Only shoe thrown at Michael Jackson’.

Keeping the banter aside, next time, Journalists in India and elsewhere may be asked to take their shoes off before attending a press conference. But I bet no one can stop a journalist from spitting at the leader or worse, writing a stinker in their column the next day. To sum it up, I would like to quote Al Pacino’s words to Russell Crowe in the 1999 movie ‘Insider’. ‘Ordinary people under extraordinary pressure, Mike. What the hell do you expect? Grace and consistency?’

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

The Forex Reserves Conundrum

Part of my job description demands me to teach, my fellow colleagues, about various types of securities including the US Treasury Securities. And, I try hard to justify my paycheck. Treasury Securities, be it a T-bill, T-note or a T-bond, are issued by a country’s central government to raise capital. The general perception is that Treasury securities issued by US Government are virtually free of credit risk, as they have the full faith and credit of the Government. At least, that is what I have been teaching in my class. The emerging American economic scenario, however, may soon force me to change the way I teach about them.

Capitol Hill’s balancing act
Every country needs capital for its growth. US is not an exception. To meet its expenditure, it levies taxes. If tax revenues exceed expenditure, the government has a budget surplus. On the other hand, if tax revenues trail expenditure, the government has a budget deficit. US Government’s budget has been in deficit every year since 1970, barring four years (1998-2001). The government raises debt (by issuing treasury securities, taking loans etc) to bridge this deficit. To put things in perspective, as of March 2009, America has managed to accumulate $10.9 trillion (Source: http://www.brillig.com/debt_clock/) worth of debt. When a country such as India invests its forex reserves in US Treasury Securities, it helps the US Government to cover the budget deficits. In other words, we indirectly fund America’s economic stimulus package, support Corporate bail-outs such as Bear Sterns, Fannie Mae, Freddie Mac, and AIG, and finance its war on terrorism.

Worried Chinese
Off late, the Chinese appear a worried lot and rightly so. After all, about half of China’s $2 trillion foreign exchange (forex) reserves are lent (invested in Treasury Securities and securities issued by Government Sponsored Enterprises such as Fannie Mae and Freddie Mac) to the US Government. Last week, Wen Jiabo, the Chinese Prime Minister, said that he was ‘worried’ about the investments concurrently criticizing US Government’s unsustainable model of development driven by high consumption and low savings.

China’s reliance on US dollar started coming down when it re-pegged its currency to a basket of currencies from the US dollar, a few years ago. The emergence of a strong Euro also supported this view. However, the mutual dependency between these two countries is forcing the Chinese to keep purchasing American bonds; China, in order to keep its factories running, should keep exporting to America, while a quintessential American is happy shopping a low-priced ‘Made in China’ product at Wal-Mart. The probability of US Government defaulting, though fairly limited, seems to be troubling China. The reassurances made by Secretary of State, Hillary Clinton, during her last month’s visit to China on the reliability of their Investments don’t seem to have allayed their concerns.

Should India be concerned too?
Perhaps yes, given that India is the fifth largest lender, behind China, Japan, Euro zone, and Russia. A sizeable portion of its $249.3 billion (for the week-ended March 6) forex reserves are invested in US Treasury securities. For years, several Indian economists were arguing that keeping money of such magnitude in forex reserves is highly risky and costly; a sharp decline in the value of dollar can result in losses. Also, they opine that these reserves can be reinvested in the domestic economy to drive growth. However, the Indian Government has learned its lesson the hard way; in 1991, it pledged its gold to Bank of England to tide over a ‘balance of payments’ crisis. Also, they know that large foreign currency can not only enable them to meet the debt obligations with ease, but also help them to play with exchange rates and in turn provide a favorable economic scenario. I am sure Indian economic experts will be closely watching to see how these turn of events play out.

My two cents
The stimulus package (we may also see another set of packages coming later this year) will require Obama’s administration to issue lot of sovereign paper. This may drive up the interest rates, concurrently lowering the prices of Treasury bonds held by countries like Japan and India and in turn reduce the value of their forex holdings.

Also, if these countries (particularly China) decide to alter their investment strategies (lets say, reinvesting in their own economy instead of lending it to US) it could spell disaster to the treasury securities market. In such a scenario, American consumers will face unprecedented increase in interest rates further delaying the economic recovery. The probability of this happening is though limited, America cannot ignore this risk; China is also going through a slowdown and has announced a stimulus package late last year, while India is not for behind in priming its economy. The need for capital has not abated in both these economies. After all, together they need to feed over two billion mouths.

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

Is it curtains for the Indian software Industry?

The ban slapped by the World Bank on Wipro and Megasoft following the Satyam saga seems to have raised more than just eyebrows. And rightly so. After all, the Indian software industry – perennially in the media limelight for the right reasons – is the centre of our sterling economic growth. Several Indian software companies have been showcased in the international markets as benchmark companies. However, the string of events that have taken place since December 2008 seems to have created a blot on Indian software companies re-emphasizing the negative opinions that arose from certain quarters every now and then. These incidents also raise serious questions on the systems, regulatory norms and disclosure practices of India Inc. Not to mention that this gives an opportunity to staunch anti-offshorer’s to walk with ‘I-told-you-so’ smirk in their face.

Are these notions justified?

It appears that we are looking at these isolated incidents with a magnifying glass. In April 2001, The New York Times published a story, accusing New York-based Computer Associates (CA) for malpractices, and inflating profits and earnings by using `pro forma, pro rata’ method. How is the Satyam incident any different from the ‘aggressive earnings management’ performed by CA at the broad level?

Also, Frauds, scams and allegations are not quite uncommon for the Indian outsourcing Industry. For instance, in 2005, Australian media alleged illegal sale of customer data by a BPO based at Noida, India. I am not sure how successful National Association of Software and Service Companies (Nasscom) was in bringing in the alleged perpetrators, if any, to justice. In 2002, the Chief of the software company Polaris was arrested (and later released) by the Indonesian police, after the company’s Banking customer, Artha Graha, filed a complaint alleging deficient performance in the software deployed by the Polaris. During the same year, the Department of Company Affairs cracked the whip by prosecuting several companies including Cyberspace, DSQ Software, Pentamedia Graphics, Nakshatra Software and Goldfish Computers. Some of the charges that were levied on these companies included placing incorrect statements in the prospectus and fraudulently inducing individuals to invest money. A year priot to that, Silverline Technologies was charged with insider trading.

What it means to Indian software companies?

‘Pooh pooh’ing the sequence of events in the name of isolated incidents doesn’t seem right either. Considering the Global financial crisis, the recent set of events is a double whammy. The acts of Satyam, considering the size and the reputation it held in the past, and the Whiplash of World Bank certainly seem to have certainly dented the image of the Indian software Vendors. Several Industry players experts opine that these events are a blot on the Indian software industry.

Globally clients will be reluctant to move new engagement offshore. Indian offshore vendors should also expect accentuated levels of scrutiny from global clients prior to off-shoring. A greater emphasis on Governance at the Program/Project level will be expected by the Clients as well. The impact is likely to bigger on the European front, considering their level of risk-averseness. Indian software companies may lose the small advantage (of penetrating the European market) they got after years of long and hard fought battles.

What needs be done?

Software companies needs to first address the immediate concerns of the clients, by delivering the existing projects on time without cost and time over-run. This will enhance their confidence in the vendors. Also, India Inc. needs amended Acts that plug the holes, ensure better disclosures, and bring-in greater transparency. Else, scams such as these will keep popping every now and then over time.

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

Is it the tip of the ice-berg?

The Chapter 11 (Bankruptcy Protection) filed by the 158-year old Lehman Brothers, the $50-billion sale of Mother Merrill to Bank of America, and the ratings downgrade of AIG seems to have sent shiver down the spine of investors in both mature and emerging markets. A reflection of the same was seen in Wall Street, as it posed its worst losses since September 11, 2001. Fears that other big Investment Banks can belly-up also seems to be haunting the investors. It may be pertinent to note that Two weeks ago, U.S. Government bailed out two of its Mortgage agencies – the Fannie Mae and Freddie Mac. A few months ago, it also bailed out Bear Sterns. However, this time it was unwilling to commit tax payers money to bail out Lehman. Understandably, this is a cause for concern for several software and IT companies in India given their dependence on BFSI (Banking, Financial Services and Insurance) segment.

Likely outcome

Albeit a good year into sub-mortgage crisis, several Investment Bankers are still reeling under losses. Case in point is UBS, one of the largest Investment Banks based out of Switzerland, which has posted pre-tax losses to the tune of US$21 billion in the first six months of 2008. Arguably, this just appears as the tip of the iceberg, as the crisis is slowly moving towards the ‘prime mortgage’ segment. To a large extent, this is due to steady increase in job losses, which is forcing even genuine EMI payers to default. Adding to the woes is the steady increase in the mortgage rates, despite the rate cuts initiated by the Federal Reserve. This may further result in a drop in the home prices, as Job losses will deepen. Fed may opt for some more rate cuts, given the liquidity crunch the market is facing currently.

What it means to Software companies

Companies such as Wipro and Satyam claimed (in a Television Channel) that the Lehman’s bankruptcy may not impact them as their exposure to the company is low. Infosys, on the other hand, claimed that the acquisition of Merrill Lynch to add to their revenue, given BOA is their key customer. Taking a broader perspective the scenario does look gloomy, though there seem to some light at the end of the tunnel.

It is pertinent to note that Indian software companies get over 90% of their revenues from US and European Customers, even as $600 billion worth of Investments are made on IT budgets every year globally. But, only a miniscule of it is generally outsourced. However, given the looming crisis several fortune 500 companies may tighten their IT budgets. In other words, several projects on the anvil (on the verge of being outsourced) may get shelved. IT services providers may also be forced to cut their prices (and in turn their margins) while bidding for projects, as the market pie grows smaller. Software companies will be forced to part with their employees to survive this shakeout over the next one year. Companies such as Satyam have started paring its employee count, even as they put several employees under ‘performance improvement’ programs. This crisis, however, will also enable the software companies to source better candidates in the market, at modest price levels.

A closer introspection of results of Investment Banking companies, for the quarter-ended September, may reveal some more interesting insights. Till then, let us keep our fingers crossed.

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com